Molson Coors Beverage Co (TAP) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Adolf Coors company third quarter earnings 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 will 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.

Thanks, Julie. Hello and welcome, everybody. Thank you for joining us today. With me on the call today are Pete Coors, Tim Wolf, Peter Kendall, Ron Trace, our controller, Dave Dunnewald, our Investor Relations Director, David Barnes who was recently promoted to VP of Finance for the U.S. business and total company planning. And Mike Gannon who has been promoted to VP Treasurer of Coors. David Kendall and are I in England and the rest of the team is in Golden.

On the call today, Tim and I will cover three topics with you. First an overview of the brewing company's performance in third quarter. Second a detailed review of third quarter results for our two operating segments, the American's and Europe.

And finally some perspective on the fourth quarter and then we'll gladly take questions. Our total -- in total our company's performance in the third quarter started slowly with sales challenges in both operating segments early in the quarter, but with encouraging improvement later in the quarter. At the same time, we continue to invest aggressively in our brands and grow profitably. Highlights from the quarter include additional progress in reducing costs per barrel, particularly in the U.S. business. Initial indications that our new U.S. advertising creative and promotions supported by higher spending levels are beginning to gain traction with beer consumers. In the U.K., although the quarter sales started slowly, because of competitive price discounting and the take-home channel during the world cup, our business regained considerable momentum in the back half of the quarter.

Now, let's get some of the key financial results for the third quarter for total consolidated company. Early today, we reported third quarter unit volume of 8.4 million barrels with 6 million barrels from the Americas and 2.5 million barrels from Europe. Meanwhile, gross sales totaled 1.3 billion dollars in the quarter with net sales of $1 billion. In terms of profitability, excluding last year's special items, operating income increased 69% to $89.1 million after tax income grew 32% and diluted EPS increased 35% versus a year earlier. Driven primarily by strong accretion from the acquisition of Coors brewers limited or CBL. It's important to note that results for all the periods prior to February 2, 2002 exclude results from CBL.

Looking at our operating business segments, in the America's sales to retail for the segment increased 1.3% from a year ago, driven by improved trends in domestic Coors Light and Keystone and Coors original. Total U.S. sales were up 2.7% and U.S. Coors light grew almost 3%. Even if you strip out the effect of timing of the July 4th holiday this year, our U.S. sales to retail would have been up 2.2% in the third quarter and Coors Light would have been up a little more than that. Sales to retail late in the quarter was stronger than this, driven primary I by sales weakness following September 11th last year. These increases were partially offset by sales declines in Zima, Killians and Coors Lite export.

Coors Lite export was hard hit in the quarter following the 50% increase in Puerto Rico's beer excise tax. Zima has been disproportionately affected by the influx of new flavored alcohol beverages this year in the U.S. On the other hand, we are encouraged by initial signs that our core beer brand, especially Coors Lite, are benefiting from our new ad creative retail promotions and sponsorships including our sponsorship for the NFL. In fact if you take out the hard-hit Zima franchise, our U.S. beer trends are about one percentage higher than overall U.S. sales trends. This is encouraging particularly in light of the recent slowing in sales trends for many of the new fabs.

The U.S. pricing environment continues to be positive in the third quarter. Our Canadian business again delivered strong growth in Coors Lite volume and pretax income. Also important we continue to reduce cost per barrel on our U.S. operations during the third quarter, even though we were overlapping significant savings from a large transportation initiative a year ago.

We remain very encouraged with the magnitude and pace of progress being made in our operations team in achieving productivity. Gross margin increased 2.2 percentages over the prior year. And we increased our investments behind our brands and sales capabilities at a low double digit rate in the quarter. We remain enthusiastic about the new approach in advertising and the sales potential for more feet on the street taking our brands to retail.

Net operating income -- operating income for America's segment declined minus 3%, excluding last years special items as higher marketing investment offset benefits from higher volumes saw the pricing and lower costs.

Meanwhile in our Europe segment, we face significant volume changes early in the third quarter as off premise retailers worked off excess inventories following the world cup which ended in June. We also faced tougher comparisons from a year ago than we saw earlier in the year. Overall, the third quarter declined slightly from pro forma volume of a year ago, while positive pricing continued to be largely off set by channel mix shifting towards the take-home channel. The Carling growth of wheat brands grew in the quarter with growth rates mirroring their long-term trends. Margins contracted modestly because of the higher off trade channel mix.

Even in the face of difficult competition, our U.K. brands continue to gain market share this year, driven by solid on-premise performance. We remain on schedule to close the Cape Hill brewery late this year. And as you know this is a critical element to reduce operating costs and better balance capacity with demand. Overall the third quarter represented an encouraging quarter where we control costs, made significant progress towards building the top line momentum and in both of our large markets. At this point, I'll turn it over to Tim to review third quarter financial highlights and that take a look ahead at the fourth quarter of 2002. Timothy?

