Molson Coors Beverage Co (TAP) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Adolph Coors first 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 be given at that time. As a reminder, this conference call is being recorded.

I'd like to now introduce your host for today's conference, Sir Leo Kiely, President and CEO of Coors Brewing Company. Please go ahead, sir.

Thank you. Hello and welcome, everybody. Thanks for joining us today. With me today are Pete Coors; Tim Wolf; Peter Kendall (ph) , the CEO of Coors Brewers Limited -- joining us by phone from the U.K.; David Barnes (ph) , our U.S. CFO; Ron Triggastat (ph) , our Controller; and Dave Dunnewald, our Investor Relations Director.

On the call today, Tim and I will cover two topics with you. First, a discussion of the key drivers for Coors Brewing Company's first quarter results. Second, some perspective on 2003 and our focus for the balance of the year. And then we'll open it up for questions.

The financial results released this morning reflect a difficult first quarter for Coors Brewing Company from a financial standpoint. But a relatively good quarter from a consumer sales standpoint as we grew sales to retail and market share in both the U.S. and the U.K..

Regarding our financial performance, the major challenges in our Company in the quarter were anticipated and they were part of the discussions during our year end earnings call and investor meetings in New York and London in February and March.

These headwinds included higher interest and pension expenses, a seasonal loss for the first five weeks in our U.K. business that was excluded from last year's reported results, and the impact of our U.S. distributors starting the quarter with higher inventories than a year ago.

Unfortunately, we also faced a couple of additional significant hurdles. Let's review. The first and largest challenge stemmed from changes in our U.S. distributor inventories in the quarter. While adjustments were expected, the impact was significantly greater than anticipated, largely because of a major snow storm here in Colorado late in the quarter.

The result was an eight percent decline in America's production in the quarter and a 4.4 percent decline in unit sales. Reduction in inventory both for our distributors and our own warehouses had a two pronged impact on our results for the quarter, negatively effecting both sales volume and fixed cost leverage.

In total, the impact was approximately $20 million in pretax profits in the quarter. About half of the negative financial impact of these inventory dynamics should begin to reverse out in the second quarter. In our Europe business, we reported pretax income of $0.7 million, down from pro forma income of 3.9 million for the comparable period a year ago. As a reminder, the pro forma income for the first quarter of 2002 is calculated by taking the reported 13.1 million profit for the eight weeks that we owned the U.K. business last year and subtracting the 9.2 million pro forma pretax loss for the first five weeks of 2002.

This $3.2 million year on year decline in pro forma results was primarily driven by soft volume in our flavored alcoholic beverage or FAB brands, including Reef, our most profitable brand along with negative off premise channel mix shifts which more than offset the benefit of solid volume growth in the quarter.

Among factors that were anticipated, corporate net interest expense increased $13 million versus the first quarter of 2002, which was prior to our setting up the long term debt structure for the U.K. acquisition. In addition, global pension expense increased about $6 million for the quarter. This increase was driven by soft equity markets for the past three years along with our decision to reduce the 2003 asset return assumption for our U.S. pension plan to nine percent.

Our full year outlook for global pension expense is now approximately $38 million. Now let's put the numbers we released this morning in context by looking at the most important drivers of first quarter results, starting with the America's segment. U.S. sales to retail growth of 1.4 percent was particularly encouraging in light of a very soft U.S. beer industry in the first quarter.

Our sales to retail in the quarter were led by modest growths in Coors Light and double-digit growth from Keystone Light. Although Zima and Killions continued to decline, Killions trends improved from recent quarters. Coors original declined only slightly.

Sales to retail in the quarter were aided modestly early in the quarter by the timing of New Year's holiday within our fiscal calendar. On the other hand, the timing of Easter moves from sales from retail out of the first quarter and into the second. America's first quarter volume to wholesalers declined 4.4 percent, partially because our U.S. distributors came into the quarter with inventories about 150,000 barrels higher than a year ago, which was driven by the strength of our new NFL promotions.

Then coming out of the quarter, distributor inventories were approximately 100,000 barrels lower than a year ago, largely impacted by the record snowstorm in Colorado which hampered our ability to produce and ship beer just prior to quarter end.

So in total, our distributors worked off about 250,00 barrels of inventory versus first quarter of 2002. The storm also adversely affected, excuse me, impacted cost of goods sold per barrel in the Americas, which I'll cover in a few minutes. We're working to rebuild our U.S. distributor inventories to normal seasonal levels as we go into summer.

Meanwhile, our Coors Light business in Canada continue to perform well with mid-single digit volume growth and double digit earnings growth in the first quarter. Our most in U.S. venture grew sales of retail nearly three percent in the quarter and more importantly, mostly Canadian and Canadian Light brand family grew nearly 50 percent for the quarter.

The U.S. pricing environment continue to be positive with about two percent U.S. pricing growth in the first quarter. Meanwhile, our sales mix continued to shift toward lower revenue per barrel brands, packages and geographies which offset the majority of the positive pricing benefit. First quarter cost of goods per barrel increased 2.8 percent in the America's segment, primarily because of the increased per unit fixed cost related to lower product volume, as well as increased pension and diesel fuel costs.

