Molson Coors Beverage Co (TAP) 2003 Q4 法說會逐字稿

Please stand by for the realtime conference call. The Adolph Coors Company conference call will begin momentarily. Good day, ladies and gentlemen, and welcome to the Adolph Coors Company 2003 year end earnings conference call. At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session and instructions will follow at that time. 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 introduce your host for today's conference, Mr. Leo Kiely, the President and Chief Executive Officer of Coors Brewing Company. Mr. Kiely you may begin your conference.

Hello and welcome everybody, thanks for joining us today. With me on the call today are Pete Coors our Chairman, Tim Wolf our group CFO, Peter Kendall [sp] CEO of Coors Brewers Ltd, Katie McWilliams [sp] our CBL CFO, David Barnes our U.S. CFO. Ron Tryggestad [sp] our group controller and Dave Dunawald [sp] Investor Relations Director. Peter Kendall's in the UK and the rest of the team is here in Colorado. On the call, Tim and l will cover two topics with you. First the discussion of Coors Brewing Company full year and fourth quarter 2003 results. Second some perspective on 2004 for our company.

And then we'll open it up for questions. Early this morning, we reported 2003 total company net sales up 5.9%. And net income and earnings per share up 7.9%. These results were driven by improved performance in the second half of the year and our major businesses outside the U.S., including Europe, Canada and the Caribbean. Our full-year profit growth was also aided by non-operating factors, including a lower effective tax rate and favorable foreign exchange rates.

Meanwhile our U.S. business suffered from weak industry demand throughout the year. Increased popularity low carb...of beers with low carb positioning and product supply disruptions related to implementation of our new supply chain systems processes late in the year. Overall our full-year financial results were below our goals. Nevertheless we made important progress in a number of strategic areas. To prepare us for better performance going forward. and I'll take you through some of these a little later. Since we've discussed our results for the first three quarters in details on prev --in detail on precious calls

okay ma'am.

we'll focus primarily on fourth quarter results today Earnings grew significantly in the fourth quarter, again driven by our businesses outside the U.S. Particularly the U.K. and Canada In Europe we achieved good results in both earnings and cash generation in the quarter. Our team in the U.K. struck a better balance between volume and margin priorities in the offtrade and carling [sp] brand growth continued to be strong across all channels. On an enterprisewide basis, we made substantial progress, including cash discipline, generating cash, and repaying debt well ahead of our goals, aided in part by some short term factors. Meanwhile, we had a difficult fourth quarter in our U.S. business

with soft volume, and higher costs. Volume softness was driven by industry [inaudible] that were with us the entire year. Traditionally our volume trends in the U.S. during the fourth quarter [inaudible]made worse by disruptions related to our recent supply chain implementations and heightened consumer interest in products with low carbohydrate positions. Now, let's review the most important drivers of our fourth quarter results, in more detail, starting with the Americas segment. Pretax income for this segment was $31.7 million, up 14.6% from a year ago.

Driven primarily by solid pricing, higher income from Canada, and lower operations restructuring expenses in the U.S. Our Americas sales to retail declined 2.6% in the fourth quarter, driven by two main factors. First with growing consumer interest in low carbohydrate food and beverage products, the church sales trends for Coors Light and other premium lights that did not have a low carb positioning. Past few months, we've been running new consumer education ads showing that Coors Light is nearly as low in carbohydrates as the other low-carb brands. Our preliminary data indicate that these new ads are working for us to blunt this issue. We are also introducing our own low-carb beer, Aspen Edge in less than four weeks. More on these efforts in a minute

The second major volume challenge for us was the new supply chain systems and processes that we implemented the at beginning of the fourth quarter. As we worked to get the right amount and type of products to our distributors. We incurred about $8 million of increased costs in the quarter. Primarily related to extra freight, labor and finished goods lost. Supply disruptions also had a meaningful negative impact on volume. After a difficult start-up early in the fourth quarter, our supply chain performance improved in December. By the end of the quarter, we were able to ship sufficient quantities of beer in most SKUs. We still face stockouts on lower volume SKUs.

These SKUs represent only about 1% of our volume, but some are important channel packages and they're a source of great frustration for our distributors, appropriately so. We're working hard to eliminate them. In fact one key reason we made the investment in the new supply chain systems is to improve overall service to our distributers and reduce problems such as out of stock as close to zero as possible. Dominations with our efforts to rebuild inventories, stock retail sales in December resulted in distributor inventories about 100,000 barrels higher at year end than a year earlier.

Probably started the fourth quarter with field inventories approximately 100,000 barrels high in anticipation, the supply chain crossover. The first few weeks of 2004, we've continued to improve shipping performance. And we're working to rebuild the reliability and efficiency of our supply chain and reduce out of stocks. It is critical, as we prepare for peak summer selling business...season in our Americas business.

Cross trends in our are Americas business are also impacted in the fourth quarter by our volume decline and attendant deleveraging of fixed costs. The result, Americas cost of goods per barrel increased 1% in the quarter. Our operations cost per barrel which make up 90 to 95% of the cost of goods line are better indica... and are a better indicator of success of our operations cost initiatives were flat in the fourth quarter. Significant achievement in the quarter with declining volume and higher fuel and supply chain costs. On top of this, we again face higher pension and health care costs.

In terms of Americas brand trends, Coors Light sales to retail decreased slightly more than the overall portfolio, due in part to the low carb dynamics. Important to note that while low-carb beers are attracting market share, particularly among older demographic groups, our research tells us that Coors Light continues to gain strength among our target young adult consumers. In addition Keystone Light drew a mid single digit rate in the quarter. While Killians decreased at a mid single digit rate. Coors original fell to a low double digit rate and Zima's continued decline at a substantial double digit rate. Americas volume to wholesalers dncreased 2.7%. In line with sales to retail,

we began and ended the quarter with whole sale inventories above last year's level. In Canada, our Coors Light business continued to perform well with pretax income growth of more than 38% in the fourth quarter. Earnings increase was driven by a 16% appreciation in the Canada dollar versus the U.S. dollar. High single digit volume growth and improved beer pricing. Sales to retail in our Molson/U.S.A.

joint venture decreased at a low single rate in the fourth quarter, despite double digit growth in the Molson Canadian and the Canadian Light brand family. Our share to pretax loss posted by this business was less than a million dollars in the fourth quarter. Turning to the Americas revenue per barrel, we achieved about 2% of pricing growth in the fourth quarter ad the North American pricing environment continued to be positive. The net affect of ,ix and other factors on revenue per barrel in the quarter was neutral.

