Molson Coors Beverage Co (TAP) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Adolph Coors Company 2002 year-end 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 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.

Hello and welcome, everybody, and thanks for joining us today. It is a cold, snowy day here in Golden.

With me today are Peter Coors; Tim Wolf, our CFO; Peter Kendall (ph), CEO of Coors Brewers Limited; David Barnes, our U.S. CFO; Ron Trigistat (ph), our Controller; and Dave Dunawald (ph), our Investor Relations Director.

On the call today, Tim and I will cover three topics with you. First, an overview of Coors Brewing Company's performance in 2002; second, a detailed review of fourth quarter results for our two operating segments, the Americas and Europe; and finally, some perspective on 2003 for our total company. Then we will open it up for questions.

A few years ago, we established a fourth (ph) generation vision for Coors of becoming a much larger and stronger company, and we articulated the values that would help us achieve that vision. Our initial goal was to become, within several years, a more global and profitable $5 billion plus brewer. In 2002, with the acquisition of the second-largest brewer in the United Kingdom, we moved a long way towards that goal, with $5 billion in gross sales and $3.8 billion in net sales for the year.

More important, we reached this milestone with growing overall profit and operating cash flow substantially, and will make (ph) significant investments in both of our major businesses.

2002 was a year of fundamental transformation for our company, a year when we greatly increased our size, strength, and flexibility. At the same time, we diversified and strengthened our earnings and cash flow streams with new geographies and brands.

During 2002, we faced significant challenges in both our major business segments, but we also achieved major successes, and overall results were very encouraging within the context of our economic and industry environment.

Still, America's volume was up only slightly, and some of our key brands declined in North American, particularly domestic Zima and Killian's, along with Coors Light in Puerto Rico. In addition, we faced some competitive challenges in the UK last summer around the World Cup sales period. Nonetheless, as a company, we achieved many of our goals. The UK acquisition proceeded exceptionally well, and this business added materially to our profitability in our first year, even after financing costs.

Also important, we retained key talent during the transition. After one year, it's clear that we bought a great and growing brewing business at an attractive price.

We achieved substantial reductions in cost per barrel in our U.S. business, along with continuing cost reductions in Europe. This represents a good start to our goal to reduce our cost of doing business and improve our operating capabilities, particularly in the U.S.

Meanwhile, we invested heavily in our big brands in key markets in 2002, while still growing profits significantly. We revamped and improved our advertising effectiveness in the U.S. We secured and began to leverage our exclusive beer sponsorship as the official beer of the National Football League, and our Canadian Coors Light business with Molson achieved another strong year, with volume and pretax profit growing at double digit percentage rates. At the same time, we made solid progress in our Molson USA joint venture.

In the face of competitive onslaughts in the U.S. and UK markets, we maintained our focus on the key drivers of our business. As a result, we believe we are in a good position to capitalize on the changes ahead for the beer industry on both sides of the Atlantic.

Now look at some key financial results for our total consolidated company in 2002. Earlier today we reported 2002 units volume of 31.8 million U.S. barrels, with 22.7 million barrels from the Americas and 9.2 million barrels from Europe. Gross sales totaled nearly $5 billion for the year, with net sales of 3.8 billion. In terms of profitability, excluding special items and gains on sales of distributorships a year ago, operating income increased 74 percent to $305 million, after-tax income grew 38%, and diluted EPS increased 40 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 CBL.

Looking at the full-year results for our operating business segments, in the Americas, sales volume for the segment increased .1% from a year ago. Growth in domestic Coors Light and Keystone Light was offset by declines in Zima, Killian's, and Coors Light export to Puerto Rico. Zima was impacted disproportionately by the influx of new flavored alcoholic beverages recently in the U.S., and additionally, Coors Light export was hit hard in the bank half of the year by the 50 percent increase in Puerto Rico's beer excise tax. If you exclude Zima and Coors Light export, our U.S. domestic beer volume was up about 1.7%.

Coors Original declined only slightly in 2002, and that's a significant trend improvement in a tough year, driven by better, more effective advertising and retail execution. Sales to retail for the Americas were particularly soft late in the year because of a number of factors, including the Puerto Rico tax increase, poor weather, and the timing of the New Year's holiday within the fiscal 2003 calendar.

Even in a weak economy, the U.S. pricing environment continued to be solid in 2002. Our Canadian joint venture delivered strong growth for Coors Light volume in pretax income, our Molson USA venture stemmed a seven-year double-digit decline in that franchise and delivered a strong double-digit growth performance in the flagship Molson Canadian brand within that portfolio.

Also important, we reduced costs per barrel significantly in our U.S. operations. We remain encouraged at the magnitude and pace of progress being made by our operations team in achieving solid cost reductions. Gross margin increased 1.6 percentage points over the prior year. We increased our investments behind our the brands and sales capabilities at a mid single digit rate for the year. We continue to believe in our new young adult advertising, as well as the sales potential for more feet on the street, taking our brands to retail.

Pretax income for the Americas segment increased 8.1%. That's excluding special items and gains on the sale of distributorships in 2001. As positive beer pricing and lower costs more than offset the flat volume and much higher spending for marketing, sales, and information systems and a mix shift away from our profitable brands and markets.

We are encouraged by our heavier 2002 investment levels, however, because we believe those strengthen the business in 2003 and beyond.

Now, turning to the Europe segment, 2002 sales volume in Europe increased at a low single digit percentage for the full year and fourth quarter, compared to a pro forma 2001. Even in the face of difficult competition, our UK brands as a group gained another .4 percentage points of market share in 2002, driven by solid on and off premise performance. Volume for Carling, the largest beer brand in the United Kingdom, grew at mid single digit rates in both the one and off trade during 2002, while Grolsch (ph) and Reef (ph) both grew more than 20 percent during the year.

