Molson Coors Beverage Co (TAP) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Adolph Coors Company second quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Leo Kiely, President and Chief Executive Officer of Coors Brewing Company. You may begin, sir.

Thank you, John. Hello and welcome, everybody. Thanks for joining us today.

With me on the call today are Timothy Wolf, Peter Kendall, CEO of Coors Brewers limited, David Barnes, our USCFO, Ron Triggastat our controller and David Dunnewald our investor relations director. Peter Kendall and I are in the U.K. while the rest of the team is in Golden.

On the call today Tim and I will cover two topic with you, first a discussion of the key drivers of Coors Brewing Company second quarter results, and second, some perspective on the back half of 2003, and then we'll open it up for questions.

Earlier this morning we reported higher second quarter consolidated net sales, net income and earnings per share, but that really doesn't toll the full story. Although our diluted earnings per share increased to $2.09 from $1.84 last year, more than all of this increase, or about 29 cents per share came from a short-term reduction in our effective tax rate. Tim will take you through the tax rate dynamics in a couple of minutes.

In the meantime, if you look beyond the tax rate, financial results that were released this morning reflect challenges for the Coors Brewing Company in both of our major operating segments. Our U.S. business suffered from significant category softness, but maintained solid pricing and margins while our U.K. business achieved strong volume growth but was weak off-trade pricing and margins.

Other headwinds in the quarter included higher pension and interest costs along with unfavorable sales mix shifts on both sides of the Atlantic. Comparisons versus a year ago were further impacted by income received last year from some contract brewing and transitional service arrangements that we had in our U.K. business. Now, most of these difficulties were continuations of factors that we saw in the first quarter. On the other hand, our results benefited from additional sales volume related to building U.S. distributor inventories.

Now, let's review some of the most important drivers of the second quarter results starting with the Americas segment. Pretax income for this segment was $90.2 million, up 4% from a year ago, driven by solid pricing, cost reductions and the person fit of rebuilding distributor inventories. The U.S. sales to retail decline of 1.9% reflects a very soft U.S. beer industry in the second quarter driven by poor weather and economic weakness across much of the country along with localized issues in some key markets for us.

The effect of cold, rainy weather and a wide range of consumer product categories from soft drinks to charcoal during the second quarter have been well publicized. The economy also had an impact on our business as unemployment among our core demographic of young a dealt men reached its highest level in more than a decade and has nearly doubled the level of three years ago when industry volume trends were much stronger.

The impact of the weak economy on our business can be seen from several angles. Unpremised volume trends have been especially weak this year as consumers have reduced their discretionary spending. Encouragingly, off-premise sales to retail grew during the first half, but this growth was not sufficient to offset the on-premise decline. From a brand perspective, Keystone Light continued double digit growth in the second quarter as its appeal grew for the brand's unique mixture of value and drinkability. From a package perspective, higher priced package configurations, especially bottles, declined, while value-oriented can packages and draft beer grew. More localized challenges include a smoking ban in New York bars and restaurants and continued distributor transition issues for us in Texas and Southern California. Given an idea of how these factors compounded in the quarter, our sales to retail in the northeast with its weather issues and the southwest with its distributor issues represent all of our decline.

In terms of U.S. brands trends, Coors Light sales to retail declined at a low single digit rate. Killian's and Coors Original sales fell at a mid single digit rate and Zima continued to decline at a double-digit rate. America's second quarter volume to wholesalers increased 0.8% and U.S. domestic volume grew 1.8% as our U.S. distributors rebuilt their inventories after the big Colorado snowstorm at the end of March. We successfully rebuilt the 100,000 barrel shortfall in inventories by May. Sales were also boosted as our distributors ordered an extra hundred thousand barrels of inventory at the end of the second quarter in anticipation of a strong July 4th holiday that fell in the second quarter. This enthusiasm was rewarded since our U.S. sales to retail trends for the three weeks around July 4th were up about 1.3%.

Meanwhile, in Canada our Coors Light business continued to perform well with mid single digit volume growth in the quarter. South of the Canadian border overall sales to retail for our Molson and USA joint venture declined about 1%, but the Molson Canadian and Canadian light brand family grew nearly 30% in the quarter. U.S. pricing continued to be stalled in the second quarter. We received about 2% of U.S. pricing growth, which was partially offset by negative sales mix toward lower brands and packages.

Cost of goods per barrel decreased 0.5% in the Americas segment primarily because of lower packaging costs and continues substantial progress by our operations team in reducing cost per barrel, partially offset by increased pension and diesel fuel costs. Also, higher sales volume in the quarter contributed leveraging of fixed costs. Marketing and general and administrative expense in the Americas increased 5.2%, driven by increased advertising and sales spending along with higher information systems and pension costs. Turning to results from the Europe segment, pretaxed income was $41.9 million, down 10% from a year ago. This is primarily a balance issue between volume growth and margins in our off-trade business and the challenge of the transitional income last year following the CBL acquisition.

Our on-trade business, which is more than two-thirds of our Europe volume and margin, continued to perform well in the second quarter, specifically our on--trade volume increased nearly 5%. Pricing remains solid and we continue to grow market share and margins in the on-trade. We increased our on-trade market share more than a full percentage point in the first half of this year primarily on the strengths of the Carling brand and a much more focussed sales effort.

In the past months we've made significant strides in growing the on-premise distribution of the largest beer brands in the U.K., Carling. One drive of this is the rolling out of Carling extra cold. The only significant negative trend on our on-trade business was a double-digit decline in factored brand sales. This longer term trends is a result of heightened sales focus on our own brands along with the move by some of our on-trade chain customers to ship shift the delivery of non-Coors beverages to alternative distribution systems. These factored brand sales have the effect of grossing up both sales and cost of goods with only a small margin impact. The second quarter impact of the factored brand decline was less than $2 million pretax.

