Molson Coors Beverage Company (TAP.A) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2005 second quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Leo Kiely, President and Chief Executive Officer for Molson Coors Brewing Company. Sir, you may begin.

Hello, and welcome everybody. Thanks for joining us today. With me on the call today are Tim Wolf, our Global CFO; Kevin Boyce, CEO of Molson Canada; Frits van Paasschen, CEO of Coors Brewing Company; Peter Swinburn, CEO of Coors Brewers Limited; Mike Gannon, our Global Treasurer; Ron Tryggestad, our Global Controller; and Dave Dunnewald our Investor Relations Director. During the call Tim and I will cover three topics with you. First an overview of Molson Corp. Brewing Company second quarter 2005 performance. Second a discussion of the results drivers for each of our five reporting segments which are Canada, the United States, Europe, Brazil, and Corporate. Third, we'll share some perspective on the balance of 2005 for our company, then we'll open it up for questions.

So let's get started. In the second quarter our financial results reflected continuing challenges in most areas especially the U.K. and Brazil but with some encouraging trend improvements in our two largest businesses, Canada and the U.S. For the total company reported second quarter consolidated sales volume of 12.8 million barrels down 3.1% on a comparable basis from a year ago. Sales to retail, or STRs, for our total company declined 3.8% on a comparable basis driven by declines in Brazil, Europe, and the U.S. and partially offset by STR growth in Canada. Net sales were $1.61 billion, down 1.3% on a pro forma basis from the second quarter of 2004. Meanwhile, cost of goods per barrel was virtually flat on a comparable basis and marketing, general, and administrative expenses increased more than 5% or $23 million globally.

Pro forma operating income excluding special items fell 7.5% from a year ago. Reported net income was $38.5 million in the second quarter. Our second quarter results were impacted by a higher tax rate and $87.7 million in pretax special charges which we'll discuss in detail in a minute. Excluding these special items and merger related amortization expense after tax income totaled 105.1 million, or $1.22 per share. Both down approximately 12.4% on a pro forma basis from last year. At this point I'll turn it over to Tim to review second quarter segment and corporate highlights and trends, then I'll finish with perspective on the balance of 2005. Timothy.

Thanks, Leo, and hello, everybody. Thanks for joining us. Before I go through our segment highlights I want to cover two accounting related topics that will be key to understanding our second quarter results. First, as we mentioned in our earnings release this morning we plan to file an amended first quarter 10-Q later this week primarily to correct the initial recording of a U.S. deferred tax asset as part of the purchase accounting for our U.K. acquisition in 2002. Although the original determination was made with a consultation of the Company's external auditor recent discussions have resulted in a determination that this asset should have been recorded in goodwill. Besides moving $140 million from a non current deferred tax asset to goodwill on our balance sheet this change has caused us to restate our first quarter 2005 tax provision and therefore our first quarter earnings. Our restated pro forma after tax income was $7 million or $0.08 a share for the first quarter and that excludes special items and merger related amortization. It's important to note that this accounting change does not affect the fundamental economics of our business. More on tax rates in a few moments.

The second accounting subject is simply an overview of which of our second quarter reported results are comparable and which are not. Europe results have been adjusted in both years to include our Asia business so they're comparable year-over-year without pro forma adjustments. The only pro forma adjustment needed to make U.S. segment results comparable is the addition of 100% of Molson U.S.A. volume and 50% of those financial results to the 2004 P&L. Therefore, our discussion of pro forma results for this segment will be limited. The Canada and Brazil segment reported results for 2004 exclude Molson, Inc., pre merger results so these are not comparable to the results of our merged company this year, consequently we'll discuss nearly all performance trends for these businesses on a pro forma basis as if the merger had been completed at the beginning of 2004.

So starting with Canada, operating income of $106.6 million in the second quarter was down approximately 12% on a pro forma basis from a year earlier primarily due to lower shipment volumes, significant increases in investments in our core brands and higher general administrative expenses. Although shipments were lower we were encouraged by the solid increase in sales to retail in Canada in the quarter. Second quarter financial results also benefited from an 8.4% year-over-year appreciation of the Canadian dollar versus the U.S. dollar which boosted Canadian operating results by about $10 million U.S. in the quarter. Total Canadian beer industry sales increased about 2.6% year-over-year primarily due to improved weather versus a year ago. In Ontario and Quebec the industry was up nearly 5 and 3% respectively. In Canada our sales to retail in the calendar second quarter increased approximately 2.1% driven by great beer weather for most of the quarter, improved sales and marking programming, tactical price promotion over key summer holidays, and a relatively easy comparison against labor disruptions in the distribution system a year ago in British Columbia.

We built solid sales momentum to start our summer in Canada especially leading up to the critical July 1, Canada day weekend. Our national market share declined about a third of a point in the quarter. Our best retail sales performance in more than seven quarters in Canada. Aside from the overall share trend improvements versus previous quarters we're pleased with the renewed retail strength of some of our most important brands in the second quarter. Coors Light sales to retail grew at a low double-digit rate and is now our largest brand in Canada. Our partner Import Brands grew at a mid single-digit rate while the Carling and Black Label family grew at a high single-digit rate. Molson Canadian, Dry, and export declined at single digit rates.

In the second quarter value brands continued to gain significant share in Ontario and Alberta resulting in a sustained challenge for the Molson Canadian brand. Second quarter sales volume in Canada totaled 2.22 million barrels down 2.8% on a comparable basis from a year ago due to lower trade inventories at quarter end this year, one fewer shipping day in the quarter this year, and the timing of July 1, Canada Day shipments. Net sales per barrel increased 2/10 of 1% on a pro forma basis in local currency, driven by about 2 percentage points of net pricing year-over-year which is largely offset by unfavorable sales mix shift toward value brands, again, primarily in Ontario.