Although Worthington (ph) has declined at a low single digit rate, it gained market share in a declining standard ale segment. These achievements were significant in the face of competitive pricing challenges in the second half of 2002, particularly following the World Cup.

In addition, early results from our growth initiatives in Scotland and London are very encouraging. The continuing shift to the lower margin off-trade channel reduced overall margins slightly per barrel in 2002. Within the channels, margins were flat in the on trade, but reduced in the off trade in the face of aggressive competitive promotion activity.

Our UK team successfully closed the (inaudible) malting facility in the summer, and the Cape Hill Brewery (ph) at the end of the year. These steps were a critical part of our program to reduce operating costs and better balance capacity with demand. And marketing spending for the year grew both in total and on a per-barrel basis as we stepped up the investment behind our core brands and higher opportunity markets.

In sum, we had major achievements on both sides of the Atlantic.

At this point I'll turn it over to Tim to review fourth quarter financial highlights and take a look at 2003 - Timothy.

Thanks, Leo, and hello everybody. I'll start by offering some performance highlights for our two operating segments, and then give you some additional consolidated highlights.

Now let's take a look at the results of the Americas segment, specifically in the fourth quarter. Unit volume in the fourth quarter of 2002 decreased five-tenths of 1% from a year earlier, while sales to retail were down 3.0% against a relatively strong quarter a year ago. As Leo said a moment ago, soft sales to retail were driven by a combination of the timing of the New Year's holiday, retail load-in (ph), soft industry trends aggravated by poor weather versus last year, and the Puerto Rico excise tax increase.

These factors were especially pronounced in December. If you eliminate the effect of the holiday difference, our sales to retail would have declined about 2% per quarter.

Aside from the timing of New Year's, the difference between unit volume and retail sales was due to our distributors' demand for higher inventories leading up to our January sales promotions in support of our NFL sponsorship. As a result, we ended 2002 with wholesale inventories almost 200,000 barrels higher than last year. We believe that this will be a permanent change in our year-end inventory levels.

In terms of brand trends in the fourth quarter, Coors Light and Coors Original sales to retail declined at about the same pace as our overall results, while Zima and Killian's declined at double-digit rates. Keystone Light sales to retail grew at a high single digit rate.

Best sales per barrel increased four-tenths of 1% in the fourth quarter from a year ago. This was driven by a little more than 2% of domestic pricing and reduced price promotion versus a year ago, partially offset by negative sales mix, which moved towards lower per revenue per barrel brands, geographies, and packages.

Cost of goods sold per barrel increased two-tenths of 1% in the fourth quarter, driven by higher labor-related expenses, primarily pension, and costs associated with adding brewing capacity in Golden and Memphis and bottle packaging capacity in Virginia, Shenandoah. These higher costs were almost entirely offset by lower packaging costs and continued operations efficiency initiatives, including lower transportation spending and improved operating line efficiencies.

The fourth quarter of 2001, as you'll recall, marked the beginning of our trend of reducing operations costs per barrel. So the comparisons we faced in the fourth quarter of 2002 indeed were challenging.

Our gross margin increased slightly to 35.7 percent in the fourth quarter, up 10 basis points from the prior year. Marketing, general, and administrative expense in the fourth quarter was $7.6 million or 4.5% higher than a year ago, reflecting increased advertising and sales spending. General and administrative expense also increased due to higher systems investments and labor-related expense.

Americas' fourth quarter results included a $4.5 million pretax special charge primarily related to operations restructuring initiatives, partially offset by a credit stemming from a settlement with Genrow (ph) Limited. The restructuring initiatives will eliminate 130 positions from our operations organization, resulting in savings of about 40 cents per barrel started during the first quarter of 2003.

Other income totaled almost $3 million, primarily because of a gain on sale of non-core water rights, partially offset by a loss from our Molson USA joint venture.

Pretax income for the Americas segment was $24.6 million, which was down $5.6 million or 18.5 percent from fourth quarter of 2001. This excludes special items and a gain on the sale of distributorship from a year ago.

Since the fourth quarter is our smallest earnings quarter in the U.S. business, relatively modest changes in expenses - for example, spending more on systems and on driving the front end of our business, can result -- did result in large percentage changes in the bottom line in this modest profit quarter.

Now for our Europe business segment. Please keep in mind that, because we did not own the Coors Brewers Limited business a year ago, the results we release for the Europe segment for 2001 include only our pre-acquisition European operation. We can't offer specific historical quarterly results for the CBL business because it did not exist in its current form prior to February 2, 2002. Still, we will offer our best estimate of current results and key business trends versus a year ago.

For the fourth quarter, the Europe segment reported unit volume of 2.8 million U.S. barrels. Net sales for the quarter were $426 million and cost of goods sold was $299 million, with a gross margin of 29.8%. Marketing, general, and administrative expense totaled $103 million or 24.1% of net sales. This business segment contributed in total pretax income of approximately $30 million to our consolidated results.

For the purposes of assessing performance, we believe it's more helpful to look at year on year trends for our Europe business. European unit volume for the fourth quarter increased just over 2%. Most important, Carling, the biggest beer brand in the UK, grew at a mid single digit rate, while Grolsch and Reef, our two other core brands in the UK, continued to grow at strong double-digit rates in the quarter. Our brand performance in the quarter was particularly encouraging given that it was compared with a strong quarter a year ago.

On trade channel volume, about two-thirds of our mix was even with a year ago, while off-trade volume increased at a high single-digit rate. Although challenges in the multiple on trade channel do continue, we strengthened our sales trends in the independent on trade and in the off trade leading up to the key Christmas holiday for 2002.

