Molson Coors Beverage Co (TAP) 2002 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Adolph Coors second quarter earnings release conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. 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 CEO of Coors Brewing Company.

Mr. Kiely, you may begin.

Thank you, .

Hello and welcome, everybody. Thanks for joining us today.

I apologize for the delay in getting started. We had a little backup on the check-in. Security was particularly tight. I'm just joking.

Now with me on the call are Tim Wolf, our CFO; , CEO of .; , our Controller; and , our Investor Relations Director. Now is in England. The rest of us are here in . And we look forward to chatting with you.

Here's how Tim and I would like to structure our time with you today. First, an overview of the Coors Brewing Company's performance in the second quarter. Second, a detailed review of second quarter results for our two operating segments, now designated at the Americas and Europe. And, finally some perspective on the balance of 2002 for our total company.

Overall, our performance in the second quarter was mixed. Most notably, our Americas segment unit volume continued to be soft, importantly offset by positive cost performance. And our Europe segment delivered a very positive quarter. As a result, overall financial results were encouraging.

Highlights from the quarter include continued progress in reducing cost per barrel throughout our U.S. business, and we rolled out new advertising creative and promotions that are well targeted towards our core demographic. Although the headwind from new competing brands and ad spend has been stiff, all of our diagnostics indicate that we're on the right approach to build our brands. Equally important, our U.K. business continues to perform well on both the top and bottom lines, providing encouragement that the deal was a good one at an attractive price.

Now let's look at some of the key financial results for the second quarter for our total consolidated company. Earlier today, we reported second quarter unit volumes of 8.9 million barrels with 6.4 million barrels from the Americas and 2.5 million from Europe. Meanwhile, gross sales totaled 1.34 billion in the quarter with net sales of 1.02 billion. And for the record, that's our first ever billion-dollar quarter.

In terms of profitability excluding special items, operating income increased 65.9 percent to 121.4 million, after-tax income grew 37.5 percent, and diluted EPS increased 40.8 percent versus a year ago driven primarily by strong accretion from the acquisition of Coors Brewers Limited or CBL. It's important to note that the results for all periods prior to February 2, 2002 exclude results for CBL.

Looking at our business - excuse me, looking at our operating business segments, in the Americas, as I said, sales to retail for this segment were down 0.6 percent from a year ago. This result was impacted by the July 4 holiday being one day later in our fiscal calendar this year than last year. Without this shift in key holiday, sales to retail in the second quarter would have been about the same as a year ago.

This is a disappointing result in a big quarter for this segment, and we're taking action to strengthen our Americas volume trends. First, our new creative retail promotions and sponsorships continue to be well received by our distributors and the retail trade. They've also tested well with our core business base while being aspirational across broader demographics. An example of the popularity of our new advertising can be found on ads.com, where various of our commercials have been among the top ten advertisements across all industry categories for several weeks.

Number two, we're aggressively leveraging our new role as exclusive beer sponsor for the National Football League. We'll have our heaviest presence in many years on key football properties and we'll do it with NFL-specific television spots for the first time. In addition, we're the exclusive sponsor of NFL.com, an especially hot property in the fall among young adult males.

Number three - Coors Light in the U.S. grew slightly during the second quarter, but it's really more complex than that, as usual. In the East and Midwest, our largest brand started the second quarter soft because of poor weather but has recovered since mid-June including a solid July 4 holiday. On the other hand, California and Texas continue to have their own challenges and we're working hard to change those trends.

In other highlights, we continue to achieve solid progress in reducing cost per barrel in our U.S. operations. It was particularly encouraging to reduce costs during peak season and at a time when volumes were lower than anticipated. Gross margin increased 2.3 percentage points as a result.

Our Canadian business continued to deliver strong growth in Coors Light volume and pre-tax income, primarily driven by solid share and profit growth in Ontario and Quebec. Molson USA was up for the second consecutive quarter although sales to retail were down modestly in the quarter.

Operating income from our American segment grew 6.5 percent excluding special items because of solid pricing and lower costs. A significant achievement in the face of softer volume.

Meanwhile, our Europe segment turned in a strong quarter with mid single digit growth in volume, solid market share gains, continued overall margin growth and flat overheads. The Carling, Grolsch and brands continued to lead this volume growth which was booster on a one-time basis this year by the World Cup and the Queen's Jubilee celebration.

Some of our key actions included the airing of a series of Carling ads on TV specifically designed around the World Cup. Launching the Carling Extra Gold brand into the on-premises trade late in the quarter. This is the first extra cold lager in the UK. It's Carling served 2 degrees colder than normal to tap into a real consumer demand for colder draft beer and deliver an entirely different consumer experience.

We also put a fifth flavor of into the trade. The new Lemon and Lime gives us a foothold in the largest flavor segment of the market in the UK. In sum, our UK brands are solid and our team have been leaders in both core brand building and innovative new product development for many years.

We also continue to implement plans to reduce costs per barrel by better matching capacity with demand and in particular we're on schedule to close Brewery later this year.

To energize the Coors message and culture, the UK Board undertook a series of 36 road shows going to see practically all of our 3200 UK staff during June and early July. These have been enthusiastically received by the organization and form a great base from which to move forward.

The overall result in Europe year to date has been solid pre-tax profit performance ahead of expectations.

As most of you know, the second quarter is particularly important to our annual performance because it includes the start of the key summer selling season and usually drives about half of our annual earnings in North America. This year, with the addition of the UK business which usually has a substantial fourth quarter, the seasonality of our business is reduced but still significant.

At this point, I'll turn it over to Tim to review second quarter financial highlights and to take a look ahead at the second half of 2002. Timothy.

Thanks Leo and hello everybody. I'll start by offering some performance highlights for our two business units and then give some additional consolidated highlights.

Now, let's review first the result for the American segment. Unit volume in the second quarter of 2002 was down 7/10ths of one percent from a year earlier while sales to retail were down 6/10ths of one percent. Lower volume was driven by declines in Zima, Coors Original, Killian's and Coors Light Export which was overlapping a heavy wholesale inventory load in a year ago in Puerto Rico. For Coors Light low in domestic US shipments and sales to retail of our biggest brand were both up slightly in the second quarter.