As strong results in Canada and Puerto Rico were offset by negative brand and package mix in the U.S. Marketing in general, administrative expense in the Americas increased 2.6%... 2.6% per barrel in the fourth quarter due to a higher spending on pension, health care and information systems. A pressure against the market per barrel was essentially unchanged in the quarter versus last year.

The full year pressure against the market was up modestly and consistent with our long term trend. Other income declined from a year ago as we lack the sale of non-Coors water rights in fourth quarter of 2002. Looking at the results of our Europe segment, pretax income was $48.5 million, up more than 60% from a year ago. It's important to remember that our Europe financial results in the fourth quarter were affected by an 8.5% year-over-year appreciation of the British pound against the dollar.

Was practically offset by a natural hedge in our debt structure which flows through the corporate interest at times. Besides favorable exchange rates, the growth in European income was driven by improved operations productivity, on trade volume growth. Better margins in both the on and off trade. Favorable overlap of one-time expenses totaling $6 million a year ago. Primarily related to an adjustment in our U.K. pension expense and bad debt write-off.

These positive factors were partially offset by lower offtrade volumes from a loss of transitional income by other brewers. During the fourth quarter we grew overall volume of our own licensed brands in the U.K. at 0.2% [inaudible] continued solid growth in our ontrade business declining sales in the offtrade. A trend that we believe will improve somewhat in the months ahead. Carlin [sp] brand grew at a high single digit rate supported by growth in the on and off trade. Both declined in the fourth quarter, driven by our more balanced focus this year, in contrast to overly aggressive discounting a year ago.

For the full year Carling [sp] grossed, growlth -- excuse me. Both grew at double digit rates. Our on trade business, representing two thirds of our Europe volume and an even greater portion of our profit continued to grow market share and gross margin in the fourth quarter. Volume in the ontrade increased more than 5%, due to continued improvements in U.K. distribution and sales execution, especially for Carling [sp] and Carling Extra Cold [sp]. Factory brand sales declined slightly in the quarter with only a small impact on sales, cost the goods and gross margin.

Meanwhile our offtrade volume decreased approximately 5% in the fourth quarter as we lacked aggressive discounting activity in 2002. The fourth quarter this year we achieved a better balance between volume and margin. Offtrade volume for the full year 2003 we've reached nearly 13% over a comparable period in 2002. Fourth quarter of 2003, benefits from right sizing improving our U.K. production infrastructure succeeded for the first time the lost income from contract brewing and transitional service agreements with other brewers that we had in 2002.

[inaudible] the production right sizing, the supply chain improvements, and the loss of brewing and transitional arrangements was positive by more than $6 million pretax in the quarter. A substantial improvement versus the first half of the year, and the net affect of these factors was several million dollars negative for each quarter. Production costs per barrel for our own brands declined modestly in local currency versus a year ago.

The benefits of production right sizing, and higher ontrade volume were particially offset by the fixed cost de-leveraging of the offtrade. Marketing and general administration costs decreased 8.4% primarily because of unusually high G & A expenses a year ago, including for pension and bad debts. Marketing expense in local currency was essentially flat in the quarter. At this point I'll turn it over to Tim to review fourth quarter corporate and consolidated highlights. and to take a look at 2004. Timothy.

Thanks, Leo and hello everybody. Continuing through our fourth quarter 2003 P & L, consolidated pension expense for the total company was $9.7 million in the fourth quarter, up $2.8 million from a year ago. Consolidated operating income increased 59.6% to $66.1 million in the fourth quarter last year driven by improved operating performance in Europe and Canada, as Leo mentioned, along with favorable exchange rates. Corporate interest expense was $18.5 million in the fourth quarter, $1.1 million lower than last year.

In the fourth quarter, we paid down about $88 million in net debt resulting in a full year debt paydown of $272 million more than 35% above our goal for 2003. Although our business historically has been a net user of cash during the fourth quarter, this year benefited from temporary reduction in cash taxes, working capital improvements and capital spending discipline in the U.S. In the two years since we bought the U.K.

business, we have paid $480 million of debt principle repayments as of year end 2003. This debt paydown result exceeds our commitment made at the time of CBL acquisition to our banks and rating agencies. Our enterprise-wide capital spending for the full year 2003 totalled $240 million, about the same as a year earlier. This is more than $10 million below our expectation, partly driven by U.S.

capital spending discipline and despite spending on the new supply chain systems. The cost of these new systems has totaled about $53 million over the past three years. This very large project has grown in scope over this period to replace scores of old legacy systems and improve our supply chain processes to make our company more competitive over time. Most of the new systems and processes are working quite well and are well on track to deliver anticipated benefits. Our effective tax rate was 33.1% of the fourth quarter. And 31.2% for the full year. As we continue to benefit from the tax impact of our CBL acquisition structure and the settlement of tax audits ah, that we mentioned to you earlier this..in 2003.

Finally, fourth quarter net income for the company was $36.1 million or 98 cents per diluted share, up a little over 78% from a year ago. Now, we'll preface the outlook section of my comments as usual by paraphrasing our safe harbor language. Some of what we discuss now and in the Q-and-A may constitute forward-looking statement. Actual results could differ materially from what we project today so please refer to our most recent 10(K) and 10(Q) filings for more complete descriptions of factors that could effect our projections. Regarding any non-GAAP measures that we may discuss during the call, please visit our web site at WWW.Coors.com for reconsillation of the measures to the nearest GAAP results.

Let's start with some perspective on 2004 by segment. As always, our Americas results are driven primarily by volume and pricing. Looking ahead, we believe that many of the factors that have slowed the U.S. beer category recently will begin to lessen in 2004. Still, we believe that our success in the coming year will depend primarily on the strength of our marketing and sales efforts, especially behind Coors Light and the results of our new product initiatives. Our research tells us that our brands continue to become more relevant to our target demographic and that we have exciting new programs in store for 2004 to invigorate or reinvigorate Coors Light sales in the U.S., including exciting new ad copy that is starting to hit the air waves this week.