Cost of goods sold declined modestly per barrel due to supply chain improvements and initial savings from closing the Cape Hill Brewery, partially offset by slightly higher distribution costs. Marketing spending and local currency decreased per barrel in the fourth quarter from a year ago, primarily driven by strong sales near the end of the year. Meanwhile, overheads declined slightly because of the Cape Hill Brewery closure, and the trade loan interest income from the UK business was $4.4 million within the quarter.

Turning now for a moment to consolidated highlights, corporate net income expense in the fourth quarter - and this excludes income interest on trade loans in the UK -- was $19.6 million, which is a $21.8 million change from a year ago, given that we used cash and took on debt to buy the UK business just over a year ago.

At the end of the year, long-term debt, and that includes the current portion, was approximately $1.53 billion. During 2002, we made principal payments on our debt totaling about $208 million of net on short-term borrowings. This exceeded our debt pay-down objectives for the full year and places us well ahead of our commitments to our banks.

Our effective tax bank was 33.7% in the fourth quarter, down from 37.9% a year ago, excluding special items and gains on the sale of distributorships. The fourth quarter tax rate brings the full-year rate down to 37.0%. The rate for 2002 declined from 2001 primarily due to our new tax structure following the acquisition of CBL.

In the fourth quarter, average weighted diluted shares outstanding increased by 513,000 shares from a year ago because of option exercises in the past year combined with a higher stock price, which increased the calculation of diluted shares. Consistent with what we have said before, we have not purchased shares since before the CBL acquisition and have no intention of buying back any shares until our debt has been reduced significantly.

We achieved after-tax income of $23.1 million in the fourth quarter, up 28.7 percent from $17.9 million, and this excludes special items in the fourth quarter of 2001. Diluted earnings per share equaled 63 cents per share -- 63 cents, up from 49 cents per share a year ago. Our net income of $20.2 million in the fourth quarter this year was up 27.4 percent from $15.9 million a year ago, including special items and gains on the sales of distributorships.

Full-year after-tax earnings were $4.53 per share, a 40.2% increase from 2001, and that excludes special items and gains on the sales of distributor ships. This increase year-to-year of $1.30 per share breaks down roughly as follows -- the Americas segment performance added 26 cents per share, driven primarily by pricing and cost reductions after additional advertising and sales investments of about $24 million. Europe segment added $2.35 per share. The change in corporate interest and other expense primarily related to adding our debt subtracts $1.42 for the year. Our lower tax rate increased overall results by five cents per share, and as I just mentioned a moment ago, the reduced number of shares outstanding resulting from share repurchases in 2001 added six cents per share to 2002.

Looking at how much the CBL acquisition added to our earnings per share in 2002, the acquisition was about 95 cents per share accretive on a booked basis, and about $1.30 per share on a cash EPS basis for the full year. In percentage terms, the CBL acquisition added 27 percent to book earnings per share and 37 percent to cash earnings. This achievement has been driven by solid operating results, along with favorable interest rates and exchange rates for the British pound in the past year.

The pound appreciated about 8% last year, and that's an average for the whole year. With a majority of our debt effectively denominated in pounds, we have a natural currency hedge that offset more than a third of this pound appreciation. Based on virtually any set of metrics, we are pleased with this acquisition and its first year of results.

Now a brief look ahead to 2003. To paraphrase our Safe Harbor language, some of what we will talk about now and in 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.

We anticipate the Coors Brewing Company's performance for 2003 will be driven by a few primary factors in each of our operating segments, starting with the Americas first. First, volume. We finished 2002 with soft retail sales trends, but our distributors increased their beer orders to ensure that they had sufficient beer inventories to meet demand as we approach the NFL playoffs and the Super Bowl.

In the first five weeks of 2003, our domestic sales to retail have increased at a mid single digit rate. As always, it's not possible to forecast the quarter based on the first month, but we are off to a good start. We continue to be pleased with the energy, excitement, and impact of our new advertising creative and will have a bias to invest additional dollars behind our brands to further build our sales momentum.

We expect distributed inventories at the end of the first quarter to be in line with a year ago, so our sales volume in the first quarter is likely to lag sales to retail. This could challenge our ability to leverage our fixed costs. As previously discussed, our sales in Puerto Rico are likely to be under pressure at least until we lap (ph) the local tax increase that occurred in mid June.

Second, pricing and mix. The U.S. beer pricing environment has been solid the past four years. The recent quarters, however, our positive pricing has been partially offset by a mix shift away from Zima and Killian's, so future trends in these brands with the competitive flavor alcohol beverages that have been pressuring them will be important factors affecting our revenue per barrel. Packaged and geographic sales mix also have been negative, and we are watching them very closely.

Third, cost of goods. The outlook for our cost of goods performance continues to be encouraging. We believe the following factors will be most important going forward - first, input cost trends appear slightly unfavorable. At this point, the outlook for 2003 in the Americas is for modestly higher paper, fuel, and agricultural commodities costs, while aluminum can costs are trending lower. Large changes in oil or natural gas prices could alter this outlook.

It is important to note that, for barley specifically, recent sharp increases in spot prices are likely to have only a minimal impact on our cost trends within the next 12 months, since we contract far ahead with U.S. farmers for our special strains of barley. This gives us a more consistent supply and a much smoother cost curve than if we bought barley in the spot market.

Next, operating efficiencies. Significant savings from our work in the U.S. have improved gross margins in the past five quarters, particularly in the areas of transportation costs and related supply chain work. Starting in the fourth quarter of 2002, we began to lap the first significant savings from these efforts compared to a year earlier, which is making our costs of goods comparisons more challenging than we saw in the first three quarters of 2002. Still, our operations team has many more projects planned or currently underway as we continue to describe (ph) $5 five to $6 a barrel from our controllable production costs in the next few years.

