Molson Coors Beverage Co (TAP) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2005 third-quarter earnings conference call. [OPERATOR INSTRUCTIONS]. I would like to introduce today's host, Leo Kiely, Chairman and Chief Executive Officer for Molson Coors Brewing Company. Sir, you may begin.

Thanks, Matt. Hello, and welcome, everybody. Thank you for joining me today. With me on call is Tim Wolf, our Global CFO, Kevin Boyce, CEO of Molson Canada, Fritz Van Paasschen, CEO of Coors Brewing Company, Peter Swinburn, CEO of Coors Brewers Limited, Mike our Global Treasurer, Marty Miller, our Global Controller, and Dave Dunnewald our Investor Relations Director.

During the call today, Tim and I will cover three topics for you. First an overview of Molson Coors Brewing Company third-quarter 2005 performance, second a discussion of the results drivers for our operating businesses in Canada, the U.S., Europe and Brazil, and third we will share some perspective on the balance of 2005 for the Company and then we will open it up for questions.

So let's get started. Our third-quarter financial results reflected encouraging volume and financial performance in Canada and the U.S., despite extensive competitive price discounting in some of our largest markets and significant and cost inflation. We made good progress on cost reduction initiatives and synergies across the country with jaded financial results in the quarter, and we increased investments in marketing and sales programs.

At the same time, substantial market challenges in the U.K. reduced the financial performance our Europe business. Our Brazil operation continued to report operating losses in this winter quarter but at a significantly reduced level. For the total company we reported third-quarter consolidated volume of 12.8 million barrels. That's up 0.3% on a comparable basis from year-ago.

Sales to retail or STRs for our total company were even with prior year on a comparable basis, driven by growth in Canada, Europe and the U.S., offset by declines in Brazil. Net sales were $1.6 billion, up 0.3% on a pro forma basis from the third quarter of 2004. Marketing and G&A expense increased 4.1% or $18.5 million . globally.

Pro forma operating income excluding special items increased 5.9% from a year ago. Reported net income was $108.2 million in the third quarter. Our third-quarter 2005 results were impacted by a temporary reduction in the effective tax rate and the $33.5 million pretax special charge. Which we will discuss in detail in a moment. Excluding special charges, after-tax income totaled $129.5 million, or $1.51 per share. That's down 4.1% on a pro forma basis from last year.

If we also exclude merger-related amortization expense of $14.7 million, after-tax income was $139.1 million or $1.62 per share. That's 3.7% lower on a comparable basis from prior year.

So at this point, I will turn it over to Tim to review third-quarter segment and corporate highlights and trends and then I will provide some perspective on the fourth quarter. Timmy?

Thanks, Leo. And hello, everybody. Good to be with you today.

In segment performance highlights, starting with Canada, operating income of $138.2 million in the third quarter was up approximately 11.2% on a pro forma basis and excluding special items from the prior year, mainly due to higher shipment volumes and favorable foreign currency movements. The Canadian dollar appreciated 8% year-over-year versus the U.S. dollar which boosted Canada operating results by about $10 million U.S. in the quarter.

The Canadian beer industry sales increased about 3.5% year-over-year, due primarily to improved weather in the east and more extensive price promotion activity in Ontario and Alberta versus a year ago. In Canada, our sales-to-retail for the calendar third quarter increased 1.5%, driven by the same factors as the industry, along with stronger, more integrated sales and marketing programming.

Our National market share declined about 0.75 of a percentage point in the quarter as the smaller value brand brewers continued to show share gains from the ramp up late last year primarily in Ontario. Along with the overall growth of our portfolio, we are pleased with the continued retail strength of Coors Light, whose sales to retail grew at a double-digit rate for the second consecutive quarter. Our partner Import Brands on the Carling black label family grew at high single digit rates while Molson Canadian declined at low double-digit rate.

Third-quarter sales volume in Canada totaled 2.4 million barrels, up 4.0% on a comparable basis from a year ago. Sales volume grew faster than sales-to-retail primarily because of a reduction in trade inventories last year. Net sales per barrel increased about 1% on a pro forma basis in local currency driven by increased pricing in select markets. Cost of goods sold per barrel decreased about 1.5% of local currency due to lower overhead expenses and favorable results from our cost reduction programs which were offset partially by sales mix shift to higher cost products.