Additionally we feel very good about the launches of our Aspen Edge low carb beer and three new Zima flavors in the first quarter this year, which will inject additional excitement into portfolio. We had a strong Superbowl program this year and we have some new marketing sales plan that we will cover in some detail when we hold our annual New York analyst meeting earlier next month, March 2. Meanwhile the U.S. beer pricing environment continues to be positive. In the first quarter this year,however, we will be [indiscernible] $4.2 million of additional revenue from the favorable arbitration ruling in the first quarter of 2003. This additional revenue increased net sales per barrel by 80 basis points in first quarter of 2003.

In the Americas, our first quarter results are likely to be affected by changes in U.S. distributor inventories. As Leo mentioned, our distributors came into this year with inventories about 100,000 barrels above a year ago because of slow sales to retail in December. By the end of first quarter, we plan to bring these inventories back down to a level roughly in line with normal seasonal levels, or about 50 to 100,000 barrels higher than at the end of the first quarter last year.

Recall that our distributors ended the first quarter of 2003 with inventories about 100,000 barrels below seasonal levels partially due to the snow storm we had last year. This year we anticipate that the inventory reduction will negatively impact volume costs and profit trends in the first quarter relative to what they would have been otherwise. For the average gross margin of about $40 a barrel 100,000 barrels of lost sales can represent a profit impact of approximately $4 million plus any reduction on our abilities to leverage our fixed cost. This is a relationship I believe we have shared with you numerous times before.

With the supply chain work under way and the Aspen Edge introduction, our wholesalers inventories will tend to be more volatile in the next few quarters than they have been in the past. The new supply chain systems and processes that we implemented last year are operating better than they were in the fourth quarter. So we expect the related incremental costs to be less significant. Still we have much work ahead of us in order to improve the effectiveness and efficiency of our supply chain in advance and during peak season of this summer.

We plan for Americas marketing general and administrative spending for 2004 to be up at a mid single digit percentage rate per barrel, modestly higher than our average growth in recent years. The majority of incremental marketing spending is intended to support the Aspen Edge launch beginning in March. We also plan to increase the focus of our spending behind Coors Light this year. As always, we'll continue to assess the competitive landscape as the year progresses and adjust our spending priorities as needed. One quarterly timing issue to keep in mind. Is that given the timing of the Aspen Edge introduction about one fourth of the annual expenses to launch this new brand will be in the first quarter.

But most markets are not slated for the rollout until after the first quarter. This will have a negative impact in first quarter profits. Excuse me. Our full year 2004 Americas results will also be affected by three factors from 2003 that are unlikely to reoccur. In the first quarter last year, results benefited from a $3.1 million gain on the sale of a warehouse in California. And the...and second the $4.2 million arbitration ruling that I mentioned a moment ago.

And then third, in the fourth quarter of 2003, our results were negatively impacted by soft volume and additional supply chain related costs of about $8 million that both Leo and I referenced earlier. In Europe, we anticipate that our ontrade business will continue to gross share in margins in 2004 but at a slower pace than last year when volume trends benefited from the rollout of Carling Extra Cold [sp] and favorable hot summer weather. In the offtrade channel, volume and market share trends are likely to slow substantially in the first three quarters of 2004 as we lack the unusual warm summer of 2003 and we continue to balance growth and margin priorities.

Nonetheless we are optimistic that the impact of slower volume will be more than offset by the related improvement in margins as it was in the fourth quarter of last year. In 2004 apart from a minor impact in the first quarter, we will no longer be lacking the the income from contract brewing and transitional service arrangements which challenged us throughout 2003. As a result, the benefit of right sizing and improving our U.K. infrastructure and supply chain will flow into our cost structure. But we anticipate that we will face a significant offset from inflation and negative channel and package mix.

With slower offtrade volume growth and our new Burton [sp] packaging lines offering better, we anticipate a much lower need for high priced contract packaging services from other breweries in 2004 than we experienced in 2003. Marketing, general and administrative expense is likely to increase several million dollars in 2004 as we roll out the Coors Fine Light brand and cover increased labor costs and depreciation on expense equipment with the latter related to the strong entre growth we experienced in 2003. Excuse me. Meanwhile profit trends in the third quarter of 2004 will be challenged by lacking the $3.5 million gain in the sale of rights to our to our [inaudible] brand in Russia a year earlier. Excuse me. In terms of company-wide factors, we anticipate that total company interest expense in 2004 will be about 8 to $9 million lower than in 2003. And of course this depends on interest rates and foreign exchange rates as we benefit from a full year of commercial paper program cash generation and debt repayment for 2003. And also what we pay down in 2004. At current exchange rates more than three fourths of reductions would be in the first half of the year. Our debt repayment goal for 2004 is, again, in the range of $200 million.

But many factors could affect this, including asset [inaudible], exchange rates and of course the timing of working capital funds flows. Global pension expense will be approximately $50 million, up 11 million from 2003 primarily because of a reduction in long-term interest rates and amortization of asset loss from previous years. This is about half the increase in pension expense we saw in 2002 to 2003. We expect that our 2004 effective tax rate will be in the range of 32% to 35% absent any unusual items up from the 31.2% in 2003. The comparison will be particularly challenging during the second quarter of 2003 when our effective tax rate was temporarily 25.8% because of the completion of five years of tax audits.

As we've said previously our acquisition structure for the U.K. business is generally beneficial from a tax perspective but adds considerable volatility to our tax rate. Finally, enterprise-wide capital spending for 2004 is currently estimated to be about 5 [inaudible] lower than the $240 million we reported for 2003. The actual expense will depend on foreign exchange rate and our progress on new potential projects that are currently progressing and under way. Now, let me turn it back to Leo to wrap this up. Thank you.

Thanks, Tim. Some of you may remember on our earnings call a year ago when we said 2003 would be a challenging year. It certainly was. From shifting industry dynamics to chain problems in the U.S. to lost transitional income and off trade [inaudible] in the U.K. overall our results were disappointing. But I think it is important to mention [inaudible] that positioned us for improved performance in the future.

For example, our Americas business, we continue to refine our advertising copy to be even more relevant to our target, demographic, more focused and we're more focused Coors Light on our team market than ever before. Additionally we have more product news coming in 2004 than in any recent year in history. Including Aspen Edge and three new Zima flavors. We also strengthened our work in trial channels and with our hispanic consumers. Key growth drivers in the category.

