Molson Coors Beverage Co (TAP) 2004 Q1 法說會逐字稿

Welcome to the Adolph Coors Brewing Co. 2004 first-quarter earnings conference call. At this time all participants are a listen-only mode. Later we will conduct a question-and-answer session and instruction will follow at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Leo Kiely, President and Chief Executive Officer of Coors Brewing Company.

Hello and welcome, everybody, thanks for joining us today. With me on the call are Tim Wolf, our Global CFO; Peter Kendall, CEO of Coors Brewers Ltd.; David Barnes, our U.S. CFO; Katie MacWilliams, CFO of Coors Brewers Ltd.; Ron Tryggestad, Global Controller; and Dave Dunawald, Investor Relations Director. Peter Kendall is in the UK and the rest of the team is here in Golden. On the call today Tim and I will cover two topics with you, first a discussion of the Coors Brewing Company's first-quarter 2004 results; second, some perspective on the balance of this year for our company and then we'll open it up for questions.

Earlier this morning we reported first-quarter total company net sales up 11.5 percent with gross margin, operating margin and earnings per share increasing against a tough quarter a year ago. Consolidated net income also increased to $4.8 million or 13 cents per share, up from $0.8 million or 2 cents a share a year ago. This improved performance was driven by profit growth in both of our operating segments. Our results were also affected by the adoption of a new accounting rule related to how we account for some of our joint ventures. And Tim will explain this change and the impact it had on our numbers in a couple of minutes.

Now let's review first-quarter results for our Americas segment. Pretax income for this segment was $31.5 million, up 18.1 percent from a year ago. In many ways this was a better quarter than a year ago with solid pricing and mix trends, strong results from our Canadian business, and a substantial improvement in our supply chain performance from last call. We did not, however, achieve our most important goal of restoring retail sales growth in our U.S. business.

Looking at our Americas results by line item, our U.S. sales to retail, which excludes the Caribbean and other export markets, decreased 0.6 percent in the first-quarter primarily the result of sustained consumer interest in low carbohydrate years, a product segment where we did not play until late in the quarter. Beginning March 1st we started a phased rollout of our low carb beer, Aspen Edge, which is today available in 46 states. The impact of Aspen Edge on first-quarter retail sales was minor, about 40 basis point of STR growth, because the brand was available only in initial rollout markets during the last month of the quarter. Distribution of Aspen Edge in the introductory markets to date has outstripped our expectations and we plan to introduce this brand in the balance of the U.S. within the next couple of weeks.

Stepping back to the full Americas business, sales to retail declined 1.4 percent in the first-quarter because of the additional effect of lower export sales to Puerto Rico where we were lapping the load in ahead of a price increase a year ago. In terms of U.S. brand trends, Coors Light sales to retail decreased at a low single digit rate due partially to consumer focus on low carb beers. Keystone Light grew at a mid single digit rate in the quarter. Killians and original Coors decreased in the mid single digit rate while Zima trends improved following the relaunch of this brand in February.

U.S. volume to wholesalers increased 0.4 percent excluding Americas export as we built distributor inventories of Aspen Edge early in the national rollout. We ended the first-quarter with U.S. wholesale inventories about 50,000 barrels above normal seasonal levels and about 150,000 barrels above year ago when distributor stocks were low following our record setting Colorado snow storm in 2003.

In the first-quarter our supply chain performance improved significantly with out-of-stocks and order compliance improving by the end of the quarter to levels better than before our system changeover last fall. In particular, supply of our new Aspen Edge product was excellent. We feel good about the effectiveness of our supply chain as we head into peak season.

In Canada are Coors Light business continued to perform well with pretax income growing more than 56 percent to $12.5 million in the first-quarter driven by high single digit volume growth, improved beer pricing and a 13 percent appreciation of the Canadian dollar versus the U.S. dollar. Americas net revenue per barrel increased 2.7 percent in the first-quarter as we achieved about 200 basis points of U.S. pricing growth, similar to a year earlier.

The net effect of sales mix boosted that revenue per barrel by about 150 basis points in the quarter driven by strong results in Canada and increased sales in import brands by company-owned U.S. distributors. Brand and package mix in the U.S. were essentially neutral for the first time in several quarters. The benefit of these factors totaled about 350 basis points in the quarter and then were partially offset by lapping the onetime $4.2 million arbitration settlement in the first-quarter last year which boosted net sales per barrel 80 basis points a year ago.

Americas cost of goods per barrel decreased 0.7 percent in the quarter driven primarily by the new accounting rule for our can and bottle joint ventures, the reallocated cost within our P&L as well as progress on our operating cost initiatives. These favorable factors were partially offset during the first-quarter by high costs for freight, pension, healthcare and overhead costs.

Marketing G&A and administrative expense in the U.S. -- excuse me, in the Americas increased $9.9 million or 6 percent in the first-quarter. About two-thirds of this increase was attributable to additional front end investments behind Coors Light and the introduction of Aspen Edge this year with the balance related to higher pension, healthcare and information system costs. Other income declined from year ago as we lapped the $3.1 million gain on the sale of a warehouse in the first-quarter of 2003.

Turning now to the results from our Europe segment, pretax income was $6.2 million, up from less than $1 million a year ago. Overall this was a good first-quarter for the Europe business with strong volume and margin growth in both our on-trade and off-trade businesses. Although our Europe financial results in the first-quarter were affected by a 15 percent year-over-year appreciation of the British pound against the dollar, our pound denominated debt more than offset this benefit through higher corporate interest expense.