Thank you, Leo. Hello to everybody from Golden.

I'll start by offering some performance highlights of the two business units and then give additional consolidated highlights.

Let's review the results for the America segment. Unit volume in 2002 increased 1.1% from a year earlier, while sales to retail were up 1.3%. As Leo mentioned this volume growth was driven by domestic Coors lighted and keystone lite and Coors Original. Each of the brands achieved solid growth in the quarter. Net sales per barrel decreased 2.4% in the third quarter from a year ago.

To get a clearer view of the America's segment performance, it's helpful to eliminate, however the impact of the sale of company-owned distributorships from the prior year. Most of you will recall that we sold three of the distributors branches in 2001. Without the impact of the divestitures, net sales per barrel would have been up half of 1%, driven by approximately 2% of domestic pricing and reduced price promotion expenses versus a year ago. Positive pricing was partially off set by negative sales mix which moved toward lower revenue per barrel brands, geographies and packages.

Cost of good sold per barrel decreased 5.7% in the third quarter. Again if you back out the sale of distributorships, costs of goods per bushel would have been down 2.4%, driven by lower packaging costs, continued operations efficiencies initiative, including lower transportation spending and much improved operating line efficiencies. These lower costs were slightly offset by expected payroll-related expense, and costs associated with adding brewing capacity in Golden and Memphis and bottled packaging capacity in Virginia. As a result of the cost reductions, our gross margin increased to 39% in the third quarter up about 220 bases points from prior year.

Marketing general and administrative expense in the third quarter was 6.8% higher than year ago. This year, we increased the M part of this line marketing, advertising and sales spending at a low double digit rate. Meanwhile, administrative expenses in the third quarter were down at a high single digit rate reflecting non-recurring items including the sale of company-owned distributorships last year. Other income increased almost $3 million from prior year, primarily because of a gain on the sales of non-core water rights during the quarter.

Pretax income for our America's segment was $56.2 million, up 54% from the third quarter of year excluding special items and gains on the sale of distributorships a year ago.

Turning to our Europe business segment, please keep in mind that because we did not own the Coors brewers business a year ago the results we released for our Europe segment for 2001 include only our preacquisition European operation. We can't offer historical business for the CBL business because it did not exist in its current form in 2002. Still we'll offer our best notes on it.

For current results the Europe segment reported third quarter unit volume of 2.5 million U.S. barrels. Net sales for the quarter were $377 million, and costs of goods sold were $255 million yielding a gross margin of 32.4%. Marketing general and administrative expense totaled $87 million or 23% of net sales. This business segment contributed pretax income of $39 million to our consolidated results. For the purpose of assessing performance, we believe it's more helpful to look at it year on year trends for the Europe business we now own. From this view, European unit volume for the third quarter declined slightly versus third quarter a year ago as a result of aggressive competitor promos surrounding the world cup.

More important, the biggest beer brands in the U.K. -- Carling grew at a low single rate, while two other brands grew at double digit rates in the quarter. Following the world cup, some of our off-trade customers entered the third quarter with slightly excess inventories. As a result, our sales were slow early in the third quarter until the discounted inventories were cleared. In contrast, the sales on the back half of the third quarter were strong and running at or above our long-term trends for the U.K. business. On trade channel volume which is about two thirds of our mix declined slightly, while off trade volume increased slight limit volumes were very soft in the first few weeks of the third quarter, particularly in the off trade, but they came back solidly in the balance of the quarter. Marketing spending and local currency increased slightly per barrel from a year ago, while overheads have been trending about flat.

Trade loan interest income from the U.K. business was 4.6 million dollars in the quarter. Now, turning for a moment to consolidated business highlight. Corporate net expense in the third quarter excluding interest income on trade loans in the U.K. was 20.7 million dollars which is the $25 million change from a year ago, attributed to our using cash and taking on debt to buy the U.K. business early in this year. Cash balances for the quarter ended at approximately $71 million and long-term debt totaled $1.50 billion, so net debt approximated 1.43 million dollars at the end of the third quarter. In the first nine months of this year, we had made net principal payments on our debt totaling $226 million. Seeing our debt paydown objectives and placing us well ahead of our commitments to our bank group. It's important to note, however, that our combined business historically has been a net user of cash during the fourth quarter because of lower seasonal profitability in the U.S., higher capital spending, and working capital changes in the U.K.-related to holiday sales. Our effective tax rate was 47.5% in the third quarter, down from 57.9% a year ago.