Meanwhile Keystone Light continue to grow at mid single digit rate. Net sales per barrel and cost of goods sold trends were both affected by the sale of three company owned distributorships last year as we've shared with you in the last two quarters. Without the impact of these divestitures, net sales per barrel would have been up about one percent from a year ago, driven by approximately two percent of domestic pricing and reduced price promotion expense versus a year ago, partially offset by negative domestic and international sales mix. Including the impact of selling distributorships, reported net sales per barrel decreased 1.5 percent in the second quarter. Again, if you back out the sale of distributorships, costs of goods sold per barrel would have been down by 2.1 percent driven by operations efficiency initiatives and lower packaging and raw material costs.

Most of these cost savings related to materials were attributed to improved purchasing arrangements, business profit enhancements and streamlining, rather than to favorable changes spot prices for commodities. If lower costs were slightly offset by higher capacity cost, including the impact of some distributorships, reported costs of per barrel decreased 5.1 percent in the second quarter. As a result of the cost reductions, our gross margins increased to 40.8 percent in the second quarter, up 230 basis points from last year.

Marketing, general and administrative expense in the second quarter was 2.5 percent higher than a year ago. This year, we increased the , the marketing part of this line of marketing, advertising and sales spending at a mid single-digit rate. Meanwhile, overhead expense in the second quarter was flat, reflecting higher spending related to improving our systems and organization, are offset by the sale of company-owned distributorships last year.

Operating income was $78.9 million, up 6.5 percent from a year ago, excluding special items. Our Americas business segment contributed $79 million pretax income to second quarter consolidated results.

Turning to our Europe business segment, please keep in mind that since we did not own Coors Brewers business a year ago, the results we released for our Europe segment for the second quarter of 2001 include only our small pre-acquisition European operation.

We can't offer specific historical quarterly results for the business, simply because it did not exist in its current form prior to February 2, 2002. Still, we will offer current results and key business a year ago. , our CEO, will also be able to offer additional perspective during the Q&A session in a few moments.

For current results, the Europe business segment reported second quarter unit volume of 2.5 million U.S. barrels. Net sales for the quarter totaled million, with costs of goods at $215.7 million, and a gross margin of 37.9 percent.

Marketing G&A expense equaled $89.1 million, or 25.6 percent of net sales. This business segment contributed pretax income of $46.4 million to our total consolidated results.

For the purposes of assessing performance, it may be more helpful to look at trends for Europe, including the business results second quarter a year ago. From this view, European unit volume for the second quarter was up at mid single-digit rate, versus the second quarter a year ago, with brand growing at strong single-digit rates.

, two other Coor brands in the U.K., grew at double-digit rates in the quarter. The World Cup and Queen's Jubilee celebration, neither of which do we expect to repeat again for a while - that was a joke - contributed significantly to second quarter volume growth, particularly in the on-premise channel. These positive factors were partially offset by the timing of the Easter holiday, which was in the first quarter this year versus the second quarter last year. We grew market share overall with on-trade volume up at low single-digit rates and off-trade volume up at double-digit rates.

Net sales in the first quarter were up at a mid-single-digit rate from a year ago driven by volume growth along with improving mix toward more premium products. Marketing spending increased slightly per barrel in the second quarter from a year ago while overhead expense was flat.

Now turning for a moment to consolidated business highlights for total Coors, we did recognize a net special credit in the quarter of $1.0 million pre-tax primarily related to the settlement of claims against , our former partner in a brewing business in South Korea. This credit was partially offset by transition expenses related to our U.K. business.

Corporate net interest expense in the second quarter excluding interest income on trade loans in the U.K. was $18.2 million, which was a $22.3 million change from a year ago which was attributable to our using cash and taking on debt to buy the U.K. business earlier this year. Trade loan interest income from the U.K. business was $5.0 million .

At the end of the second quarter, cash balances totaled approximately $170 million, while long-term debt totaled $1.62 billion including $80 million or the current portion of our senior notes, which were paid off earlier this month.

In the past six months, we have repaid $180 million net debt, well on pace for our debt reduction objectives for this year. We did not buy back any stock during the quarter, and the quarterly dividend remained at its previous rate of twenty-and-a-half cents per share.

Now that we've added debt to our business, cash generation has become an even more critical focus for Coors. In the second quarter, we generated a total of approximately $150 million of EBITDA. Capital spending in the quarter totaled about $60 million, and our full - our expectations for full-year cap ex is in the range of $225 to $235 million for our total business, and that excludes about $5 million in capitalized interest. This range is obviously somewhat sensitive to the exchange rate of the British pound on the CBL portion of our capital spending.

Our effective tax rate was 36.6 percent in the second quarter, down from 37.9 percent a year ago. The first quarter tax rate of 39.5 percent was higher because we had not completed either the purchase accounting or the tax accounting for the Carling acquisition. The average of the tax rates for the first and second quarters equals 37.5 percent. Based on our progress with this work, we now expect the same tax rate for the second half and full year.

Meanwhile, second quarter average weighted diluted shares outstanding decreased by nearly 840,000 shares from a year ago because of significant repurchases we made last year particularly after September 11. Excluding special items, we achieved after-tax income of $67.0 million in the second quarter, up 37.5 percent from the $48.7 million a year ago. Diluted earnings per share equaled $1.83 per share, up from $1.30 a year ago.

This increase of 53 cents per share breaks down roughly as follows - the Americas segment performance added seven cents per share driven by pricing and cost reduction. The Europe segment, driven obviously by the additional of CBL, drove earnings per share by 82 cents. The change in corporate interest and other expense primarily related to adding debt subtracts 42 cents in the second quarter. Our lower tax rate increased overall results by 3 cents per share and share repurchases last year, as I mentioned, added 3 cents per share in the second quarter of this year.

Looking at how much the acquisition has added to our earnings per share this year. The deal was about 44 per cents per share at in the second quarter and 47 cents for the first half of the year. On a cash EPS basis the acquisition was about 53 cents into the second quarter and 62 cents for the first half. Keep in mind, our interest expense in the first half was lower than it will be going forward because we have not yet completed our long-term financing which is at higher rates than the much lower current floating rates. Therefore, these results are not necessarily indicative of longer term .