And U.S. production and sales trends matched sales to retail, which increased 1.4 percent. America's cost of goods would have been down slightly per barrel in the first quarter. We believe the cost of sales trends will improve in the second quarter as we rebuild our distributor inventories and grow volume and leverage our fixed costs.

Marketing, general and administrative expense in the Americas increased 4.7 percent, driven by marketing and sales investments and higher information systems, pension and healthcare benefit costs. Americas' other income net was $2.7 million, due to a $3.1 million gain on the sale of a distributor warehouse, partially offset by a modest loss in our Molson U.S.A. business.

Turning to our results for the Europe segment -- remember, most of the comparative indicators are distorted because we owned the business for 13 weeks of the quarter last year, versus only eight weeks last year, and also because the British pound depreciated more than 12 percent, year-over-year, against the dollar. As we've mentioned, excluding the first five weeks of 2002 results makes comparisons difficult this year. It's also important to remember that the first quarter has historically been, by far, the smallest revenue and earnings quarter in our U.K. business, which magnifies the percentage impact of any individual events and trend changes in the business.

As with the U.S. business, volume and share trends in our U.K. business were very encouraging in the first quarter. Full-quarter pro forma volume increased more than four percent, despite the shift of the Easter holiday to April this year from March last year. On a pro forma basis, our on-trade volume grew about two percent in the first quarter, while our off-trade business grew more than 13 percent, yielding market share gains in both channels and overall.

On a brand basis, volume was driven by the Carling brand, growing at a high-single digit rate, and gross growing nearly 20 percent in the quarter.

Two key factors drove our disappointing financial performance for the quarter in the segment reflecting more than all of the year-on-year pro forma decline of $3.2 million. First, FAB volume declined in the quarter, partly because of the continuing effect of the increased excise taxes last spring, and from excess off-premise retail inventories after the busy Christmas season. As a result, sales of our largest FAB brand, Reef, were down modestly in the quarter, while our other FABs, as a group, were down more than 50 percent from a year ago. We're optimistic for Reef sales trends for the balance of the year, since actual consumer take-away for this brand was up in the quarter, benefiting from new advertising and a new flavor introduction.

Second, although the U.K. pricing environment in the first quarter continued to be positive in the on-premise channel, off-premise results suffered from a mix-shift towards lower-revenue channels and brands, which negatively impacted revenue growth in gross margins. Also, cost of goods did not show the benefit from the efficiencies related to the closing of Cape Hill Brewery late last year because of offsetting training and other transitional expenses that will continue through, at least, part of the second quarter.

Taking it to the bottom line, net income for the overall company was less than a million dollars in the first quarter. Lower Americas' production volume, high interest rates and pension expense and the exclusion of U.K. results for the first five weeks of last year had a combined negative impact on first-quarter pre-tax income this year of nearly $50 million versus a year ago. This represents more than all the variants with last year's first quarter results. Most importantly, anticipate that these factors as a group will present a much less severe challenge in the balance of the year.

At this point, I'll turn it over to Tim to look ahead to the balance of 2003. Timothy?

Thanks, Leo, and hello, everybody.

Let me start by paraphrasing our Safe Harbor language; some of which we'll discuss now and in the Q&A, may indeed constitute forward-looking statements. Our actual results could differ materially from what we project today. So, as usual, please refer to our most recent 10-K and 10-Q for a more complete description of factors that could affect our projections. Regarding any non-GAAP measures that we may discuss during the call, please visit our Web site, which is www.coors.com for reconciliation of these measures to the nearest GAAP result.

Let me begin by providing some perspective on the second quarter. In the Americas, U.S. unit sales volume should run ahead of sales to retail in the second quarter as we rebuild distributor inventories. While April sales to retail trends have been slightly better than those we experienced in the first quarter, we won't really have a clear read on second quarter volume trends until after the key Memorial Day holiday. America's cost of goods sold per barrel trend should be significantly more positive, that means lower, than most the first quarter, as our operations cost per barrel benefit from higher volume with intended improvement in fixed cost leverage, and as we also realized the impact of recent reductions in the price of diesel fuel.

In Europe, second quarter volume trends will be positively impacted by the inclusion of the Easter holiday this year. But the benefit of Easter volume will be largely offset by the lack of a World Cup competition this year. While we anticipate the unfavorable mixed shifts we experienced in the UK in the first quarter will abate somewhat in the second quarter, the lower margin offtrade channels will continue to grow as a portion of our total business. Meanwhile, FAB volume is likely to recover, though only modestly.

Trends in Europe cost of goods are likely to improve toward the end of the second quarter as we begin to realize the benefits of the Cape Hill Brewery closure and related capacity realignment at our Burton (ph) plant.