Meanwhile, third quarter average weighted diluted shares outstanding decreased by 700,000 shares from a year ago, because of significant repurchases we made last year, particularly after September 11th. Consistent with what we have said and committed to previously, we have not purchased shares since the CBL acquisition and have no intention of buying any shares back until our debt has been reduced. We achieved net income of 46.6 million, up 32.5% and that excludes special items in the third quarter of 2001. Diluted earnings per share equal $1.28, up from 95 cents per share a year ago.

This increase of 33 cents per share breaks down roughly as follows. The America's segment performance added two cents, driven primarily by pricing, volume growth after heavy advertising and sales investments. The Europe's segment added 72 cents per share. The change in corporate interest and other expense primarily related to adding debt subtracts 44 cents this quarter and our lower tax rate increased overall results improved the overall EPS results by one cent per share. Share repurchases last year added or improved two cents per share in the third quarter of this year. Looking at how much the CBL acquisition has added to our earnings per share this year, the deal is about 27 cents per share accretive in the third quarter and 77 cents year to date. On a cash EPS basis, the acquisition was 37 cents accretive to third quarter and about $1.02 a share accretive year to date.

Keep in mind that our interest expense in the first half of the year was unusually low because we had not completed our long-term financing which is at higher rates than on our short-term borrowings. Third quarter interest expense of almost $21 million reflects our long-term debt structure. Our net income of 46.6 million dollars in the third quarter this year was up 19.8% from net income of 38.9 million dollars a year ago. Including special items and gains on the sale of distributorships in the third quarter of 2001.

Now, a brief look ahead to the fourth quarter of 2002, an as usual, to paraphrase our safe harbor language what we discuss now and in the Q&A may constitute forward-looking statements. Actual results could differ materially from what we project today so please defer to the most recent 10-K and 10-Q for factors that can affect the projections.

We anticipate the Coors brewing company's performance, the balance of 2002, will be driven by few primary factors in each of our business segments.

Starting first with the Americas. First volume. In the third quarter, we began to see modest lift from our U.S. sales and marketing efforts, and we'll work to build on that trend. We're investing additional resources behind our brands particularly linked to our national football league sponsorship. We also saw many more geographic areas of strengths for our brands. Additionally with slowing sales of the new flavored alcohol beverages introduced by our competitors, we're looking for opportunities to build our own sales momentum.

Another factor that we have been watching closely is the impact of the large excise tax increase in Puerto Rico. Our sales in Puerto Rico were particularly soft following the increase and although the trend what improved somewhat since then, we still have a steep hill to climb.

Second, pricing and sales of distributorships, and in the first few weeks of the first quarter this year, we have announced additional front line pricing increases in select U.S. markets. U.S. front line pricing so far this year continues to be as positive as last year, which saw roughly 2% year over year pricing along with reductions in price promotions. Positive pricing has been partially off set for us by a mixed shift away from Zima and Killians, so it can be important factors affecting our revenue per barrel. Also important, the impact that we saw in the past four quarters related to if sale of U.S. distributorships, a reduction of about 250 bases points in the net revenue per barrel will end early in the fourth quarter of this year.

Third, cost of goods. The outlook for our cost of goods performance continued to be very encouraging. We believe it's the following factors will be most important going forward. First, input cost trends. Including packaging materials, cultural commodities and fuel, they appear favorable. At this point, the outlook for the balance of 2002 in the Americas is for modestly higher glass bottle costs and lower costs for can, paper packaging and agricultural commodities. The fuel costs outlook, while particularly uncertain appears at this point to be somewhat higher than year ago. Changes in oil or natural gas prices could alter this outlook. For 2003, we expect recent increases in spot barely prices to have no more than a minimal increase because we contract far ahead with U.S. farmers for our special strains of barley, and that this gives us a smoother cost curve than if we bought the barley in the spot market.

Next, operating efficiencies. Substantial savings from our efficiency improving efforts in the U.S. has helped gross margins in the past four quarters. Particularly with distribution costs and related supply chain work. In the fourth quarter, we will be lapping the first significant savings efforts from these efforts a year ago, which makes our costs of good comparisons more difficult than we have in the first three quarters of this year. Going forward our operations team has many more projects planned or currently under way as we continue to strive to cut five to six cents from barrel of our controllable production costs in the next few years.

We are particularly excited about the implementation early next year of the series of new software and improved process disciplines for our entire U.S. supply chain, that are designed to improve the customer service and product freshness while reducing costs. We have timed this important series of systems to be operational ahead of our U.S. peak summer season and have planned a wide range of contingencies and tests for key supply chain processes.

Finally, we anticipate that the sale of Coors owned distributorships in 2001 with a positive impact across the goods of about 300 basis points year to date will be essentially normalized by early in the fourth quarter of this year.