Including the net special credit, our reported net income of 67.6 million dollars or a dollar 84 cents per share for diluted share was up 35.6 percent from a year ago.

Now, just a brief look ahead to the second half of this year and again, to paraphrase our safe harbor language, some of what we cover now and the Q&A may constitute forward-looking statements. Actual results could differ materially from what we project today, so please refer to our most recent 10-K and 10-Q for a more complete description of factors that could affect our projections and, as I think most of you know, we plan to submit the 10-Q for this quarter -- for the second quarter on or before the August 14th due date.

To assess Coors Brewing Company's performance for the balance of 2002, we are focusing on a few primary factors in each of our business segments, starting with the Americas. First, volume. Although we have not yet seen significant lifts from our US sales and marketing efforts, we believe, as we will mention, that they are on target. Our experience in branded consumer products indicates that our type of advertising generally takes several months to have a major effect, especially when there's considerable news in the category.

Another factor that we are watching closely is the negative impact of the large excise tax increase in Puerto Rico which took effect in mid-June. Not surprisingly, sales have been soft in the first few weeks following the increase, but it's really too early to determine the longer term impact on sales. We should have a better read on this after the third quarter.

Second, pricing and sales to distributorships. US frontline pricing so far this year continues to be as positive as last year and we saw roughly 2 percent year over year pricing along with reductions in price promotions. Positive pricing has been partially offset for us by a away from Zima and Killian's. Also important, the impact that we saw in the second quarter related to the sale of US distributorships, a reduction of about 250 basis points in net revenue per barrel. This is lightly to lessen slightly in the third quarter this year with significant lessening in the fourth quarter.

Third, cost of goods. The outlook for our cost of goods performance continues to be encouraging. We believe that the following factors will be most important in 2002. First, operating efficiency. Substantial savings from our efficiency improving efforts in the US have helped gross margins in the past three quarters. Particularly with distribution costs and related supply chain worth. As we've said in the past, with numerous areas for cost improvement our operations team is striving to pare between 5 and 8 dollars per barrel from all our controllable costs in the next several years.

Next, input costs including packaging materials, agricultural commodities, fuel. At this point, the 2002 outlook for the Americas is for modestly higher glass bottle costs and lower costs for cans, paper packaging and agricultural commodities.

The fuel cost outlook, while particularly uncertain, appears at this point to be about even with or slightly higher than a year ago. Changes in oil and natural gas prices could alter this outlook.

Finally, we anticipate the sale of Coors-owned distributorships in 2001 will be a large factor effecting costs of goods in 2002. As I shared with you earlier, the first half of 2002 impact of about 300 basis points offers the best approximation for the third quarter of 2002, with this factor essentially normalizing by early in the fourth quarter of this year.

marketing and G&A: Our spend strategy for 2002 is the same as in recent years. We start with a fully-funded plan for sales and marketing, with a strong bias to invest incremental resources if they are available during the year. Our sponsorships of the NFL and other properties offer significant opportunities to invest incremental dollars behind our brands.

To model the line in the second half of 2002, it will be helpful to recall that this expense line in 2001 was several million dollars low in the third quarter because of the impact of September 11th accounting. And low in the fourth quarter because of one-off items.

In our Europe segment, we are focusing on three areas. First, volume. Our U.K. business achieved particularly strong first-half volume this year. And while we believe that execution has been very solid, volumes did benefit from the World Cup at a relatively easy comparison from a year ago. A time that you will recall when category sales were slowed by limitations on access to the countryside from hoof and mouth disease.

For the high leverage in the business, the profit impact of these factors tend to be exaggerated. The second half of 2001 was strong for this business in both volume and profitability. So these results will be much more challenging than in the first half.

Second, pricing and mix. We implemented some pricing earlier this year in the U.K. We've seen a more competitive off-premise pricing environment related at the World Cup, along with the continuing shift of the market toward the off-premise channel. Beyond channels, our mix is moving toward higher margin brands. We will closely monitor the level of promotional discounting, channel shift and package mix shift.

Third, cost of goods. In Europe, we continue to achieve modest savings from operating and purchasing efficiencies. In addition, we have detailed to right-size our production footprint around the end of this year in the U.K.

Overall, we believe that we are on the way toward double-digit percent earnings accretion from our new U.K. business, on both the book and cash basis in 2002. This belief is based on its solid operating results in the first half, along with favorable interest rates and exchange rates for the British pound so far this year.

As we've said previously, we believe that this was a good acquisition for our company, bringing with it strong brands, a strong team and an attractive price.

Now let me turn it back to Leo to wrap us up.

Thanks, Tim.

To summarize our discussion, the second quarter was a mixed quarter for Coors, with sales in the Americas, but solid progress towards reducing cost per barrel. And our Europe segment continued to perform well.

In the Americas, we believe we have a solid marketing and sales program to build our brands, and this is obviously our top priority. So we will continue to invest behind these programs. Meanwhile, our cost reduction efforts gained momentum in the second quarter, and we're working hard to sustain that momentum.

In Europe, the acquisition is going well. This sale of business has made Coors a stronger, more diversified beer player on two continents. We continue to be encouraged about the potential of this business.

Our focus continues to be on the basics of growing our key brands and key markets, driving productivity, reducing our debt and building a great team. We believe we have the foundation in place to achieve these goals and build profitability and shareholder value over time.

At this point, , we'd like to open it up for questions.

Thank you.

If you do have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you do have a question, please press the one key.

Our first question is from with Prudential Securities.

Good afternoon, gentlemen.

Just a quick clarification question - the tax rate for the duration of the year is going to be 36.6 percent. Is that correct? Basically what we saw in the second quarter?

I think that's a little higher, - 37.5 ...

Basically, it was the first half average.

Right.

OK. I just didn't understand that.

Revenue per barrel up one percent excluding the sales of distributorships. How much did - how much did the Canadian joint venture contributed to that amount I'm assuming that's in that number? And what was the Canadian joint venture contribution?

Very little. I presume you're referring to the Canadian joint venture north of the border.

That's correct.

Yes, very, very little.

And what was the contribution on an absolute basis?

Nine - point - eight million.

Nine - point - eight?

Yes.