The most current example is the restructuring initiatives I mentioned a moment ago, with cost savings of about 40 cents per barrel savings starting in the first quarter of this year.

Finally, labor-related costs, including pension expense, will be significantly higher in 2003, particularly in the first half of the year. Recall that we booked about $6 million of America's pension expense in the first half of 2002, and that more than doubled in the second half. This year we plan to maintain a quarterly expense rate similar to or slightly higher than the last two quarters of 2002.

Fourth, marketing, general, and administrative costs. Our media spend strategy for 2002 reflects our confidence in the new ad creative and the sales initiatives that we have developed. We plan to start this year with a solid increase in pressure of the market with a very strong bias to invest even more resources if available during the year. This strategy is key to our long-term success in the U.S. beer market. Also, general administrative expenses is likely to be slightly higher as we make key investments that will help us effectively lead our larger global business.

Turning for a moment to our Europe segment, we are focusing on four areas. First, recall that we did not own the CBL business for first five weeks of 2002, when it lost approximately $10 million. This business usually reports a loss in January because of the seasonality of the UK beer market. On a reported basis, this will make the first quarter earnings comparisons difficult this year, especially given the recent further strengthening of the British pound.

Second, volume. Seasonality changes will be a communication challenge for us all in 2003. Volume and profit comparisons will be challenging in the first quarter because of the key Easter holiday shifting to April this year from March the previous year. Second quarter will benefit from the Easter holiday but be challenged more by the lack of a World Cup contest, which boosted second quarter last year. In turn, third quarter should benefit from the lack of a high post-World Cup and retail inventory. You are getting the idea here, this will (ph) be a fun quarter - fun year.

We are also introducing Carling into Scotland, spearheaded by major soccer sponsorships that takes effect in the third quarter of 2003.

Third, pricing and mix. While pricing the on and off premise channels in the UK has generally been favorable, periods of off-premise competitive price discounting, especially around big holidays, continue to be a risk factor. In recent years, most of the benefit of positive pricing has been offset by the continuing shift of the market toward the off-premise channel, which offers lower revenue per barrel and lower margins, but with lower distribution and service costs.

Fourth, cost of goods. Following the closure of our Cape Hill Brewery late last year, we began the process of moving some people and equipment to our Burton (ph) Brewery. When the process is complete, probably late in the first quarter, we anticipate beginning to see the benefits to our cost structures from closing the brewery. We anticipate pretax benefit will be approximately $4 million to $5 million per quarter starting towards the end of the second quarter this year.

For corporate debt service, it is important to remember that our higher rate long-term debt structure was not in place until late in the second quarter of 2002. As a result, corporate interest expense in the first half of last year was nearly $15 million lower than in the second half. So we will face much higher interest costs in the first half of 2003 versus the first half of 2002.

For the total company, pension expense will also be a very significant factor in 2003, increasing an estimated $15 million in total over 2002. For perspective, this equals about 26 cents per share after tax. Our initial outlook for 2003 capital spending is in the range of or slightly lower than the $240 million we spent in 2002.

Looking at the first quarter of 2003 alone, we face particularly significant challenges in several areas. In the Americas, higher distributor inventories coming into the first quarter than a year ago. Second, the Easter holiday moving to the second quarter this year versus first quarter last year. Certainly a factor with tough comparisons over a (inaudible) relatively big earnings quarter last year. Higher MG&A spending plans for this year, and as I just mentioned, much higher pension expense.

In the UK, including the normal money-losing first five weeks of the year, this year, but not in 2002, and the Easter holiday shift is a bigger factor in the UK than in the U.S. As I just finished saying a moment ago, in corporate we will have much higher interest expense. So taken together, these factors are likely to add up to a very challenging first quarter this year.

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

Thanks, Tim. To summarize the discussion today, 2002 was a year of fundamental transformation for the Coors Brewing Company, which is now the eighth-largest global brewer and a major player in two of the largest, most profitable beer markets in the world.

Although we face several challenges in 2002, we nonetheless made significant strides in key areas of our business. We successfully integrated our UK acquisition while retaining key talent and investing to grow our key brands and markets. At the same time, we stayed focused on our core business in the U.S. in a year with lots of competitive distractions. We sharpened our competitive edge in marketing and sales and made substantial progress in reducing our costs of doing business.

Bottom line, we are a stronger company today than we have ever been, and we're excited about our future. Going forward, we will continue to focus on driving shareholder returns by staying focused on the basics of doing great beer, investing to grow our key brands in key markets, driving productivity and reducing costs, generating cash and reducing debt, and most important, building the best team in the beer business.

So at this point, back to you, Jennifer. Let's open it up for questions.

Thank you. If you 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, press the pound key.

Our first question comes from Jeff Kanter of Prudential Securities.

Good afternoon, gentlemen. Just -- Tim, a couple of quick clarifications. One, what was the -- how much was the gain on the sale of the water right in the quarter?

About $2.5 million, $3 million.

2.5 to 3 million.

Yeah.

What did the Canadian joint venture contribute?

North of the border you're talking about?

Yes.

In the fourth quarter, it contributed about $9 million. The team up there has been - done a spectacular job in virtually every quarter -- as I think we've shared with you, the volume gains have been low double digits, and the profit gains have been very strong double digits. So this is a very significant business for us.

Fine. And just thinking about -- you know, just trying to paint a picture here for 2003, pensions going up, you have higher MD&A. You are lapping a lot of big savings. On the cost side, more marketing. Do you think you're going to have an up year? I'm trying to figure it all out.