Fourth marketing and generally administrative expense. Our [immediate] expense strategy for 2002 and 2003 is very much the same as it has been in recent years. We start with a fully funded plan sales and marketing with a strong bias to invest incremental resources if they're available during the year. Our sponsorships of the NFL and other properties offer significant opportunities to grow sales, and we've already invested more money this fall. This strategy is key to our long-term success in the U.S. beer market. Like most ore U.S. companies with defined benefit pension plans, we're seeing significant increases in pension expense driven by a combination of lower equity values and lower interest rates. Specifically, America's pension expense for 2002 is expected to be about $19 million pretax, up from $12 million in the previous year.

Our current outlook indicates an additional increase in pension expense for 2003 along with a balance sheet adjustment at the end of 2002 because the market value plan assets has fallen below our planned obligations. The assets in next two months is along with the level of interest rates could have a significant impact on the pension expense and the balance sheet adjustment to the other comprehensive income component of our shareholder's equity.

Turning to Europe, we're focusing on three areas. First the volume. Soft volume related to high inventories following the world cup had a noticeable effect only on first few weeks of the third quarter so that appears to be largely behind us. Meanwhile, volume comparisons will continue to be challenging since the second half of 2001 was strong for this business in both volume and profitability.

Second, pricing and mix. We implemented some on-premise pricing earlier this year in the U.K. but we have seen some off-premise price discounting along with a continuing shift in the off premise channel. As a result, we will closely monitor the level of promotional discounting, channel shift and packaged mix shift we move into the key Christmas holiday season which in the U.K. is as important as summer is in the U.S. beer business.

Third cost of goods. In Europe, we continue to achieve modest savings from operating and purchasing efficiencies. In addition, we are taking an important step toward right sizing our production footprint in the U.K. by closing the Cape Hill brewery before the end of this year.

Through three quarters, we've posted solid double digit percent earns accretion from our new U.K. business on both a book and cash basis in 2002. This achievement has been driven by solid operating results along with favorable interest rates and exchange rates in the British pound so far this year. This was the latest vision for the company bringing strong brands and a strong team at a very attractive price.

Now, let it turn back to you, Leo to wrap it up.

Thanks, Tim. To summarize the discussion today the performance in the third quarter was mixed with sales challenges in both operating segments early in the quarter, but with solid improvement later in the quarter. We're especially encouraged by sales trends for Coors Lite and Coors Original in the U.S., which are both being supported by the new advertising creative and NFL sales promotions. Meanwhile, we continue to reduce our cost of doing business, particularly in the U.S., while increasing our investments in the front end of our business on both sides of the Atlantic. All in all, we stayed focused on the basics and made significant progress in key areas of the business. Going forward, we'll continue to focus on growing our key brands in key markets, driving productivity, reducing costs, generating cash, reducing debt, and building talent and a great team. We believe that we're on track towards achieving the goals and, therefore, building shareholder value.

At this point, we'll like to open it up for question, Julie.

Thank you. If you have a question at this time, please press the number one 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 number one. And our first question comes from Jeff Cantor of Prudential Securities.

Good afternoon, everybody.

Hi, Jeff.

I think you said that Coors Lite was up 3%? In the quarter, was that correct?

Tim, confirm the number.

Yes, sir, that's correct.

Are you seeing similar trends as we trend through the early stages here in the four quarter?

Jeff, we really don't -- we don't comment on that. It's week to week it's real difficult right now because of the price increasing overlaps from a year ago. Suffice to say, I would say that the momentum generally felt better since the middle of the quarter.

That's fair enough. And --

Jeff, just a quick caveat that 3%, I hope you understand, that's U.S.

That's what I was referring to. Thank you. When you think of your pricing algorithm, when we go into the fourth quarter, when we're lapping the sales of distributors and what have you, there's mix working against you, but should we see a number that's more closer to this 2%? Or just give us a sense on, you know, how you're thinking what we're going to see going forward?

I think we've characterized it as we're taking the same pricing as we took last year in the quarter that's the way it looks to us. It's about the same amount of geography, so I wouldn't expect a change in the comparison. It looks to me like the mix affects largely going to be with us, although maybe dissipating a little as we approach the end of the year.

Just finishing off on that, you know, the mix -- getting the mix right has been a challenge for us because of Zima and that's a more profitable product and a higher-priced product.

Puerto Rico. Yeah. The other thing is Puerto Rico. It's still a challenge for us, and also in terms of this year over year comparison, don't forget that in the fourth quarter last year we sold our San Bernardino distributorship. So that will still have a downward effect on the net sales per barrel look. So there are a bunch of things -- it will be small, but it's certainly there. So the fourth quarter will be a tough one to pin down in terms of a net sales per barrel sort of number.