Now let's look at the European highlights for the quarter. In the first-quarter we grew overall volume of our owned and licensed UK brands 6.5 percent, reflecting double-digit growth on Carling. Growth declined in the mid single digit rate in the first-quarter largely due to lower sales in one large UK pub chain. Volume in our on-trade business representing two-thirds of the Europe volume and even a greater portion of gross margin increased more than 4 percent due to continued improvements in UK distribution and sales execution, especially for Carling and Carling Extra Gold. We continue to be pleased with the market share gains we've achieved in our on-trade business in the UK.

On-trade factored (ph) brand sales increased about $19 million in the first-quarter with a positive impact on revenue. Nevertheless, overall gross margin from factored brands declined modestly in the quarter because of a mix shift of factored sales towards lower margin customers. Our off-trade volume grew more than 16 percent in the quarter driven by a retail load in ahead of an excise tax increase in March of this year along with continued strength on the Carling brand.

Lost income from contract brewing and transitional arrangements with other brewers that we had in 2002 and early 2003 affected the first-quarter operating margins by less than $2 million. Cost of goods per barrel for our owned brand, that's excluding factory brand sales, declined modestly in local currency versus a year ago driven by lower contract packaging of our products by other brewers and the new JV accounting rule. These positive factors were partially offset by higher raw material costs and depreciation mainly on dispense equipment and the new packaging lines in (indiscernible).

Marketing and general and administrative costs in local currency increased 6 percent primarily because of the new joint venture accounting rule and higher overhead spending related to the UK rollout of Coors Fine Light Beer as well as investments in our sales capabilities and information systems. At this point I'll turn it over to Tim to review first-quarter corporate and consolidated highlights and look ahead to the balance of 2004.

Thanks, Leo, and hello, everybody. Continuing with our first-quarter P&L. Corporate interest expense was $19.8 million in the first-quarter, $1.1 million lower than last year. Interest expense declined despite about $2 million increased interest expense related to foreign exchange, $900,000 from new joint venture accounting rule, and $100,000 of accelerated amortization fees related to paying off the last of our term debt during the first-quarter. Speaking of debt repayments, in the first-quarter we made payments on our debt of about $60 million. So in the two years since we bought the UK business we have made $540 million of debt principal repayments as of the end of the first-quarter of 2004.

Our effective tax rate was 33.7 percent in the first-quarter, down from 36.2 percent a year ago as we continued to benefit from the tax impact on our CBL acquisition structure. Our tax rate was also reduced by about 100 basis points because of the new joint venture accounting rule. Let's take a look at the new accounting standard referred to as FIN 46 that affects how we account for some of our joint ventures. This standard requires us to consolidate our U.S. container joint ventures and our UK with Grolsch. The bottom-line impact of this change in the first-quarter was a reduction in net income of $600,000 or about 2 cents a share due entirely to the quarterly phasing of annual income tax expense.

The primary effect, however, was to move some expenses and income related to these ventures within our P&L. These reallocations by segment are as follows -- in the Americas the new rule reduced our cost of goods sold by $2.8 million; in Europe the new accounting decreased cost of goods by $4.9 million and increased MG&A by 3.4 million, it also increased the segment's other cost by $900,000. Finally, the rule change increased corporate segment interest expense by $900,000 primarily due to the requirement now to consolidate the $45 million of debt issued by our (indiscernible) venture. This $2.5 million of additional pretax income is entirely offset in a new line in our P&L called minority interest. Speaking of the bottom-line, first-quarter net income for the company was $4.8 million or, as Leo said, 13 cents per diluted share up from $800,000 or 2 cents a share a year ago.

Now I'll preface the outlook section by using the -- by paraphrasing our usual Safe Harbor language, some of which we discuss now and in the Q&A may indeed constitute forward-looking statements. Actual results could differ materially from what we project today, so please, as usual, refer to our most recent 10-K and 10-Q filings for a more complete description of factors that could affect our projections. Regarding any non U.S. GAAP measures that we may discuss during the call, please visit our Website at www.Coors.com for a reconciliation of these measures to the nearest U.S. GAAP results.

Let me start by reviewing some key factors that will affect the magnitude and timing of our earnings during the balance of 2004 by segment. In the Americas positive factors include relatively strong pricing in the U.S. and an expectation of continued solid performance in our Canadian business. Overall 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. Additionally, to date we're pleased and encouraged with the initial results from the launch of Aspen Edge, our low carb beer, and three new Zima flavors in the first half this year. We're focused on building big markets and are continuing to look for ways to achieve growth for our brands.

Consistent with our long-standing commitment to growth, we plan to invest a portion of the benefit of topline growth back against the front end of our business. We're planning to increase MG&A expense at a mid single digit rate per barrel this year which is consistent with our rate of investment growth in the first-quarter. Virtually all of the increased brand spending is behind Aspen Edge and Coors Light. The balance of the MG&A increase will center on sales efforts, information systems and labor related expense. As always, we'll continue to assess the competitive landscape as the year progresses and adjust our spending priorities as needed.

In Europe our pricing trends within the on- and off-trade channels and cost reduction initiatives all continue to be quite encouraging and progressing as expected. By the middle of the first-quarter this year we were no longer lapping the transitional services income that we received in 2002 and early 2003, and we expect a smaller profit hit in 2004 from aggressive off-trade price discounting, declining factored brand sales and contract packaging of our brands by other brewers.