Cost of goods sold per barrel increased only about 1/2 of 1% in local currency driven by fixed costs de-leveraging due to lower shipment volume and higher labor and materials rate inflation. These were largely offset by positive results from our project 125 cost reduction program. Marketing, general, and administrative expense grew about 20% in local currency driven by two roughly equal factors. First, mid-single digit growth in marketing and sale spending. Additionally sales curve accounting resulted in incremental advertising expense in the second quarter this year. Second higher non labor related expenses and losses from the Canadiens hockey club this year resulted in higher general and administrative expenses. These higher expenses were partially offset by merger related cost synergies.

Turning now to our U.S. segment operating income for Coors Brewing Company in the second quarter was $78.8 million U.S. excluding $10 million of special charges this year operating income would have been up approximately 17% on a pro forma basis from a year ago driven by positive pricing and lower manufacturing costs partially offset by materials in energy inflation and negative brand mix. Looking at U.S. performance highlights sales to retail in the U.S. decreased 2.6% in the second quarter on a pro forma basis. This was due to lapping the introduction of Aspen Edge last year and lower sales of Coors original and the Molson U.S.A. brands which declined at a double-digit rate in the quarter. Excluding the Aspen Edge decline however, our U.S. sales to retail would have decreased only about 1% on a pro forma basis. With the industry down approximately 1% in the quarter our market share was about even with the year ago if you exclude again the Aspen Edge rollout.

Most encouraging for our U.S. business, Coors Light quarterly trends continued to improve with slightly positive sales to retail for the most important brand -- for our most important brand in the second quarter. This was the first STR increase for Coors Light in the past nine quarters. Additionally, Blue Moon continued to grow at a strong double-digit rate. U.S. volume to wholesalers increased 1/2 of 1% on a comparable basis as our distributors ended the quarter this year with inventories about 100,000 barrels higher than last year. U.S. net sales per barrel increased 2.2% in the second quarter on an apples to apples basis driven by about 2 percentage points of net U.S. pricing growth. It's important to note that price promotion spending in the quarter increased a few million dollars indicating a modest expansion in industry discounting versus last year. U.S. cost of goods per barrel increased 1.0% on a comparable basis in the quarter primarily due to higher packaging material, freight and energy costs partially offset by higher finished goods yields and the results from our operations cost reduction initiatives. U.S. marketing general and administrative expense was essentially flat on a pro forma basis in the second quarter as we increased investments behind our brand building and sales efforts offset by merger related cost synergies.

Our Europe segment reported pretax income of $30.4 million U.S. down 40% from $50.9 million a year ago. Lower results were due to declining industry volume and increased competitive discounting in the on and off premise channels as the U.K. beer industry has become more competitive this year. Our Europe financial results in the second quarter were also affected by a 2.7% year-over-year appreciation of the British pound against the U.S. dollar.

Now let's look at Europe highlights for the quarter. Overall volume of our owned and licensed brands declined 5.8% reflecting a decline of less than 2% for the Carling brand and steeper declines in other brands with the exception of the recently introduced Coors fine light. We attributed our lower U.K. volumes to three factors during the quarter. First the U.K. beer industry declined at more than 4% in the second quarter versus a year earlier driven primarily by lower consumer spending and a challenging volume overlap with the Euro 2004 football tournament last year.

Second, off-premise discounting among our competitors increased substantially in the quarter with some competitor's products selling for pre-Christmas prices normally the most promotional time of the whole year. We've been working to establish the right balance between volume and margin priorities and during most of the second quarter we were less aggressive in pricing than our competitors. This stands at the substantial impact in our off premise volume and share in the second quarter, late in the second quarter we began responding more aggressively to these activities.

Third, the on-premise channel continued to be very competitive with other brewers discounting at unusually high rates and introducing draft setups that compete directly with our Carling Extra Cold product. The 10.5% decline in Europe net revenue per barrel in the second quarter was the result of three factors. First, 12 percentage points were driven by a change early this year to our contractual arrangements with one of our largest factored brand customers. This invoicing change resulted in a one-time decline of $65 million U.S. in both net sales and cost of goods in the second quarter with no net impact on gross profit. Recall that factored brands are sales of non-owned beers and other beverages that we delivered to some of our on-premise customers. These beverages are included in our sales and cost of goods but not in our reported volume. This invoicing change will continue to affect the Europe net sales in cost of goods until the end of 2005 but without any impact on profit.

Second, 1 percentage point was due to decreased revenue per barrel from our own brands driven by lower off-premise pricing and and adverse brand and channel mix partially offset by higher pricing in the on-premise. Third, these negative factors were partially offset by the appreciation in the pound versus the U.S. dollar. Cost of goods per barrel decreased 10.7% in the quarter due to the previously mentioned change in factored brand invoicing arrangements. Excluding factored brands, cost of goods for our own brands increased approximately 8% in local currency driven by the deleveraging of fixed costs related to lower volume and the impact of higher input and distribution costs. Separate from the change in factored brand invoicing continued shifts in the volume and mix of factored brand sales reduced Europe gross profit by about $2.5 million in the second quarter. Marketing, G&A costs in local currency decreased nearly 8% in the second quarter primarily because of lower labor related bad debt and brand promotion expense. Advertising was essentially even with a year ago.

Finally in our Brazil segment excluding special charges, operating losses were slightly less than half as large on a pro forma basis versus a year ago. Brazil results were affect by a 16% appreciation in the Brazilian real against the U.S. dollar which increased the operating loss including special items by about $7 million U.S. in the second quarter. Results for the second quarter show significant progress in costs from a year ago for our business in Brazil realizing that substantial challenges remain. Beer volume declined 11.7% in the quarter on a pro forma basis versus a year ago. Revenue per barrel increased 13% on a comparable basis in local currency due to the improved pricing and channel mix this year versus a year ago.