And finally, you said that you saw some competitive pressure in he U.K. - pricing pressure in the off-premise channel in the U.K. Now, I think we remember when you were closing the deal that you said that pricing was pretty solid. Is this - is this a cyclical trend to you think or secular? And then finally, Leo, if you could address what's going on in Texas and California?

You bet.

Thank you.

I'm going to turn U.K. over to Peter, but the headline is we think the aggressive pricing largely was tied around the football. Peter?

Yes, I think our feeling is that it is a kind of thing, but obviously something we want to keep track of and monitor very carefully going forward. But I think as Leo mentioned, it was in conjunction with aggressive sort of promotion over the World Cup.

So it's eased?

I - yes, we do - we expect it to ease. Yes.

Expect it to ease. OK. And just, Leo, in Texas and California, what - this is the second - you know, you mentioned this softness in the first quarter conference call. Can you just address what's happening there?

Yes, there are two different situations. In Texas, we've got kind of a mixed bag. In south Texas, we're going through year one of a lot of distributor consolidations. As you know, year one is the - is the toughest year of those consolidations. We're still encouraged with the ongoing results, but that's certainly a factor. But more of a factor is there's a huge competitive battle going on in north Texas. And we're right in the middle of that battle. We had an encouraging July 4, and, you know, we think we've got things in place to address that, but that's been an ongoing battle now for three quarters, actually.

California's more difficult to interpret. It's - I was just in both of these states, by the way, last week when we had all of our distributor principals in to talk about it. The category is very soft in California. In fact, from a share basis, we're doing relatively well in California. But we've got some category issues that I'm not sure we have a total handle on and we're working hard to figure that out with our distributor partners.

OK. Thank you very much.

You've got it.

Thank you. Our next question is from with Credit Suisse First Boston.

Hi, Tim and Leo.

Hi Andrew.

Couple of questions. First, Leo, as you look at your report card of second quarter performance in the context of your comments on sales momentum, particularly around Coors Light, if you could, in a way, diagnose maybe one or two issues that may have fallen a little behind your expectations and how your company is going to move against those, perhaps, as we continue through the summer selling season into the third quarter and some of that may revolve around your comments on California and Texas?

And then, Tim, I apologize, my line faded out a little bit as you were talking about costs per barrel on the Americas business.

Sure.

Could you talk a little bit about what level you think you can get to over several years and what are some of the material inputs in making your business more competitive.

Will do.

Andrew, Coors Light perspective. If -- you know, outside of Texas and California and these numbers are rough numbers, but Coors Light grew in a 1 to 2 percent range. The weather was a very confusing factor in the beginning of the second quarter, as you know. And I mean, we saw that in our Canadian business, we saw it all across the US beer business.

But since that, in most of the country, we've seen some really encouraging trends on Coors Light so I'm not sure we're behind schedule on that. We're still firing into a very tough market. Our attitude is stay the course. Certainly the diagnostics we're getting back in our marketing are very encouraging.

By the way, parenthetically, original Coors is responding well to the advertising too and firming up, particularly in it's heartland markets, but also in our eastern markets. So there's some encouraging stuff going on underneath. The problem is that every time we see a trend start to set in, it sort of takes a half step back. We can't seem to get a solid trend to set in and I don't know how much of that's category, how much of it's unique to us. You know, most of that is clearer in hindsight than it is in foresight, you know.

Yeah and so you're pleased with your -- the tools and your field team working with your distributors with product placement. So you're saying it may be more of marketplace consumer dynamic than specific execution?

Well, hey look, there's an awful lot of trial going on in the more alternative categories still. You know that. I don't think any of us know where that's --

Sure.

-- going. I'm not really -- you know, I'm not a primary prognosticator in that category, you know. But, the fact is we know that trial is being absorbed there. I think we're doing pretty darn well with that headwind and we're going to stay the course.

Great.

The other encouraging thing is that we haven't even begun to leverage the other major program which is the NFL program and that'll give us a stronger fall presence than we've ever had before Andrew. I think it's gonna be exciting. But, you know, at some point, you know, the category will break out here. I think we're going to be in a good position. We've kept our organization focused, very effectively, on our core brands. I've just been out in the market on a prolonged trip and so has . Our execution in the marketplace really is quite good. So ...

Great.

... it's breaking through right now.

Okay, Andrew, on cost of goods and hopefully I'll hit all your questions. What we have said today and what we said in February and have been saying for some time, that we believe that over the next few years, and I can't tell you, I don't think the operations team can tell you the exact ending month, but over the next few years, we anticipate that there's an opportunity to take out between 5 and 8 dollars per barrel all in. And really, in becoming more competitive, there really isn't a place that we can't do better. I mean, and labor productivity, purchasing leverage, waste reduction, those are some of the areas where we've seen good progress so far. Transportation, distribution costs, maintenance, we're increasingly understanding and using a much more preventative and predictive model to do our maintenance - not just maintaining equipment when it breaks down.

A lot of the investments we have made last year in for Brewing, in Memphis for Brewing, in for packaging, not only provided us with more capacity, but a lot more flexibility. I think you're aware of the significant investments we made last year in our management system.

Sure.

Basically, a distribution cost algorithm optimizer. We're working on our supply chain as we speak. So there's a lot going on. A lot of great work by a lot of great teams within the broader ops team making huge progress.

I think you asked about balance of the year. We're encouraged by the pace of progress and the extent of the progress. The challenge will be, you know, fourth quarter, late third quarter, when we started getting traction last year. The challenge will be those really good performance in cost reduction.

I mean the last time we had significant, you know one, two percentage points every quarter reduction, was never. So the next couple of quarters will be challenging, but we're encouraged by the pace.

And I think - I mean the rate of change in your cost per barrel has been, you know, spectacular. And so from a growth rate going forward, as you look to '03, '04, '05, to the extent that you can have the flexibility of getting between $5 and $8 through that timeframe, you know gives you more flexibility to manage your Americas growth. And that's the perspective I wanted to get. Thank you.

Yeah, and , the only thing I'd add to it is, you know capacity was one of the things that we invested heavily in the previous two years, as you know. And we're in good shape. So when we get volume going, we've got some good capacity over the next few years without heavy capital investment. It's a class A situation in that sense.

Thank you.

Volume is our primary focus right now.