Meanwhile, in our off-trade business, which is less than a third of our Europe sales and margins, we've achieved rapid volume growth but suffered margin erosion driven by heavy price discounting and mix shift toward lower revenue per barrel sales. This off-trade discounting during the quarter drove about $6 million of operating margin decline. We are working hard to improve off-trade pricing and margins, and we achieved significant improvement toward the end of the second quarter.

On channel trends three other mostly short-term factors reduced our profit by about $10 million in the second quarter. First, we're no longer contract growing significant volume for other U.K. brewers. Most of this contract brewing, which included a transition agreement with Intabrew concluded at the end of last year.

Second, we're no longer generating income from a handful of transitional service arrangements with Intabrew that we set up following the CBL acquisition. This generated a significant pretax income last year and involved the provision of distribution, dispense equipment maintenance and administrative services. The loss of related income this year has been partially offset by modest initial benefits and the right sizing of our U.K. infrastructure. These costs and the loss of the brewing and transitional arrangements had a combined negative effect of about $7 million in the quarter.

Third increased overhead expenses, including stepped up investment in sales staff, for example, for the Scotland rollout of Carling, reduced second quarter income by approximately $3 million. Moving to the other income line, Europe other income was 2.2 million, about half of which was the inclusion of trade team income, which was in cost of goods last year. The other half was non-recurring gains in the sale of non-core assets, including property.

It's important to remember that our Europe financial results in the second quarter are affected by an 11% year-over-year appreciation of the British pound against the dollar, which was partially offset by hedging new our debt structure which flows through interest expense.

At this points I'll turn it over to Tim to review second quarter corporate and consolidated highlights and to take a look at the second half of 2003. Timothy, are you there?

Yes, sir. Thanks, Leo. Let me finish up with the corporate segment and our consolidated results.

Operating income in the quarter was $117.5 million, down 4.1% from second quarter last year. Consolidated pension expense for the total enterprise was $9.7 million in the second quarter, up about $7.5 from the prior year. Corporate interest expense was $21.9 million in the second quarter, 3.7 million higher than last year.

About half of this increase was related to having our long-term debt structure for the CBL acquisition in place for the full quarter this year along with the effect of currency appreciation on our British pound-denominated debt. The other half of the increase was the temporary effects of a change we made in our debt structure late in the second quarter that we believe will significantly reduce our interest expense in the future. In June we set up a dollar denominated commercial paper program and used a portion of this low rate debt capacity to pay down about $300 million of pound-denominated term debt. This caused higher overall interest expense in the second quarter because amortization of fees related to our old term facility were accelerated resulting in an incremental $2.4 million, or 5 cents a share of non-recurring expense within the second quarter. Beginning in June our new debt structure is shaving more than three percentage points off the rate on our short-term borrowings, yielding significant savings of about $2 million pretax each quarter.

Now let's turn to our effective tax rate, which was 25.8% in this quarter, temporarily down from 36% for the first quarter. We previously disclosed that our tax rate could be significantly impacted by the favorable completion of IRS audits for the five years 1996 through 2000 and the continuing impact of our CBL acquisition structure. We now have more clarity on the impact of these items and expect them to reduce our 2003 full year tax rate by about 4 to 5 percentage points to an estimated range of between 31% to 32% this year only with the second half of the year at about 35%. Taking it all to the bottom line, net income for the overall company was $76.4 million, up 12.9% a year ago and driven by the short-term reduction in our tax rate.

Now I'll preface our outlook section, as usual, by paraphrasing our Safe Harbor language. Some of what we talk about today and in the Q and 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 filings for a more complete description of the factors that could affect our projections. Regarding any non-GAAP measure that we may discuss during the call, please visit our website at WWW.Coors.com for reconciliation of these measures to the nearest GAAP results.

Let's start with some perspective on the back half of 2003. In the Americas our results will be driven first and foremost by our ability to regain volume momentum. It's no secret that building sales growth has been our biggest challenge in the past several quarters. Additionally we don't wants to pretends to know when the economy and weather patterns will turn more favorable. Nonetheless, we continue to invest in the front ends of our business and we are optimistic that we can improve our sales trends when the environment eases as we leverage the strengths of our marketing and sales efforts, including our relationship as official beer sponsor of the NFL.

Americas sales to retail trends in the past month or so have been modestly better than those we experienced in the seconds quarter, but one month does not make a quarter or a year, so we'll have to see how the balance of the summer plays out. Probably more important are the comparisons from last year. Third quarter was definitely our best quarter last year for U.S. sales to retail while the fourth quarter last year was particularly soft. We plan for U.S. distributor inventories to be about 100,000 barrels above seasonal levels in the end of the third quarter in preparation for the switch over to our new supply chain processes and systems. As a result, the extra hundred thousand barrels of inventory that our distributors built in the second quarter will stay in the system until the fourth quarter. By year end, we plan to bring these inventories back down to a level close to the level of the ends of 2002. As a result, the -- building distributor inventories during the second quarter is likely to reverse in the fourth quarter this year. America's volume trends in the second half will benefit from lapping the June 2002 increase in the Puerto Rico beer excise tax and the resulting price increase to consumers. While adverse U.S. mixed shift trends will continue to be with us all year, we believe that they will gradually be less challenging as the second half progresses. This is a continuation of the trend that we saw in the second quarter.

As always, America's cost of goods trend in the second half of the year will be influenced strong by by volume levels. As a result, we will face the toughest cost comparisons in the third quarter as we benefited last year from relatively strong volume growth and a number of operations cost reduction initiatives. We currently anticipate that America's marketing, general and administrative expense spending for the year will be up at mid-single digit rate consist tonight with our trends in recent years. As always, changes in our spending priorities for reinvestment on the front end of the business could change this outlook.