I understand. Two quick questions, Tim. Ad spending, a percentage of sales was at 30%. You know, should we expect that rate to go higher as we trend through, you know, if not the quarter certainly looking into 2003? Also, what was your joint venture income in the quarter? Thank you.

Joint venture income with north or south of the border?

North.

North of the border was about a million -- a little more than a million dollar increase. And south of the border it was a small loss.

Ad spending, I mean, our hope and expectation is to be, you know, exactly the way we did this year is to be planning a solid mid, high single digit percent increase for our plan, and then as the year goes on, as funds become available as we, you know, improve productivity, lower costs, drive sales and see incremental resources, we'll invest them back. But the pace we're growing right now in the third quarter as I mentioned with the M portion of our MG&A growing at a low double digit pace is where we'd like to be, but we don't plan that aggressively. We plan lower and add during the year if we can afford it.

Thank you very much.

Your next question comes from Mark Swartzberg of Legg Mason Wood.

Good afternoon, everyone. Two questions, one for you Peter, and one for Tim. Peter, can you update us on the view of long-term growth and underlying long-term operating growth? And Tim, as you look at '03 of cash flow available to pay down debt, I think we have a handle on what your minimal obligations are there, but as you look at non core assets and other sources of flexibility above and beyond those minimums, can you give us a sense of how much cash flow you see having available to paying down the debt in '03?

Unknown Speaker*: Yes, sir. I think in terms of going forward, mark, we don't really make much comment about that other than to say, you know, we expect everything to -- you know, a strong fourth quarter. But in line with our kind of annual growth which is in the sort of low to middle single digits.

Okay. Great.

Mark this is Tim. Just a couple of punch backs and then I may even answer your question.

Yeah. We're looking all in for about a 10% thereabouts lower -- 7 to 10% lower year on year cap ex spending. So that's obviously going to provide us a bit of lift. We've got a lot of really, really good focused work, primarily led by Peter Kendall's team in the U.K. but also some work in the states on to your point monetizing non-core assets, assets that may be, in fact, more easily better operated by an outsource party. We're working on those plans as we speak.

I mean, obviously, the cape hill brewery sale, we had previously planned that for 2004. Depending on what the market looks like that that may happen in 2003, but that's not something we can commit to.

In terms of a range, taking all this together, I don't think we'll be looking at the same level of debt reduction next year as this year, but I think right now, and again, our plans are still very, very much in the making, and we're going to certainly update you with more precision in the February meeting in New York. But right now, we're looking at 170, 180 million dollars sort of net debt reduction for 2003, but again, please understand that that is tentative. That's preliminary. The range could shift up by $20 million, it could shift down by $20 million. But I think right now, I feel pretty comfortable saying it's in that 170, 175 million dollars sort of range.

That's great. Thanks, Tim.

Your next question comes from Matthew Webb of Cavanaugh.

I wonder if I could ask two questions, please. First on the U.S., can you talk us through the various areas of the negative mix trend, both by product and by geography and tell us whether those are ongoing and also whether you see them as reversable?

Secondly on the U.K., I've noticed just around and about some fairly generous price offerings on some of your brands in the off trade. Would there be any truth in the suggestion that some of the recovery you saw late in Q3 in your volumes was as a result of you responding to the competitive activity of others?

Matthew this is Leo on mix issues. We have both product mix and geographic mix issues. Geographic is in the Americas is largely impacted by Puerto Rico. Secondarily impacted by sort of the east-west mix swing. The east -- the lands in the east are quite robust. We've had some recovery in Texas which is good news on the quarter. California it continues to lag, and our western markets are somewhat more profitable than eastern markets. And product mix, it's -- the good news is that Coors Lite, Coors original and Keystone, which are our three biggest brands are back in -- back in the growth column. The bad news in that mix is that Zima and Killians which are so disproportionately profitable on a per barrel basis are still suffering some negative trends.

I would say that the geographic mix is still unknown because Puerto Rico is not really settled out. The good news on domestic U.S. is that the west has shown some recovery and that's -- that's encouraging, but these things have a tendency to move around on us. On product mix, I would say it will be early next year before we see a significant change in the product mix impact. Tim, anything to add to that?

That's right on. I mean, you know, Killians and Zima, obviously have hurt our mix impact because they are -- they are higher priced, higher margin and same logic, same is true with Puerto Rico.

Peter, on the U.K. pricing front --

Yeah, I think the off-trade pricing environment for a few weeks following the world cup became very competitive. But since then, pricing has firmed. You know, you may see a few small things out there in the trade, but overall it has firmed quite bit. Since the July period. We'll be obviously watching this closely as we move towards the Christmas holiday.

Yeah. Indeed. Great. Thank you indeed.