Meanwhile we invested in a new supply chain system and processes, change that we believe will over time improve service, cut costs and make us more competitive in this market. Our operations team continued to make solid progress on a wide range of initiatives, to reduce costs to other U.S. business, including restructuring our Memphis brewery to make it more cost competitive. Our Europe business has achieved outstanding growth in volume and market share in 2003 driven by double digit growth in Carling [sp] and Grolsch [sp].

Specifically our own brand volume for the full year increased 6.7% on a pro forma basis, that's including the first five weeks of 2002 when we did not own the business. This translated into market share gains by our own brands of more than one percentage point for the full year. And that's a great accomplishment. In 2003 we also rolled out Carling Extra Cold [sp], introduced Coors Fine Light beer to the U.K. consumers. Improved our trade distribution of pricing in the ontrade. The back half of the year we began to realize productivity savings and struck a better balance between volume and margin priorities in the offtrade. With improved margins we've set the stage for possible growth in the future.

Enterprise wide, we greatly exceeded our cash generation and debt paydown goals for the year. And we've improved our capabilities to focus to achieve another solid cash generation year in 2004. These are the types of investments you expect to see from good companies in tough years. We are staying focused on the basics to improve our business for the long term. 2004 will continue to strengthen our team and our business, further growth profitably and increase returns on capital for our shareholders. At that point, let's open it up for questions.

Thank you, Mr. Kiely. If you have a question at this time please touch the 1 key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the cue, please press the # key. One moment please.

Our first question is from Jeff Kanter from Prudential Equity.

Good afternoon gentlemen.

Hi, Jeff.

Tim, what is um, what do you expect the shipments to be in the first quarter as your working down these 100,000 barrels -- I mean they were down 4... they were down 4.5% last year. What are we looking at?

Well, you are always kind to ask a question you know I won't ask answer. You know we're obviously lacking a very strong first part of the first quarter of last year. We had a very strong Superbowl last year. And as I mentioned in my comments it looks like we had a very strong Superbowl program this year. I think Leo can characterize this as well, but I think we feel encouraged by a good start to the year. Low single-digit sort of growth.

But, again, to your point and the points we made, we've started with inventories about 100,000 barrels higher than even last year, which was pretty high. So we've got to see how the remaining nine weeks, eight weeks of the quarter go. And obviously we've got good hopes for what Coors Light is going to do, But then we have the added benefit, if you will, of a new product roll.

So hopefully that characterizes what it looks like we're going to do. But I think in terms of your model building and assessing, Jeff, I think the assumption that removals and shipments are pretty close in line is probably the best bet going in assumption for now.

Fair enough. And do you have a sense on how much Aspen is going to cost you this year? I guess mostly in the first quarter you said, right?

We obviously have in aggregate -- I'm not going to go there. But we do have the timing challenge that I mentioned in terms of a fourth of the -- you know we spread marketing cost over the volume plan for the whole company. And so to some extent the launch cost and the spending will be front loaded based on that arithmetic, while the volume will spread out through the latter part of the first quarter and then well into the second and third quarter. So there will be a mismatch. It will definitely -- you know, and this is arithmetic. Not from the standpoint of benefit. It will hurt the arithmetic of the first quarter obviously because of that mismatch.

Far enough. And it just seems like everybody's jumping on every type of trend around. And I don't know. Leo, do you feel like...do you feel like Coors Light is kind of caught in the crossfire betweeb whether it's Miller Lite's revival, low-carb issues, Ying-Ling [sp] gaining share in the northeast, you know you keep on saying that the beer is gaining relevance, but it is hard to see that from where we're sitting. Just if you can comment on that, that would be helpful. Thank you.

I'm not sure it sounded like a question, Jeff. But I think -- what we know is there's a lot of product news and news activity in the category. And um, product news gets trial in the beer business. That's, that's not new news. We do believe that the focus we've got on young adults on Coors Light strategic focus is working for us.

We also believe in the overall mix of our marketing this year, we need some product news to be able to compete effectively. And that includes some packaging product news across the summer on Coors Light. That's why you've got to get some of that trial generated in this, this kind of a marketplace. But all of our data in terms of where we are with our important 21 to 29-year-old consumers, which is the long term strength of this business, I'd say that we're in a much better place than two years ago. And that'll pay off for us at some point in this market.

And in the meantime, we're spending more of our money up front. We've got a full schedule starting immediately, Jeff, so that we peak our awareness going into summer. Our goal this year was to get a fast start. We've done that. We've had a good January. Now, we've got to ramp up towards summer and have a good summer. And then we, then we're back to NFL and another really strong season there. So we are, we're staying the course.

Okay. Thank you.

Thanks, Jeff.

Our next question is from Matthew Web [sp] from Pace [inaudible].

[inaudible]. I wonder if I could just ask a few questions about the progress of the Carling [sp]brand in the U.K. Firstly I wonder if you just could talk about what some of the drive is behind the success, whether it is really market share going across the U.K. or what particularly concentrated in, in Scotland and London where you've traditionally been underrepresent in that brand and if it is could it be driven by those areas, where you could perhaps quantify some of the market share gains. And then finally if you could discuss whether the gains are from the lesser brands or whether they are from some of your more significant competitive rounds such as [inaudible] and Fosters.

Yeah, Matthew I can...I can pick that up. I think it's, it's fair to say that the growth rate both in terms of volume and share for Carling [sp] is across -- geographically across most of the country. Second, it's been driven in a couple of areas in the ontrade, particularly with Carling Extra Cold [sp]. You know, we invested against that and I think that's really paid off for us. In terms of building through puts in our current accounts. And also building distribution. I think in terms of the image of the brand and obviously we track that very carefully, and I think we're making headway in terms of those image pointers and relevance with younger people. So it is a broad range thing built on a lot of different kinds of initiatives.

Would it be fair to say, though, you are particularly focusing on Scotland and London? I mean if, if that's the case, it would just be good to know how much progress you think you're making in those areas and how much more you think there is to go for.

We'' we're particularly excited about the growth in Scotland and in London. London obviously being the biggest opportunity. But the challenge for us is distribution. And Carling is only in a third of the country, in terms of distribution points. So we really want to build the presence of the brand. And that's the challenge. But, I mean in terms of through put and overall share growth, it comes from a much broader area than just London and Scotland.

Yeah, yeah great. Thanks very much.