In the second and third quarters of this year off-trade channel volume and market share trends are likely to slow substantially due to the retail trade load in ahead of the excise tax increase in March. Other factors that may mute volume growth are continued balance of growth and margin priorities and the lapping of the unusually warm summer of 2003. As a partial offset we anticipate higher spending on overhead, depreciation of dispense equipment and the cost to rollout Coors Fine Light Beer throughout the UK along with a continued mix shift toward lower margin off-trade channel.

Also we anticipate that factored beer sales will resume their declines in the second half of this year which we expect to have a modest negative profit impact on profit. We estimate that corporate segment interest expense in the last three quarters of 2004 will be about $17 million per quarter which is on average just about $2 million per quarter less than last year. Obviously interest expense will depend on interest rates and foreign exchange rates. Global pension expense will be about $2 million higher in each quarter of 2004 than the year earlier and the actual amount will be affected by foreign exchange rates as well.

We anticipate that our 2004 effective tax rate will be in the range of 32 percent to 35 percent absent any unusual items and this is up from 31.2 percent in 2003. We estimate that the new FIN 46 accounting standards will have no significant impact on our full year earnings since the 2 cents per share tax timing impact in the first-quarter will be reversed out in the balance of the year. Above the bottom-line however, operating and pretax income will tend to be higher because the minority owner's share of joint venture income is now included in these totals while an prior years only our share was included.

The quarterly impact on cost of goods sold, MG&A, interest expense will also be significant with the magnitude dependent on the performance of our container and Grolsch operating ventures. Basic and diluted shares outstanding are trending higher so far this year due to the combination of a higher stockprice and option exercises. Full year diluted EPS will be affected by actual stockprice and option exercises.

With this overview of the balance of 2004, here are a view of additional quarter specific factors to keep in mind as we look ahead. Second-quarter results this year will be challenged by several factors. You'll recall that our distributors began the second-quarter of last year about 100,000 barrels below normal and ended about 100,000 barrels above normal. The Aspen Edge launch may increase wholesale inventories a bit more than usual this year which could push part of the financial impact of this inventory overlap into the third-quarter of this year. In Europe we will face the reversal of the first-quarter load in ahead of the UK excise tax increase along with the cost related to restructuring our UK sales organization. We anticipate these two factors will have a combined $5 to $6 million negative profit impact in the second-quarter. Below the operating line we will be lapping the temporary reduction in our tax rate a year ago when our effective tax rate temporarily dropped to 25.8 percent due to the settlement of tax audits.

In the third quarter challenges include, as you'll recall, the very hot weather in the UK last year as well as a $3.5 million gain on the sale of Rights to our Hooper's Hooch brand in Russia. Finally fourth-quarter results will be helped by lapping the decline in U.S. volume and additional supply chain cost of about $8 million that we experienced in the fourth-quarter of 2003. If you net out all these factors we anticipate a very challenging second-quarter of 2004 with the balance of the year showing somewhat easier comparisons particularly in the Americas in the fourth-quarter. Now let me turn it back to Leo to wrap this up. Thanks very much.

In summary our first-quarter results improved in the U.S., Canada and Europe. Although we didn't grow sales to retail in the U.S., we're encouraged by the solid pricing, improved supply chain performance, and the programs our sales and marketing teams have developed to drive our top line. The U.S. beer industry is the most dynamic and competitive we've been in a long time, with consumer focus on low carbs driving substantial shifts in food and beverage purchase patterns, including in beer. Head-to-head competition is intense between brewers across all categories and in all channels, and distilled spirits have gains grown among some young adult consumers.

Overall I believe we're off to a good start in 2004, but to succeed in this challenging environment we must maintain focus on the fundamentals that drive our business on both sides of the Atlantic. These strategic priorities are -- growing big brands in big markets, which means growing Coors Light in the U.S. among our key legal drinking age demographic while we launched Aspen Edge, and growing Carling and Grolsch in the UK while we launch Coors Fine Light Beer. Two, strengthening our access to retail by building the capabilities that are key to winning and partnering with our wholesalers and retailers. This means refocusing our sales efforts on both sides of the Atlantic to improve our performance with the retailers that will drive the future of our beer business. Number three, continuing to lower our costs so that we can make even more critical investments that will help grow volume and profits in the future. And number four, building the best team in the beer business.

These strategies are key to winning in beer. We've emphasized these four areas in the past several years and made progress in all, but to win we must intensify and refine our tactics. That's what we're doing in 2004 and beyond. At this point, Matt, we'd like to open it up for questions.

(OPERATOR INSTRUCTIONS) Jeff Kanter, Prudential Equity Group.

Have you seen any stabilization of Coors Light due to your new ad spends and your new advertisements, or is the plan with Aspen Edge to kind of offset the Coors Light decline? Can you just kind of talk about your outlook for Coors Light and how these two brands interact?

Jeff, good morning. How are you? Coors Light -- let me see if I can characterize -- you asked if we stabilized or whatever. We certainly had a better first-quarter than we had fourth-quarter on Coors Light. We're still not where we'd like to be obviously. We're growing Coors Light in more than half of our overall markets. We had pacific problem in Texas, Pennsylvania and the New York/New Jersey metro market in the quarter. The encouraging news, particularly encouraging news is coming from the West Coast where California and the Pac Northwest are really showing encouraging recovery trends for Coors Light, particularly in market share. We continue to have a very regional pattern for what we're experiencing on the Coors Light brand.