Thank you.

Our next question is from with UBS Warburg.

Good afternoon, everybody.

Hi.

Hi. I have a number of easy ones, and then a little more detailed. Revenue per barrel in the U.K., did you suggest that was up a little bit in the second quarter?

?

Let me just - yeah, it is up a little bit, . It is up per barrel in the second quarter, yeah.

And any guidance on the outlook for revenue per barrel?

No, I don't think so.

I mean is there any reason to think it would be heading down? I guess you've faced this in the second quarter, but you still got a little bit of an increase in overall revenue per barrel.

Yeah, we got a little bit of an increase in overall barrel. It obviously softened a bit with the World Cup. But we're pretty optimistic that we're going to be able to hold up pricing through the rest of the year.

The on there at are still doing very well, still growing at good . So that helps that revenue per barrel.

OK. Moving next to - you alluded to the NFL and the opportunity there. And one of my concerns is that it seems that Anheuser Busch owns the rights to most of the teams - the individual teams. Can you address how you plan to leverage NFL in that context?

, we've - our situation comes from a point where, you know, Anheuser Busch had most of the teams last year, too, and we didn't have anything to play. What we have today are the NFL shields, which they also had in the past - those we do have to play exclusively. And this puts us in a really good competitive position to have the kind of merchandising and top spin across the country to play there. So, we fell really good about it.

OK. I also want to clarify, Tim, you talked about $5 to $8 per barrel savings. Are you saying, "going forward from here," or are we already - you'd count this year?

You're sounding like our operations team around plan time.

I think some of that five to eight is - we've already achieved a bit of it.

What percent of your savings do you think you've already captured - ...

Boy, that's a ...

... a potential?

That's a tough one. I mean I'd love to give you a specific answer, but since we're talking in a range of $5 to $8, I'd only be guessing. I think the most important point, , is that you've made some nice progress for three quarters and we've got many quarters to go before we tap out, so to speak, the full extent of our opportunities. And, you know, I think the best thing for us to do is to continue to share with you every quarter and then once a year at our - at larger gatherings the nature of the progress, the extent to - I mean we'll be tightening that range from five to eight to, you know, four to six to two to five as we go through the next few years. It'll still be a range and it'll be tightening down and it'll be - it'll be reduced as we capture more and more of that five to eight. I'd say a piece of it we've already captured, but ...

OK.

... there's a lot, lot more to go than what we've captured.

Great. And then, lastly, Leo, would you mind helping us out a little bit with what your outlook is for Zima and some of your other higher-prices that have been under pressure? I mean is there any risk that they just sort of continue to weaken over the next few years, and, you know, the risk to net revenue per barrel from that?

that's a - that's a really good question. It's been a real tough year in that - in that sector. There's been a lot of stuff going on, .

Zima actually in perspective has weathered this thing pretty admirably. You know, we don't - we haven't lost any shelf space virtually. It's still one of the top handful of brands in the category which surprises the trade a little bit when we go and present the facts because it's still turning and it's - you know, still a good brand. Disproportionately hurt in the chains where you sort of get a one-on-one tradeoff for shelf space, but in channels of choice, Zima continues to do extremely well.

I'm optimistic we can recover our position as we head back into next year as this trial eases. I'm optimistic that we can recover the trend on Killian's as we get focused back in our wholesalers on the more balanced portfolio. Original Coors, as I said earlier, is already showing good signs of stabilization which is quite encouraging.

Thank you so much.

Thank you. Our next question is from with Deutsche Bank.

Hi, Tim and Leo. Just a couple of follow-up questions. First, I wonder if you might give us your sense of the onslaught. What kind of incremental impact do you think the category should have over the remainder of the year, first of all? Second, with regards to the Carling brand in the U.K. specific, Peter, if you might address how things are going with regards to some of that Heineken share that's been up for grabs and then lastly, there was an article in citing you're doing a new ad agency search? I was just kind of hopeful that you might comment with regards to what kind of additional copy you feel would make sense for the marketplace? Does it relate to coming up for football, or is it to replace anything? Thank you.

Good. Thank you. Let's see, I'll take the , hand it to you Peter, and then come back on the agency. As I said, I'm not the best prognosticator in this category. Let me tell you what we think we do know, Mark. This is a seasonal business so your balance of year question, clearly as we come out of summer there'll be some perspective here, right? Because what we've seen is this category slows down going out of season.

What we do also know from our history is our Zima experience back in the early mid-90s. There's a lot of trial going on in this category. This is an easy trial category, but I mean, beer in general's an easy trial category. The real question is which of these brands are going to stick and get repeats. You've already seen some announcements from some of the players about the positions of their brands. We've been to this show before. You know, the real test of this is what the shake out looks like next year as we overlap this trial period.

Bottom line, awful lot of money has been spent against a pretty narrow category for the past several months and remains to be seen how it -- how much lasting power it has.

Now, having said all that, Mark, I'm a believer in the segment. We've been believers from the beginning. That's why we got into it with Zima, so I'm not hear saying that this isn't going to be a segment to play in our category on-going and we also see that in the UK. Now, remember the UK plays younger, so it's, I think, a higher potential segment. Peter, you may have an editorial on that, but you have a younger LDA over there. But the -- you know, it's matured at about 5 percent of the total -- if you count it in the beer category, it matured at about 5 percent of the total category over there. I'd be very surprised if, in a mature state, it was as big as that here, just because of the LDA age differential. But that's what we know, Mark. Peter.

Well, I think, Mark, on your question regarding Carling, you know, we've had terrific and quite strong growth behind that brand in the first six months. You know, in middle to high single digit kind of range and clearly a low, as we've mentioned, the second half was a much better half last year, so we're not probably going to expect that kind of growth rate going forward. But overall, the brand is very robust and we feel very good about the progress there.

Now, in terms of Heineken, clearly Heineken have made an announcement that they're going to be changing their brand and that they're going to be moving out of their mainstream lager to a premium lager as they have in the rest of the world. Clearly, we're planning to -- and we are, targeting some of their major accounts and we expect to get more than our fair share of that volume which is, you know, something north of a million barrels. So it's -- and it's a big competitive opportunity for us.