Marketing G&A expense grew 12.8% in local currency driven by two factors. First, high single-digit growth in marketing sales spending, along with changes in the timing of other expenses this year versus the prior year. As you know, we have increased marketing and sales trade spending this year to drive our key brands. Second, changes in a variety of nonrecurring general administrative recoveries increased costs in the quarter. These higher expenses were partially offset by merger-related cost synergies.

Other expense on -- net totaled about $7.0 million in the quarter, nearly two-thirds of this was due to a one-time reclassification of the first-half 2005 equity losses from the Canadien's hockey club that was originally recorded in MG&A along with amortization expense as part of the application of purchase price accounting for our ownership interest in the Canadiens. The balance was attributed to third-quarter equity losses from the club.

Turning now to our U.S. segment, operating income in the third quarter was $31.2 million U.S. Excluding $37.1 million of special charges this year, operating income would have been up approximately 13.8% on a pro forma basis from a year ago, driven by lower overhead and manufacturing costs, some of which were merger synergies. These cost savings were partially offset by higher packaging materials and energy costs.

Looking at U.S. performance highlights, sales-to-retail in the U.S. increased 0.1% of the third quarter on a pro forma basis. This was driven by low single-digit growth for Coors Light in the quarter and strong double-digit growth of Blue Moon, offset by lower sales of Aspen Edge and the Coors Brand which declined double-digit rate for the quarter.

Coors Light performance trends have improved significantly in recent quarters due to the strength of our new Silver Bullet train ad campaign, improved sales focus on large chain retailers and the on-premise channel, as well as improved focus and execution among our wholesalers. Excluding the Aspen Edge decline our total U.S. sales-to-retail would increase by 1% on a pro forma basis. U.S. volume to wholesalers decreased 0.3% on a comparable basis,again due to declines in Aspen Edge and Coors original.

U.S. net sales per barrel increased 0.3% on an apples-to-apples basis as increased sales of import beer from distributors more than offset a slight decline in that pricing. Discounting activity increased significantly in July and carried through Labor Day with coupons and other discounting especially prevalent in the west, southeast and parts of the midwest.

U.S. cost of goods per barrel increased 2.1% on a comparable basis in the quarter, due primarily to higher freight, energy, can, and bottle costs, partially offset by positive results from our operations cost reduction initiatives and cost synergies. The U.S. inflationary environment continues to be very challenging in all areas that rely on energy, which means everywhere.

U.S. marketing, general and administrative expense decreased 7.6% on a pro forma basis in the third quarter due to lower overhead cost and changes in the quarterly timing of other expenses, partially offset by higher investments in our key accounts and on-premise sales efforts. Other income decreased 8.4% -- excuse me $8.4 million, primarily due to recycling $5.7 million of nonrecurring income in the prior year related to the sale of the warehouse and the coal mine.

Our Europe segment reported operating income of $27.7 million U.S., down 24.2% from prior year. This business grew unit volume 3.4% in the quarter compared with less than 1% growth for total U.K. beer market, driven by strong on-premise performance. Nonetheless, industry conditions remain very challenging with widespread price discounting especially in the off-premise channel.

Our Europe margins also continued to be impacted negatively by the ongoing adverse channel mix driven by retailer consolidation in three non-core factors. These are, first, sales of high-margin flavored alcoholic beverages continued to decline rapidly. Second, sales of factor brands continue to decline as large chain customers move forward -- move toward their own distribution systems. Finally, distribution costs are increasing due to European work time legislation for drivers. Excluding the proper impact of these non-core factors, our Europe operating incomes excluding special items was down approximately 4%.

Our Europe financial results in the third quarter were also affected by a 1% year-over-year depreciation of the British pound against the U.S. dollar. Now let's look at the Europe highlights for this quarter. Overall volume for our own and licensed Europe brands increased 3.4% driven by mid single-digit growth for the Carling brands which benefited from new on premise chain distribution, warmer weather and a lack of a retail destocking after a major soccer tournament as was the case in the third quarter of last year.