On Aspen Edge, it's just flat too early to tell, Jeff. We're right in the middle of a launch. Obviously our premise here is that this is a different price point category, that we've already been cannibalized by activity from this premium category and that this should be largely incremental for us.

Fair enough. And Tim, is there a way to quantify how much you think you borrowed from the second-quarter with respect to the load in the UK? Thank you.

Yes. Peter, do you want to take that? I think we've got a very good handle on that.

Sure. Jeff, overall I think the -- this was about a third of our growth increase. Half in the off-trade and it was primarily -- in fact, almost entirely an off-trade phenomenon. So, as I say, about a third of our overall growth in the first-quarter we feel was that load in.

Okay, thank you.

Jeff, just one point to that. That dynamic notwithstanding, I think we mentioned the share gains that Peter and his team have achieved. All our competitors have the same sort of dynamic, but we still ended up taking share from them.

Fair enough, thank you, Tim.

Skip Carpenter, Thomas Michael Partners.

Tim, you had mentioned -- you guys highlighted 540 million in terms of debt reduction thus far post Carling. could you -- now that you've made such significant progress on that, I guess as you're going forward do you feel kind of comfortable now where the debt levels are? Should we anticipate another slug of debt reduction this year? And then as we go forward I guess maybe into the '05 timeframe where are your priorities going to be on this cash? I know you guys have stopped share repurchasing program, are you going to reinstitute that as well as potentially look to kind of further dividend increases? What are your thoughts right now in terms of cash flow?

I'll give you the cliff notes answer because that answer could go on for a long time. Thank you for the question. First and foremost, we have a commitment to ourselves, to our Board to achieve another $200+ million of debt reduction this year. And today we feel that we will do at least that. As I think you saw in the first-quarter, we're right on track to do that, maybe a skoshe better, but we're right in that range.

Our objective is to get this debt below $1 billion. And today with the payoff, as I mentioned, of our term loan in the first-quarter, our capital structure has gotten very simple very quick. We've got our bonds and we've got commercial paper. And even though the commercial paper is very, very nicely priced basically at LIBOR, we're going to continue to whittle away and pay it down which is very easy because they're very short-term maturities. And toward the balance of the year, early next if we start accumulating a little cash we'll do that.

And obviously the decision that Leo and the team and all of us have to make is if that amount of cash starts to be more than a few score millions of dollars what do we do? And we are thinking about and planning ahead on that issue I think with more and more clarity every day. But we are not going to raise our hand and say as of this date and this cash level we will automatically mindlessly start buying back stock. We're just not going to do that. There may come a time to think about that selectively, but today job one is paying down the debt, job two is to make sure we have the appropriate investments in our business. And Peter's team in the UK and the team here in the United States have some very, very good ideas how we might invest incrementally in high return projects. So we'll look at those as well. Leo, do you want to add anything else to that?

Well said.

Skip, I hope that's helpful.

Yes, very. Thank you.

Mark Swartzberg, Legg Mason.

I guess a question if I could for you, Leo. As it relates to the United States, we've spent a lot of time over the last few quarters talking about all the work you guys have been putting in on the poll side, if you will, of demand for Coors Light and other brands. But here we are, you're talking about the supply chain initiatives, kind of some of the challenges being behind you. I wonder if you could talk a little bit more how this selling season might be a little different for you all from an execution standpoint here in the United States? And then closely related to that, if you could update us on how you're performing in share houses because when we spoke last quarter you described your performance as quite similar shared versus all other, and yet we know that Miller as a company is seeing its share loss trend improve, if you will. So some color on what's happening in your performance with those distributors would be helpful as well.

Mark, let me take that first. We just finished our first-quarter analysis and the trend holds. We continue to marginally outperform our non shared system and shared houses. Somewhat surprisingly that continues to be the case. It argues against loss of share of mind obviously (indiscernible). Nonetheless we're dealing with a competitive situation that's a significant one in virtually every market.

And if I could, while we're on that topic, Leo. Miller has obviously said Texas in a priority for them. They've made some other markets priorities. Have you looked at it that way in those markets they've said hey, this is a priority ahead of this or that other market down the road, how you're performing in those markets? I know you pointed out already that Texas has been a trouble spot for you. But if you look at other priority markets for them how you're performing there versus other markets?

That's a little hard for me to make a comment on Texas, but I'm not sure what their priority markets are, Mark. I know where we're pacing sort of unusual trends and, as I suggested, Texas is certainly one of those markets. The Eastern Pennsylvania/Philadelphia market is another, and then New York is another in the quarter, although not, I think, the same phenomenon. I think there are other things going on in that -- that's a Northern Jersey/New York market. So the head-to-head bells for us right now with Miller are pitched in Texas and Pennsylvania.

Okay, helpful. Thank you. And on this whole new supply chain that you now have more up and running, if you will, it seems like it's going to give you some benefits year in and year out you didn't have previously from an execution standpoint. How are you feeling -- can you help us understand what specifically you think is going to make this key selling season different for you purely from an execution standpoint?