Cost of goods sold per barrel in local currency was largely unchanged primarily due to fixed cost deleveraging related to lower volume offset by cost reduction initiatives and lower U.S. dollar denominated input costs. Marketing G&A expenses decreased 12% local currency per barrel due to lower sales center and overhead costs partially offset by our higher marketing expense.

Now continuing with our second quarter P&L, special charges totaled $87.7 million pretax or $0.67 per share after tax. By segment the special charges and credits were as follows. In the U.S. special charges of $10 million were primarily for accelerated depreciation of the Memphis brewery which will be closed by early 2007. In Europe, a special credit of $3.2 million was due to one-time development profits and real estate formally held by the Company. Brazil results included a $46.7 million special charge due to an increase in Brazil tax contingent liabilities as developments in recent months indicate a higher probability of future payments related to some transactional tax disputes.

Finally corporate segment special charges were $34.2 million, primarily due to the severance payments and benefits for executives who elected to leave the Company following the merger. Of this corporate total 13.3 million was the cost of providing a floor price under the options for the Coors executives who left under the change of controls following the merger. If the price of the Company's stock rises this option for provision will provide option income to the Company. Corporate interest expense was $33.6 million in the quarter as we continue to benefit from low rate bridge financing as we prepare to refinance the former Molson Inc. debt. Our effective tax rate was 53% in the second quarter, up from restated 13.5% pro forma rate in the first quarter this year, primarily due to two factors. First the special charge and other losses in Brazil for which no tax benefit can be recognized increased our effective tax rate by 26 percentage points in the second quarter.

Second, a one-time tax benefit that we expect to arise from the merger structure will not be recognized this year. We still anticipate this benefit in future years, this delay in one-time tax benefit has no effect on the Company's cash tax rate. Excluding special items the second quarter effective tax rate was 37.5%. In terms of balance sheet and cash flow highlights net debt at the end of the quarter was $2.7 billion. Depreciation and amortization expense was $119 million, in the second quarter it was 16 million of this attributed to the merger related step up in value over the Molson assets. Total company spending in the quarter was $85 million.

We'll preface the outlook section as usual by paraphrasing our Safe Harbor language. Some of what we discuss now and in the Q&A may indeed constitute forward-looking statements. Actual results could differ materially from what we project today so please refer to our most recent 10-K, 10-Q, and proxy filings for a more complete description of factors that could affect our projections. Regarding any non U.S. GAAP measures that we may discuss during the call, please visit our website, which is www.molsoncoors.com for a reconciliation of these measures to the nearest U.S. generally accepted accounting principal results.

Looking forward we estimate that corporate segment interest expense in the last two quarters of this year will be about 33 to $35 million per quarter. We anticipate that our full year 2005 effective tax rate will be in the range of 38 to 42% excluding special items -- excuse me, including special items, and 33 to 37% excluding special items. Excluding Brazil losses the range, including special items would drop more than 9 percentage points to the low 30s% range. As we've said in the past our tax rate is volatile, it may move up or down with changes in, among other things, the amount of source of income or loss, our ability to utilize foreign tax credits, the impact of our merger purchasing accounting, and changes in the earnings and profits of our foreign subsidiaries.

We still anticipate that the Company's long term effective tax rate will be in the range of 25 to 30% or about 5 percentage points below the premerger effective rate. Right now we expect total company capital spending this year to be within 10% plus or minus of $380 million. We continue to expect free -- total free cash flow available for debt repayment in the range of $200 million this year and aside for changes in business performance this outlook could be altered by the magnitude of stock option exercises, asset monetization, and capital spending needs. At this point let me turn it back over to Leo for a look ahead for the balance of 2005. Leo.

Thanks, Tim. Let me start by giving you brief synergies update and then review some key business drivers that we're focused on for the balance of 2005. In the second quarter our synergies teams throughout the Company continue to pursue aggressively the $175 million pretax in annual cost synergies that we've committed to capturing over the next three years. Year to date progress includes in the time sense we closed the merger in mid February our synergies teams have already captured approximately $15 million worth of pretax cost synergies with the savings mostly in overhead costs and about evenly divided between our U.S. and Canadian businesses. At this point we have teams in the business actively involved in specific projects that cover more than 90% of our three-year $175 million cost synergy commitment giving us continued high confidence in meeting or exceeding our plan. All in we are well on our way to delivering the entire $50 million commitment for this year. More updates on synergies will follow in the months ahead.

Now let's look at some of the main drivers of our results for the second half of 2005. First in Canada. We've talked extensively about the fundamental changes we've made in our top-line strategies in Canada such as significantly greater investment behind stronger, fully integrated marketing and sales promotion efforts for our two largest brands and more moderate pricing. Second quarter share trends indicate early progress towards reinvigorating our premium brand franchises. Our challenge now is to build on this improvement and ensure that top-line growth translates to bottom line performance. This process will take time but we believe that we have a strong team in place that's working on the right fundamental strategies to succeed in this very important market.

Looking ahead we'll be lapping poor weather in the third quarter along with the beginning of a substantial ramp up of the value brand activity leading into the fourth quarter of last year. Nonetheless the value segment continues to grow on a year-over-year basis and the market remains very competitive. Comparison of Molson Canadian's volume growth over the last 3, 6, and 12 months shows steady improvement. We're striving to improve sales mix through higher investment and harper sales attention behind this key brand. Meanwhile Coors Light momentum is strong and we look forward to the return of the National Hockey League in the fourth quarter of this year.

Then fourth, in the first three weeks of the third quarter our Canadian sales to retail have increased at nearly the same rate we achieved in the second quarter driven again primarily by continued warm weather in most regions of Canada. Now keep in mind that three weeks is only a small portion of the quarter and these trends could change based on weather, competitive activity, and other factors. In the U.S. business as always our top priority is growing Coors Light. We're encouraged by the continued sequential improvement in our sales to retail trend for the Silver Bullet which has improved over the past six quarters from down mid single digits to up slightly in the second quarter. Coors Light trends will be particularly important in the second half as we move past the tough comparison with last year's launch of Aspen Edge.