Our overall volume growth in market share gain on the quarter was a result of modest growth in the U.K. on trade channel and mid single digit off-trade growth, the 17.5% decline in third-quarter Europe net revenue per barrel in local currency was a result of three factors. First, 14 percentage points were driven by a change early this year in our contractual arrangements with one of our largest factor brand customers.

Recall that factored brands are non-owned beverage brands distributed by us and consolidated in our results but not reported in our reported volume. This invoicing change resulted in a one-time decline of $60 million U.S. in both net sales and cost of goods in the third quarter, but with no net impact on gross profit. Our Europe net sales and cost of goods will continue to be affected by this invoicing change until the end of 2005, but again with no impact on profit.

Second, overall factored brand volume continued to decline, which reduced net sales per barrel by 2 percentage points in the third quarter. Third, about 1.5 percentage points of the decline in revenue per barrel was attributed to unfavorable own brand net pricing and sales mix. Cost of goods sold per barrel decreased 22.6% in the quarter due primarily to the previously mentioned change in factored brand invoicing arrangements. Excluding the impact of these factored brands, cost of goods per barrel for our own brands was essentially you think changed from prior year in local currency.

Marketing G&A costs decreased approximately 2.1% of third quarter primarily because of lower overhead expenses. Finally, in our Brazil segment, the third-quarter operating loss was reduced by more than 26% on a pro forma basis versus last year.

The Brazil team continues to achieve significant progress of reducing costs and operating losses, even during the slower winter selling season in Brazil. The Brazil results were also affected by a 19% appreciation in the Brazilian real against the U.S. dollar. Nonetheless, foreign exchange had no significant effect on Brazil operating results due to a decline in U.S. dollar denominated input costs.

Financial highlights for Brazil in the third quarter include the following: Beer volume declined 7.6% in the third quarter on a pro forma basis versus a year ago, although the lead Kaiser brand declined at less than half this rate year-over-year. Revenue per barrel increased 11% in local currency, due to improved pricing this year, especially for the Kaiser brand versus a year ago. Cost of goods sold per barrel in local currency declined 1.1%, primarily due to lower U.S. dollar input costs partially offset by volume related fixed cost deleveraging.

Marketing, general and administrative expenses decreased 13% in local currency to do the lower sales center and overhead costs. Brazil segment interest expense was $7.3 million in in the quarter up 37% of local currency from the pro forma prior year due to higher liability balances. Recall that this interest expense is called monetary variation which is a noncash interest accrual on contingent tax liabilities in Brazil.

Continuing with our third-quarter P&L, special charges this year totaled $33.5 million pretax or $0.25 per share after-tax. By segment the special charges and credits were as follows: In the U.S., special charges of $37.1 million were related primarily to closing the Memphis brewery including a $25 million reserve for our estimated final contribution to the multi-employer Memphis pension plan from which we anticipate withdrawing in early 2007.

The U.S. special charge also included accelerated Memphis asset depreciation of $10.9 million, and limited restructuring expenses. In Europe, a $600,000 U.S. net special charge is made up of restructuring expenses related to cost reduction initiatives, largely offset by gains on the sale of surplus real estate.

Finally, in the Corporate segment, the $4.2 million special credit was attributed to option income resulting from the quarterly adjustment to the cost of providing the floor price under the options for Coors executives who left under the change in control immediately following the merger. In addition, 2004 pro forma Canada results included a $13.9 million pretax special charge in the prior year third quarter due to nonrecurring merger and restructuring expenses. Corporate interest expense in the quarter was $36.1 million.

Our effective tax rate was 6.4% in the third quarter. The main driver of this tax rate change was the one-time tax benefit from releasing deferred tax liabilities related to our U.K. business with the adoption of APB-23 tax payments for that operation. This one-time tax benefit reduced the third-quarter effective tax rate approximately 37 percentage points but had no effect on the Company's cash tax rate.

Aside from lowering our book tax rate substantially in the third quarter, and modestly going forward there are tax selection is expected to eliminate some of the complexity on our tax rate calculation and reduce the volatility of our effective tax rate. For these reasons, many multinational companies have adopted the APB-23 exception to recording U.S. deferred taxes for their foreign operations. Excluding special items, the third quarter effective tax rate was 13.1%.