Global pension expense in the second quarter will be up by about the same amount, which is about $6 million, as we experienced in the first quarter. Corporate interest expense in the second quarter should be within $1 to $2 million of a year earlier as we lap the May 2002 implementation of our long-term financing structure for the acquisition of CBL.

Turning now to the back half of 2003, several factors will drive, we believe, our overall performance. America's results will be driven, first and foremost, by our ability to grow in the U.S. We continue to believe that our sales and marketing programs are working, and we're optimistic that we can improve the trend that we've seen early in the year. We expect even more benefit this year from our relationship with the NFL, as we and our wholesalers have more time to plan in advance of the start of the football season.

While adverse U.S. mixed shifts trends will continue to be with us all year, we anticipate the impact will be gradually less challenging as the year progresses. For the full year, we do not anticipate that there will be meaningful difference in U.S. wholesale or inventories versus the end of 2002. America's volume trends in the second half will also benefit from the lapping of the June, 2002 increase in the Puerto Rico beer excise tax. We currently anticipate that America's marketing, general administrative spending for the full year will be up in the mid-single-digit rate, consistent with our trends in recent years. As always, changes in our spending priorities for reinvestment in the front end of the business could alter this outlook.

In Europe, third quarter volume trends should improve as we lack the impact of high competitive offtrade inventory and related discount in following the World Cup a year ago. Overall, we are optimistic about our ability to continue to gain share in the consolidating UK beer market. Also, we anticipate that Europe cost of goods will improve significantly the back half of the year as we begin to reap the full benefits of the Cape Hill brewery closure. We continue to believe that this restructuring will lower our annualized costs in the range of $15 to $20 million.

Global pension expense versus prior year will grow in the third quarter and fourth quarter at less than half the rate of the first and second quarters. It will continue at the pace that we saw in the first quarter.

Meanwhile, we expect corporate interest expense to be down in the back half of the year as we benefit from cash generation and debt repayment. To that end, we've been managing working capital and applying tight discipline to our capital expenditures program. We are confident that full-year capital expenditures will come in below the levels of last year.

Clearly, we face many trends and challenges this year that will continue to cause some fluctuations from quarter to quarter. For the full year, we remain confident that successful execution of our programs to grow volume and reduce costs on both sides of the Atlantic will provide a profit growth.

Our slow start this year has made the achievement of full year profit growth more difficult, but it is the key objective that our entire team is fully focused on achieving. We're looking hard at the effectiveness of all our spending and are refocusing our efforts on those initiatives that will drive performance in 2003.

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

To summarize, you know, the first quarter presented a range of significant challenges resulting in breakeven performance versus a year ago in a seasonally small quarter on both sides of the Atlantic.

Although we anticipated most of the negative factors that impacted the quarter, some were larger than anticipated and others were, frankly, unexpected.

We believe that most of these headwinds are not ongoing. That our first quarter results are not representative of the potential of this company. Moreover, if you dig below the surface, I believe you'll see some important positive trends in both of our operating segments.

But to be sure, 2003 will present additional challenges as have all recent years. But we believe that our focus on the fundamentals that drive this business offers the potential for significant long-term profit growth even in a tough environment. So, at this point, let's open it up for questions.

Ladies and gentlemen, if you'd like to ask a question, please press the one on your touch-tone phone. If you question has been answered or you wish to remove yourself from the queue, please press the pound key.

Once again, if you'd like to ask a question, please press the one on your touch-tone phone. If you question has been answered, please press the pound key. One moment for our first question.

We have a question from Jeff Kanter from Prudential Securities. Please go ahead.

Good afternoon everybody.

Hi, Jeff.

Tim, just quick housekeeping. What was your Canadian joint venture income in the quarter?

North or South of the border?

North.

About $8 million.

OK, thank you. Tim, when you came to New York I have in my notes that you said that consumption in the first five weeks in the quarter was up five percent. And part of that was probably due to just the hangover in the timing of New Year's.

But that implies a pretty sizeable deceleration as we trended through the back eight weeks of the quarter. Maybe Easter had something to do with it, but can you kind of just give us a sense whether, you know, consumption trends have been acceleration or decelerating as you went through the quarter? And then what's going on in April?

Jeff, we had a -- this is Leo -- we had a good, a real good January. Obviously, on the back of the playoffs. We had a soft February -- not terribly soft, but down modestly in February. I think the category was down significantly worse in February, but sort of recall the month to month category results.

We bounced back in March. Not as healthy as the overall average, but bounced back. April, so far, has been a little ahead of year to date first quarter sales.

This is removals now, right?

Yes. Just consumption. So, April is trending better when you say, then, the year to date, that's the .8 percent that you printed?

No. That's the 1.4 percent that the U.S. domestic, is what I'm talking about.

OK. And driving that, though, is Keystone versus Coors Light?

Coors Light is up modestly in the quarter. Coors Light to regional story as you know, Jeff (ph) , we've got - actually had a terrific quarter in the Northeast, which was very encouraging. Because, you know, we had some high share markets in the Northeast.