Other income in the second half will lap one-time items totaling approximately $2 million in the third quarter and $3 million in the fourth quarter, both primarily related to non-core asset sales. This year we are working to monetize additional non-core assets, but the timing of these is uncertain. but we will share the results of those when and if they occur.

In Europe we anticipate that our on-trade business will continue to grow share and margins in the second half of the year. Also, the ongoing decline in factored brand sales is likely to slow in the second half as we cycle some of the distribution changes that occurred last fall. More important, we've only begun to tap the potential of growing the Carling brand in Scotland and in the southeast. In the off-trade channel, third quarter sales trends will benefit from very soft volume last July as retailers worked off excess packaged beer inventories following the World Cup. More importantly, we have already begun to see some positive results from our efforts to improve our pricing and margin friends. We are optimistic that this improvement will continue as we work to balance pricing in the back half of the year.

Finally, the other factors Leo mentioned that impacted second quarter results are likely to be modestly less significant as we move to the second half, especially later in the fourth quarter since some of the brewing and transitional arrangements ended during the fourth quarterer last year. More important, we anticipate the benefit of right sizing and improving our U.K. infrastructure and supply chain will more than offset the second half impact of these factors. In Europe we are also focused on monetizing non-core assets, but again, the timing and magnitude of these is uncertain.

In terms of company wide factors, global pension expense versus prior year will grow in the third and fourth quarters less than half as much as it did in the first and second quarters this year. In other words, they'll increase about $3 million per quarter on the higher base in the second half of 2002. We anticipate that corporate interest expense in the third and fourth quarters will be about $3 to 4 million lower that a year ago depending on interest rates and foreign exchange rates as we benefit from our recent debt structuring, cash generation and debt reduction. We continue to manage working capital carefully and apply tight discipline to our capital expenditures programs. Finally, we estimate the consolidated results in the second half will benefit from a lower effective tax rate. As I mentioned before, at about 35.0%.

Going forward, our acquisition structure for CBL does add more volatility to our tax rate. We anticipate, however, that our tax rate in future years will be closer to 36% absent any unusual items. Now, Leo, let me turn it back to you to wrap us up.

Thanks, Tim. To summarize our discussion for the second quarter and first half 6 this year have presented a range of significant challenges in key areas of our business.

In the U.S. retail trends weakened in the face of if you have market conditions. On the other hand, the U.K. volume trends have been strong, but profit trends have been weak due to heavy off-trade discounting and overlapping some strong results a year ago associated with transition arrangements. We're working to address all these issues, and we're confident we can improve our performance trends for the balance of the year. John, at this point I think we can open it up for questions.

Ladies and gentlemen, at this time if you have a question please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, you may then press the pounds key. Our first question is from Mr. Jeff Kantor of Prudential equity group.

Good morning, gentlemen. Just to be clear, revenue per barrel increase of 1.5%, which I guess is 1.2% before the Canadian joint venture income, that's a clean number, right? There's no gains or sales or anything in that number that we should be aware of, is that correct?

You got it, Jeff. You got pricing on the one hand and you got 9 mix on the other taking it down. But you got the net absolutely right.

Okay. And I'm just trying to figure out, you know, it sounds like there were some other one-time items throughout the P&L. And I'm just -- you know, the gain from the sale of land, how much was that?

That's last year, Jeff. This quarter was, except for the one item I mentioned, in other words the acceleration of the amortization of the fees associated with our term loan which, as I mentioned, was about $2.5 million 5 cents a share, that is the only, if you will, with quotes around it one-time refresh your recollection? In the quarter. I mean, the tax rate is obviously -- but in terms of unusual charges or whatever, that's only one that I could think of.

Okay. And what were STRs in July so far? Up 1.8?

I think the more relevant number is what were the STRs around the 4th of July.

That's what I meant to say. Sorry.

Those three weeks we were up about 1.3%.

Okay. The questions you know, you've been ram putting up your marketing. Your marketing spend per barrel were up close to 10% in the first quarter, they were up 4% this quarter. I know that the weather's been lousy. Do you feel that you're getting a good return on this investment? Because it's difficult -- you know, from our vantage point you're not. Can you just explain whether you think you're getting a payoff from it and how?

Sure, Jeff. I think it's a real difficult time to read what's going on with the young adult side of the business. With the on-premise business so soft, it's tough to read through. Our diagnostics continue to say that we're building both share mind and share stomach in that key 21 to 29-year-old group. It obviously isn't flowing through. You know, this summer's been frustrating. We went into Memorial Day, load into Memorial Day was up about a point and a half, thought we were gonna have a good Memorial Day, and it just didn't show up. Goodness, I think for the next three weeks the Northeast was down close -- well, high single digit rate, you know? What I'm hoping is that the Fourth of July trends are more indicative of what's going on. But as I've said before, you know, really since late last fall it's been awful hard to see a trend set up. We're still convinced we're doing the right thing. We're gonna stay the course. And when the situation needs us, I am still convinced we will be rewarded for this.

Okay. Thank you.

You got it.

Our next question is from Bill Piccarello of Morgan Stanley.

Hi, Bill.

Hi. First question I had was on the U.K. in terms of growing the profits going forward. Some of the issues are secular trends in terms of the shift to the off-trade and some of the promotional activity that's been going on for some time. So, just wanted to understand, you've got the right size savings versus some of these transitional costs that are gonna mitigate. But do you see returning to some kind of mid single digit or low single digit operating profit growth in the U.K. given some of those longer term secular trends? And then I just wanted some clarification on the income line with the trade team income versus any other non-recurring gains in there.