Please note that our 2004 pro forma results reflect the same effective tax rate as what we are using the comparable 2005 period; therefore, our third-quarter 2004 pro forma results, excluding special items, also used this same 13.1% tax rate. Net debt at the end of the quarter was $2.56 billion net of cash on hand. This September, we finished refinancing the former Molson, Inc. debt with two senior note private placements totaling $1.7 billion U.S., which was used to pay off the -- our previously existing bridge facility .

The larger of the two issues was for $900 million Canadian of ten-year notes at a coupon of 5.0%. This is the largest ten-year triple B-rated issue ever completed in Canada, with over 50 institutional investors participating. The second issue was $300 million U.S. of five-year note with 4.85 coupon which we swapped with Canadian dollars for net borrowing cost on this piece of 4.28% after the swap. Together these issues provide a partial foreign exchange hedge for our Canadian denominated earnings and cash flows.

Now I will preface the outlook section as usual by paraphrasing our Safe Harbor language. Some of which we discuss now and in the Q & A may constitute forward-looking statements. Actual results could differ materially from what we project today, so please refer to our most recent 10-K, 10-Q, and proxy filings for more complete descriptions of these factor that could affect our projections.

Regarding any non-U.S. GAAP measures that we may discuss during the call, please visit our web site at www.molsoncoors.com for reconciliation of these measures to the nearest U.S. GAAP results.

Looking forward, we estimate that Corporate interest expense in the third quarter will be about 36 million to $38 million, with our long-term debt structure now in place. Note that this excludes U.K. trade loan interest income and Brazil, monetary variation expense.

We anticipate that -- that our full-year 2005 effective tax rate will be in the range of 25% to 30%, both including and excluding special items. As always, our tax rate may move up and down with changes in among other things the amount and source of income or loss, the ability to utilize foreign tax credit, the impact of our merger, purchase price accounting, and changes in the earnings and profits of our foreign subsidiaries.

We also continue to anticipate the Company's long-term effective tax rate will be in the same range of 25% to 30%, which is a few percentage points below the pre-merger rate. We have reduced our outlook for 2005 total company capital spending, which we now expect to be about $350 million, plus or minus10%.

Because of our Virginia brewery buildout and merger-related capital projects, we preliminary expect this range to shift upward 10 to 15% next year and drop back down to the low $300 million in years subsequent to 2006. As of the end of third quarter, we have generated more than $200 million U.S. of free cash flow this year to use for debt repayment. As a result, our merger-related special dividend debt balance stood at $208 million U.S. the end of this quarter, the third quarter.

Note that the fourth quarter tends to be a challenging cash quarter each year because of higher off-season capital spending in our largest businesses and higher holiday-related working capital use in Europe. Still, we remain confident that we will finish out the year at or above our 2005 goal of generating $200 million of free cash flow available for debt repayment. This outlook could be altered by the timing -- timing of planned capital spending, the sale of assets and working capital changes. We intend to pay down the balance of the special dividend debt by this same time next year.

At this point, I will turn it back over to Leo for a look ahead at the balance of 2005. Leo?

Thanks, Tim.

Let me start by giving you a brief update on our merger related cost synergies and now review some of the key business drivers that we are focused on the fourth quarter. As you know we are committed to capturing $175 million worth of annual pretax cost synergies in stages over the next three years. The eight months since we closed the merger, our synergies teams have achieved approximately $37 million of this goal.

With the savings mostly in overhead and procurement costs and roughly two-thirds in our U.S. business and nearly all the balance in Canada. With this progress, we are well on our way to exceed the $50 million commitment that we made for 2005. We will let you know the final synergies results for this year on our next earnings call in February. At this point, we have teams in the business actively involved in specific projects to cover more than 95% our three-year $175 million cost synergy commitment. Giving us continued high confidence in meeting or exceeding our three-year plan as well.

Now let's look at. some of the main drivers of our results for the fourth quarter of 2005. First in Canada, we will continue to work our five key priorities: First, we are driving accelerated growth for Coors Light with new ad creative and sales promotions for this key growth engine in Canada. Second, we are striving to stabilize our over all volume and share trends in our mainstream brands, in particular Molson Canadian. Toward this end we have moderated our pricing strategies and launched new Molson advertising and promotions that have been well received by consumers. Meanwhile, we are increasing our investments behind this brand at a double-digit rate this year to get it at a more competitive spend level.