We had very solid Coors Light growth in the Midwest, mid single digit increases all down South by the Southwest, which was down in the quarter. That's a combination of some consumer issues, but more importantly some key distributor issues. Which, fortunately, we're resolved in the quarter.

So our growth forward there is more encouraging.

And that's why the mix should improve as we turn through the year?

That's one of the reasons. That's right. One of the other reasons is Frederico (ph) will come back mix wise on the back half, Jeff. OK?

Yes. Thank you very much.

You got it.

Thank you.

Our next question comes from Caroline Levy from UBS. Please go ahead.

Good morning everybody.

Caroline.

I just really, quite basically I think what everybody is trying to figure out is are we in for another down quarter? I mean, I'm pleased with the top line trends, but they came at big expense. You obviously had to invest a lot in marketing and then there was some separate operational issues.

I mean, should we - can you just give us a little bit of sense of whether you are shooting for an up second quarter or if you feel the challenges be it mix shift in Europe or, you know, other cost initiatives, other cost situations here would mean another down quarter?

Well, Caroline, you know we don't give specific guidance quarter to quarter. But let me start out with the volume book and the investment look at you phrased it. The inventory shift, in fact, in the quarter, you know, dwarfed the marketing investment issue in the quarter. In fact, you know, would, you know, is magnitude bigger than the marketing investment, you know, issue on a full year.

So the major issue in the quarter was the inventory shift. Now, the back end of that inventory issue, the storm impact, really should come back to us in the second quarter. We should get that production back. We should get most of that overhead absorption back. In the cusp, we probably spent some overtime cranking back up.

But we'll get most of that back so you - that'll help us in the second quarter. So, as Jim said, our shipments, our volume in the second quarter, should run ahead of removals.

OK. Can you just help me, Leo, understand what it is in the Southwest? I think it's a really important issue if you could dig just a little deeper into the consumer and the distributor issue.

Yes. We have sort of the tale of two worlds in the Southwest. We're actually doing - and most of it is around the state of Texas. We're actually doing relatively well in South Texas, but off a very small base.

And our biggest challenge is, we've told you I think several times, is rekindling the Hispanic market in that area. And that's our consumer challenge in Texas. Our North Texas has been a very difficult distributor issue in our heartland market. That distributor sale transfer was completed in the first quarter.

Was it the first quarter, Jim, or the end of the year? I think it was first quarter, and actually that transition so far is going very well. So, we have a consolidation there with Miller; it appears to be doing well and that is encouraging.

We're also out of the overlap in L.A. on our Anaheim sale from a year ago, which was a very rugged year '01.

So, you know, those things were hangovers in the first quarter, which should get better for us.

Thank you. May I ask just one last question quickly on depreciation and amortization and your actual debt level? Would it be possible to get either of those?

For when?

For the first quarter.

Our debt level now is a skosh (ph) over a billion five, and we're still right on track, we believe, to be paying down, you know, between 180 and $200 million. That's right where we believe it would be when we spoke with you in New York. And, you know, right now our depreciation and amortization in the quarter -- we expect this will be pretty much the case throughout the year -- will be running just a little bit above our full-year cap ex, but within $10 million, full-year.

Thanks a lot.

Our next question comes from Skip Carpenter from Thomas Weisel Partners. Please go ahead

Yeah. Good morning, guys.

Hi, Skip.

Hi. I just want to get a little bit back into the STR performance in the quarter; specifically in terms of kind of now what we're looking for to drive that in as we go into the second quarter. Earlier you mentioned that you're happy with kind of the marketing and everything that seems to be taking place here. But, again, I just keep circling back to the performance at Keystone Light. And could you talk a little bit about why you feel that brand has just taken off here at a time where the company seems to be so focused squarely behind Coors Light?

Skip, it's interesting; you've got a brand in a real good value position. It doesn't appear to be coming at the expense of Coors Light, when you look geography to geography. It's interesting; Texas is actually a big growth state for Keystone, but it's not particularly coming out of our geographies where Coors Light's been challenged. So, in a sense, it's a really nice piece of business for us. As you know, Keystone's a relatively profitable sub-premium brand. And the other interesting characterization of it is it's not coming from our Coors/Miller wholesalers. They've got plenty of alternatives to selling that slut (ph) ...

Yeah.

... but it appears to be the rest of our portfolio has selected Keystone as their sub-premium brand in their portfolio. So, frankly, we're not unhappy with that. It's nice.

So, you look at this as all incremental volume and not really kind of eating away anything in terms of Coors Light. Did you see anything in terms of when you look at Coors Light performance in the quarter, and, I guess, going into the second quarter, any impact that potentially Mich Ultra had on the product? And if you could, give us a little sense in terms of any specifics in terms of share gains or losses in terms for Coors Light by channel in the quarter.

I don't -- you know, it appears that everything we can tell about Mich Light is -- excuse me, Ultra -- is that it's coming pretty balanced out of the total light beer category from a sourcing point of view, but it isn't big enough to have a significant impact on Coors Light trends, as far as I can tell, Skip.