You are such an optimist. I mean, that is certainly our objective, and, I mean, we've -- our bias is to continually invest to do the right thing for the business and grow the business, and we do have a lot of encouraging things going on on the cost side of our business. You know, you've cited, I think I cited the factors that we've got to offset and more than offset. But we invested in the Americas business, as I think Leo and I mentioned, about $23 million, $24 million more in marketing and sales efforts, all good money to invest in great ideas. And we are going to do -- we are committed to do more of the same in 2003.

And you are happy with the return on this investment? You know, you have been -- given that Coors Light didn't really respond that well.

Leo here, Jeff. Yes, I think what we are watching very closely is the impact on the young adult cohort. That's the future of the business. And I think this year is very confusing to read in terms of, you know, what impacts are, given all the puts and takes. But our sense is, stay the course.

Fair enough. Thank you very much.

Thanks, Jeff.

Thank you. Our next question comes from Andrew Conway of CSFB.

Hi, Leo and Tim. Two questions I just wanted to get your perspective on. When do you anticipate in the Americas your shipping growth and STRs (ph) moving closer together based upon your read of the current marketplace?

And then secondly, a more strategic question. On your cost of business, in light of the fact that you share a great many wholesalers with Miller and in the context of the need to continue in this premium beer market and net realization market of stepping up your MD&A, at what point do you feel that you are getting the adequate returns that we're going to be able to see improvement in the Coors Light brand, and then assessing some of the costs to compete and some of the shared houses would be helpful.

I'll do the first one, Andrew. We see the equilibration between sales and removals kind of mid-second quarter.

Great.

Andrew, I'm not sure I catch your drift on the wholesale thing. I have been out and talked to the majority of our top 50 wholesalers over the past few months. And we are very bullish on the way they feel about our brands, particularly Coors Light. You know, the fact that we are increasing investment there is because we believe it will pay back.

In terms of the feet on the street investment, it's sort of a one-time bubble investment as we shift some of our resources on the front end. But it has been very well received. So I don't see it as this advantageous at this point, Andrew.

Great. No, my comment was less -- more on your preparedness for -- as Miller becomes more performance-oriented and more brand-focused on execution. And that's an evolutionary issue. That's not a one or two quarter issue. My comment is, you guys are prepared for that environment and in terms of the need to have feet on street, in store execution, as well as your capability to see return results that are positive on brand investment?

Yeah, absolutely. I mean, you know, I haven't got a crystal ball that goes out two or three years and -- but momentum behind the brands is still the largest issue, Andrew, and our bullishness on Coors Light in any given market, booting up to a significant share if we do it right is still very high.

There is one other element, the whole cost of goods picture, and that's continue to improve service. That's a hallmark of what we are trying to do. We want to be - our shared houses (ph) best supplier. We want to be the easiest to do business with, we want to make sure that what they order is what they get and they get it in a timely fashion. So that's the other piece of this execution focus that, as we become a better, tighter, lower-cost operations organization, we will have benefits of retail.

Thank you.

Thanks.

Our next question comes from Skip Carpenter of Thomas Weisel Partners.

Hey, Skip.

Good afternoon, guys. Leo, you actually just mentioned momentum behind the brands. And I know repeatedly during your commentary with regards to the year and everything like that, you said you guys are pleased with where things are headed with regard to Coors Light, yet it doesn't seem that that's kind of showing up on the surface. I know you said it's a confusing year, but if you could try to give us a little sense of why you guys remain so confident in terms of the directional approach in terms that you are taking for the Coors Light brand? And I was also intrigued, if you guys -- if I heard you correctly, you said that Keystone, I believe, was up in the high single digits. Why is that going on, and is that of a concern that your sub-premium business seems to be spiking up while your premium business seems to be soft?

Regarding the latter issue, I read that as more a sign of the times, Skip, than a strategic shift. We have a terrific brand there. But the fact is that's more, I think, a sign of the short-term economic pressure than anything else. Regarding our confidence on the Coors Light front - actually, right up until the first week of November, I thought we were going to have a very strong finish this year, and then somebody turned on the icebox in the Northeast. But if you look at our recovery on the second half, all year long we were plagued by some tough trends in the Southwest, as you know. But our recovery in the second half really was pretty encouraging in most of the country, and then it really sort of shut down on us about the second week in November

And that shutdown was attributed mostly to the Northeast in terms of the cold? Are you saying that?

Yes. The northeast has a huge impact on our business volumetrically. So it's just plain cold weather comparisons (inaudible).

Yes, but cold weather has been pretty persistent in January, and you guys are now saying your STRs are up mid single digits.

The Super Bowl and the playoffs in the NFL were definitely a positive kick for us. No doubt about it. But I don't see any free lunch in the rest of the quarter. I think it could be a long, cold quarter. You know, we haven't seen solid trends set in. We talked about that each of the last few quarters. I think we will start to see the true strength of the business in those trends kick in as we get into the second quarter and third quarter where, frankly, we've got much more favorable comparisons.

Do you think, given your portfolio and right now, do you think it's still feasible for Coors to grow north of the industry growth rate still at this point?

Absolutely.

Thank you.

Thank you. Our next question comes from Marc Cohen of Goldman Sachs.

Hi, guys. Two questions. One, to just clarify something that you touched with Skip. Leo, I think the pickup you cited in January really was a sales to retailer pickup. And clearly you had a lot of promotion work going on the NFL around the playoffs and the Super Bowl. Do you have any sense at all yet, or is it too early, to know if that was pulled through by the consumer, or if it really was just great execution in the store and without that pull-through? That's my first question.