Third, to drive volume growth, we are leveraging the strength of our partner import brand portfolio that includes Heineken and Corona. These brands have benefited from increased programming and new packages this year. Fourth, adjusted our pricing and brand strategies to compete more effectively in the value segment to regain lost volume.

Looking ahead, we will be cycling the beginning of a substantial ramp up of value brand activity in Ontario in the fourth quarter of 2004, So we expect the value segment headwind to lessen in the fourth quarter this year. Nevertheless, the value segment continues to grow on a year-over-year basis and the market remains very competitive.

Finally we are on track to capture the remaining cost savings identified by our P125 program. Going forward, we will build on our progress in these areas and work to ensure that top-line growth translates to bottom-line results. This transformation will take us time, but we believe we are working on the right strategies to succeed in this very important market.

Our Canada fourth-quarter financial performance this this year will also be affected by lapping up pro forma $6.5 million pretax special charge a year earlier due to non-recurring merger expenses. And the first three weeks of October, our Canadian sales-to-retail increased slightly on a shipping day adjusted basis. Keep in mind that three weeks is only a small portion of the quarter and these trends could change based on weather, competitive activity and other factors.

In the U.S. business, our team is focused on four factors in the fourth quarter: First, Coors Light is obviously the key to our success, and our topline programs revolve around this brand. The renewal of our NFL sponsorship contract and ad creative is giving us positive momentum this fall and we are encouraged by the continued improvement in sales to retail trends for Coors Light in the third quarter. In the area of of innovations, Coors Light 8 ounce can and 18-pack Coors Light plastic bottle cooler box have been successes throughout the peak season this year.

Second, our sales initiatives focused on chain accounts, Hispanic consumers and the on-premise channel of providing incremental momentum in these three critical areas of our customer base. Third, the U.S. beer price environment became more competitive this summer than at any time in the past several years. We gave up about 250 basis points of revenue per barrel for more extensive price discounting in the third quarter, which presented a substantial financial -- financial challenge for our U.S. business.

Also in the first few weeks of the fourth quarter, we realized less front-line pricing than we did a year ago. Nonetheless, some indicators in recent weeks have pointed toward a more favorable pricing environment. Fourth, regardless of the competitive dynamics, current trends for freight, energy, and packaging material rates point toward a difficult fourth quarter performance. We are aggressively pursuing our cost initiatives throughout our business to offset as much as these inflationary increases as possible. The Company focused an unfavorable factor for fourth-quarter results this year will be the cycling of an $11.7 million pretax gain on the sale of real estate a year ago.

In addition, our U.S. distributors ended the third quarter this year with inventories about 100,000 barrels higher than prior year and if distributors dropped their inventories back to last year's levels by year end this year there are would have an unfavorable financial impact on the fourth quarter. In the first four weeks of the fourth quarter, our overall U.S. sales to retail increased a low single digit rate, a modest improvement over the third quarter trend, while Coors Light grew at a similar rate as in the third quarter.

In Europe, the U.K. beer industry continues to present very challenging pricing environment as indicated in our third-quarter results. Although volumes improved in the quarter, price discounting continues to be very competitive leading up to the key year-end holidays and we can't predict when the situation will improve. Our year of financial results continued to suffer from the ongoing headwinds of declining factored brands and flavored alcoholic beverage sales and higher inflationary cost pressures, particularly in distribution, along the sales mix shift toward lower margin channels.

The face of these challenges, we are focused on three main strategies: Number one, we are staying the course in our front-end investments with continued focus on our core lager brands, Carling, Grolsch, and Coors Fine Light. The future of the UK beer market and future of most beer markets around the globe remains in lighter, more refreshing lager beers and strong brands supported by the strongest sales and distribution organizations. In this context, we remain encouraged by the continuing strong brand help of all of the major lagers in the U.S. based on share trends in each segment.

Second in the fourth quarter, we expect a continued positive market share trends in our on-premise business, driven by Carling's significant distribution gains this year. Meanwhile, off-premise volume is likely to be challenged by increased competitive pricing activity.