Our U.S. team is focused on five factors on the back half of the year. First, driving the Coors Light brand. Our new ad creative this year has been well received by consumers and the trade and we like what we're seeing is in terms of sales trends. We intend to maintain heavy add rates to drive a strong finish to our summer and the area of packaging and product innovations we have two solid hits with the Coors Light Quick Cool 8-oz can and 18-pack Coors Light plastic bottle cooler box. Second our sales team is focused on chain accounts and that focus continues to drive stronger performance from our chain customer base this year relative to the rest of our business. Meanwhile our on-premise initiative is ramping up across the U.S. this summer.

Third, despite positive revenue per barrel in the second quarter, the U.S. beer environment definitely has heated up this summer. We gave up about 30 basis points of revenue per barrel to deeper price discounting in the second quarter in contrast to almost no impact last year. If the deep discounting spreads significantly by geography or brand this trend could represent a substantial financial challenge for our U.S. business. Fourth, if our distributors drop their inventories back to last year's level by the end of this quarter it would also have a negative financial impact on third quarter results and finally regardless of competitive dynamics current trends for freight, energy, and packaging material rates point towards a difficult second half for costs. In the first four weeks of the third quarter, our overall U.S. sales to retail decreased slightly a significant improvement over the second quarter trend while Coors Light brew at low single-digit rate driven by a strong July 4, holiday.

Turning to Europe the U.K. beer landscape has become much more challenging in the first half of this year, with soft industry volume trends and much more extensive price discounting than is usual for this time of the year. In fact, the industry volume trends have worsened as this year has progressed. In the face of these challenges we're focused on four main strategies to drive our top line and reduce costs. We're staying the course on our front-end investments with continued focus on our core lager brands, Carling, Grolsch, and Coors Fine Light. Second in the back half of this year we have initiated more targeted on-premise sales efforts which will be accompanied by the benefit of recent distribution contract wins for the Carling brand and key on-premise chains. Third we continue to launch C-2 through the U.K. The rollout of this low alcohol Carling line extension is on track. In addition we introduced Coors Fine Light beer into two cities in Russia this year. Finally, we've increased the scope and sense of urgency for our cost reduction initiatives especially related to restructuring overheads and reducing supply chain costs. In the first five weeks of the third quarter our Europe sales to retail have increased at a mid teens percentage rate driven by significantly more favorable weather this summer and more targeted activity by us in the off-premise channel.

Now, the U.K. off premise channel has historically exhibited high level of sales and margin volatility so it's difficult to assess the impact for our third quarter in Europe. In Brazil we have a two-pronged approach to building shareholder value. First, Fernando Tigre and the Kaiser team have made a great deal of progress during the past year in right-sizing our costs in a difficult volume environment and strengthening our relationships with our distributor system. The results of this work are evident in the improved financial trends for the Kaiser business in Brazil. Nonetheless the cash and profit trends in Brazil still remain negative. As the Brazil team works to improve financial performance we're addressing the second priority with this business which is to determine our long-term role in the Brazil beer market. As we've mentioned before we're evaluating a full range of strategic options for this business with the goal of maximizing our shareholder returns. At the appropriate times we'll update you on our progress. In the first eight weeks of the third quarter our Brazil sales to retail have decreased at a rate essentially in line with a low double-digit second quarter decline driven by a challenging competitive environment.

To summarize our discussions today, the second quarter represented another difficult quarter for Molson Coors but we made progress on several key top line trends. All of our operating teams are motivated to build on these trends to improve the performance over the merged company. We're also encouraged by the integration and synergies work that we've achieved to date. Overall we believe we have a strong team in each of our businesses, solid programs to drive top-line growth, and a clear focus on driving profits in cash flow.

One final note. Our prepared remarks will be available on our website for your reference within a couple of hours this afternoon. Also at 3:00 p.m. eastern time today our Investor Relations team led by Dave Dunnewald will host a follow-up conference call. Essentially a working session for analysts and investors who have additional questions regarding our second quarter results. This call will also be available for you to hear via Webcast and recorded replay on our website. At this time let's open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Bonnie Herzog from Smith Barney.

I just wanted to follow up on something that you mentioned. I just wanted to to be clear if I heard you correctly it sounds like you've had to follow your competitors increased discounting in the U.K. Do you think this is the main reason why your net sales were down in that business? Or you did mention three reasons for the weakness in U.K. in terms of the top line. Can you give us an idea of the magnitude of each? Also regarding the increased discounting in the U.K. what are the similarities that you see to the U.S. marketplace? In other words do you think it's possible that a price war could start in the U.S.A.? Furthermore another quick question on the U.K. market how is the government intervention in the U.K. impacting your marketing strategy and then do you have to make any major adjustments to your existing advertising campaign?

Peter Swinburn, why don't you give Bonnie a shot on those.

In any particular order? I'll take the last one first. There's some straight answer to that is no, not presently. I assume you're referring to the latest white papers that have been put out in the proposed legislation. The things that will possibly affect us will come in next year and that will be the smoking ban but that's still at a consultation stage. That would be the biggest thing that would affect us. Certainly not on the advertising front.

Second pont I think you raised was whether we include the U.S. or not, pick up on the U.S. but in terms of the price war breaking out in the U.K. our interpretation of what we've seen is in the second quarter some pretty aggressive pricing in the off trade led by competitors that have lost significant market share specifically to ours. We saw that as something as an adjustment. That was why we decided to stand clear out of it because we didn't want to bring the category down. It's always volatile, the statements and it does go up and down pretty quickly but the latest indications that we've got is that our core was probably right. We've seen pricing coming back in the key supermarket multiples there. And we actually concentrated our activity during this period in different channels that gave us slightly better margins so at the moment that's our take on it but these things do change pretty dramatically. But we have seen higher pricing in the last sort of four to five weeks.