Thank you.

Thank you. Our next question comes from Andrew Conway of Credit Suisse First Boston.

Good afternoon. Leo and Kim, you talked a little bit on the sales mix component for the Americas. It is first -- the first question, is it reasonable to think by the middle of next year you would have lapped the more difficult part of the sales effect of Zima and Killian and Puerto Rico? Secondly, Tim, if you could -- I really value some guidance on where you see cost per barrel trends for '03 in the Americas business in light of the tremendous success that your planning people have been able to accomplish. And then is it reasonable to think for '03 -- and I know it's early but as you go through your planning process now, is it reasonable to think that total Coors consolidated can grow its operating income in the high single digit rate off of your base established this year?

Andrew, Leo here. Regarding the mix mitigation, Puerto Rico will naturally overlap itself come midyear next year. We don't know what kind of trend will firm up in the first half of the year. Understand we've got a really interesting challenge there. Not only do we get hit with a sticker shock of a large price increase, because of the tax. But the local brewer, Medalia, didn't take any tax increase. So the price differentials down have there have shifted significantly. And that's something we're still protesting through legal and legislative channels, and I have some optimism that at some point we'll make some progress on that. But don't have anything to report at this point. So we've got a double whammy factor going on. Net -- but having said that to the overlap, yeah, we'll be on some normalized trend by the middle of the year.

Regarding Zima and Killians, we don't know what's in store next year on the sort of product news front in the category. We certainly have our own plans and have our own goals to be back in the growth situation, but a goal is different than a prediction, right? And so we'll keep you posted as we go. Thanks for the question.

You're welcome.

Andrew, Tim, on cost of goods, thanks for the question. Obviously, we're really pleased and -- really pleased with what the operations team has done this year. We're fond of saying the last time we've had, you know, four quarters back to back of reducing our cost was never. So this has been a really exciting year for us. Obviously, the job will get tougher next year when we're lapping really good performance every single quarter, you know, for 2002. Will we be able to achieve? -- Are we planning the same sort of, you know, 2 1/2-plus percent reduction of cost to goods per barrel? No, that wouldn't be prudent because I mean we really want -- you know, our operations team is really committed to making, if not exceeding their plans. So, you know, there's always a good creative balance between stretching achieveability.

We're not going to be planning the level of reduction per barrel that we achieved this year, but, again, we've got a lot of really exciting initiatives that are in place now and will benefit on a full-year basis next year and some like our entire supply chain projects going into effect in early -- excuse me, late in the first quarter. Middle of first quarter. So we're hoping good things from that as well. So, you know, I think that from an expectation standpoint we'll be looking at reductions, but not as aggressive a level as we saw this year. Your question about operating income, I think if memory serve me right now, the consensus of all you kind folks has us something like 9% or 10% EPS growth next year. Hey, from our operating profits standpoint, I mean, we strive for solid double digit sort of growth, but again, we don't commit to that, we don't guide that. We want to stay flexible in both businesses so that when we have opportunities and we have ideas we invest behind them. We think we have those very much in both businesses now. So the keeping powder dry and this constant bias to invest incrementally is something that we're always going to be committed to. So, you know, following our shot is here's exactly the percent or here's the range of operating profit growth is not a business as you know we have been in.

Sure. Sure.

If you go through the model and look at the sort of pricing environment we have got and the sort of volume trends we want to keep to, if not accelerate for the cost reductions. So the wild card or the number to strive for becomes that M investment, in MG & A. But we're certainly aware of the sort of profit increase that it takes to be a solid returning business. We've got this debt load on our back and our objective is certainly to increase ROIC, and you can't do that unless you're growing profit at a strong clip.

Sure. And Tim, as you continue to take costs out and, Ron gets the benefit of that. I don't know if you or Leo can comment a little bit on the effectiveness, and you talked about traction on the marketing programs. But how do you finally affect the efficiency of how you're allocating your brand-building activities?

I will say this Andrew on both points. I think Tim said it just right on the cost side. I will say that I'm really encouraged that the team has, you know, has the initiatives in hand going into the year to be confident that we can lower the cost per barrel that's good news.

We have a high bias to invest. We really believe that our new accretive is working. We have strong indications of that. It's particularly working in the young adult cohort which is exactly what we're trying to accomplish. As you know, that doesn't drive your total volume base overnight.

But it's the kind of investment we have to make, particularly as we develop markets. Growing plans and growing markets is our business. What's been gratifying more recently is that the copy really resonating through the NFL positioning extremely well, and broadens the copy as initial consumer feedback would say. We're right in the middle of this, but we are pretty encouraged with having things that are worth investing behind. As you may know, we signed up two new creative resources recently. And it's -- it doesn't have anything to do with being disappointed with our work. They have done a great job for us B -- we have brought Arnold and Deutsche both on because we feel that what we need is big ideas to invest behind, and, you know, we're just going to need more resources to give us those kind of big ideas. That's the game, right?