On the operating profit picture, Bill, should be able to do a little better than that. And we're seeing very good top line growth, particularly rewarding on the on-trade side of the business. Contratrend, which is really strong. And the margins in are holding up well. The challenge has been balancing the spending act in the off-trade and then calculating the timing of over lapping transitional costs with the time that the productivity from the whole restructuring hits our bottom line. You know, those are some glitches in terms of anticipating that well. But fundamentally, the work's done and the top line trends are terrific. Peter, you might want to talk a little bit about, you know, what happened with the off-trade spending and that margin picture and where you think it's going.

Well, Bill, I think in the take there are some industry trends, clearly. If you recall, almost this time last year we had some strong competitive pricing coming out of the World Cup and, you know, it hit us pretty badly. And we, I have to say, responded to that in the second half, and a lot of that pricing, competitive pricing, carried in through Christmas. Now, I think we've seen some change in that, and it's primarily driven by the wholesale channel less the major multiples. But we've made some adjustment. We saw that happening in the first quarter, and certainly in period 6 we're seeing some impact of doing a better job of managing our margins. So, there is some competitive pressure out there, but I think we're just being a lot smarter about how we manage the business going forward. And I think we'll see the impact of that on our take-home business.

Hey, Bill, this is Tim. On the other income issue in the U.K., our income from our trade team, our distribution JV was about one and a half million dollars, just about the same as last year. Last year you'll recall the trade team was virtually a captive JV. So, it was appropriate to reflect that income, if you will, in cost of goods. In other words, reduced cost of goods. Now that's no longer the case. There are other players involved in trade team distributing their product, so now it's appropriate that we show this in other income. So, the amounts are about the same. The P&L geography is just a little bit different because of what I just indicated.

What's the annualized amount that we should be able to see, the '02 full year on the trade team?

It's about this sorts of running rate plus or minus a couple hundred thousand dollars pretty much each quarter. I think the all in number last year was somewhere between 7 and 8 million dollars.

Thank you very much.

Our next question is from Mark Schwartzberg from Legg Mason.

Thank you, operator. Good morning, gentlemen. Good afternoon, I guess, to a couple of y'all.

Two questions regarding the United States. And I'm particularly focused on the situation with the brand mix. You talk in your press release about trying to manage against what appears to be a sort of a downgrade we've seen with Keystone Light growing stronger than Coors Light. The two questions are these : Number 1, can you give us some added color on what you intends to do to try to have that relative relationship improve? I think we all know what's gonna happen with the NFL relative to Coors Light, but increments there would be helpful. And number 2, as we all try to run sensitivities, it would being extremely helpful to give us some orders of magnitude contribution per case or barrel difference between a Keystone Light barrel per se and a Coors Light. We know it's lower, but we don't know if it's 10%, 20%, 30%. Something directional would be extremely helpful, as well.

Tim, you go put the magic number machine together, okay?

Yeah. I can answer the second question very, very quickly. The Keystone Light contribution per barrel is just about half, a little bit more than half the Coors Light barrel.

Great.

Regarding the mix, let me just start by saying it's a little more complicated than just Keystone growing faster than other brands. It's really through the whole portfolio. Mixed shift from bottles to cans, and the cans were -- you know, in the retail trade tends to be the larger pack, value pack cans. So, it's a real trends to value packs. In the entree it's a mixed shift from bottles to draft. And there's a dramatic difference in our margin picture on draft versus bottles. By the way, that reverses out at retail. The trade itself has a high bias to sell more draft. So, you're seeing that sort of economic pressure all the way through the mix picture. Obviously we don't -- by the way, as I've told you before, we don't sense that this is Keystone Light cannibalizing Coors Light. And we watch that very closely in terms of pricing incentives, et cetera. So, it isn't a matter of wanting to sell less Keystone. Without being glib, it's a matter of wanting to sell more Coors Light. And in this quarter, particularly because the Northeast and Southwest are our biggest challenges, that's a relatively high-impact issue on Coors Light.

Well, I mean, it seems reasonable over some periods of time to assume whether it normalizes out.

Yep.

That makes sense internally. But on the Southwest side of things, you've got Miller saying that Texas is a priority from a distribution standpoint. We've got some consolidation that is's note worthy in the north Texas region from a wholesaler perspective. What are you doing to manage in that situation, because it's not necessarily a situation that's gonna improve for you over the near term, or perhaps it will. So, can you give us some added color there?

I think that it's already improving. We had a very difficult situation in north Texas. That was in limbo for the better part of a year. It's been resolved. We're with a very good wholesaler there. Our first job is to stabilize that business, and they're in the process of doing that quite nicely. Next year we hope to be back growing the business. So, I think we can make some significant turn around there. And we continue to see in Coors/Miller houses the picture we've seen traditionally. You know, Coors Light tends to do, if anything, a little bit better in our mixed houses than they do in the overall system.

And do you have any basis for considering that statement in light of Miller's priorities increasing in Texas?

I don't -- I wouldn't expect it will change. It's not like Texas hasn't been war for the past five years. A very, very competitive market.

Yeah, right.

So, I don't see it as a significant change in the environment.

Fair enough. That's very helpful. Thank you, guys.

You got it.

Our next question is from Andrew Conway of credit Swiss first.

Good afternoon, gentlemen. Leo, Tim and Peter, a couple of questions, first on the European base. Did I hear you guys correct that the traditional income or contract income boosted your operating income by about 7 million in the quarter a year ago? Is that fair?

Yeah, that's fair, Andrew, yes.

Okay. Annals you look at your consolidated operating income and earnings, what effect net of managing your assets and liabilities in Europe did currency have overall on your full results?

Andrew, I think we mentioned it's about 11%.

About 11%. Great.