Bonnie regarding any comparisons to the U.S. I really don't think that's relevant. The market structures are so different and that they're really two totally different dynamics.

Just to be clear again, do you think this is -- the increased discounting has been one of the main reasons why you saw some weakness again in the top line during the third quarter? You did highlight the three reasons which--.

During the second quarter, that's right.

I'm sorry the second quarter.

That's right. On top of a very soft overall category volume.

Thank you.

Thank you. Our next question comes from Filippe Goossens from CSFB.

My question is directed towards Timothy. Timothy, can you give us an update in terms of your current thinking with regard to the refinancing of the old Molson debt please? Thank you.

Thanks for the question, we're finishing our plans, we plan to go to market in exactly what form we're still working through. In mid September we still see the pricing environment, as I think you know, quite favorable and we're looking at planning to do a significant portion of the $1 billion U.S. in Canada and we're still balancing out how much we may do in the U.S. But clearly one of the very attractive opportunities for this financing is an opportunity for us to provide really a natural hedge if you will, with our very significant Canadian cash flows, because the more interest we pay in Canadian dollars, obviously the more we that we have ostensibly hedged. So that's really where we're going.

The second question I had, Timothy, the $200 million in cash flow, that you're forecasting for this year, is that a little bit better than what I recall from the last earnings call? I seem to recall you were actually guiding towards less than 200 million.

I think it's within the same range, probably a tad bit -- a slight bit more favorable, and again you can understand how sensitive that number is to EBIT and the rest of our capital program. Our capital program has been tempered a bit and we're still, Greg Way, Dennis Puffer, Martin Thomas, Ken Campbell and the whole team, and all our operations, Charles Jordan, are doing a great job making sure we continue to invest in the critical projects we've got to get done but still ratchet back our CapEx a bit. So that CapEx range is probably the most significant change in terms of coming down circa 10% from what we shared with you in the past.

What is that CapEx number again, Timothy?

The CapEx number this year will be about $380 million, again, plus or minus about 10%. I think the number we shared with you last time was in the range of $420 million plus or minus 10%.

Thanks so much.

You're very welcome. You can call me Tim.

Thank you. Our next question comes from Christine Farkas from Merrill Lynch.

Thank you very much. I have a couple of questions with respect to rate and mix. Specifically in the U.S. you've indicated that your rate growth or frontline pricing was up 2% and revenue per barrel up 2.2%. With the negative drag on promotions of 30 basis points does that mean that your mix was favorable 50 basis points? Was that Coors Light?

No, mix was unfavorable -- modestly unfavorable actually, Christine.

Your total revenue per barrel was reported up 2.2%. If I understand correctly your rate was 2%.

Yes. Pricing was just over 2%. Maybe, Frits, you want to follow on.

I think the other piece of the equation that you'd have to factor in would be fuel surcharge if I'm not mistaken. So you'd have a negative effect of discounting of mix offset by the fuel surcharge and that would net out to the difference between the 2 and the 2.2% you cited.

Great. Moving to Canada you indicated 2/10ths of a point in pricing -- I'm sorry, in revenue per barrel growth. With frontline pricing up 2% with the offset of negative mix. So there was no promotional activity or no increase in promotional activity in the quarter?

Kevin.

Promotional activity was similar to a year ago but broadly speaking price offsets mix and that's why you've got the results we had.

Kevin, if I can follow-up, can you comment a little bit about the price gaps of premium to the low end beers in Ontario? I think in the first quarter you've indicated that spread was $9. What does it look like now? What are the trends doing?

That's still -- the prices have stayed similar to the first quarter with the exception of the long weekends where both our own and some of the competitors' brands have gone down for periods between one and two weeks. That gap has usually been closed to just over $5 during those weekends.

But it's generally on the quarterly average it's since reverted back to that same rough $9 difference?

It's held the same and there's been -- certainly the bottom end of the market has been discounting below that.

Okay. Terrific. And my final question, just to clarify, what was your Canadian market share in the first quarter and what was the Brazilian share as well in the second quarter? Thank you.

The Canadian market share?

Yes.

Well, I can say that broadly speaking we're down about a third of a share point we don't actually give specific market shares. But we're down about a third of a share point, in the second quarter.

And in the first quarter how much were you down in the first quarter?

Under 1 share point.

Great. In Brazil?

I don't have that data. Leo I'll have to turn that over to you.

Around 10%.

Christine it's about 10%.

Thanks a lot.

Thank you. Our next question comes from Kelly McMenman from David J. Green. Mrs. McMenman your line is open.

Sorry. I didn't dial in.

Let's go to the next question.

Our next question comes from Mark Swartzberg from Legg Mason.

Thanks, operator. Good morning, guys. Tim, a three-part question on free cash flow. Firstly, CapEx sounds like your '05 view has come down from sort of a mid 400s type number, so I was wondering if you could update us, maybe a three-year view on CapEx, what's delayed, what's not being spent? Secondly, this tax benefit which is one-time, you're saying it's delayed. Is it cash? When do you expect roughly you might get it? Can you just elaborate on your opening remarks there? Then from a kind of broader perspective obviously your business has a lot of puts and takes going on in this first year of being the new company and it seems to me at least that $200 million is probably understating the underlying free cash flow power of the business. Do you agree with that assessment and if you do can you give us some sense of order of magnitude what you do think the underlying free cash flow base, if you will, of the business is?

Let me start with your last, I'll let Ron Tryggestad and our tax staff at Jay Wells address the tax benefit issue. Let me hit number three and number one first. You have seen, we have all seen the EBIT pressure that virtually all our business have been under the first half of this year. Really nice improvement in Canada and U.S. to be sure, but overall some significant pressure on EBIT and that is directly translated into pressure on free cash flow. So the question you're ostensibly asking is do we believe there's more upside in EBIT performance and the answer is absolutely yes. So the $200 million. Again, that's very, very sensitive to the sort of discounting we've been talking about in the U.S. and the sort of competitive pressures in the U.K. and Canada for sure but our belief is and our job is to deliver free cash flow considerably above the 200 million. So yes I think that the underlying ability of the enterprise to produce a much stronger free cash flow performance is absolutely there. So that's really point one.