Well, how about the second one?

The second one relates to the UK business. And what I'm interested -- I guess Peter Kendall is not on the phone. What I'm interested in understanding is a little bit more about how you are looking at the pricing situation in the UK business, for two reasons.

One is, in light of Scotch and Newcastle's (ph) announcement last week, there has been some talk and consideration about whether we may be seeing some pushback on pricing in the on trade channel after a few years where it's looked pretty good. And I was wondering how you saw that scene, and whether or not you saw any change in the pricing flexibility in the off trade channel in light of the consolidation, and maybe coming with the Safeway transaction.

Peter actually is here, and let me tackle the U.S. question, and I'll turn it over to him.

You've seen the scanner numbers as well as we have. We had a relatively good month. So I would say pull-through did accelerate. Anecdotally, we get the same feedback from wholesalers. But the truth is, we will know over the next three weeks. So you're sort of asking for stuff that will be a reality very soon. And, you know, anyway you look at it, we've got a plus out of the NFL playoff hit. And that's a great way to start Coors Light out for a new year and get it some exposure.

Peter, on the UK?

Well, I think, Marc, on the UK, in terms of pricing, the on trade pricing has been reasonably firm, and as you know, ScottCo (ph) just raised their prices again, the second time in six to nine months. So I think the outlook in the on tried trade is still pretty decent. I think, in terms of the off trade, you know, the off trade pricing rural (ph), we are going to continue to be under pressure from the major multiples, and there are ways in which we handle that in terms of our packaging flexibility and our, you know, separate kind of promotional offers. But I think we will continue to see price pressure.

I honestly don't know -- I guess as far as the Safeway situation is concerned, where that is going to lead us. It depends a lot, obviously, on who ends up in control of Safeway. But I don't have a crystal ball on that one, I'm afraid.

Peter, can you just elaborate -- what kind of feedback have you gotten from actually the multiple pub operators in terms of this price increase that ScottCo tried to put forth? We've heard that some of them have really resisted it. Is that your perception, or is that wrong?

No, I think that's right. But of course, you know, most of the multiple, the big multiples, anyway, you know, they are on a separate contractual relationship. So the general price increase that, for example, ScottCo put through has primarily been executed against the independent sector. And it generally does not affect the ongoing, longer-term contracts with the big multiple on trade.

OK, thanks.

Thanks.

Thank you. Our next question comes from Matthew Webb of Kath & Knolls.

Hi. I wonder if I can ask a slightly more general question about the UK, particularly about the profits in the fourth quarter, which came in a bit below on (inaudible) despite what was obviously quite a good volume performance. I'm obviously aware there has been weak trading in parts of the market, particularly the cities (inaudible). Is it the case that you had to particularly increase your promotional spending to support your volumes, or is it just the case that this year there is a fair base to work from when we are looking at our forecasts?

Well, I think that, in terms of our trading performance in the fourth quarter, it was generally strong. We did have -- in fact, you know, towards the end of the year we had an adjustment for our pension contribution, and that did affect our EBIT number and what you're seeing in terms of the fourth quarter performance.

Sorry, can you quantify that pension adjustment for us?

Tim?

It's a couple million pounds. I mean, it really is most of the difference between what I think you guys were expecting and what we reported. And as I mentioned for the whole company, you know, the back half of the year had a basically doubling of expense, and as we look to next year, we will have just a little bit less than a doubling. This is becoming a good-sized cost hit. So that's really what I think you are seeing, to Peter's point, almost exclusively in the fourth quarter CBL results.

All right, great. Could I just ask one follow-up question?. The net debt level finished the year a little higher than, I think, the previous guidance. Was there any particular reason for that?

No. I think the net debt is right along the lines that we've shared in the past. I mean, we have been targeting -- we have been saying all year our objective was to pay down at least $190 million. And obviously working capital towards the end of the year, the CBL business uses working capital. And then the other factor that, of course, is playing into this, the recent strengthening of the pound causes the pound denominated debt to be, when we reported it in dollars, obviously to be higher. And the pound, you know, the last month has gone up, what, about 3%, 4%. So that really is what you are seeing.

I think the main point from our point of view is the underlying ability of our total enterprise to generate cash that we use to pay down debt. If anything, it has slightly exceeded our expectations. So we are on a good track. We are way ahead of what we committed to our bank. And obviously those are folks we want to exceed their expectations, and we have.

That's great. Thanks very much.

Thank you.

Thank you. The next question comes from Mark Swartzberg of Legg Mason.

Good morning, guys. Two questions. First on Coors Light, Leo, I wonder if you can give us a sense -- what sort of run rate in terms of STR growth in the U.S. do you have to see in your mind to justify the level of spending, and relating to that, if you don't see that run rate in the second quarter or into the third quarter, do you start pulling back on the spending? And then unrelatedly, on Puerto Rico, where do you think we are, or you are in the stabilization of volume trends there?

Regarding Puerto Rico, just mechanically, we won't be in a good comparison until midyear.

Right, but in terms of the pace of the decline?

Just because of the -- you know, that's when the pricing went into effect. So we have got difficult comparisons through then.

Right, but just in terms of the pace of the decline?

It's stabilized, if anything firmed up in recent weeks and months. So this isn't something that's continuing to drift. And we're still working on some legislative issues to try and balance the playing field over there. But you can't put those into your forecast. We're just -- it's a big, profitable business. We're continuing to support it. We continue to have a huge share of that market. And that appears to be stabilized and firming up as well. So it's just a situation.