I just, you know, add one final thing on the question. As Leo mentioned, you know, it is around 5 percent of the business in the UK. You know, it's still continues to grow. And certainly, as had mentioned, we just gained a major student . And in the university bars, they have a much higher percent. But I think as some of these drinkers move on a bit and get a bit older, they start selecting other products.

And, you know we're certainly seeing a lot of these ready-to-drink brands are beginning to tail off. And I think there is really some limited lifecycle to those products.

They're very news-oriented, right ?

Yes, absolutely.

Regarding question on agencies, we're doing what a prudent man would do, a prudent person would do, in fact. And this has nothing to do with not liking where we're going. We just need good ideas.

Hey, the beer business is in window, a high profile idea business. And we need to have as many good ideas as we can. is clearly our lead agency. They did a great job of turning around creative and getting it in in the right direction. We're asking the question of, can one agency really give us all the ideas we need, which is as well. We went out to look at some other selective resources, particularly resources who have a track record in young adult marketing.

So that's what it's about; nothing more or less than that. And when we've - if and when we've got something to say about it, we'll be right there with it.

Thank you, Leo.

You got it.

Thank you.

Our next question is from with .

Hi guys.

Hi.

Tim, can you give us the cap ex, if you have comparable figures from '01? And also depreciation, what's that looking like this year and last? And maybe your thoughts going forward into next year - thanks.

Yeah, cap ex for last year 2001, when we didn't have , if memory serves me, was $245 million, give or take. The range for this year, as I mentioned, is with - basically 11 months of capital spending will be in the $225 to $235 range. That doesn't include about $5 million of capitalized interest.

And obviously to the extent that the pound continues to strengthen the balance of the year, you know we could be on the higher side of that range. So just know that.

The cap ex range, I think we shared this in February, I think we shared it at the last conference call, for next year is in the $210 to $230 range. And, again, that's probably a little bit more. You could pull that range about maybe $5 million each way because of the pretty significant movement in the pound over the last, you know, four or five months.

Depreciation for 2001 all in was about $120 million. And this year will be obviously a bit higher than that, because of the heavy load at capital spending last year. And also understand, I mean the mix of our capital spending over the last couple of years has moved a higher percentage of our capital in IT spending, which, as we all know so painfully, as a shorter , so you depreciate it faster. So we'll be up probably another 10 to, you know, 12 percent of depreciation 2002 over 2001. Hope that's helpful.

Do you have the CBL cap ex or give us an indication of what it was in '01?

'01 - it was, it was quite low because - it was much lower because as you'll recall, held off - and Peter probably knows this better than I - but, held off on a number of capital projects that could have and will, as we - as we take them on, reduce bottleneck. There's a - there's a need for refreshing the IT backbone and desktop there. So held off - I believe the cap ex spending was in the high fifties - low sixties millions of dollars - not pounds. And we'll be spending in the low sixties at CBL, and that's pounds, not dollars. So, we - you know, we took it up this year to a level that we thought the business really warranted having gone a bit without for the last couple years.

And Peter, you may - you may want to comment on that.

Yes. No, Tim, I think you're absolutely right. Those ranges are about right, and, you know, we have invested a bit more in the business because the last couple of years particularly on the production side, you know, there was a bit of under-investment for the obvious reasons. But I think you're absolutely right in the ranges.

Yes, , just one more thing. I mean, this year - and this year and next year, we'll also have a of capital spending to be moving some of the packaging capacity to as we close down . So, you know, that's - you know, that's the sort of spending that we want to take on to right-size our infrastructure and make even more efficient and, you know, ultimately dispose of at hopefully an attractive price cash. So there's some capital spending for that, as well.

That's helpful. Thanks a lot.

Yes.

Thank you. Our next question is from with Legg Mason.

Hey there, everyone. Couple questions for you, Peter, and then, probably one for you, Tim.

Peter, I wonder if you can give us an estimate in the second quarter roughly of how much share you think you took in the U.K. and how that might compare to your expectations for share in the second half and longer-term. I think it relates obviously to some of your comments on Heineken if you're seeing tougher comps in the second half, it would be helpful to see how you're thinking about - due to the industry issues, it would be helpful to hear how you're thinking about share.

And then, also, on the portion of your business, if you could update us. If I'm correct, there's some nice incremental business coming your way. If you could give us an update on how you expect that to impact your business - you know, magnitude - timing - that would be helpful.

And then, Tim, I wonder if you could kind of - I know we've talked about this over the last few months, but obviously management is becoming an important - a more important issue for Coors as a larger entity. I wonder if you could update us on how that's progressing and specifically with the pound doing as well as it's been doing or did do in the second quarter, what sort of protections you've put in place or are putting in place as you look at potentially a reversal in trend. Not that there would be, but what - you know, what sort of protections might you putting in place that you contemplate calendar '03?

On the share question, you know, I think we're expecting - well, the experience in the second quarter was ranging between about half and one percent on a moving average basis and we're expecting that kind of growth rate going forward.

On the question, yeah, you're absolutely right. The addition of the UK business to the trade team operation will result in some long-term benefit, obviously to their business, and to the extent that we share essentially 50 percent of that, we do expect some increase in the dividends from that business. You know, in order of magnitude, you know, it's in the sort of low single digits in millions. But it won't be hitting, you know, our business instantly because it's going to take 18 months or so for trade team actually to invest a bit in that business and consolidate it into their network.

And that low single digit, that's your estimated 50 percent and that's in pounds?

Yeah.

Thank you.

Okay, Mark, to your -- I'll try to hit your question and, as you well know, this is a subject you'd go on for hours, so I'll just hit it real top line. We've got about 1.2 billion pounds of assets in the total Carling business and we've got about 700 million dollars -- and we have about 1.6 billion dollars US dollars of debt.

What we've done, basically, is taken out, if you will, 700 million pounds of our debt to, basically, hedge the asset base on the one hand and the income stream on the other so that we think we're in a really nice position of, as we've said when we had our last December conference call with you all and we talked about the deal in terms of having two sources of income, two sources of revenue, we think we have now, you know, constructed a capital structure that has the income streams, you know, intelligently hedged. Not completely hedged, certainly not exposed. In the second quarter, for example, we've benefited to the tune of about a million dollars US because of the favorable exchange rate. I think the overall good, good news headline, not that we're ever going to sell the Carling business, we're not going to, so this is somewhat academic, but the fact is, we've got an asset now, we've got a business that's worth about 10, 11 percent more than what we paid for it.