Point two, on CapEx, what we are doing, and I think the U.S. and Canadian operations team and frankly the U.K. team are just doing a really really good job of rationing and sequencing CapEx with a lot of discipline. I won't say more discipline because that's been the case for a long time but for example in the U.K. we're going to have less need as Peter's business continues to get challenged on the top line, there's less pressure on capacity related to CapEx projects so we'll be able to put those off, this is not a question of not doing things it's a question of the timing being put off. Our expectation today and obviously we're just the very, very beginning of 2006 CapEx spending plans is to be somewhat higher than that 380 range plus or minus 10%, but so, too, given our critical need to generate cash we'll be scrutinizing the CapEx plan significantly for next year. So I'd be more inclined to give you a 2006 look after the third quarter after we're much farther along in our planning but suffice to say it will be off a lower base in 2005.

And do you still have the view that -- I think your view that was from a longer term perspective 350 or so.

Yes. Longer term and obviously we've got a couple of big projects, the Shenandoah Brewery, build out, the -- bring in the volume, closing down Memphis, moving capacity to Golden and Canada, that has and that will take some CapEx but yes I think the mid 300 sort of range, again, plus or minus is the longer term rate that we intend to hit.

On the '05 revision if we say it's roughly on the order of 70 million in savings you're saying the U.K. is the biggest number in there?

No, it's a piece of it. I think the North American, Canadian, U.S. really is driving most of that and Brazil has chipped in significantly as well. So -- and I think it's less than 70 all in.

Okay. And it's mostly a delay rather than an absolute decision not to spend?

Yes, there are a couple of projects at the margin that we've just said hey, look, they're lower priority, they're really nice to have, they're not critical to do, and we've put them on hold but again that's the minority of the reduction.

Got you.

Maybe on the tax front, Ron, you and Jay can handle that.

The tax benefit is not a cash tax benefit at least in any near term view. It relates to tax expense that we've booked on future repatriations of U.K. earnings. That liability would be able to be released if we can project being able to offset those low tax U.K. earnings with higher tax Canadian repatriations. At this point we can't project that but it wouldn't turn into cash for sometime.

Okay. And, Brazil is a factor here as well and I think, tell me if I've been reading your press release wrong but I think at one point you were thinking that was going to help you, now you're not believing those losses are going to help you. Am I misreading that?

Well, in order to record a tax benefit for the Brazilian losses we'd have to be able to project income that would offset them and we're not able to do that now so we provide a full valuation allowance against the tax benefit on Brazilian losses.

And that's a change in your view?

No, that's not a change.

Help me -- okay. When you talk about this 26.0 increase in the rate and 37.5% effective rate that you had for the Company overall, and previously you had talked about 10 to 15%, for the whole company, you're saying that doesn't have to do with Brazil? Am I wrong in thinking that's the connection there?

The only thing I can think you might be referring to is in the second quarter we took a large charge on Brazilian non income taxes that are special charges, so if you take -- since we can't take a tax benefit for those special charges if you exclude specials then it would have a beneficial view on the rate.

I'm actually -- I can pull out my notes, but I think it was in New York in March and Tim maybe this is for you, you talked about 10 to 15% for the whole of '05, that it was not a normal situation, that 25 to 30 is kind of the more long term, and my impression here is that the reason it's changed is primarily Brazil. Is that a fair assessment?

Yes, it is. It's a significant piece of the currently higher rate because obviously we're not getting a tax shield on a higher level of all in losses, and to Ron's point, the special charge on the tax contingencies increases that reported loss. So I think the logic is still very much the same, Mark, and, importantly, it's still our belief, and I'm not making the projection for third quarter or fourth quarter, but over time we still believe that the tax structures we've established that have the rate on average in that 25 to 30 percentage point range longer term is the right one.

Tim, just to clarify that longer term rate doesn't include any later realization of the tax benefits from the Brazil losses, it just kind of assumes no Brazil losses.

And am I correct in understanding that your free cash flow view, which obviously changes as time goes on, but you're saying that in March you didn't think you were going to get any sort of cash flow benefit from Brazil's losses from a tax perspective and that today that view is the same or that there's been a negative change there from Brazil's ability to help you not pay taxes?

It's certainly not helping our cash tax situation so that's really the same.

I think maybe the point of view before was that the Brazil losses as they went away, as they moderated then we wouldn't have the detrimental impact on our rate of not being able to utilize them.

Mark this might be a good subject area for you and others to follow up with Dave at 3:00 because we don't have lot of time left.

But the cash flow view you're saying as relates to Brazil and taxes hasn't changed versus March?

Correct.

Okay. Thank you.

Thank you. Our next question comes from Nik Modi of UBS.

Leo or Tim, can you give some more color on the U.K. cost cutting initiative that you referenced earlier? Can you give us some context around that? The sources? How much that will be and what you plan to do with the incremental money? And then separately, just curious did all 15 million in the realized synergies in the quarter fall to the bottom line?

The issue in synergies is that $15 million year to date I believe is reflected in our P&L.

Okay. So that hit the profit line.

That's right. So we have $15 million of synergies year to date that have been reflected in our profit performance and we are -- continue to be confident that we'll reflect the full 50 for the full year of year one of our synergy efforts by year end. Regarding the U.K., Peter Swinburn why don't you step up on that.