OK.

In terms of channels, I don't have anything off the top of my mind that's unusual about channel growth to give you from a share performance.

OK. And I just had one quick question for Tim. Tim -- correct me if I'm reading (ph) about this -- in terms of the other income reported in the Americas -- the 2.7 or 2.6 million -- that includes the gain that you guys got from a sale of a distributor in the quarter. Is that correct?

A warehouse, yes.

OK. And that was offset by...

It was a small Molson USA loss, about a half-a-million-dollar loss.

OK. And net gain, you said was one, you said three one?

Correct.

OK.

Jeff, just, I mean, just one more thought on Keystone, and this has been emerging over the last year, the margins on Keystone are starting to improve as our underlying cost of goods go down. Obviously the leverage issue that Neal (ph) spoke to at length is very significant in the first quarter. But the underlying margin for Keystone is getting bigger and better because we're getting more efficient and we're getting more productive. So, it's, you know, obviously we would rather sell a barrel of Coors Light and Keystone Light, though they're not at all mutually exclusive. But that's an important point for is that Keystone continues to roll.

OK. Thank you, guys.

We have a question from Matthew Webb (ph) from Cavanaugh & Company (ph) . Please go ahead.

Hello. I've just got two questions on the UK, firstly on the negative mix shift in the offtrade. Do you think that that is a beer industry issue or is it that quite specific to you because of your exposure to the RTD category? And then secondly, on your supply contract, I see you've accepted lower pricing on your volumes at a puncture state. I was wondering whether you could possibly quantify that. I know that you picked such a low price in order to improve the increased number of outlets [Inaudible] so, to offset that, and just also whether there are any other contracts coming up for renewal over the next couple of years.

Peter, you got that?

Yeah, sure. Matthew, just on the punch contract, obviously, for obvious reasons we don't really discuss the details of these contracts because they're confidential, but I think it's fair to say that for us, obviously, it's an attractive win, simply because we're getting significantly added distribution in the punch estate. So, one of our challenges, I think I alluded to in New York, was the fact that we've got to build distribution for calling and this is one way, and an important way, of getting there. So, we felt that was a big win and provides a good value for us and business benefit to both sides.

On the negative mix question, I think it is primarily an industry situation here. You know, our fake-home, as you know, take-home margins generally are lower than the entrée. But in fact, our weaker margins, meaning the margins in the major multiples, like Tesco (ph) and Sansbruy (ph) and so on are actually holding up very well. The issue we've got in what we call the wholesale channel and the convenience channel where there's been some pricing pressure. And basically they've continue pricing, really, that was extended from Christmas. And there have been one or two structural shifts, as you know. There have been a couple of acquisitions in that channel. So, overall, I think it's primarily an industry issue. We think that we can change that, and going forward, we're going to be able to manage our net pricing better in that segment. So, we don't see it and we see and opportunity to improve that next quarter and in the second half.

All right. Thanks very much.

We have a question from John Faucher from JP Morgan. Please go ahead.

Actually, I'm fine. Thanks.

OK, John. Thank you.

Thank you.

Our next question comes from Bryan Spillane from Bank of America. Please go ahead.

Hi, good morning.

Hi, Bryan.

Hey, two questions. One, Tim, do you have a cash flow from operations number for the end of the quarter? Or a free cash flow number? One of those?

Yes. Positive 38 million.

That's cash flow from operations?

Correct. That doesn't, obviously, include cap ex or investing or dividends or anything else.

And then just, I guess, for Leo. Have you made or have you begun to invest yet in putting more sales people out on the street so far this year?

I think that was -- if I remember correctly -- that was one of the initiatives you were looking for this summer was to increase the number of sales people you had out there. And I guess particularly in trying to increase your presence in some channels where you're under represented.

I'm kind of curious -- as you move into the summer months now, are you going to market with more people on the street than you did last year?

The answer is we will be, Bryan. We've got about 50 people on the street that got out of training in the fourth quarter. So, they've just been in the market and just come, you know, sort of ramping up.

And we have another 50 people who will be coming out over the -- I guess in about three or four weeks and getting their assignments coming out of training. And right now we're looking closely at where we'll go beyond that prior to summer, OK.

So, of what -- full year we plan to be about 150 people. We'll have 100 at least in place in the market as we head into the summer season.

These people were hired and you were training them already when you started the year. Is that right?

That's right. Yes.

OK, great. Thank you.

We have a question from Andrew Conway from Credit Suisse First Boston. Please go ahead.

Hi, Leo and Tim.

Hi, Andrew.

A couple of questions. Tim, is it fair that the majority of your revenue growth came from Carling year on year? Is that fair?

You mean in the U.K.?

No, I mean consolidated revenue overall -- did more than 100 percent of the growth come from the acquisition?

Well, remember that we're -- offhand I'd say yes.

OK.

Because, remember, the year over the year comparison.

Correct.

We're still not including the five weeks -- five plus weeks in the 2002 base. So, yes.