But I think in terms of the overall economic and the overall structure, we've taken the right steps to hedge our position. Primarily, by taking out a little more than half of the total company debt -- total Coors debt in denominated it in British pounds.

Thank you. Our next question is from with --

.

-- Cazenove Company.

Yes, Cazenove, thank you. I was just wanting to ask about the competition amongst the wholesalers in the US with all the new launches in the second quarter because it does appear from looking at the quarter 2 numbers from Miller Bud and yourselves that, you know, both the Miller volumes and your own are perhaps a little bit disappointing and that's been, perhaps, at a time when the wholesalers that you share have been very busy with the launches. Do you think there's been a significant diversion of their time and emphasis?

Well, let's put it this way. We know that they spent quite a bit of their time and emphasis?

Let's put it this way, we know that they spent quite a bit of their time and emphasis launching those brands. And there have been a of launches. I think, you know what else - and that's not the only thing they focus on.

Sure.

So in fairness, has that suppressed Coors Light trends a little bit? You might make that case. I don't know if you'd make it any more than you'd say the consumer trends in the marketplace had suppressed it, though, on the same issue.

Has it suppressed the trends of the rest of our portfolio? Clearly. You get beyond the big brand, and the other brands clearly have a harder time fighting for attention. So that's going on out there, , no doubt about it. And some of that will come back at us.

Yeah, absolutely. Thank you.

You bet.

Thank you.

Our next question is from with Credit Suisse First Boston.

Yes, good afternoon, gentlemen.

Fixed income research here. I have a couple of questions for Tim, first. Tim, do you have, by any chance, a pro forma EBITDA number for us?

I'm sorry, say again?

Do you have for us perhaps a pro form EBITDA number?

The EBITDA number that we shared in February I believe was $530 million.

$506.

$506?

On a pro forma basis from .

Yeah. It was $506.

But that was as of - for what period was that, 12 months ending...

That was a full 12 months.

For the period ending yearend or for the first quarter?

No that's $506 for a full 12 months, realizing - 2002 - realizing that, clearly, we're not going to do that because we didn't own the business for the first five weeks of the year.

, that's the pro forma - this is - that's the pro forma number from the that we filed.

Right.

So that was full year 2001 pro forma, including the acquisition.

Correct. And would you have a similar number for the 12 months ending with the second quarter this year?

No, we would not. We would have second quarter approximately $150 million, and then the first quarter, I don't remember what the number was but I can find it.

Yeah, if you could just give me a ring back on that, that would be great.

Then, Tim, could you just share with us one more time what your cost reduction is, as well as debt reduction targets, are for 2002?

Well the debt reduction target is $190 million. And, as I mentioned, we think we're well on the way to that, having paid down $180 million so far this year. And some of that, as I noted, was after the end of the quarter, because we paid down the $80 million of private placement notes. So the target for this year is $190, and we're well on that way.

You know the cost reduction target, again, I guess I'll refer you back to the $5 to $8 per barrel over the next few years. That's akin to about 1.5 to two percent. You know somewhere between those two numbers. Costs of goods per barrel reduction, year in, year out, for the next few years. And that's really the way our operations team has set their plan for this year and expect to do so in the future.

So those are kind of the targets that we've got.

OK. And I just have to ask a short question for Leo, as well. You indicated the Coors Light category showed some mild growth in the quarter. It's perhaps still too early to tell us what the impact is of the launch of the Samuel Adams Light beer, but do you expect to be competing in a significant way with that product?

No, that really -- that really isn't a product that would have an impact on Coors Light.

OK, so at this moment you don't see anything on the competitive horizon that would impact the performance of the Coors Light brand aside from what we already know, then?

Except from what we already know, that's right.

OK, great. Thanks very much, .

You've got it.

Thank you. Our next question is from with Goldman Sachs.

Good morning. Good afternoon. I guess I have a question about marketing and spending -- actually, two questions about marketing and spending. First of all, you announced the NFL -- I'm not sure when you announced it, but I'm wondering if that's incremental spending and how have you been building that spending into your budgets, you know, with respect to this idea of sales curve accounting.

And specifically, could you just say, is there going to be a big step up in that expense against the lower numbers you were reporting last year. And secondly, and maybe more from a strategy stand point, know, we are -- we're seeing basically that your brands are losing market share, you know, at least year to date, and your competitor is stepping up, yet again, his media spending.

, can you really just tell us how you assess that situation? How long you think, you know, that can go on before you really have to either step up your marketing spending considerably or begin to -- and just not follow these price increases that AB's leading?

OK, let me see if I can walk through both those questions. First, in terms of the NFL spending, that spending is within our total plan envelope, so while we are spending some more money in marketing this year, that announcement didn't indicate a huge increment in overall spending. So that's a mix within it, and I think as you might have imagined, the number that was rumored, which didn't come from us, on the total cost of that, includes a lot more things than just media spending.

So that's -- that was something we could handle. Regarding strategy versus a competitor who's stepping up media. What we know, , is that our message is getting out there. The reaction to our message this year is almost stunning. Reaction whether it's call ins or value, or, you know, ratings on commercials. There's no doubt that we're out at media levels that are sufficient to get attention out there.

That's what we try and make sure we're at. We're at critical mass on spending. Now, are we aware of total spending in the category and wanting to take our spending up appropriately, as that spending escalates? Absolutely, and we've talked about that before. Our bias as we go through any year as we see gains ahead of our plan is you ought to drop some of that to bottom line, but our heavy bias is to invest it back against the business.

You know, this has been a more challenging year than most, but on balance, we've done a really good job of that over the last five years, and I expect we'll do a really good job of it over the next five years. So I think we can manage our competitiveness envelope very well, and we really don't feel like we're disadvantaged on the spending issue right now. I think we're in a tactical situation in the beer business that we've got to work our way through.