Thank you very much.

You've got it.

Thank you. Our next question comes from Bill [Decoriello] of Morgan Stanley.

Good afternoon, everyone. Two questions, one is on the pricing front, one on the advertising. On the pricing front, if you strip out the Zima mix effects and look at the core brands of Coors Lite, it looks like we saw more professional activity between July 4th and labor day. Can you talk of the latest increase since October, are we going to see less of the promotional activity and what we monitor is the food channels since we don't have a read on the other channel, so can you give us more color on just those pricing trends since the increase, in California or Texas, where it seemed to be more promotional during the peak season? And on the advertising side, I know you have the sales curve of how it hits the P & L, but in terms of the actual spending, is there more fire power here in the back half in terms of hitting the airwaves with the NFL timing and with some of that more alternative spending coming off during the fall?

Tim, I'll let you comment on the ad numbers, but the answer, bill, is yes there is. We've added more particularly behind football. So it's, you know, strategic there and we hope that it will come through stronger, you know, given what's likely to go on in the category. And on the promotion mix, I think what you're seeing is promotion pack influence. We're seeing -- and this is going on across the category, it shows up particularly in the -- as you would guess in the supermarket or track channels, right? But it's -- there's a strong move to the 18 packs, some parts of the country a strong move to 30 packs. This appears to be where the action is. In C stores in some cases, a strong move on the large single-serve packs. So, you know, the category is not without its competitive notions, as you know. And overall though, I would say that -- you know, we haven't really increased our promotional profile significantly. Obviously, when you come out of season, some of that stuff wanes and you sort of set up for that next year. I hope that's helpful.

Thank you.

Bill this is Tim. Just, you know, it's hard to get arms around all these different markets where you're seeing, you know, in some cases maybe a little bit of activity from price promotion standpoint, but all in for the third quarter, we, in fact, were down. I mean, for the American -- for the U.S. business. So to Leo's point, just a little bit, but all in all it was down slightly. So that's just one overview point and to Leo's point, yes, we are -- year on year, we will have added some pretty significant increase in our branded marketing expense, especially this the back half as Leo said in his comments to largely to support the NFL relationship. So you've been seeing a lot of Coors Lite NFL ads and will continue to see them.

And Tim, that's curved over the year? Will it it this TNL harder over the back half or it's curved over the year?

Well, not all, but a good portion of the incremental investment has happened since the second quarter. You have seen the results we have just shared, so you'll see more in the fourth quarter. It won't be gigantic, but it will be a couple million dollars more.

Thank you.

Thank you. Our next question comes from Mark Greenberg of Deutsche Bank.

Hi, guys. Mark Greenberg. Just a quick nitty-gritty on the operating leverage to follow on Andrew's question. Can you discuss the inventory levels, both here and in the U.K. at quarter end and how if at all you see that creating the potential for some additional operating leverage as a first question?

And the second question is?

I was going to ask you, Leo, have you seen or have your contacts seen any change incrementally within the shared house distributors, as far as focus on your brands, either as a function as the decline in the RTD sales or the ownership transition at miller?

Yeah, let me comment on that, and Tim, why don't you pick up the operating leverage point. On the shared houses, we've had a lot of activity, as you know in the last 18 months. It will probably be the peak changeover activity we'll ever go through markets, and, you know, as we went through those transitions, we saw some softness in the overall averages there. The good news is it's right back to our previous conclusions. We do relatively better in the mixed houses than we do in the rest of the portfolio. That's particularly driven by Coors Lite. Our Keystone is either up or down, depending on how many other brands they have to sell in the house. So it's kind of challenged. This year, of course, Zima and Killians suffered because of the attention on the overall fab category.

But, you know, actually quite encouraged by trends. I don't think we have seen anything yet, other than emotions out of the SAB Miller piece. I don't think there's anything in the results yet that we'd be able to draw any conclusions from.

Thank you.

Hey, Mark, Tim. On the inventory issue, really in terms of the third quarter this year versus last year inventories almost if same going into the fourth quarter, same answer, pretty much the same as we had last year. So, you know, very, very tiny differences and so in terms of swaying or swinging results in the fourth quarter, you know, my guess is very little. Very little.

Yeah. We plan to go out of the year pretty much the same level as last year. In terms of the distributor inventories. I don't think we'll see a big shake there. Peter, anything on the U.K. in inventories?

Not really, mark. Of course, we are building stock, and, you know, the next three months are pretty critical. But, you know, it's in line pretty much with last year, so there's not going to be any unexpected levels of inventory.