Great. And if you exclude the New Year's benefit on STR's (ph) , I know that may have been offset by Easter, but about how much in your mind did that effect STR's (ph) in the first quarter?

The ...

New Year's inclusive around -- was it maybe a half a point or less?

Yes, just above a half a percent.

OK, great. And as you look at the America's business in terms of net revenue per barrel going through the year as you lap Puerto Rico -- even taking into account some of the negative mix issues with Keystone -- could we still see accelerated net revenue per barrel result, you know, in that one to two range second half of the year?

Yes. It'll be closer to the one and the two because we still have, I mean, Killian's, as we've said, is getting better. Zima's still got the flu, and it's - that's, as you know, a disproportionately profitable brand for us.

So, Puerto Rico will be laughing, getting much better. Killian's will be getting much better. So that we'll still have a little bit of a dent from Zima. So I'd be seeing us closer to the one than the two, but to Leo's point, pricing is still, you know, the challenge to the economy notwithstanding holding up pretty well.

Great. And on your America's shipment numbers with the first quarter inventory adjusting as we get through the year, and with your very successful marketing programs, is there any reason to think your shipment growth in the U.S. can exceed one percent this year?

Absolutely. Absolutely. I mean it - obviously we've got a run for the roses the last couple of quarters here because we've got a bit of a hole for the first quarter. But the underlying STR growth we think will, you know, the shipments will be stronger in the second quarter than the STR growth. And the STR growth is coming.

So our objective and our U.S. sales force objective is to beat the heck out of that one percent.

Great. And in the quarter, as you saw, the inventory shipment performance and bad weather, my sense is you continue to spend on marketing so you went away, you know, took strong stomachs through the quarter. Was there any tweaking of marketing in light of performance or did you stick to the course?

No. We stayed the course, Andrew, but we're watching it very closely. And what we're watching particularly closely is the smaller brands, right, where we're, you know, not going to spend in the weakness in Zima particularly. The sense is that Killian's can run the numbers with less spending than we had a year ago.

So we're watching that very closely. We're also watching very closely where we've got heavy market commitments where the market isn't responding. And we have a couple of markets like that and those tend to be distributor alignment issues as you know. And we're going to align where people are ready to play.

And so far this year, we've held the course. We'll be making some adjustments here in the second quarter, but we're, you know, we believe what we're doing right, Andrew, and you cant make a case that we're overshooting share hoists here. OK?

Right. Right.

So this is job one, is to keep that volume pressure on.

Great. Great. And finally, Tim, on cost per barrel. Also, in the Americas, don't mean to short step Peter on my line of questioning but ...

No. You can spread the wealth, Andrew. It's OK.

OK. As you look at, Tim, the plans you set out kind of in your planning process in February ...

Right.

Even with - clearly you'll get some pretty decent fixed cost leverage second quarter. Full year anticipation still to be down a couple of dollars cost per barrel in the Americas?

Maybe not a couple, but we'll make progress right along the lines that we talked about in February. We're still very much on track.

Remember, we've got some pension working against us on that, Andrew. SO we've got a couple of mechanical things. The underlying controllable cost per barrel performance, you know, relative to that five to seven target, is really very solid this year. It was very solid in the first quarter.

Great. Thank you gentlemen, and very much really appreciate it.

Thanks Andrew.

We have a question from Shay Hill (ph) from HSCC Securities. Please go ahead.

Yes. Hello there. It's Shay Hill (ph) here from HSCC in London. I just had two questions, gentlemen. One is a follow up, really, on U.K. pricing.

Because when I look at the European figures, obviously you've got a surge in sales and in operating costs for the extra five weeks, but your gross profit is down about four percentage points, down from 30.8 to 26.4, and you're making about five dollars less per barrel. And in the FP this morning, you know, it was talking about Scottish and Newcastle, but it was talking, I think quite rightly, about how Carling and Carlsberg are on heavy promotion everywhere in off-premise, wherever you look. And I just wanted to know, really, more precisely what your pricing strategy is. I know you are not leading the price discounts. It seems, certainly, that Carling is happily following deep discounts. So, I wonder what you mean when you said earlier that you plan to manage net pricing better. That's my first question.

My second question is on the total U.S. market. Could you give me an indication of what you think the total tax-paid shipment to the U.S. has done in Q1? Because I'm working off an estimated figure of about minus 3.4, and I wondered if yours was materially different from that.

The answer on the U.S. market -- I'm not sure. Is that -- that's the best we know at this point, too. We're using the same database you are, so 3.44.

Does that imply -- just on that -- but that implies that is something like minus 3.4. We've had the Anheuser Busch shipment. We've had yours. We know that imports are sort of down seven and a half. But it implies that Miller and others are sort of down about 10 percent, Q1. Can that be right?

That's the same math we did.

OK.

So, we don't know. We haven't seen their announcements. But that's what it appears to imply to us, too.

OK. Thanks.

Do you want me to address the other question?

Peter, I think you'd better take that. It sounds like your friends up north are doing some professional wrestling on that pricing articulation.