That's just on the debt operating result. Obviously the offset goes to the hedge. But just in terms of looking at the operating performance of the business unit, it's 11% [inaudible].

Great. And Peter, now that the EBIT margins on Europe are in the mid 8s, in your mind is that base now a base of which you expect to see improvement of? Do you expect to see those types of EBIT or operating income margins maintain that level? What's your perspective given the on-trade and off-trade performance year to date?

Well, I think, Andrew, it's fair to say that we continue to see some real momentum in the on-trade. And I'm -- you know, I'm -- I think that's gonna go forward. And as I mentioned, we're already seeing some change and improvement in our margins in the off-trade. We already saw that in period 6. So, I think it's fair to say that those two things should put us in good stead looking forward in the balance of the year.

Great. And, Tim, on the Americas business, cost per barrel trends either second quarter or first six months, I'd value your report card. It seems to me over time I know you're focused on taking several dollars out over time six months over six months and this may be some changes in there for wholesaler activity. But would you have expected a greater cost per barrel benefit second quarter? And where do you think we're going to be, let's say, 12 months from now?

Well, the operations team in the Americas has done, I think, nothing less than a brilliant job, to use the British word, in the first half of the year, because you gotta remember all in, given where removals have been we have not had huge increases in production. And if you net out, which is really the way I look at this, and I think Leo looks at it -- I mean, not that we ignore pension costs and benefits costs, which almost all Fortune 500 companies are seeing going up, if you take that out, the real operating benefit, the operating cost of goods per barrel reduction, you know, is cresting 2%. So, that's really, I guess, what I look at. And again, that's 2% reduced thereabouts without huge leverage from significant increases in production. So, you know, all-in, especially considering that during that time fuel costs have been up a skosh, more than a skosh, we're really pleased, more than pleased with what the operating time, the supply chain team have accomplished in the Americas in the first half of the year. So, I'd give the report card an A, pretty strong.

Great. And as you have less of an effects on incremental pension expense, let's say 12 months from now, what type of cost per barrel range for the Americas or U.S. business do you think is a reasonable place to be?

Well, with the strong caveat that that will always be quite sensitive to what our volume growth is. But if we can get back on track, I mean, it's our objective to get back on track our, you know, hundred or two hundred basis point growth over the industry, our ability to take the buck-plus out of, you know, cost of goods per peril year in, year out is really, really strong.

Okay. Great. And on Coors Light, Leo and Tim, is there an expectation second half of the year that Coors Light STRs are up and as you manage your inventory levels third into fourth quarter, how close are you monitoring production given the trends on package and the trend on acceleration of Coors Light -- excuse me -- of Keystone Light versus Coors? How important are you monitoring the efficiencies there?

This is the day in, week in, week out that Dennis and his whole operations team goes through with an incredible amount of discipline. You know, we're looking, obviously, especially in the fourth quarter with the advent of our supply chain systems that we've been working about a year and a half to put in place to provide us with some significant benefits. You know, this is one of the large initiatives, to consistently be able to take costs out of our business. You know, the mixed shift between Coors Light and Keystone Light is not as significant on Dennis' operating cost structure as is the dynamic that Leo talked to; I E, moving from at the margin from bottles to multipack cans. That's where he's got to manage his capacities better. They're not doing that well now. But that's where the challenge becomes. And because of the supply chain systems we're putting in place, which are ends to end, we'll have a much closer, tighter view of what our distributors are ordering, and we can accordingly schedule our three plants that much better. I hope that answers your question. But I mean, I think the disciplines there are good and they will only get better.

Great. And just finally the outlook on STRs for Coors Light second half?

You got a couple of things going on. Web, we've been -- really had a heavy issue in Puerto Rico plaguing our trend through mid-year. That will start to turn positive for you was in the third and fourth quarter, which overall gives us some boost. We've actually got in the, you know, domestic U.S. numbers. Third quarter was a relatively good quarter last year in retrospect, Andrew.

Right.

And then the fourth quarter we should be able to make some hay on. But it's -- I don't -- I gotta sit here and tell you we haven't been able to see the trend be consistent. And until we do, we can't call it out for you, you know?

Right. Super. Thank you, gentlemen.

Thanks, Andrew.

Our next question is from Caroline Levy of UBS.

Good morning and afternoon, everybody. Just a couple of brief things. Can you please walk us through in a little more depth what's going on in California and how you see that playing out over the next year, whether that's a market where volumes -- I mean, my understanding is they have turned up recently. And if you could just talk about that and the -- the mixed shift impact of having Texas and California be weak, that's the first thing.

Well, you know they're big profitable states for us, Caroline. And so, there are, a disproportionate impact on us. And we did have a -- actually a really good start over the Fourth of July in California, which is helpful. But again, that tends to be -- that tends to go hot and cold depending on how the chains are supporting the business. I don't really have anything more current for you on that. And I think we kind of went through the Texas situation a few minutes ago.

But why has California been such a difficult market for domestic brewers? Is it the retail system?

Well, it's partially, certainly. And I'm not sure -- I'd have to go back and check my own sort of history in terms of when the -- when the retailers, chain retailers changed their strategy. They went from using beer as pretty much a loss leader to making some money on beer. And that really changed the dynamic. Now, my recollection is that we should be coming through that cusp just about now. But I have to say I'm not as current on that as I ought to be. The other issue clearly is the growth of the Hispanic market and the huge new of the Hispanic market on the Southern California market. And that's -- that's been a challenge to all the domestic players.

Leo, are there other large states where retailers use beer as a loss leader at this point?

The other most competitive state right off the top would be Florida. And Florida can be, you know, a very aggressive pricing market. It appears to me it's set up very aggressive over the holidays. They didn't get much lift memorial day, and I haven't seen the specific feedback from Fourth of July. But I know it's set up very high.