Sure, no problem. As far as the savings are concerned, Nik, in the U.K. I can't, be specific because we're in the process of going through a legal process that we need to go through in European legislation. That involves agreeing everything with employee quorum in terms of detail. That won't actually be finalized until August the 4th, which is two days' time. So it would be -- it would mean collecting (INAUDIBLE - highly accented language) so we haven't gone one piece of overhead reductions which is virtually contingent, as I say it's about 48 hours away, and we will be looking ongoing at any other cost opportunities that we can take during the rest of the year's normal course of business.

In terms of what you plan to do with the money, you don't have to give out a number, but is this something you plan to reinvest behind the business the U.K. or do you plan to let it fall to the bottom line?

That will be a decision we take when we finalize our plans for 2006 with the rest of the enterprise.

We'll help Peter with that decision.

Thanks, guys.

A friendly negotiation.

Exactly.

It's collegial.

Our next question comes from Robert van Brugge from Sanford Bernstein.

Another question on Brazil. You're taking a charge to shore up your tax reserves there and you had mentioned in your 10-Q that you believe, just off the top of my head there was like 60 to $70 million off taxes in dispute and then a larger amount it was in your words remote. Do you believe the current charge is sufficient to cover all the future liabilities at this point based on your negotiations with the Brazilian government authorities?

Yes.

Robert this is the very best look that we have based on what we know today and we thought it prudent to take the charge that we've referenced in the second quarter. Obviously it's made larger by the strong REI but this is the best determination that we can make based on what we know today and obviously to the extent that that changes over time we will let you all know as soon as something changes if it does.

Am I right to assume that you are in active negotiations with the government over there over these tax liabilities or is this essentially the view from your tax lawyers at this point on where you stand?

This is our assessment from our lawyers and accountants.

One more question on Brazil. I notice there's about $10 million of interest expense sitting in the Brazil segment which is separate from the corporate interest expense you were talking about. Is this new debt that you've taken out?

No this is something called monetary variation. This is basically the interest expense that per U.S. GAAP we're required to accrue, we're required to reflect based on the interest on these -- the potential interest on these tax contingencies. So as that amount increases, which it obviously did in the second quarter to the more probable category we've got to reflect the appropriate cost of money on that accrual.

Okay. Got it. Thanks.

You're very welcome.

Thank you. Our next question comes from Corey Horsch from Credit Suisse.

Hi, Corey.

Good afternoon everybody. I just had a question on U.S. and the promotional environment we saw in the second quarter and continue to see 30 basis points of increased promotional pressure or discounting strikes to me is not terribly high given all the rhetoric around what's been going on in the U.S. I was just curious if you could give some more color on your execution promotionally versus your competitors, if you're content with the relative price of Coors Light versus Miller Light and Bud Light and if there's any distinction you can talk about between the promotional efforts on the premium end versus sub premium and what your response has been? Thank you.

Corey, let me take a shot at that, then turn it over to Frits for some perspective. But remember what we said going into this discounting round. Clearly there was more aggressive discounting in the U.S. business in the first two summer holidays. But you got to remember, our pattern of business says, just because our shares are so disparate market to market, that we are more selective market by market by where we react and we react by brand and by package size as appropriate. So we would tend to have a little different trend than our competitors perhaps and I think that's something you need to remember in terms of the makeup of our business. Frits, why don't you give some color on what's going on regionally, what's going on the key holidays, and help him out a little bit.

Sure this is Frits talking. Leo used the word selective. I was going to use the word surgical. By that I think we both mean we respond where we need to but philosophically our feeling is that the best thing for our business would be to continue to build brands and to invest as much as we can on the demand creation side as opposed to on the price promotion side. Having said that, obviously we've got a make sure we're competitive in the market place. If you look across the U.S now, our take is that where the beer category is the softest is California and that's also where you see the most aggressive price promotion which is obviously then compounding a falling volume with more aggressive pricing. As you get to the northeast it's abated a bit and southeast and Texas not much change really in the last couple of months. We saw aggressive pricing both in Memorial Day and coming out of that and really between the holidays, Memorial Day and the 4th of July, then coming into 4th of July again continued pressure and we haven't seen that abate really as we've gone into the post-4th of July period here.

Thank you. And is there any kind of difference that you can discuss between what's happening on the premium end and sub premium as some of your competitors have changed their approach to that segment?

Well, we're still seeing more pressure on the premium end. Keystone we've been able to sustain our prices, certainly better than at the premium, at least for our part of the business and I'm sure some of that relates to Leo's comment around the regionality of our market shares. But we continue to see price promotion pressure particularly in premium light and in the premium segment overall as you see pressure coming from both ends meaning the imports on the one hand taking significant volume now and continued low prices on the sub premium side.

Thank you very much.

Our next question comes from Carlos Laboy from Bear Stearns.

Good afternoon gentlemen.

Hey, Carlos.

I was hoping you could give us some clear guidance on when is the appropriate time to address your long-term plan for Brazil?

Carlos, excuse me, I can't hear you.

My question is when do you think is the appropriate time to address your long term plan for Brazil? Can you give us some more guidance on timing on when you think you can share with us a comprehensive plan for Brazil?

Carlos, as we told you at the end of last quarter we have embarked on a valuation -- full evaluation of all of our alternatives. We are well into that process, there is no news to tell you today. As soon as we have news we'll be back and give you a very clear understanding of what we know and where we're going forward.

Leo is there a risk here that the synergies for this year which seem to match these undisclosed tax liabilities are going to get all trued up in Brazil and that there is a risk here that the synergies for next year get chewed up by a turnaround plan for Brazil, or do you keep Brazil? Are you worried about that?

I don't think of those two things hand in hand, Carlos. I think we have a situation in Brazil where we have an operating team really doing an excellent job in a very challenging situation, and as we've told you we're looking really hard at our strategic alternatives, clearly the synergies fall to the bottom of the P&L. In a tough year, you have the appearance they get chewed up by something. In a really good year they really buoy our profitability and we're going to have good years and bad years, fundamentally our profitability has improved by these synergies. That's the whole point of ongoing synergies. So I feel really good about that. And to speculate on what goes on next year I think is way premature.