On the pricing, first off, you know, as I mentioned, in the retail trade, which includes, you know, sanes, reseskas, the major molt (ph) -- in fact, our pricing is competitive, but it's significantly ahead of where it was at Christmas. So, our actual margins are holding up pretty year. The issue we've got is in the wholesale channel and in the convenience piece.

But, you know, your -- I think what's confusing a little bit on the calculations of gross profit, is that we've got, you know, these factored brands that are included in our net sales, and also in our cost of goods. And in a couple of these areas -- particularly in our multiple on-trade business -- our factored brand -- we've actually lost some business. This is sort of portered (ph) brands, for example, in punch. And our factored brands have declined by as much as eight percent in the first quarter.

Now, that does impact, quite significantly, the cost of goods, because, apart from the fact that the brands are in there, they're also in there on a fully-tax-paid basis. So, it represents almost 50 percent of our cost of goods. So, you know, it's very difficult to track the overall gross profit. And I, you know, certainly sympathize with that. But the overall answer is that, in fact, our net pricing has risen on average over the course of the piece, and so, the overall margin doesn't look as bad as it might appear at first.

Thanks, Peter. We obviously can't comment about [Inaudible] pricing and other than what Peter referenced earlier.

OK. Thank you.

Our next question comes from Mark Swartzberg from Legg Mason Wood Walker. Please go ahead.

Thanks, operator. Good morning, everyone. Two questions. First, the 20 million you referred to regarding the first quarter, I think you were tying it in too early to the inventory shift, but if you could unpack that a little bit and include in that what you were saying, I think, when you said half of that sustaining in the second quarter. And then unrelated, I had a question on your effective tax rate.

Yeah. Let me try and run through it. I'll watch for my CFO here to nod at me as I go through these numbers. You know, with the $20 million, basically take 250,000 bottles, right? Roughly $50 a bottle. You've got a large chunk of it, 60 percent of it. And the rest, really, is lost absorption on an 8 percent production decline, right, which is a big deal. And that's what the number is. Now, we'll get some of that volume back, 'cause we'll rebuild the 100,00 bottles in the second quarter, right? And we'll get a chunk of the volume absorption back because production won't actually, you know, we'll be running this place flat out now and get some extra yield on the productivity on that. So, that's where it is.

And yet, you still think it doesn't disappear. It only goes down to a 10 million or so drag?

kiely well, no. Remember we've got a permanent reperiodization of our business with the fourth quarter change in the inventory pattern, which was, we anticipate will be there again this year. So, that's just the mechanics of them having loaded earlier this year. They'll load earlier again next year, about the same quantity and that's an ongoing quarterly shift in our dynamics.

Gotcha.

And Mark, we'll also, they'll, we'll lose a million or so, maybe a little bit more in we're going to have to spend more overtime, more premium pay to get this back within a shorter period of time. So, we won't get all the $20 million back, but Leo's point, we'll get most of it.

We'll get most of it.

Great. And then shifting onto the effect tax rate, it sounds like when you're saying you expect the EPS to still be up for a year, you're making some assumption there. Your 10-K talks about your 36 percent. You've got some audits going on that are supposed to clarity on in June. I mean, it's, either you're telling something about what you think those audits are going to say or you're taking measures that you think are going to effectively give you some lower rate, assuming some adverse outcome from those audits. Can you tell us how you're thinking about this issue?

Well, it's obviously not appropriate to comment plus or minus on the outcome of the audits, but it's fair to say as we live longer with our new structure, we think the 36 percent is the right, 36.0 percent is the right rate, and there may be some upside, i.e. lower, but right now I think that's a pretty good estimate that I'm certainly using, you know, our folks are using to balance the year. I think that's the best estimate forecast we can give you.

No, that's helpful. Thank you, Tim.

Sure. Thanks, Mark.

We have a question from Marc Cohen from Goldman Sachs. Please go ahead.

Yeah, thanks. Hi, guys. I guess I had three questions, maybe just to get a little bit more precisive on a couple things.

Can you, first of all, give us exactly what the, I mean, your per barrel was -- growth was in the Americas? I guess you gave us, Leo, the price part of that. But I'm wondering just how much mix really impacted it, first of all.

Second is, as I heard you go through the April numbers, I was puzzled why with Easter shifting in April wouldn't have been talking about just sort of a much more significant STR (ph) lift? And I wonder if you can give us some sense of the effect of moving, you know, of that timing shift into April?

And then finally, and more strategically, you mentioned that the Keystone margins were getting up to a point where it's attractive. And I'm wondering if they're getting attractive enough to you that you'd start to think about putting incremental investments into actually trying to build more brand equity around that brand? And how you're thinking about that issue?

Yes, Marc. I'm going to have to give you more perspective on Easter when we talk second quarter. I really can't give you a better perspective today. Suffice to say that we're encouraged with the April trends.

But I've got to tell you, I haven't seen a four week trend setting in this business for six months. So, you know, we're just going to have to tell it as we see it in the rearview mirror, OK?