Thanks Matthew

Our next question is from Dara Mulhainin [sp] from J.P. Morgan

Good morning guys. Can you give us some kind of sense of how much FCRs were impacted in Q4 by the supply and chain issues? And you mentioned low single-digit volume growth in January. I assume that was FCRs. What was the January comparison versus last year? Was it in the middle single-digit range?

Tim, do you want to take that?

Yeah Let me hit your first question... the first part of your question first, and then I didn't catch the last four or five words. You may have to --

I'll take January. That's all right.

Oh Good. You'll take January. There were, and I think Leo and I both hit this in our comments, the supply chain challenges did impact us. But there were so many, I mean so many factors moving around on us, giving an exact you know, to the barrel estimate is very, very hard.

And I'm not going to do it. You can see, however, the trends that we came off in the third quarter. Leo mentioned and I mentioned that we had an encouraging January. Realizing that we did basically move about 100,000 barrels. That's about 4, $4.5 million of profit.

Basically from the first quarter '04 into the first quarter '03 because of our distributors ordering a lot and running their inventories up 100,000 barrels. And in fact, that was on their part obviously a great idea and an apropriate idea given the strength of the playoff and Superbowl pull-through. So those are the dynamics that are moving on us.

But we would be hazarding and therefore providing you with what would certainly be an inaccurate estimate to try to point to the exact number of barrels that we were hit as a result of the supply chain. The really more interesting and constructive place to look is the cost, incremental cost we incurred. Leo and I both referenced $8 million and at this point, I'm happy to say that we still have some incremental costs that we're incurring. But it really is in the range of kind of normal operating noise that you experience as you kick start any new year.

It is really hard to trianglate what impacts us most in the fourth quarter. But the first quarter startoff in the month of January is encouraging. And this was our toughest month to overlap from last year. To be back in low single digit sort of growth land is pretty encouraging.

Okay. Fair enough. And you guys highlighted U.S. marketing per barrel, I think was flat in Q4. And European marketing spending was flat on a currency mutual basis. Was that in line with your expectations heading into the quarter? Or did you cut back at all on marketing, given we couldn't in expect volumes?

Actually, we had increased our markets last year in the fourth quarter dramatically. This year our plan was to come in with about the same spending, and we did. That's in the U.S. Peter?

I think um, you know from a U.K. standpoint, you know, we were pretty much where we expected to be at the end of the quarter going in. So I think it was pretty much as we expected.

Just a little additional color. You may recall -- you may not, that fourth quarter, end of third quarter, but mostly fourth quarter last year in the U.S. business we had a pretty significant run-up with support of the NFL season and our football advertising. So Leo's point, holding that flat was actually a pretty good thing in terms of overall pressure against the marketplace.

Okay. Thanks.

Thank you.

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

Hi, Bryan.

Hi guys, good afternoon or good morning for you. A couple of questions. The first is, Leo, if you could just give us some commentary on how you...where you stands in terms ever distributor relationships in terms of Texas and California. I know we've talked about it a couple of times during the year and some of the work you've done there to try to improve that. And then you know, the second thing is if you could just talk a little bit about how you feel the beer industry performed in January.

And I think you know over the last couple of weeks, couple of days, you know we've certainly seemed as if the industry was doing pretty well. At the beginning of the fourth quarter, December seemed weak. And you know, between what Anheiser Busch said yesterday and what you guys had said about January today, it seems like things picked up a little bit in January. So if you could just you know, give us any color at all about you know, what has happened in the industry over the last four or five months, that would be real helpful. Thanks.

That's good, Bryan. Industry continues to be uh, sort of light up a little bit and then slow down again. Coming into the fourth quarter, I think we were all pretty optimistic. We had soft year-ago comparisons. And started out with some pretty good momentum. And then November and December, I think for most of the industries, was pretty disappointing.

I don't have a good feel for January industry numbers obviously. We really only have our own sense of it and what Bud said yesterday. We were pleased with January for two reasons. One as I said before, last year in January was a big jump up. And this year we were able to overlap that positively despite, you know, coming off some head winds on our own supply issues. I think that's a pretty good accomplishment.

I don't have a good read for you on the industry. Regionally, I can give you a sense of it. For example, we had a good January without the northeast helping us. The northeast, again, I mean you talk about a weather story that won't give up!

Ha-ha.

But the northeast is just waiting to wake up and sell beer again. They uh, they had a tough time. So despite the northeast actually you know being down sort of modestly for us in the quarter, the momentum in the rest of the country carried it. From a uh, our own distributor point of view in Texas and California, two different stories.

We're real pleased with where we ended up in California relatively last year. We saw share gains on Coors Light. That's a turnaround. That's, that is good news. Southern California continues to be a battle ground obviously. But we've gotten the major transitional issues behind us. And big consolidations out there and feel good about that on a go-forward basis. Our relations with our whole salers are very positive there.

In Texas, Texas is obviously the biggest share battle ground in the beer business right now. And I think we've got a terrific wholesale lineup there. Texas was one of the hardest hit areas in our supply chain issues. Reasons of supply coming out of virtually all out of golden. So they were inordinately impacted through November and December.

We spent a lot of time down there working with them. They had a terrific January. I think attitudes are really good. And, again, a couple of major transitions are now behind us, we should be headed in the right direction.

Thank you.

Thank you, Bryan.

Our next question is from Mark Swartzberg from Legg Mason.

Thanks, operator. Good after..or good morning, guys. Two questions for you. First on the U.S. It relates to this subject of competition. Can you give us a sense of shared house performance and potentially including the month of January which you know, had a nice pickup for you. but can you give us a sense of shared house performance relative to your overall performance judging by what Miller said and what you have all just told us about your fourth quarter.

If we would only look at the fourth quarter it tookings like there might have been deterioration, particularly in that portion of your business, that may be improving here in January. On the related front of the whole subject, the competition, I mean is this, as relates to natural light being reformulated, is this ordinary Coors competition in your mind or more significant? Totally shifting gears on to Europe, Peter, if you could, you're now right sized or you're closer to right size, can you give us some sense at least directionally, um or perhaps Leo, you're the person, about you know right...how you're thinking about normalized operating margins for that particular portion of your business.

Cue me again on your first question. I was making notes.

Yeah, it simply boils down to shared house performance. And it looks like it deteriorated in the quarter. It also might have improved bit in January. But can you give us some incremental color on what's going on with your business in shared houses.