Regarding Coors Light, you know, the question you asked is a good one, but this isn't different than what we have done over the last three or four years, really, which is to continue to keep pressure against this business. It is not like we are doubling down or something, Mark. It's a continuing attitude. To the extent we can afford it, we want to continue to invest on the front end. And obviously that conviction weighs a little heavier when you see the diagnostics of how it is impacting the target audience, and you can see positives there. We think relatively the next couple of years are a window of opportunity for us with Coors Light, and therefore we don't -- you know, we really don't intend to back off the burner.

Now, you know, we are wide open about the fact that we plan our BME (ph) in an envelope that we can afford and still drive good financial performance. And, you know, I think the ability to drive incremental spending this year at this particular juncture looks like we will be holding sort of where we set the sale well into the year. But remember, things have a way of reversing themselves. The last year's fourth quarter downside in the Northeast becomes an upside opportunity next year. And that's the way this business works.

So - and none of us have any idea what impact, what goes on over in the Gulf has on us or what the economy trend is. I don't see anything in the beer business trends that would say that the economy has turned around at all. If anything, things like the Keystone trend and some of the on premise trends, which tend to be very sluggish, say we are not out of this.

But it is certainly not a time to panic at the wheel. Quite to the contrary, what we did structurally to our business a year ago allows us to play this game with more confidence. And so it's a continuation of where we have been.

Thanks for the question, Mark.

Thanks, Leo.

Thank you. Our next question is from Caroline Levy of UBS Warburg.

Good morning, everybody. Hi. A couple of quick questions, actually. Do you have a number for D&A for this year, and a projection at all for next year? (inaudible) help with that?

Did you say D&A?

Yes, depreciation and amortization.

Oh, I thought it was genes.

I thought you were turning genetic on us.

We will be in the vicinity of $230 million to $240 million of total enterprise. We will be -- you know, our cap ex will be very, very close to maybe a skosh above our depreciation.

OK. And D&A came in where for this year?

About 230, 230 and change.

OK. Then I have a slightly more strategic question. If you could just talk about what sort of a rate increases you put in place in the fourth quarter? Did you follow Anheuser-Busch and Miller to the extent (ph) they took pricing, and have you taken further rate increases in the first quarter? Just, sort of, what is your view? How do you strategically approach pricing?

Very carefully. The answer is, we continue to be bullish on top-line pricing. Clearly top-line pricing in the fourth quarter came through. Start (ph) early signs for first quarter pricing look like they're going to stick. It doesn't seem to be a sticker shock issue as we watch closely. And we believe that beer is still a relatively good value, so we will price as much as the market will bear for us.

Now, you know, obviously there are things to watch within that. And the things I think everybody ought to watch are sticker shock. Doesn't seem to be an issue. Watch trends within premium and sub-premium brands. I would say, you know, that's worth watching for the next year. The third thing to watch, really, is mixed shift towards value packs, and that's what you see market to market go on, and I think causes consternation when people do the Nielsens from time to time, is the market runs against 30-packs or c-stores run against hot 24-ounces sometimes, it really makes the numbers look a little funny. But so far so good, Caroline. It doesn't appear that that's going to be the wild card for the year.

And just to clarify, in the third quarter was your rate increase, if you took out the mix effects and stuff, about 2%? Is that what you said?

Yes.

And did you then take further rate in the first quarter?

It's market by market pricing, so, you know, it's which markets go when, Caroline. We are pricing every market where we can.

Is there any sense of, given the sluggish volume for the fourth quarter, that you want to lag following up the competition to try to sort of jump start?

No. That's proven to be a non-rewarding game.

OK. Well, I'm pleased to hear you speak that way because prices were so much more than volume.

And then, just to ask you, given that you have such strong cash flows, I think the UK might have been just step one in a bigger plan. Could you talk a little bit about how you think about acquisitions and what you would look for?

That is a question I would rather not answer today just because it's not really, you know, top of mind today. I think a better time to talk about it is when we come out and visit with you in New York. And we will address that and have a full discussion of it.

When you say it's not top of mind, it doesn't mean it's not something you would consider this year. It's just not an earnings-related question?

That's right.

OK. Last thing, do you by any chance have that wonderful breakdown you gave for the full year earnings per share contribution from the U.S. Europe interest, et cetera, for the fourth quarter?

Dave could probably pull that up for you on the phone.

Great, thanks.

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

Hi. Good afternoon, guys. A question for you on -- sounds like you got some lift on Coors Light around the Super Bowl, and I guess that the next question is, now that the football season is over, what do you have on the promotional calendar to sort of drive Coors Light here between now and in August, I guess, when preseason football starts again?

Bryan, it's not like football is the only thing we do, I mean, but it's a fair question. the -- when you think about the initiatives, you generally think nationally about initiatives. But that just isn't the way we run our business. We run our business market by market, and more so each year. And as you know, our top markets are incredibly important to us. And what we have is business plans in every DMA -- every major DMA, and very aggressive sort of activity planned with each distributor. And if you had to pick a headline, the headline for spring will be NASCAR is that's what is hot sort of market to market and gets topical for awhile. And then we head into just plain summer-themed activities. But as you know, that's what drives the beer business in the summer, and every place has a little different spin on it

I guess what I was looking for was just, is there anything incremental, sort of -- the NFL sponsorship was incremental the last few months. And is there anything that is incremental big news in the coming quarter or two? It sounds like NASCAR may be it.

I would say our themes tend to be -- for the spring and summer would tend to be a racing summer and music. And those are things we are leveraging. As you know, we've got the Miramax contract too, and that has some fun stuff coming with it. So -- our team feels pretty good about the programming setup as we head into the spring. So - but obviously the NFL is an impact item that, first of all, impacts the whole year. And we will get better at leveraging it again this year.

OK, great. Thank you.