On Keystone. Hey, while we're not unhappy with the run that's on Keystone right now, no, we don't intend to put incremental spending behind it. It's an important brand in our distributors' portfolio. It's a brand that, you know, we look to try and make more money on, candidly.

But, you know, our real focus is growing Coors Light and we don't waver from that. Tim, on the -- that was per barrel pricing Americas. Do you know what the net on that was? Net of mix and two percent up?

From pricing was about one and half percent.

Thanks.

Yes.

As a reminder, if you'd like to ask a question, please press the one on your touch-tone phone. We have a follow-up question from Caroline Levy. Please go ahead.

Good morning. Again, I'm just sort of struggling with the numbers for the industry being down so much. It looks as if you have taken a substantial amount of shed. Does that gel with what you're thinking?

We don't have a 20/20 hindsight on this yet. I haven't got a good sense of industry removals on the quarter, which is really what we need to put the barometer on. My sense is we've gained some share, yes.

Yes, and I mean ...

But I don't know how much because it's, you know, the shipment numbers are so wild in the quarter -- ours included, right?

Right.

That I think it's going to take a little time to smooth out. No doubt, however, we are driving into a very, very soft demand situation, particularly on premise. And that's impacting everybody, you know, sort of across the category.

Are you saying that has happened or that that continues to be the case? The weak on premise?

It has happened. I, you know, since about the second week in November heading into the holidays we really saw that the on premise channel does start to soften. And as I do my sort of calls around the country, this is pretty universal.

Obviously, more impacts major metro areas than it would the more rural markets, but it's a big deal, you know. Our grocery take on trade is relatively solid. Our performance is relatively solid. The other place we're beginning to see weaknesses in the convenience store and that's to a question that somebody asked earlier. I'm sorry I didn't know a better answer then.

And so we're seeing some weakness in overall category performance, excuse me, in the convenience channel. Although our shares are trending about they same as they are in grocery.

And then, Leo, just to take Texas and also if we could add California a step further, because combined if you could just help us out as to how much of your volume is there. But I think it's a good chunk in California and in Texas.

And maybe you could just tell us specifically is there a couple of programs that you have underway or how many of your new salespeople are going into those markets.

Thanks. The salespeople really aren't targeted specifically towards our Western markets, Karen (ph) . It's been - the issue there has been very large distributor consolidation markets there. And last year was particularly punishing.

One is we couldn't get Dallas done, and Dallas as you know from any external measure was our softest market last year. It's also our highest share market in the country and, you know, very big Coors Light market. Southern California, the Anaheim consolidation with Harbor was a very difficult consolidation.

It's a huge distributorship. They've done a great job of getting on top of it coming through the overlap and I'm much more encouraged about our ability to be competitive there this year. Actually it wasn't Southern California that dragged us down in the - it was the offset in the first quarter. It was the Southwest, mostly Texas and somewhat Arizona.

Anybody off the top of their head have how much Texas and California or ...

Slightly higher than...

You know, if you take Texas, California and add Arizona into it, you're talking almost 25 percent of our total volume.

Thanks Leo.

You got it.

Thank you.

We have a follow up question from Mark Swartzberg. Please go ahead.

Thanks again. On Coors Light, I may have missed it, but can you repeat for us Coors Light volume growth in the United States STR's quarter to date and then give us some color on what's going on there with the advertising both in terms of message and plans ahead of NFL preseason?

Yes. Coors Light in the quarter was up a little less than our overall average. Right?

I mean in the second quarter to date.

Oh, the second quarter. It's actually right about on our total performance. So it's actually come up a little bit in the portfolio.

Great. OK.

Where we're going is very strong media focus that is on right now. We broke about a week ago. If anybody happened to watch the NFL draft, we were all over it. It was really exciting and the ratings for the NFL draft among young guys was also very exciting.

It was the highest rating ever. That was the kickoff along with the NBA playoffs which we're currently heavily involved with. And so we'll have a heavy young adult focus as we head into summer. We also are spending very aggressively in our key markets.

And as I said earlier, just watching that closely to make sure we're in alignment with our key distributors in terms of impacting growth.

Thanks Leo.

You got it.

We have a follow up question from Bryan Spillane. Please go ahead.

Hi. Just real quick. Tim, could you just remind us on pensions, first. Are you reviewing again return on asset assumptions? I think your at about 9.5 or 9.25 right now and the potential for taking that down again this year.

No. We've taken it down to 9.0.

OK.

Yeah. And that's where we'll be all year.

OK. And then, the second is just how much are you expecting to contribute -- you know, cash contributions -- to your pensions this year? And is there a potential that that may increase?

The cash contribution will be virtually the same as the expense said -- that, you know, 38 million total company -- that is, total enterprise -- level.

OK. Thank you.

Yup.

There are no further questions in queue. Please continue.

Hey, everybody. Thanks for being with us. We are very focused on selling beer and making money, and we will see you at the end of the second quarter.

Good show.

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