You know the surprise answer is that shared house perfomance perspective didn't change in the quarter. And you know honestly I guess I would have expected it, too. But triangulating our own performance and shared houses and nonshared houses and even trying to go out to the Neilson numbers and triangulate it that way. Our issues are across the board, they are not weighted towards shared houses, in fact again as we've looked at over the past couple of years. If you take out the most recent transitions, we continue to do marginally better in the quarters in shared houses. So that was a surprise. I don't have January numbers. But I wouldn't suspect they'd look any different.

That's very interesting.

And Natural Light -- your words. This is normal course of competition. I don't think this is a big issue for Keystone. I don't think this is a big issue for Coors Light frankly. So that doesn't mean we're not watching the carb issue all across the board. We are. But technically, I don't see that as a big play on our franchise.

Great. Thank you.

Peter Kendell?

Well, I think Mark, I'm not quite sure what you're wanting me to comment on. But you know, I'd say a couple of things. I think as Leo mentioned, at the end of last year, I think we left last year in a lot better shape, particularly in the take-home side of the business in terms of our kind of margin and volume mix. So I think the outlook there looks reasonable. I think in terms of overall cost, as you say, I think we're in a lot better shape now in terms of right sizing the business,

and we'll see some inflationary costs going forward. But not dramatic increases there. So overall, I guess directionally positive in terms of a margin performance. But I think it is probably about all I can say at this point.

Fair enough. Thanks, guys.

Unhuh.

Again, if you have a question at this time, please press the one key on your touch tone telephone. Our next question is from Christine Farkas [sp] of Merrill Lynch.

Thanks you very much, good afternoon. A question for you in your U.K. business. Could you comment on the rate growth in the market versus the currency appreciation and how much mix offset that. And short of forcasting currencies in 2004 perhaps you can comment on the direction of rate growth and mixed growth in the U.K. next year.

Tim do you want to comment on the exchange rate.

Thanks for the question that relates the mix of brands to the currency. Christine, I think the -- Peter's team has and continues to do a really great job on focusing the business more and more behind fewer brands that're really lighting up performance. I'm sure you know the U.K. business has and continues to move really briskly toward lagers, point one. And point two from on trade to off trade though, Peter's team is doing a good job of taking a share in each. .

So the...the...if what you're getting at is pricing and the ability of strong share players to price behind their main brands, I think at this point we'd have as much ability to do that as anybody...in the beer industry...in the U.K.

You know, both Grolsch and Carling have good, and Peter's point over time will get even better margins, as some of the production costs and overhead rationalization starts to, you know, finding its way into our operating margins. And then obviously, when we consolidate results for the whole company, I think I mentioned the 8. -- whatever it was. 8.3% appreciation in the Pound that obviously impacted the consolidate... the consolidating of the U.K. results in the fourth quarter

year-over-year, we've got to -- you know, the pound today is at $1.84. Some of that benefit gets taken away from us because we've hedged -- we've swapped out some of our dollar-denominated bond debt to pound. But net-net will still show a bit of improvement in overall reported results.

At this point, it'll, it'll be a couple, probably less than $2 million per quarter. And that's assuming the exchange rates stay where they are throughout the course of the year. And of course, that's anybody's guess. So you've got an interplay of a bunch of different things there. Not all of them at all related. I hope that is a helpful answer to your question.

It is. I'm wondering if, in fact, you have specificly what your price growth or rate growth was in the U.K. in the fourth quarter in the full year, just specifically price growth.

Peter, correct me if I'm wrong, but I think it was, it hovered about 1%.

Yeah, the net price was probably a bit less than that. But it was around 1%.

Yeah.

And that would include or not include any offset from mix?

No. That's -- well, it would being a bit of a mix effect there. That's right, Christine. It would be a combination of pricing and mix.

Okay. Great. And if I can follow up with a more general question in terms of currency. How much did currency contribute to the company's overall earnings per share in the fourth quarter and in 2003?

8% in the fourth qauferter.

And is that of operating profit or of EPS?

That's from Europe. That's the Europe piece. Notice the CBL Europe results were 8% higher because of the stronger pound, weaker U.S. dollar.

Okay. Great.

Okay?

Thank you.

Yep.

Our next question is from Bonnie Herzog [sp] from Smith Barney.

Good afternoon. Hi Bonnie. Hi, I just wanted to talk about the Keystone Light brand which I think has shown some signs of strength and I'm just wondering how you're going to position that brand in the future. I'd like to clarify, if I may, how many carbohydrates the brand has. Because I think it was my understanding it's you know, already low-carb beer And if that is accurate, have you considered taking advantage of that and trying to position it -- you know, as a lower-carb alternative in the lower-price segment, especially now in light of what AB is going to be doing with Natural Light. That's my first question.

What's your second one?

Okay. I'll keep going. I thought I was going to save you guys. All right so my second one is on Zima. And you had in your prepared comments that you noted Zima had been weak.

But yet you are still planning on introducing new flavors. So I'm just trying to understand, you know, why you're doing that. Are you hoping obviously to turn the brand around through the new line extensions or flavors. And then I'd love to hear, as my final question, you know, just some comments on where you're at with the possibility of building out Shanondoah [sp]-- are there any more plans about sort of committing to doing something like that, especially in light of what you talked about with Q1.

Leo, let me hit the Shanendoh with a one quickly, because it's probably the easiest one to answer briskly. You know, as we've said all along. The idea of having a free standing brewery, Coors Brewery closer to our eastern mid-Atlantic markets, which are significant for us, is really appealing. Closer, faster, better service, less rail cost, less transportation.

At the same time, we also recognize that that would be -- that would not be an insignificant investment, so our ops guys and engineers guys they continue to look at it and have plans to produce spectacular beer at a lower cost. In other words the capital cost today would be lower then they were say five or six years ago by order of magnitude.

That notwithstanding, timing's everything. And the time to really look at that seriously and consider it seriously is to Leo's point when we were back at a point where we got sustained growth. Today we have ample capacity. You'll recall we had significant brewing investment. We hadn't made any investment in

Golden in brewing capacity for 11, 12 years. We did so about 2 years ago. We spent about $70 million improving the brewing capacity of our Memphis brewery two years ago. We've got round numbers, about 3 million barrels of brewing capacity there. So we're very well situated. We have ample capacity today, near future

but our end, as our growth gets back to the one to two percentage points above the industry, that we really target and challenge ourselves to achieve, we'll keep you very, very closely posted on when we think that it would make sense to do a Shannondoah brewery. But right now, it is -- as it has been for each of the last five, six years ago, something we're looking at. And constantly challenging our thinking on how to do it more effectively and more cost effectively. Is that helpful? Absolutely. Thank you. Thank you.