Thanks.

You're welcome.

Thank you. Our next question comes from Bryan Spillane from Banc of America Securities.

Good afternoon, guys.

Hey, Bryan.

A question for Kevin. I don't know if you disclosed this or not but how much was your marketing spend, your advertising spend up in Canada in the quarter? And then if you can just give some color first on how much -- what the incremental spend you're expecting to see in the second half and then some color on the impact that you've had on the market or on the consumer with your new ad campaign.

Let's talk about your first question with the increase. I'll -- total marketing spend is up about 10% of which half of that is true spend and half of it is curving for the change in the policies related to the merger. So spending is up. We will continue to track spending up the rest of the year. Part of it is we'll be spending more as hockey comes back. But continue the programs that we started. The second question about how is progress on Canadian, on we seeing any uplift of that. Yes, we're seeing encouraging signs and certainly as you look at the trends they're getting better quarter by quarter, month by month. We've said all the way along, this is going to be a long-term turn around for Canadian, we're happy with the progress and we believe that the programs we have in place right now are better integrated, they're stronger than we've had in the past and we're encouraged by it. Still work to be done.

I'd also say that it's encouraging that off an increasing solid Canadian base, if you look at Canadian and Coors Light together as those two big brands, and Dry in our Quebec province, you've got to feel good about the total growth of the business and the total portfolio overall and I think that's the way we have to look at it increasingly so.

When you look at the strength of the portfolio, we actually grew market share in eight of ten provinces in the last quarter.

Okay. Thank you.

Our next question comes from David Hartley from First Associates.

Hi, I just wanted a little more clarity on the tax thing if you wouldn't mind, Tim. The 26% impact, what would net/net be the tax rate in the quarter? Should we use a 25, 30% as your normalized rate and go from there? Or are you expecting 37 to be the number for the next two quarters?

Well, I'm not going to go quarter by quarter. I think the long-term rate, the 25 to 30% is right. I think the sort of rate for balance of this year that for now is most prudent is the rate without excluding special charges, in terms of -- that gives probably the best read on what our real tax rate will be or could be balance of this year. Because obviously with so many special charges and the Brazil impact that's largely what you're seeing in that 50 plus rate for this second quarter.

Right. So okay. All right. That helps.

I think that gives you the sort of flavor and that's -- that's where we are for now.

Just a general question, in terms of your plan for the quarter on the sales revenue side and some of your spending margin? Are you happy with what happened quarter? Did you meet plan or are you below plan there?

More specific. I don't understand the question.

I'm just trying to understand when you mapped out your budget for the first half of this year and you looked at what you hoped to achieve in terms of revenue gains for some of your key brands and your overall portfolio and the amount of promotion dollars you had to put behind it, are you on plan in terms of the type of earnings you've gained this quarter and in terms of your marketing spend are you on plan for that?

Let me give you three sort of comments in answer to that. One is we're clearly not performing where we had had hoped to perform. We've got market dynamics in each of our markets which are more difficult than we anticipated, particularly the U.K. which is where we continue to spend as aggressively as we had planned on our key franchises, but where the market is considerably below expectation. Secondarily in the U.S., where we came into the year really not fully anticipating the price activity and anticipating a more aggressive market growth. So I guess I'd say within the category and market share expectation we feel pretty good about the U.S. trends. And I'd say the same for Canada. So our attitude towards it is at this point we will continue to invest aggressively in our brands as appropriate going forward and we're pleased with the trend changes we're beginning to see in Canada and the U.S.

And do you still have as a plan, I forget the exact guidance, but to outpace the -- in terms of market share gains or volume gains, to outpace the U.S. market by a factor of 2 to 3? Maybe you can clarify.

Our long term strategy has been to outpace market growth by 1 to 2 growth points in the U.S. and that's clearly what we'd like to get back to. There's a lot of noise in the history particularly given the low carb category last year. We're encouraged by the trends on Coors Light towards that long term goal.

Just final question, how is the light category trending against the remainder of the market, or category?

Light, what's going on in the U.S. category is Light is good, and premium -- above premium is good.

Great. Thanks a lot, Leo.

Thank you. Our last question.

Matt, we have time for one more question I think.

Yes, sir. Our last question is a follow up from Nik Modi from UBS.

One follow up question. Maybe this is for Frits. Can you give us some kind of color on the impact the cooler pack had in the quarter and given the supply situation is corrected now are you seeing kind of an incremental boost here in the third quarter and expecting it to the lap in the fourth quarter?

Yes, as we start to ramp up our capacity to meet demand and we start to get back out to having to cooler pack distributed nationwide we should see a little bit more volume there but bear in mind overall the relative proportion of cooler pack to the total amount of sales we have, it's meaningful in that we see it as incremental volume. On the other hand as a percentage of the total it's still quite small.

Just one follow up. Are you planning on building on the cold train advertisements or do you have other ad creative in the works for the back half of the year?

Well, we really like coming to the equity of cold and Rocky Mountain pure refreshment and I think you'll see us continue to play that court as we move forward.

Excellent. Thank you.

Thank you all.

Do we have any other questions?

We have no other questions at this time.

Okay. Thanks for being with us. Sorry it took us a little bit longer today but really appreciate your interest in our business. As we said earlier at 3:00 -- 3:00 eastern time, David Dunnewald will lead a discussion that may be able to get at some of your more technical questions and I guess I'd summarize by saying what feels really good to me right now is the leadership team coming together around the new company, you've heard from some of those leaders today. I feel good about the leadership teams as they develop and forming in our major divisions around the Company and that our center team is coming together so that the integration and synergy work that was presented by the merger is going really well. As we confirm up the trends in each of these businesses we'll continue to have more optimism. But thanks for being with us today, look forward to talking to you again next quarter. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now all disconnect. Have a great day.