Well, maybe you can elaborate on that because going back and sort of looking at this quarter, AB actually gained share. You lost share. Miller lost share. The spending levels are going up. Pricing is going up creating, you know, a price umbrella and you're getting good profitability out of that, but that seems to me, from your perspective, to be a pretty unsustainable situation. Especially if the dollar's working in a way where you can, you know, bring income from Carling into the US and maybe cross-subsidize?

You know, we've got investment opportunities at Carling too. You know, I hear what your saying and I understand the academic, sort of, theory on it, I think our cost savings outlook is really positive giving us a source to invest back on the front end. A little bit of volume traction against that cost picture drops a lot of money into the pocket of investable money. You know, Mark, I just don't feel intimidated by it.

You know, the other thing to keep in mind is on a rolling 12 month basis, our total pressure against the market place spending is up about 20 million dollars which is, for us, a lot. And, you know, as we have in the past and we're at it right now, you know, we're going to have a bias to spend any additional funds, any upside, on the front end of the business. So, you know, we're not, even at the high levels we're spending today, we're constantly looking for opportunities to appropriately and effectively spend more and I think if you look at the last 12 months, as I say, that's pretty much what we've done.

Sure, and what's that based on?

Say what?

What is that 20 million based against?

That's total pressure against the marketplace. That's spending on advertising, media, production, sales force, local promotions spending, you know, all in.

The base of that -- I mean, in other words, that compares to a total base number of what?

The total end portion of our last year.

I'm wondering how much of an increase this is, Tim, can you, sort of, put a number on that?

It's mid single digits.

Okay, thank you.

Yeah.

Thank you. Our next question is a follow-up question from .

Yeah, hey, Tim, I got cut off there with on the . You were talking through the natural hedge you've installed. What I'm trying to understand is incremental to that, you're getting, what is somewhere between a meaningful and material benefit from the dollar getting weaker and the pound getting stronger. What I'm trying to understand is if, you know, if we expect that continues, not that it will, to the end of the year and you keep getting this nice benefit --

Right.

-- beyond the natural hedge, you know, you obviously want to protect against that comparison issue next year and it's obviously dangerous to be predicting currencies, but you have to have, you know, things in place to protect against changes and movements beyond what you would have thought. So that's what I'm trying to understand is, beyond the natural hedge, what's happening?

Well, you never want to hedge in any commodity, any currency, 100 percent of your position at any single point in time.

Yeah.

And I think the debt structure that we've got today, in other words, taking out, basically two-thirds of our total debt in pounds, is the most secure, most beneficial way of doing that. And I think that, again, I mean, the reason you take out an economic hedge is to really reduce and mute volatility, not to speculate, not to make money, not to try to be experts in one currency or one commodity. And I think that what we've done with the debt structure we've created is we've narrowed that variability, up or down, to the single-digit millions of dollars, which for a business with a profitability cash flow that we now have, is a really prudent place to be.

Because, you're right, I mean if indeed the U.S. economy gets stronger the next 12 months, you can pretty well count on the dollar getting stronger and the pound getting weaker. And, again, we're not in the business; we don't want to be in the business of being interest rate or prognosticators. But I think that, you know if you track us over time, you'll see that this structure we've created is a darn nice hedge. And our inclination today is to pay off the U.S. dollar-denominated debt before we pay off the pound denominated-debt.

So that's another way that we keep that hedging structure, if you will, in place for a good while.

That's very helpful. Thank you.

Yeah.

Thank you.

Our next question is a follow-up question from .

Thank you very much.

, what was the contribution for factor brands both on a revenue and operating income basis? If you could give us any color so that we get a pure, you know revenue per barrel type of number for the U.K. That's question number one.

And, two, Leo, with Miller changing hands a little bit, have you seen any changes at the wholesale level? Opportunities, concerns, anything like that, particularly going into - as you think about 2003 with the new Miller talking about putting pressure at the wholesale level around their brands? Thank you.

.

Well in terms of your question about factor brands, let me - just hold on one sec. And I think on an overall basis, we were looking at about five pounds per barrel. Does that sound right? Are you looking at a margin kind of thing, or are you looking for a total contribution?

Just total contribution to revenues and operating income. One hundred and some odd million dollars or so in the quarter on a revenue basis and that type of thing.

I think the thing to realize is that that's an intentionally lower margin business for us. And it - you know we haven't so far, and I don't anticipate we'll start breaking out the different, you know, operating profits, margin contributions, from each piece of our business.

But to point, it's a lower margin business...

Right.

... carrying other folks' stuff through our distribution capability. And obviously they don't have our names on them. So...

And year over year, , would you describe the performance or the value of the factored brands to the business is roughly comparable to, I guess, what you understand from last year? Maybe that kind of guidance would be useful.

You know actually, it might be a little bit more than that, . But I think the short answer is we don't - you know I don't have that number right in front of me. But, you know, it wouldn't have changed a great deal from last year. It might be slightly higher than the trends from last year. But I think we don't actually have a number for you right now.

Thank you.

, regarding the Miller SAB deal, sort of way to early to read this. Obviously, listening to wholesalers talk about it, they're concerned about any -- you know, about changes in direction primarily. Because change is confusing to them. They haven't seen anything different. I'm -- you know, my own feeling is that first of all, SAB is a really fine operating beer company. They're operation's focused, they've dealt mostly in either markets where they have a very, very high market share or low marketing intensive markets. Their bias, I would imagine, is to come in and focus on operations first, and learn the U.S. marketing game.

The team on the ground has not materially changed, as far as I can tell, and the signals they're giving their wholesalers is business as usual. So that's what I've heard. If you've heard something different, I'd be curious. But -- you know, to me this isn't likely to hugely change Miller's strategic direction. So what we do is try not get distracted by it and keep our blinders on and do our business.

What we do know is that in these combinations, Coors Light is a very, very attractive brand to these guys because of its young adult profile, and I haven't seen any change in their attitude towards enthusiasm on our flagship brand. How much of the confusion on the other brands this year is attributable to malternatives, you know, versus other things, I think is more of that situation than it is any fundamental change in the way we've been managing these combinations.

Thank you, .

You got it.

Thank you. I am showing no further questions at this time.

That's terrific. Thank you, , thanks everybody, thanks for being with us today and we'll look forward to giving you a full summer report in our third quarter discussion. Thanks for your interest in Coors.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time, and have a good day.