On Zima, remember, this is still a very profitible brand. And we've got a vested interest in stabilizing this brand. As do our wholesalers. So our point of view is that our wholesalers need a nonspirits branded alternative in this cab category and want one. So flavors are clearly what is driving this category. These are great flavors, a little more alcohol. We think it is a solid positioning.

Product news is the way to try to stabilize this brand in a declining category. Zima still is in the top five or six fad brands ranking. and we'd like to notch it up a bit in that. Long term this will be a good profitible segment of the beer business. Regarding Keystone, Keystone Light is within a trace of Coors Light in terms of carbs. So your point of it has you know, a basically different carb level than Coors Light.

Fundamentally not true. Keystone Light's franchise is also among popular priced beers, particularly oriented to young adult guys. It's a very strong franchise. We've seen that our advertising reinforces that positioning. This is a terrific beer with terrific momentum. With a target audience is less concerned about this carb issue, from our point of view, than older beer users -- this is what the research says

than older beer users. So we are watching this very closely, the answer. At this point we don't have any plans to try and reposition Keystone Light you know, up against low carbs. But you know, this is a very dynamic part of the category right now. We are watching and ready to be as nimble as we need to be. Thank you.

Our next question is from Andrew Conway with Credit Suisse.

Hey.

Hey, Tim and Leo how are you guys doing? A couple of questions on Coors Light. With the inventory changes in the first quarter, what would be a range of kind of base case of shipment or SCRs you would expect in your planning for Coors Light for '04?

And in the event in terms much, Tim, you've been very successful at managing your cost per barrel. Should revenue be somewhat choppy as we get through the year, just your confidence on being able to make sure you manage the gross margins of the business and the cost structure, cost per barrel, just your comments there would be appreciated.

Tim let me take number one, you take number two.

Yes, sir.

Andrew, I think on Coors Light, the key barometer for Coors Light is going to be heading into summer. Our first goal is to have a fast start. We've had a good start with Coors Light.

Like the total portfolio, Coors Light is up low single-digit growth so far in January. For the playoff season and Superbowl, you know goal accomplished. By the end of the quarter, however, we're going to have some impact from launching Aspen Edge. We don't know what the impact is going to be exactly. A lot [inaudible] probably has already taken place. But you can't launch a new product without some impablgt.

So I think the critical time to watch Coors Light is really coming into summer. We'll be really focused on it. We will have very high [inaudible] awareness levels as we hit April and May. And our job is to start out the summer strong with Coors light.

Hey Andrew, on the cost per barrel question, you gotta, you gotta...the easiest way to answer is to look at 2003. I mean, overall, I think 2003 was as choppy a year as you can ever see and the chop tended to --

sure.

Soft and occasionally slightly down. It is so hard for the -- even the best run manufacturering organizations to leverage costs, spread overhead and reduce costs when volume is up. When it is soft or slightly down. It is really hard. Our operations team did that nevertheless. So I think that as we look at 2004, yeah, we're going to have some choppiness. And I think Leo's characterization is right on. You have a rollout of a new product.

And that changes mix and that changes patterns and that changes run times. And all sorts of things that can effect your cost, but I think if you look at what our operations folks have done the last two years, the strength of their plans and clarity of our plans for this year, choppiness or not, I think we're still feeling pretty good.

Not without challenges to get our supply chain more consistent and bring down out of stocks even further. But I think we still feel pretty good about continuing to march down that buck to two buck per barrel net costs of goods per barrel reduction that we've been on for a while and are going to work hard to continue on the next two, three, four years.

Great.

So I think the prognosis is really good, choppiness notwithstanding.

And a follow-up, on where do you guys see the price positioning of Aspen Edge you know, in the portfolio? And you know, competitively versus some of the products out there in the low-carb area.

And as you look in 2004, Leo, one of the things I think, that will be new, you talked about new packages to grow share mind with your wholesalers. When you look at your selling capability and your entire marketing promotional mix, in terms of investment this year, what is the delta or what are some of the changes in recap brating, if you felt it necessary, how should we approach your strategy for '04?

And as you look in 2004, Leo, one of the things I think, that will be new, you talked about new packages to grow share mind with your wholesalers. When you look at your selling capability and your entire marketing promotional mix, in terms of investment this year, what is the delta or what are some of the changes in recalibrating, if you felt it necessary, how should we approach your strategy for '04?

On Aspen Edge our goal is to price it right up against the current segment market leader. As you know that varies market to market. And it is currently a moving target. But that's our goal. Regarding Coors Light and our business plans are for the year, obviously part of that business plan is re-engaging the confidence of our wholesale system. First as I said was to have a good January. We have. Second was to really change our spending pattern.

What we realize last year is when we you know after Superbowl, we kind of went dark for a couple of months. Came back up in April, heading into the summer. But that tended to peak top mind awareness, mid-summer. Andrew. That's not when we want to peak it. We want to peak it in May. This year we'll have a, ahh, A- a much stronger Coors Light advertising schedule. And we'll have it earlier. We've taken our ad money, we'll refocus it behind Coors Light. And we'll focus it earlier in the year.

We've got real good momentum going into summer. We will have package news throughout the summer. We know in the product news game, you've got to have the reason to get the display, and get on the floor. And we'll also be announcing a reorganization of our selling organization as we head into summer. I think it will be exciting for our distrib... our distributor partners.

And could you think -- do you think that has a chance of optimizing your performance, you know, equally between -- on the light category shared houses versus solo houses?

I do, yeah.

Thank you.

Let's take just one more question, if that's okay.

Yes, sir. Our next question is from Caroline Levy from UBS.

Good afternoon from New York here.

Hi Caroline.

I have to say, I'm looking at your SVRs down 2.7, I believe. I guess your shipment is down about 2.7 in the quarter.

About the same.

And I think your pricing and mix was up 1.9. Is that about right?

About right.

And it makes me think -- I'll be the first to admit, I have no idea how to forecast earnings for this company. But I hate -- I'm sort of imagining what earnings might have been if your SCRs had actually been up 1 or 2%.

It would have been different.

Sorry?

It would have been different.