So, basically Florida and California from a retailer perspective are the -- the issue in Texas does not relate as much to retailers?

No. The issue in Texas is not as much a retail issue, that's right.

Thank you. On Miller, my understanding is the volumes are coming in a lot weaker than anybody would have spooked and haven't actually improved in July with the better weather. And where you're seeing Miller down sharply, has that proven to help you were trends, or do those tends to be markets where you're also weaker than you are overall?

Yeah, their big markets tends to be markets particularly in the Midwest. You take that Midwest heartland of theirs where we're relatively low share.

I guess what I'm driving at is do you think their weakness is good or bad for you?

Ha, ha, ha! Now, that's a loaded question, Caroline. I don't -- I don't have an overall points of view on that. As you know, we set up market by market with a different competitive set. And Miller is a much different mayor in the east, which is our heartland, than they are in the Midwest or Southeast. And I know they're frustrated with their volume trends.

Right. Thanks, Leo.

You got it.

Our next question is from Mark Cullen from Goldman Sachs.

Good afternoon. I guess I have two questions. I just wants to first of all probe around Coors light situation just a little bit more. As the numbers lay down, Coors Light brand looks like it's losing share. It does look like it's feeling the brunt of the Michelob Ultraintroduction. It does look like it hasn't really responded to the marketing. I'm wondering the degree to which you think Michelob Ultrais at issue here that you've got to responds to, what your options are for doing that. And I also wonder if your diagnostics are showing that this repositioning is such that you're not losing, you know, existing core users while you start to build up this 21 to 29-year-olds group. In other words, there might be leakage out of the franchise at the other ends.

Mark, you know, to your last question, it doesn't appear that way. It appears to be, you know, a strengthening of the young adult with very little weakening in the other age cohorts. And that's actually an encouraging look at the data. Regarding Mich Ultra , our numbers say it is coming out of our brands proportionate to their size in the markets, not disproportionate.

Well, then, what do you adjust the market share losses to? Even relative to the segments, this investment in marketing hasn't brought up the performance of Coors Light within the premium light segment. And that's really the puzzle here.

I'd say as I look -- you have to look at -- where our business has been soft, I would say share loss for us disprortion proportionately impacted in Texas and the Northeast, from a national perspective, remember, because we're not losing share in the Northeast, is about weather. You know, our estimate is year to date probably less than a hundred thousand barrels on weather, and we lost 50,000 barrels on memorial day. You got that look at that when you look at Coors Light trends. Coors Light is, what, 85% of our business in the Northeast.

All right. Let mow just sort of broaden that out and ask a more philosophical kind of question, which is basically we're seeing trying price growth start to to notch up above inflation. And I'm wondering how your research shows the impact of pricing above inflation on the way consumers see the value proposition for premium brands, because the mixed shifts you describe suggest there is more sensitivity to this than we really imagined.

Certainly there's -- there is mixed shift going on in the business, Mark, that's true. And you can see it in several aspects, as I discussed earlier. That's accurate. I think that's a sign of the economic times.

But do you feel that the price increases are having some impact in terms of the way people look at the value of opposition on premium brands or not?

You know, what we've seen so far, and it's been pretty consistent is -- you know, the best place to look at impact on pricing is the point of pricing inflection. And we're just not seeing sticker shock go through, which to me is an indicator that you've still got beer at a relatively good value overall, right? So, now, you know, how you read the -- how you read the mixed shift going on is a more complicated issue. And I'd suggest to you that it is a sign of the times.

But they're not related.

Are they related somewhere there? Yeah. But you know, is front line pricing per se what's slowing down the business? I don't think so.

Thanks, Leo.

Our next question is from Christine Farkas from Merrill Lynch.

I'm with wondering if you could clarify in further detail the off-trade channel in the U.K.? You had mentioned that operating margins declined by about 6 million as a result of price discounting and mixed shift. How much of that is really the discounting and how much of that is due to the special sure in RTDs and in products? And my second question has to do with mix again in the second half of the year. If I understood correctly, the expectation for slow improvements in mix in the second half of the year, was that based on given the outlook for Keystone's growth and Coors Light growth in the second half of the year?

Christine, let me answer the first question to the extents that I can on the off-trade. Yeah, that was -- of course, that is a margin reduction versus year ago, that 6 million you mentioned. About 25% of it is mix and the rest is -- you know, is net pricing. So, does that answer your question?

It does. Thank you.

Christine, I apologize. I thought you were asking another U.K. question. So, help me. What was your second question?

Well, just in terms of the overall commentary of an expectation for slowly improving mix in the second half of the year and given where we are today and what has happened in the Northeast with Coors Light, what is that comment based on when you look at what your expectations are for Keystone growth and Coors Light growth in the second half of the year?

Christine, this is Tim. For a second I thought you were talking about selling Keystone in the U.K., which is really interesting. If you look at our expectations, and I've tried to address this in some of my comments, but the negative impact that mix has had in the first half of the year; I E, more Keystone, more multi-pack cans will be with us the second half, but not to the same extent. To Leo's point, we still expect front line pricing to be, you know, pretty good, pretty strong, not significantly over inflation, not to disagree with Mark and his previous comment, but pricing -- front line pricing we expect to be, you know, in the 2% sort of range, plus or minus a few basis points, and mixed -- the negative impact from mix, of which Keystone is a part, to be, you know, really probably less than half of that. So, it will be with you was the second half. It will be negative in the second half but not nearly to the extent that it was in the first half of the year. Is that helpful?

That is helpful. If I can just follow up with respect to what's happening in the marketplace with Michelob Ultra , and we're seeing Miller -- is Coors planning anything in that fronts, or do you see a need to react to this kind of initiative in the marketplace?