Thank you.

Our next question comes from Scott Stark of Salomon Smith Barney.

Hi, I'm on a fixed income here. You had indicated that you wouldn't resume share repurchases until you pay down debt significantly. Can you highlight -- and you might have done this, I might have missed it on the phone - at what level were you trying to get the debt down to? I mean, do you have a certain ratio of debt to EBITDA, or EBITDA to interest coverage?

What we have shared, I think most of this past year, is our objective is to get to a debt to capitalization ratio in the low 40% range. We are obviously higher than that now, but we're, as I think I mentioned, right on our expectation, slightly ahead of paying down debt and getting that debt to cap ratio down. So we're shooting for the low 40% sort of range over the next few years.

And rating targets, (inaudible) be where they are, or you want something higher than where they are now?

I'm sorry, say again?

Your debt ratings, are you happy where they are, or do you want something higher?

Oh, gosh, we'll (ph) always go higher.

OK. Some companies say that they don't just because they don't want to limit themselves for acquisitions or share repurchase activity.

Well, I mean, when we started this gambit, we believed we had a AAA minus or better balance sheet. And our rating agency friends said, look, you are a one product, one country play. We can't ever see you above BBB plus. So we've addressed those issues, but now we got leverage. So you bring some of the leverage down and you continue to perform well, and we'll get to a higher rating. It's just - that's part of our objective. That's part of excelling.

Having said that, Scott -- Tim is right, but we are not uncomfortable where we are, and think that you would say that, in this range and obviously aspiring to do better is where we want to play.

Great, thank you.

Again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone phone.

Our next question comes from Jeff Kanter.

I don't know if this was answered or -- asked or answered yet. But what is the tax rate for 2003, Tim, and why was it 33.7 in the fourth quarter?

It will be no higher than 37.0%, probably a skosh below that.

OK. And what happened in the fourth quarter then?

The fourth quarter just gets the benefit from the -- putting the tax structure in place that we have been working on, and obviously the fourth quarter becomes the true-up. So (inaudible) it's much lower. But the rate for the full year 2003 will be at that 37% or slightly below it.

Good enough. Thank you very much.

Thanks for your interest.

Thank you. Our last question comes from Blain Marter of Seminal Capital.

Hi, guys. Question -- for the year, Leo gave, I think, a volume number excluding Puerto Rico and Zima. Can you give it just for the quarter? I think he gave us a 1.7 percent number for the year.

Let me have Dave pull that together for follow-up, Blaine.

All right. And then finally, Tim, I'm trying to understand the exact -- all the headwinds you face in growing earnings in 2003. Just tell me if my list is correct, and maybe you can quantify that a little bit better. I'm just trying to understand what you have to overcome in order to actually make an incremental contribution. I mean, you got the MG&A spending, which is going to be up another $20 million some, pension of 15 million, you got a higher interest expense versus the prior year.

Right.

You have to work off your inventory that you built off towards the end of the year.

No. That has pretty much pulled through, that inventory. What I said is it will equilibrate sales and STRs, you know, early, mid second quarter.

All right. And then the UK business, which you did not own in January, we're just going to lose money this year in January?

Right.

And then finally, Puerto Rico, you have a tough year of - about a half a year of tough comparisons?

Right. And there's one more, and that is the impact of higher marketing advertising sales spending. I mean, you know the way sales curve accounting works. That will hit us disproportionately more heavily in the first quarter, first half than it did last year. So that's another head wind. That's -- to us, that's a really good headwind, but in terms of the way it hits the P&L, it's definitely headwind.

But the increment was $23 million to $24 million in '02, and you're saying -- is that going to be an additional 23 to 24 in '03?

Well, it will be a bit lower than that. That's the sort of range for the full year, yeah.

You are facing a headwind of something near $1 a share?

We have some good challenges, but again, the first quarter, even with - I mean, is a low profit quarter, and to the point you and both made, because the loss of CBL for the first month is $9 million, $10 million ...

Right.

... it makes that denominator, that base, if you will, even lower. So yeah, we've got to, a lot of work to do in the first quarter. We have a lot of headwind. But we have savings coming through from both businesses in terms of operations costs, reductions, the CBL one, and obviously with the closure of Cape Hill doesn't really kick in in earnest until the second quarter. But a lot -- the underlying programs, the domestic operations business are basically in place, very much in place. And then we have this added benefit of the restructuring that occurred fourth and a little bit first quarter this year. So it's not like we are just looking at headwinds and just letting the (inaudible) blow us away. We have a lot of energy behind it.

Right, that's fair. Thanks a lot.

Blaine, I would say that, you know, we've done a better job of articulating the things that are a little different in impacting us. But the truth is, at this time of year, there's always stuff out there. This year the unusual stuff really has to do with pension hits and some of the mechanical overlaps. But we have very good productivity flowing through both the U.S. and the UK. And remember, the UK is benefiting from the restructuring post the acquisition. We believe that the marketing level is affordable and still allows us to have a good year

Right. Thanks for fleshing it all out.

You got it.

Unidentified Hey, Blaine. To close the loop on that one question, America's STRs, without Zima and without Puerto Rico export, would get you down a little less than 2%. That compares to the reported number of down about 3%.

OK, thanks a lot.

Thanks, everybody.

I am showing no further questions at this time. You can continue with any closing remarks.

Thanks for being with us, everybody. 2003 certainly promises to be an exciting year. And despite my rope-a-dope to Brian, we are not without our surprises in the marketplace. We don't like to talk about it because it's a competitive thing. But we think we have fun things out there for us, and we really look forward to talking to you when we get back together at the end of the first quarter. Thanks for your interest in Coors. We really appreciate it.

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