Was it 98 cents? 98 cents is a fairly huge numbers compared to consensus. And you did it with volume way down. Your growth margin expanded. Definitely a huge surprise to me. I thought if you got a down 2.7 kind of shipment number, that was going to make margin expansion impossible. But is it, is it reasonable for us to assume that the tiny bit of leverage we saw in the fourth quarter in the U.S. will be explosive if you get SCR growth in 2004?

Caroline, remember our story and [inaudible] Where we are in the profit curve you know a little bit of volume leverage really runs our numbers.

I know, I also thought that worked in reverse. But it didn't.

It does. We had a lot of things happen positively underneath it to keep it from impacting the bottom line even worse.

And those positives continue into '04.

Say it again.

I think those positives actually continue into '04.

Yes, they do.

Cause it's largely your supply chain initiatives, right?

It cuts two ways Caroline. We did take some incremental hits, $8 million plus In the fourth quarter for beginning to get our supply chain systems right. We'll have a little bit of that dribble into the first quarter. But go back to what Leo said, we've got really good operating leverage when our volume starts moving through. Now we've got some of these inventories anomalies to work through.

We do have the marketing spend that's gonna to hit full force in the first quarter. But also look at what happened in the fourth quarter. We've got the U.K. business in the second half of the year, especially the fourth quarter, really starting to get that margin and volume dynamic much, much more in view than we had the first half of last year, the first half of the year to a large extent lesser as the year went on. We had contract packing costs.

We had a loss of the hosting agreements with Interbrew and others that provided a good profit in 2002. So you've got a lot of factors moving. And, you know, we are very gaurdedly optimistic about the leverage that you're referencing as we move into this new year. But, hey, you know, we've got supply chain consistency to work on in anticipation of taking our volumes up 40, 50% as we move from the slower first, to the much more active second quarter peak season. We've got a new product to roll in the form of Aspen Edge. We've got some work ahead of us. So --

Can I just ask you what you're thinking about on the net revenue per barrel lines, sort of similar to '03, do you think? What are the puts and takes there's?

Well, I think the puts and takes are more on the put side than the take side because pricing still is holding in there for the industry at large. We're going to be as Leo mentioned, Aspen Edge is going to be toward the premium plus price range. And, you know, Zima's base has suffered so ,that we're hopeful the introduction of these really exciting flavors will bring that franchise back a bit, and even a little bit of leverage with Zima, given a disproportion of profitibility can help us big time, even with relatively small amounts of volume. So um, you know I think that --

And the Puerto Rico thing, we've already had the positive of that? Or does that continued a little bit [inaudible] --

That looks like it is going to be a little bit on the upswing. But, again, we've got some good competition there in terms of the price differential with a local player. But Peter Swindler [sp] and his team are really focused and working hard to focus, as we are in the states, focusing our marketing and selling efforts to try to bring that volume slowly back up.

And then just lastly, you did not pull cost earnings, but I tell you we feel like, I mean I certainly feel like I'm totally in the dark here. Are you trying -- do you expect your first quarter to be up? earnings?

Hey Caroline, I think it is much more appropriate that we provide you more detail on more pieces of the dynamics in March. I think that you know well we don't characterize or guide earnings. We haven't in the past. We're not going to start now. I think the point is, and we are certainly very sensitive and cognizant of the swings that we have experienced throughout 2003. But I think the bottom line is, we are precisely what we said we would be two years ago. We are a more diverse company.

We are able to withstand swings and factors that for a smaller company with a narrower footprint, would have a much harder time to bear. And I think that's why you see, even with the challenges we've had, and actually some really, really good successes, you see a really nice -- I won't quite use the word juggernaut, because that implies a strength that I don't think we yet can claim, but the whole, organization, both sides of the Atlantic, every function, really, really kept the cash challenge closely in mind while still investing very heavily behind the business where it needed it.

Right.

So that's the balance and the consistency and the stay the course ability that I think we have more now than we have had in the long long time.

Well, congratulations on the quarter.

Thanks, Caroline.

Thanks. Thanks everybody. Coors.

Are you there?

Yes, sir. Would you like to take more questions, sir?

One more question. And this will be it.

Yes, sir. Our next question is from Mark Cohen from Goldman Sachs.

Yeah, I guess I got two quick things, I mean since we've covered a lot. First of all, Leo, I think you mentioned new Coors Light advertising hitting the air waves in about a week and I wonder if you would expand on whether there is any strategy tweaks or changes there that we ought to be aware of as that hits. And then secondly, Tim, I believe that you've talked in the past about a tax rate that normalized somewhere in the 35 to 36% range. Now you're talking 32 to 35 for '04. I'm curious as to whether that is something that is really fundamentally structurally different that's permanent, or if there'sis things about '04 that are causing you to see the upside?

Mark, let me hit that one first. The range I'm giving you, the 32 to 35 is right for '04. but I think we've been pretty clear that one thing that will be more variable -- I'm not talking out of two sides of my mouth from what I said a second ago will be the tax rate. So that's a very relevant -- I think that is a good range for 2004. I can't tell you that's going to be precisely the same range for 2005. You know, we had these five years worth of audits settled successfully in 2003.

We're obviously not going to have that happen in 2004, nor in 2005. So my guess today and it would be a guess, and I safe harbor the language to the Nth degree, in 2005, you'd see that 32-35% range click up 100, 200 basis points. But again, that's premature And we'll be happy to give you a better read on that as the year goes on.

Great.

And Mark, on Coors Light we actually broked two new spots this week. One ran Monday night. You'll see more product focus in our ads. But They'll still be targeted at our young adult lifestyle and targeted at winning summer. We'll also break a whole new rack of ads coming out of our distributor convention. and what you'll see much more balance of is product-focused ad. In the meantime we'll be continuing, for at least a while, with our education ads on the carbs. So that gives us more balance towards products focused in our Coors Light advertising.

did you product focus what is exactly the selling point there, Leo? When you say...can you amplify on that product focus? What is exactly the selling point here Leo?

It's really...it's really a product equity. It's going back and making sure we have a good balance of our product equities in all of our advertising. I think Ron will give you a good feel for this in March when he talks about what we'll be taking to the convention. So more to come, MarK.

Okay. Thanks.

You got it. That's it, everybody. Thanks for being with us, today. I appreciate your interest in the Coors Brewing Company. And look forward to talking to you at the end of the first quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day. Thank you.

Thank you.