Finally, we broadened the scope and increased the sense of urgency for our cost reduction initiatives, especially related to overhead and supply chain costs. The first steps we re taking in the third-quarter restructurings and more to follow in the months ahead. We anticipate that the bulk of the savings from these initiatives be realized beginning next year. Additionally in the fourth quarter, we will be cycling a $7.5 million pretax special credit in the prior year related to the sale of our Cape Hill brewing property.

In the first five weeks of the fourth quarter, our Europe sales to retail have decreased at a mid single-digit percentage rate driven by continued industry-related challenges, primarily from the off-premise channel. The U.K. market has exhibited a relatively high degree of sales volatility so it is difficult to anticipate our fourth-quarter sales trends in Europe.

Turning to Brazil, we continue to work through a range of strategic options for this business, including discussions with third parties regarding the Kaiser business. While the Brazil team continues to make progress towards bringing the business to an operating cash flow neutral position. While we hope to resolve the question about the future of this business in the coming months, we have not set a specific deadlines, and we will update you on the progress at the appropriate times. You should note that in the fourth quarter, our Brazil financial results will be cycling the $190.7 million special pretax charge in the pro forma quarter last year related to the impairment of the Brazil business in 2004.

To summarize our discussion today, in the third quarter we achieved further improvements in several of the most important areas of our operating business, including Coors Light and Carling, sales trends in Canada, the U.S. and Europe, along with solid progress in our cost reduction and synergies work. The end of last quarter 2005, our focus will be built on the volume momentum we have achieved and work to convert more of this top-line strength in the profit growth. Besides accelerating cost reduction initiatives, we will continue to invest aggressively to build our brands and our sales capabilities to drive growth.

We have strong motivated operating teams that are focused on the fundamentals of success for each of our businesses, and we are all energized by the potential we see for shareholders in our newly merged company.

One final note newsy for you, Our prepared remarks will be available on the web site for your reference in a couple of hours this afternoon, and at 3 p.m. today, our Investor Relations team led by Dave Dunnewald will host a follow-up conference call, essentially a working session for analysts and investors who have additional questions regarding the third quarter results. This call will also be available to you here via webcast and recorded replay on our web site.

So Matt, at this point, I think we can open it up for questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Dara Mohsenian from JP Morgan.

Good morning.

Hello.

Tim, synergies are moving ahead of your plan. Can you review what areas are driving the upside there and how much upside do you think there could be to your $50 million full-year forecast?

We won't update the forecast at this point, but what I can say that it is largely the G&A activities, which we got done early. We got done actually ahead of our estimates, and we've also had good success in the procurement area here in the third quarter.

As you recall, our quarterly forecast was a bit of a hockey stick. It looks much more achievable with the amount of savings we actually brought to the bottom line in the third quarter. So we are encouraged Dara.

Okay. And the MG&A decrease in the U.S., you mentioned you cut overhead costs there. Can you also give us a sense of the marketing spend year-over-year in the U.S.?

Frits?

Yes, it is at roughly comparable levels which is how we have been planning it.

Okay. All right. And then in the U.K., on the cost-cutting plan there is, can you run through the areas where you are planning to cut costs and give us some sense of the potential magnitude there?

Peter, would you like to take that?

Yeah, sure . Certainly the average cutting cost really general G&A supply chain, the two areas. We have got to go through in the U.K. a -- an employee consultation for them to -- to complete the process. So it would be putting that process in jeopardy if I give you any idea of the magnitude of that. So I will be able to give you an update on that probably if not within the fourth quarter results then probably in the analyst discussions in March.

Okay. And from a timing standpoint, does that -- is that expected to ramp up in Q1 of next year?

Yeah, it will run through the year, but it will start to impact the EBIT from -- from Q1 next year certainly.

Okay. Thanks.

Thank you.

Thank you. Our next question comes from Robert Van Brugge from Sanford Bernstein.

Yes, good afternoon, I have a question about the Corporate expenses. They seem to have gone up rather substantially even on a sequential basis. Was there any one-time item in there or was this a new run rate?

Hi, Robert, this is Tim. How are you doing?

All right.