Yeah, we're watching it real close, Christine. It probably isn't appropriate to comment on particular tactics, but we are watching it very close and we have the capability to react in this territory.

Great. Thank you very much.

Christine, just one thing. Your U.K. question on margin, that was -- that's beer margin. That does not include any FAB margin, okay, just to be clear on that.

Right. Got it. Thanks.

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

Hi. Good afternoon, guys. Just two questions. One, Tim, just a few financial. Cash from operations for the quarter, depreciation and amortization. And then where you debt balance stood at the end of quarter. And then the second, for Leo, you now, at the beginning of the year one of the things that I thought you guys were going to try to do was improve your visibility, your representation in convenience stores. And part of it was hiring some extra people to work with distributors. Could you just give us a little bit more color, you know, where you stand there, how much progress you've made and what the opportunity might look like over the next 12 months in that channel?

You got it. Tim you want to go first or do you want me to?

I'll go first. Bryan, cash flow from operations almost $125 million, which is up about $40 million, a little less, about $39 million from same quarter prior year and you know, that is broken down about 75 million of that is from income and about 60 million in depreciation/amortization. So, we're -- you know, we're on track all-in first half of the year. And second half of the year, again, second half of the year is going to be somewhat sensitive, quite sensitive to how much monetization of non-core assets we get done. But we're feeling pretty good right now in the ranges that we've been talking to y'all about the last couple of quarters in terms of debt reduction in the 170 to 190 sort of range. We'll have a lot of puts and takes. We'll be spending, because of the strengths of our business on trade in the U.K., that requires more equipment and more kegs you gotta buy to support that sort of share gains we've been achieving. So, we'll spends a little more cap ex in the U.K. We'll spends a little less cap ex in the U.S. The exchange rate obviously hurts the dollar reporting of that. But I think we're still in very good shape to be, you know, reducing our debt, as I say, in the 170-ish to 190-ish range for the full year.

Tim, where do you see cap ex at the end of the year?

Cap ex I think will be in the 250 to 255 million dollars range for the full years.

And then what about free cash flow for the end of the year?

For the full year it will -- let me just -- yeah, there are a couple of dozen different things going on, and the working capital is obviously a very significant variable in this. But I'll go back to the point about what's our full year in debt reduction? I think it's gonna be in that 170 to 190 range.

All right. Thank you, Tim.

Regarding C store initiative and focus on channels, just to give you a point of reference convenience store is our one growth channel here to date. So, view to say we're making some progress there, and we're encouraged by that. Offset by the on-premise, bars and taverns would be our weakest channel, which isn't surprising given the sort of weakness in the on-premise overall business in that segment. But convenience stores are up. We're gaining share there. We have added a hundred people to our business, what you call the feet on the street classification. And the second, or really the third traunch of that group really went out just before the holidays. We tend to concentrate them in our big markets and in our major initiative markets. So, we think we're seeing traction up against that brands and we're pretty encouraged by it.

Tim, just as a follow-up, convenience stores, does that channel tends to skew younger demographically?

Oh, yeah.

Thank you.

Our next question is from Skip Carpenter from Thomas Weisel Partners.

Hey, you guys. Good afternoon. I wanted to maybe circle back to some of the things that Mark was trying to point out and some of the things I'm still grappling with here. Leo, if you look back at the last year in terms of when you guys kicked off the repositioning of this Coors Light brands. In just the premium light category, have you guys lost share according to your data in the premium light category?

I would say our point much view is we've held share.

You've held share. Being all equal in terms of weather and economy, that's got to be a business bit discouraging from your standpoint in terms of the amount of dollars -- really haven't seen growths in the brand till, like, going back to 2000. I'm trying to get to in the next couple quarters what earnings or what data points have you guys been seeing over the course of this past year that would lead you to believe what things you're going to do differently in terms of advertising and marketing that's going to jumpstart these volume trends? Because I think going back to what Mark said, this is something I'm just still scratching my head at why we are not seeing better traction at such a strong brand from your portfolio.

Right now just from an economic impact point of view, Skip. And secondly is that this kind of franchise-building doesn't happen overnight. The -- I wish it did. I wish you could turn on a bulb and have it go off. But the fact is when you're building the business back by cohort, it takes some time to reseat it. What we're trying to watch really closely and stay really close to our wholesalers on are sort of the close to the market indicators. Is this work being responded to? If you listen to our wholesalers talk about it, they don't have any doubt that we're on the right track. They're very confident about it. They see it on-premise in terms of attitude shift and relative volume shift. They see it in the C store channel, which is where you'd expect to see it soonest. We're all frustrated it doesn't volunteer more absolute traction, no doubt.

Are you doing anything for this upcoming NFL season differently or anything that you learned from last year, given that last year was the first season that you had this property are you doing anything differently with your wholesalers and then with the retailers that you learned from last year?

Yeah. We're much better prepared, Skip. You remember last year we signed this up late, and in many cases wholesalers had already made their point of seal commitments for the football season. If you want a clean look at how it impacted our business, you'd have to go to January when there's no doubt we got a significant lift out of a really focused effort. I'd say going into the Fall I'd be encouraged that our wholesalers are really gonna be lined up well behind us. They're focused. We've got big orders in for point of sale materials. So, I'd expect to see a faster start.

One other last question. In terms of the key stow vis-a-vis the Coors Light, are you seeing Keystone growth higher in shared houses, non-shared houses? Where are you seeing a stronger Keystone Light growth?

Generally non-shared houses. Nothing's absolute, right?

Fair enough.

But in our -- when we say "shared houses," almost a hundred percent of our houses are shared, right? But nonMiller/Coors houses. In a Miller/Coors house, the store's got a lot of choices in that subpremium area. In other non-Miller houses, Keystone really has become the popular brand of choice. And it really has a lot of traction.