Great. And then, Tim, a follow-up. You made an earlier comment about this, but as we lap the effect of the distributor sales early in the fourth quarter, does that imply that your reported revenue per barrels are going to be more closely in line with the actual market experience for --

Yes. Absolutely. You will see that little bit of that piece of a couple of a tenths of a percent from San Bernardino sale last November, but, yeah, it will be pretty much washed out through most the fourth quarter.

Thank you.

Thank you. Your next question comes from Chris O'Donnell.

Hello, everyone. Peter and Tim, can you provide us with an understanding of how net revenue per barrel and cost per barrel went in British pounds versus last quarter or -- or third quarter last year? )) Tim? You want to start with that one?

Yeah. Say it again. There were two phrases that cut out. I didn't hear.

Sorry about that net revenue for the U.K. business for CBL, what was the change in net revenue per barrel and cost sold per barrel in British pounds. And maybe you can add some commentary on how the channel mix shift impacted those figures.

Chris? No pun intended, not to punt, but I think this one may be for a models building standpoint that Dave Dunowald can follow up better with you, unless Peter has the data at his fingertips. I don't. But I think Dave can follow up with you and get you your answers.

Okay.

I think the mid shift, you know, we obviously -- we actually in the first -- you know period of the third quarter, because we got a bit ahead in the off trade the mix shifted more to the on trade. And as we rebounded in the last two periods, obviously, it normalized a bit. But that obviously does impact the sort of net sales overall. And the cards, Chris. But I think Tim is right, it's probably better for Dave to handle that. Off line.

Fair enough.

Yeah, but the challenge here is you have more moving pieces because you've got equations right now, because you've got this shift between -- Peter's point, on trade/off trade. You also have the -- of the impact that factory brands have on the reported in British pounds result, even though it's each of those segments have different profitabilities. So I think that Dave can help you walk through the pieces and parts and you'll get a better handle on that.

Chris, I'll give you a call when we're done here.

Thank you. Do you have a handle on what the brewery may have in terms on the costs sold per barrel? It should be positive, but can you quantify it?

Peter, you want me to go or you want to go?

I was going to say, you know, it's going to be middle sort of single digit impact on the cost of goods, but we haven't actually got that little nail down yet for next year.

Hey, Chris, what we'll do is when we're all together in February, I think Peter or I can give you a clearer perspective on the timing of that. The impact I think as we've shared with you in the past on a full year annual basis is significant and really, really exciting. We'll be incurring some costs in the fourth quarter, we'll be having some conversion costs and interim contract packing costs in the first quarter. So we won't see kind of a true quarter by quarter tracking of those benefits until late second quarter, really starting third quarter. So we'll share the timing of that with you in better detail, more helpful transparent detail in the February New York, because we're still -- Peter's team is still working through the amounts and the timing, but overall on an annual basis, it's significant and we'll share that with you.

Hey, Chris, this is Dave Dunnewald. We put out a re's in the spring that gave you a first hit. At those numbers. And I'll refresh those for you when I give you a call.

Thank you very much.

Our next question comes from Bryan Spillane of Bank of America.

Good morning.

Hi, Bryan.

Tim, a question for you. I want to make sure I understand the pensions correctly. Did I hear right you're expecting about $19 million in pension expense versus $12 million last year?

19 million dollar in 2002, that's correct.

Have you seen any of the incremental expense already or will all of the increment occur in the fourth quarter?

We have seen some of the third quarter and the bulk of it will run through the fourth quarter. So that's -- you will see some of that -- most it come through the fourth quarter.

And then I'm assuming that you're evaluating some of your assumptions for next year. And you mentioned the potential for a balance sheet adjustment. Are you looking at your estimated return on asset assumption which I think I have at 10.5%.

Correct.

Is there a potential to take that down for next year?

Indeed there is.

Is there any way you can quantify what type of impact that might have?

Yeah. I mean, the -- from the 19 million dollar, we're probably looking at a, you know, five to ten, probably middle to lower end of that range increase in pension expense next year. So that's -- that's the impact of moving from 10.5% return assumption to 9.5%, realizing that the last couple of years of results notwithstanding that 9.5% is about 350 bases points lower than our 25-year average and a little bit lower than our 15-year compounded average. So we think we're doing the right thing by bringing that down. A lot of companies obviously oh, you heard AB talk about that yesterday. And so we'll move it down to 9.5, read it and obviously take a hard look at where the markets are. Over the next few months.

Okay. Great. Thank you.

Thank you.

I'm show nothing further questions at this time.

Okay. Thank you, Julie. Thank you, everybody. Appreciate your interest and look forward to talking to you after we get the year behind us. Have a nice day.

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