I think from a supply point of view we'll be in very good shape. Now we won't celebrate the full supply chain victory 'til we get through peak, but all current indicators are that in fact we're beginning to see the benefits of the investment as opposed to the drag we've seen, right? And our feedback from wholesalers is that their supply position is better than it was a year ago as we sit here today, notwithstanding the snowstorm a year ago but just in general. And that's very encouraging.

But the pitch this summer, this is all about the summer sales business and this is going to be the most competitive summer we've seen in a long time. There's a lot saber rattling going on in terms of market by market sort of competitive pricing. My own read on that is that's nothing new. There's a little more rhetoric about it this year and we've seen some selective activity, but it doesn't appear to be a lot different than it's been in the past. But I do expect very heavy marketing spending across the summer. I do expect that we're likely to see more plays in the low carb business before the summer is over. And we're prepared on all fronts to be as aggressive as we need to be. In fact, we have a couple of products in hand that if market conditions say that we should be rolling them we're ready to roll.

And you're referring to these low carb things we've heard about kind of second hand from distributor meetings and so forth? It sounds to me like you -- there are some data that indicate the whole low carb thing may have peaked, but it sounds like you're not quite convinced that that's the case. Or at least tactically it makes sense to have these things ready for launch.

I think everybody is watching very closely, but to the extent, Mark, that Miller Lite's trends we believe fundamentally are on a low carb premise. It's hard to say that it's peaked.

That's fair. Thank you, Leo.

Whether low carb dieting per se -- the heavy low carb dieting has peaked or not, that's for somebody else to prognosticate. Certainly the low carb benefit on the beverage side is still a very hot issue. We're out in the marketplace weekly listening to people talk about this. This is still a very hot, very big issue in terms of brand preference. We're prepared to play as hard as we need to play.

And then boiling it down, it sounds like you're saying the low carb situation and level of marketing spend are the big drivers of why you say this will be one of the most competitive seasons. The pricing is more rhetoric than real change in behavior you think?

So far, Mark.

Thank you.

Caroline Levy, UBS.

I know you've said this, but you guys speak so fast that if you think half as fast as you speak you're brilliant. It's just hard to keep up sometimes. I just wanted to go over the second-quarter -- the differential between STR and shipment growth that we should expect in the second-quarter.

Okay, that's one question.

Why don't you give us all your questions and we'll hit them.

The gross margin improved pretty dramatically in the Americas in the first-quarter but I noticed it was -- I think that was sort of an easy comp. I'm just wondering if that level of gross margin improvement is what we should look for going forward?

Okay.

Oh, I need more? Can I start with that? If I think of anything else I'll ask.

Caroline, as long as we're just on that one, let me just break this down for you, and my apologies it that was not clear enough in the script. We had something very helpful happen in the first-quarter, which I think you know hasn't happened in some time, and that is we not only got pricing about 2 percent, about 2.0 percent frontline pricing, we were also not hurt by the --

The mix shift.

The mix shift, yes, exactly that we've been sustaining from Killians and Zima which, as you know, are very profitable brands. With the XXX rollout, even though the volumes weren't large, the margins are high. That effect basically was neutralized, and that is what has helped -- the Canadian business was also in there too, but the combination of not having mix hit us with good pricing really, really helped the margins.

It sounds to me they are all relatively sustainable, although Canada started to pick up maybe in the fourth quarter of last year, except comp hit part of it.

I think all in, those dynamics Canada, front line U.S. pricing, mix, are sustainable in the second quarter. The challenge with the second quarter, and you hit on it, is this gap, is this difference in removals growth on the one hand, which we think will be significant, versus sales growth because of this inventory load and especially with Aspen Edge. So that is going to be our challenge, and that is why I mentioned that while we have an encouraging outlook for the whole year, the second quarter is going to be a challenge for us. Peter has got the challenge with the excise tax loaded in the first quarter. We have this STR sales challenge within the U.S. business, and this all happening the second quarter. The back half of the year, the comps become a bit more easy.

But would you help us out with -- are you planning to bring inventories to normal levels by the end of the second quarter?

Caroline, we don't know. In fact, inventories will probably be a little higher just because we'll have Aspen Edge still in an early roll mode, so that impact would mitigate against a (indiscernible) reduction. And the quarter ends right before the Fourth of July, and the last two years it's just been noisy based on when that load to retail has happened. So, what we do know is we've got 100,000 barrels coming in on the front end of the quarter comparison that we've got to work our way out of.

Let me give you another -- David Barnes reminds me of something that's really, really important. You've been following us long enough and you've been talking to our distributors long enough to know that historically in the summer we had a number of our distributors on allocation because the demand just outstripped supply. And because we did not have the tools that we now have with our new supply distribution systems from Cornerstone is we didn't have the transparency of understanding the real-time basis what they needed when. We now have that capability.

So, the other factor of improving service -- improving the velocity of inventory while bringing inventory down a little bit is also possible alongside of the dynamic that Leo talked about, namely still really rolling out Aspen Edge. So, we'll do the best we can in upcoming quarters to keep you posted on this, but right now I think the fairest and most accurate answer is it's really hard to tell.

So in a way the best thing we could do is just match our STR estimate with our shipments because we don't know one way or the other really?

Well, you've got 100,000 barrels that we know last year because of the snowstorm -- we made up in the quarter and that's firm. I think the going out comparison, I think that's a safe assumption. So the quarter ending I think that is a safe assumption. You've got to adjust for the 100,000 barrels that last year we made up in the quarter because of the snowstorm.