Terrific. Okay. Whole, good luck this second half, guys.

Thank you.

Our next question is from Cecil from T Rowe Price.

Hi. I think some of my questions, if not all, have been asked before, but I'm gone that try, anyway. Did I hear you say that your U.S. volume targets are to grow faster than the industry over time?

Yes.

Can you and Anheuser both be successful doing that simultaneously?

Yes.

When does that begin?

Ha, ha, ha! That's a good -- good question.

It seems to me that if you're putting out that as a target to public shareholders, then you should kinds of have some idea as to when it's gonna begin.

Well, Art, we had a pretty good track record on it, and we've been frustrated over the past few quarters with our inability to do that.

Okay. But your view is that you and Anheuser both can gain share against the industry simultaneously over time?

Yeah.

Okay. Secondly, can you slice and dice how you view achieving your volume objectives over time versus your earnings per share objectives over time?

I don't understand the question.

Push comes to shove -- push comes to shove, is your emphasis on getting volume or getting the earnings?

I guess if I had to say push come to shove, our -- our first goal is to grow our earnings. We think we can grow our earnings substantially given where we are on sort of the P&L leverage point. And our bias is once we have adequate earnings growth, that we have a high bias to invest back against the top line.

Mm-hmm.

Hey, Art, let me just interject something. The best way, the most consistent way of having us grow our profits and generate more cash is to ungrow our top line.

Right.

Not to say we will not focus -- we will continue to focus on taking costs out of our infrastructure, overheads, production, both sides of the Atlantic.

Right.

There's still, fortunately, a lot of good work to do, and we're not gonna lessen the effort on that and the focus. We'll address cap ex whenever it's appropriate to help with that goal. At the same time, the leverage from volume and pricing in the front end dwarfs cost reductions. So, if we're committed to growing profits over time, and we are, we've got to be committed to growing our top line.

Okay. And I'm not as close to this as some of the other folks are, but in the Coors Light/Keystone Light mix change, am I to understand that you believe, whether or not what geography it was in, that this mixed change is due to the economy, but somehow it's not due to the different pricing points of the two products?

I think it's definitely due to the different pricing points of the two products, Art.

Okay. And the economy just brings that into focus more.

Yeah. I think it's the economic environment that's driving the trends.

And then finally, this plays to Mark's question. Do you think it's okay as a strategy to price above the CPI longer term?

No. I any that beer has to continue to be a good value. It is, has been for a long time, and I think from a philosophical point much view, you know, pricing somewhat behind the inflation numbers is the right place to be.

All right. Thanks very much.

Hey, John, maybe we can take one important question.

If you've got one more, we'll take it.

Our final question will be from Sandy Somes from Pesenoff and Company.

Good afternoon, gentlemen. Could I just ask, in the U.K. you've quantified the short floor from the ending of the contract brewing and the transitional service arrangements. Presumably you've got some sort of feel as to the total benefit that you took from that last year? I mine, is it possible to make some sort of judgment on the total annualized contribution there?

Well, Sandy, we felt the arrangement as a group -- as I say, this is contract packing. It's also arrangements with Intrabrew and also hosting them in the on-trade, that it was -- 20 million pretax on a full year basis.

That's very clear. That will effectively go this year. And then you'll be free from that [ inaudible? ]

Yes, that's correct.

Thank you very much.

Okay. John, do we have any other questions, or are we all set?

We did have one follow-up question from Mark Schwartzberg of Legg Mason.

Why don't we take that as our last question, then?

Okay. Thanks, everyone. A quick housekeeping. I don't know if you have it, but the STR numbers in the United States by month in the third quarter of last year, if you happen to have it. And then, Peter, with the U.K. public contract state of play, it seems that the contract activity over the next 12 to 18 months might be greater than we've seen over the last year or two. Do you agree with that statement and, you know, how are you all improving your ability to retain contracts? You're obviously taking share in the on-side. And how significant is what you're doing on the logistics side as a competitive advantage, or is it simply just a cost of doing business and part of the simply staying in the game and not finding yourself at a competitive disadvantage?

Hey, Mark, the first question, why don't you follow up with David Dunnewald? I don't think any of us have the month by month detail at our fingertips. But I think Dave can -- Dave or Kevin can help you with that offline.

Great.

Mark, on the on-trade, the public contracts, you're right. Although it's a bit towards, you know, the ends of -- you said 12 to 189 months, I think, or the next 18 months, but it's more like the 18 months in terms of quite a lot of activity. But if you recall, I think of the four major brewers we have a smaller share that's in so-called, you know, tied contract relationships in the on-trade than any other brewer. And overall we view this as an opportunity going forward, and particularly, you know, with the stock separation of the brewing business from the public business, you know, that was something that we would never be able to get into. And we view that as an upside going forward. So, net-net, you knee, we think of that as a positive thing rather than the other way around.

And those activities, the work you've done to improve and change your logistics, is that just part of saying in the game or do you think it's going to translated into a material competitive advantage?

I think -- we feel that trade team lowers cost supplier in terms of distribution. You know, this was an arrangement with made in the form America best. It was a pretty courageous decision back then, five or six years ago. It's clear to me the other brewers are beginning to recognize that and hence looking at their distribution arrangements and recognizing that they have traditionally sub as I those with their brands earnings. And that's gonna go away going forward. So, I think net-net we feel we're going to be on more of a level playing field than we have been. So, I think here again that's a positive impact.

Great. Thank you.

Thanks very much, everybody. Appreciates your interest in Coors and look forward to talking to you again at the ends much third quarter. Thanks, John.

Thank you, gentlemen.

Thank you.

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