And then, Tim, if I might just on Coors Light, if you could just reiterate what the volume trend was in the first-quarter because I missed that. But then, whether you really see reasons for that you change over the course of the year? And you're sort of saying if you don't that was when you would probably move towards the lower carb products, that's what I'm reading.

I wouldn't read too much into that, Caroline. What we think in the first-quarter is we were down marginally in the quarter, that was better than the fourth-quarter. We had very unfavorable price comparisons in our big Eastern markets. Meaning that last year we had load ins in the quarter against price increases that we didn't this year, so that that was a damper on the quarter. And obviously we're just now beginning to ramp up our spending as we head to summer on Coors Light. So our media levels are higher than they were a year ago. We are very focused on the holiday execution of our promotions and really have solid expectations for Coors Light as we head into the season.

Thanks very much.

Bryan Spillane, Banc of America Securities.

Two questions for Peter. One, can you give us an idea of how much cost savings you recognized in the first-quarter from the closing of the Cape Hill Brewery? And then the second is, in the last week or two we've seen a couple of brewery closings in the UK; Diageo closes the Park Royal Brewer, Scottish & New Castle announced today that they're going to close a brewery. And I'm just curious if you have any -- if you could give us some indication of what capacity utilization for the industry is in the UK and is there a potential here to firm up the supply side and have that provide some support on pricing?

Ron, let me take the second question first. Obviously -- Stop Co (ph) just announced today that they were shutting the Newcastle brewery and have already closed the Scottish brewery and Guinness announced that they were shutting their brewery last week. There's no question that capacity is going out of the industry. There's still a fair amount of it out there with regional brewers and one or two other players. I think it's a good long-term trend. Hopefully we'll offer some positive news. I can't give you the exact number in terms of the percent capacity utilization across the industry, although we do have it somewhere and Dave, I'm sure, can get that number back to you.

On the first one, in terms of -- I think in terms of cost savings it's probably around 2 million in the first-quarter, something like that in terms of a reduction. And that's in sterling, so you figure about $3 to $4 million.

And you should see more savings in the second-quarter as well, is that correct?

We'll see some more, yes, but less obviously as we go through the year. But we'll see -- yes, we'll continue to see some savings with the closure and also with our so called project Merlin which was bringing equipment and lines up from Cape Hill to Burton.

Okay, that's great. Thanks, guys.

Andrew Conway, Credit Suisse.

A couple questions on -- Leo and Tim, I value your perspective on demand trends industrywide. In light of the low carb residue, versus expectations coming into the year and from an STR perspective on your business did you see the flow of demand improve or, Leo, would you characterize it as still somewhat choppy from a marketplace sentiment perspective?

Surprisingly choppy I'd say, Andrew. We had a very good January which I would say was not an industrywide phenomenon. We just had a good January. We had a pretty good February and we had a very disappointing March. I assume that the industry had a pretty disappointing March as well. So, once again we see trends build up for a period or two and then fall back. I think we're still shooting into what's overall a pretty soft category. There was a lot of pricing timing changing that cusped on the quarter. And that was particularly evident in the Northeast, Andrew. It was actually pretty material in states like New York, New Jersey and Pennsylvania. And that will come back and that's obviously industrywide as well. That depressed the first quarter in the Northeast and it will come back just naturally in the second-quarter.

And Leo, when you look at your marketing spending going through the year, you talked a little bit about in the fourth quarter that you do plan on stepping up spending. As you reassess the market environment is this a slight notch up from where you fell year end, or is this pretty much in line with some of the plans you presented on the last quarterly call?

I'd say we're right on track with what we talked last time, Andrew. We're looking forward to the summer with a great deal of flexibility at this point because an awful lot depends on how the category boots up underneath us here.

Terrific. And as you look at, as you target -- Leo, you talked a little bit about this at the presentation earlier this year in New York -- you focus on your key critical marketing areas, how do you feel in terms of sales and selling support to ensure you get the proper level of penetration and sellthrough as Aspen Edge moves forward and to complement your marketing on Coors Light? I know you've added some people in sales, but how do you feel? Do you have the right pressure? Are you uncomfortable with where you are? Do you see you adding pressure through the year? How do you gauge that?

I'm not sure I follow the question, Andrew, but let me take it from really chain selling capability which is where we're really focused on making a big change this year. We have reorganized our sales organization against chains, that's both grocery but particularly C-store chains. We are seeing excellent traction in the C-store channel which we think is also consistent with our young adult focus. But I have to also credit it with improving sales capability against that channel and that will come up underneath us all year. We're obviously hoping to have a chunk of that in place as we head into summer, but because it's a new organization -- a newly focused part of our organization -- you have to expect that that will build traction for us throughout the year.

Great. And one final comment on currency, I don't know, Tim, if you have a rough estimate of the benefit to operating income in the quarter and a little bit of how many points of growth did it add and how you see that for the balance of the year?

For the first-quarter, Andrew, it in fact, believe it or not, tagged us for about $300,000. The reason being is even with the 15 percent appreciation of the British pound, it's still operating on relatively small -- relative to the whole year small profits from Peter's organization. And recall the offset, if we've got our bond swapped out from U.S. dollar-denominated to pound-denominated debt we pay that interest in pounds and guess what? The interest build is also 15 percent higher. So the offset -- and through the Canadian dollar we I think smartly hedged some of that so we could lock in some of the strength of that currency. So net net in a small dollar, small profit quarter it in fact tagged us for $300,000. I think that during the course of the year when the sheer amount of profit grows, assuming the pound stays where it's been, which if you look at it recently it's moving around so fast, generally down, but of all things then you'd expect that to help us during the balance of the year.

Any idea to what level as you build critical mass in the UK profit stream?

I think it's hundreds of thousands of dollars net, maybe as much as $1 million a quarter.

Great, thank you, gentlemen, very much.

(OPERATOR INSTRUCTIONS) Christine Farkas, Merrill Lynch.

A couple of questions on your U.S. business, and you've gone through this, I'm just hoping perhaps you can clarify. You indicated U.S. rate growth of 2 percent and, if I understood correctly, country mix of favorable 150 basis points. That would leave 80 basis points either from year-over-year (indiscernible) or something. If you can explain that 80 basis point differential. And secondly for Peter, could you comment on the actual rate growth in the UK as well as the negative impact from any channel shift? Also the share gains that you're seeing in Carling and the growth trends in Scotland and London? Thank you.

Christine, on the first one, U.S. pricing was about 200 basis points, about 2 percentage points, Canada was about 8/10, and then we really had mixed virtually flat -- a skoshe down about 2/10 of 1 percent, and everything else is pretty much noise.

In terms of the Canadian boost for the favorable country mix, that revenue coming in included the favorable currency, correct?

Correct, correct. And the volume was up high single digits. The volume being up high single digits obviously helps, and to the extent that that volume grows during the balance of the year is less, we'll get less of that mix, that Canadian mix benefit. But other things being equal, it should be plus or minus 20 basis points in that range.

In terms of the U.S. product mix, as you indicated, was relatively flat; the contribution from Aspen Edge and Zima, was it a big contribution offsetting a decline in Coors Light or were they roughly just up or down 10-20 basis points?

More than 20 basis points, but the real -- more like 40 -- but the real -- the exciting and encouraging point here is as Aspen Edge really takes off, we get it rolled out nationally, advertising it nationally because that's a high profit margin per barrel product for us. If it has significant uptick on pricing for us even above this 2 percent all in base price and assuming that continues to hold.

Okay, great. And on the UK?

Yes, on the UK, in terms of overall share, you know we've put on an MAT basis something over a full share point. And that's the sustaining really where we were coming out at the end of last year. Since -- in the first-quarter I'd say the on-trade has been growing at a slightly more rapid rate than that, and the off-trade at a slightly less rapid rate in terms of share growth. But overall we end up in about the same place, so sustaining a little over a full share point. Carling itself is, in the first-quarter, has been growing around 15 percent which is obviously significantly ahead of the market. And in Scotland where we're going off a very low base, we're experiencing obviously very significant volume growth and share growth behind Carling and also Coors Fine Light. But, as I said, it's off a slow base but obviously a great start.

That's great. Can you comment at all how much the channel shift is hurting your overall revenue per barrel growth excluding any currency here, just commenting on the rates and the channel shift in the quarter?

It's interesting. From an industry perspective obviously the shift from the on-trade to the off has implications on the overall profitability. We are actually growing significantly in the on-trade so the shift for us is perhaps a bit less than the industry. But it's a bit of a mixed bag because you can't -- I mean obviously the net pricing is lower in (indiscernible) but the cost to serve is also significantly lower. So there's a lot going on there and it's very tough to make some generalizations.

Would it be just to look -- looking at the 6.5 percent volume growth, which you've indicated a portion of that is coming from the load in -- I'm just trying to get a sense of how rate increases are trending in the UK. Was there some growth because of more moderate price increases or are price increases moving up as you like to do?

I'm sorry, Christine, you were breaking up there towards the end. Can you just come again on that last half?

Sure. With respect to the price growth or the rate growth in the UK, I'm curious if any of your volume growth was driven by more moderate pricing or if you're enjoying accelerated price growth in the UK?

No, I have to say that we experienced volume growth and margin -- we instituted a price increase in both the on-trade -- primarily in the independent on-trade which is what we call IPSC. But we're experiencing those price increases and obviously our objective is to hold onto those through the course of the year.

That's great. Thank you. And if I can just follow-up with another question on the U.S. business. Are there any trends that we should be aware of that are different than the on-trade and the off-trade business with respect to Coors Light or other important brands?

In the U.S. business?

Yes.

No, none that are significant. What's different is the trends between the supermarkets and the C-stores. Where we're losing volume is in the supermarket channel which you'd speculate is where your older drinkers are getting their beer. Where we're gaining volume is in our C-store channel which in the beer business is maybe even the most important channel volumetrically. That's pretty encouraging. It's pretty hard to read the on premise channel because of all the noise from the smoking bans and so forth. We've still got a depressing effect going on in the overall channel. Our own sense of that is that our performance is pretty good.

Great. Thanks a lot for your time.

Dara Mohsenian, JP Morgan.

Peter, I just wanted to follow-up quickly on UK pricing. Things have gotten better there over the last couple of quarters and I'm just wondering, do you feel comfortable that the industry pricing environment is improving? It sounds like the price increases that you guys have taken are pretty sustainable. Can you just kind of take me through the industry pricing environment?

I think we need to distinguish a couple of things. One is the industry pricing and our net pricing. Because we have been able to improve our net pricing, and it's a combination of top line pricing and mix. So our margins have improved in both take-home and the on-trade. Industry pricing is still pretty competitive. Now, I think it's fair to say that it's fairly stable. Some of the longer-term indications are perhaps looking reasonably good as we talked about earlier. But the industry pricing, I have to say, is competitive and it's tough to say exactly the direction that's going to take in both the on- and the off-trade.

Are you pretty comfortable that your pricing trends are sustainable over the next couple of quarters?

Yes, we feel pretty good about maintaining our progress, yes, absolutely.

Thank you.

Greg Schultz (ph), SAB Capital.

I just wanted to follow-up with some of your volume growth in Canada. You mentioned you had high single digit growth. What does that translate into in terms of market share gain and/or loss? And what have you seen, if anything, from Molson's X Light and/or Bud Light moving in that segment?

The Coors Light continues to be very strong in Canada, Greg. I think last time I looked it was about half a share point gain, somebody might want to check that but I think that's about right. The brand has terrific momentum. The slow year in Ontario, which is the primary province because of a -- because we chose not to participate in a heavy promotion pack which is a trend that's behind us -- but the growth coming out of the eastern provinces, out of Quebec province is just terrific. There's no reason why that shouldn't continue.

Competitively we continue to dominate the light beer segment. And while Bud continues to be a strong brand there and while we've seen spending from the Bud Light franchise, I really don't know a meaningful traction out of some regional traction on the border. Regarding Molson and their light entries up there, it's early days and indications are that that should be incremental for the combined enterprise. So we're comfortable with that.

Great, thank you.

Skip Carpenter.

I'm sorry to ask you to repeat yourself, but could you refresh me on the Aspen Edge in terms of where you guys -- how many markets you were at the end of the quarter, where that will be towards the end of the second-quarter and kind of remainder of the summer sell? Second question, when you talked about Coors Light you mentioned some markets in terms of weaker volume trends, specifically Texas, Pennsylvania and the New York Metro area. We've known about some of the issues affecting Texas, but Pennsylvania and New York Metro, could you give us a little bit more feel for what I guess is going on in those markets, particularly given the importance that they have for that brand?

You bet. On Aspen Edge we're in 46 states today, some just though. We rolled initially in about 25 percent of our volume markets which was the Northeast and Texas. We've been in market now for I'm going to say seven weeks in those lead markets. So we've just rolled another wave to take us to 46 states and over the next two weeks we'll roll the rest of the country. We'll start national media I think in about two weeks, 10 days and so that's where we stand on Aspen Edge and the roll. Skip.

In PA and New York -- and Jersey for us splits right about down the middle on that. In PA two things are going on. One is that the spirits business has got a tremendous growth trend there. They've changed their retail selling policies for spirits and beverages in Pennsylvania, so you've got a shift in the market between spirits and beer. The last year was very dramatic and it continues -- I haven't got a good look on it this year, but my guess is it continues to impact our business with some significance.

On top of that, Miller Lite has had growing trends in eastern PA for the last two or three years. And they're experiencing the same phenomenon they are in other markets with their carb story, so that's an issue that we're on top of, have been on top of for about 18 months in earnest, but it's a very competitive market for us. In New York/New Jersey, northern Jersey it really is more the price increase overlap timing in the quarter that we sense impacted Coors Light. And we'd expect that to recover in the second-quarter and obviously we're hoping for a weather break in the Northeast. But that's what I think is going on there. It's a little bit of a different phenomenon.

Terrific. Thank you so much.

We have time for one more question, Matt.

Marc Greenberg, Deutsche Bank.

Just a few follow-ups here. First, Tim, can you give us any kind of a run rate or range for interest expense on '04 in light of the debt paydowns?

Yes, we're going to be between $15.5 and $17.5 million a quarter and, again, that range is pretty tight because as we pay down debt, even if we pay it down faster than the roughly $200 million for the whole year, we're paying down commercial debt -- commercial paper, excuse me, which is very, very low rate. So the marginal savings per quarter is not dramatic. But still all in, we're looking at about 2, 2-ish millions of dollars per quarter less than same quarter last year.

Great. Leo, a couple of questions for you. First, on the spirits growth in young consumers on premise, can you talk at all about some of the things specifically targeting that channel that Coors is doing to revitalize Coors Light?

Where we're focusing, Marc, is in our big markets and this is a feet on the street kind of business. And we are not alone in this. This is the way the spirits companies are playing the game and this is the way our beer competitors are playing the game as well. But we're being quite aggressive about it and our focus obviously is -- in that territory is Coors Light.

The other question I had on Aspen Edge -- and just trying to get a better understanding of this inventory issue -- have you guys talked about at all any indications on what you expect total barrelage on Aspen Edge to be for the year either in volume terms or as a percentage of total? And is any of this going to be brewed outside of Golden?

The answer right now is we don't know. We won't brew any of this outside of Golden. We're capable of packaging it closer to the market if we think that's smart to do. Right now we're shipping totally from Golden as well. No, we haven't talked to any total volume estimates and won't and we won't really have a good one for a couple of months ourselves. And the magnitude of inventory shift is in the range of 50,000 barrels. So it's not huge but it could impact the second-quarter.

Okay, thank you.

Matt, is that it?

That's all the questions.

Okay. Thanks very much for being with us today everybody. We look forward to what you'd call an exciting beer category for the next several months and look forward to talking to you after the second-quarter. Have a nice day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Have a great day.