Good. There are a number one-times. I mean, we do have allocated -- we've moved some of the -- the remaining overhead that was Molson, Inc. obviously into -- into this segment, so from a year-over-year standpoint, that is going to show an increase, and -- and we also have had a couple of projects, one in particular that we have been rolling out an SAP backbone financial system, which has caused some of our IT costs to blip, to go up in the quarter. So -- that's a couple million dollar item.

So those are really the significant driving elements and make no mistake, all our focus in 2006 and beyond is to manage the overhead of the Corporate segment at least as strenuously and challenge it in as disciplined a fashion as our business units are, and they are. So more to come. We will share the run rates sort of perspective at the analyst review, but the objective is to hold the line on spending here as well.

Okay. And then if I may, a question for Kevin on Canada. Now with another 0.75 point share loss in the third quarter, do you believe that the current pricing architecture is sustainable? Or do you envision taking kind of like further actions to change some of the pricing in Ontario?

0.75 loss is consistent with our run rate for a little bit of time. And when you look at what is happening, certainly we did say our investments behind Molson Canadian would take time to take hold. We are very encouraged by some of the progress we are seeing, particularly on Coors Light and some of our partner brands which we indicated would be an area of focus to us. With the return to hockey, and as Leo indicated lapping this quarter of last year the growth in the value segment we are actually seeing in Canadian, over the last four weeks very stable versus a year ago which is an encouraging trend. Right now we are focused on building our brands and making sure that they are strong going forward.

Okay. Thanks.

Thank you, Robert.

Thank you. Our next question comes from Matthew Webb from Cazenove & Co.

Hi. I wonder if it would be possible to provide a rough quantification on the various negative influences on the U.K. margin, mainly the negative channel mix, the decline in the fabs, a decline in the factor brands, and the increase in the distribution costs, please.

Peter you want to take a shot at outlining that.

Yes, I will do that. I will give you some indication, Matthew. The best way to do it probably is to tell you that the -- the impact on the factored brands element was about $2.7 million.

Right.

That's probably as far as I can go because I will get into the distribution piece, I will be giving you information on trade team since it is a joint venture, I can't do that. But what I can tell that you that is the smallest element of the three.

Yes.

Okay?

And then -- which would you say is the most important out of the negative channel mix and the decline in the fabs?

The most important in all of that over the long term is going to be the negative channel mix obviously, but in the short term, the factors will decline in terms of absolute amount actually, but the percentage decline will probably be the same for the next sort of couple of quarters, I would expect.

Right. And you say that was a big effect in the third quarter in the negative channel mix. Know it is difficult --

Very difficult. Impossible to really get pricing on the off-trade to honest with you.

Right, okay, thanks very much.

Okay.

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

Hi, good afternoon. Just two questions. One, were you able to pass any fuel surcharges across in the third quarter to offset higher fuel costs? And is that part of your plan for the fourth quarter?

Bryan, we have had a -- a surcharge program in place now for several quarters with our distributors. It is obviously something that adjusts as fuel prices adjust, and we plan to continue to have some form of a surcharge going forward.

And then it looks like you've -- you've got good traction so far in terms of -- of nailing down more favorable procurement costs. I am just curious to know with packaging costs especially having been affected by the higher in-- higher inflation, how has that affected the way you've approached procurement there, and is there more upside to those numbers?

Let me take a shot at part of this and then I will turn it over to Tim. We a decade ago ventured into joint ventures in our two most important packaging commodities, which are cans and bottles and those joint ventures continue to serve us very well. We have terrific partners in OI and Ball. We work together to continually take costs out of that system, and, so that's so the backbone of our approach there. Tim, in terms of where we are on a go-forward look --

Yes, a couple of things. First of all, all -- all the energy -- all the energy inflation does is make our work on synergies even more important. The work that we are doing in building out the Shenandoah facility, closing Memphis , even more beneficial in terms of better returns.

You know Leo referenced the synergy mix so far this year, mostly G&A with some procurement and operations benefit. It is about 2/3, 1/3. That mix changes very significantly next year when we have much, much more pro procurement and -- procurement and more ops, savings, less G&A and then the third year almost exclusively -- mostly operations of benefit.

But the rationale for -- for building out Shenandoah, as an example, that logic only gets strong we are higher -- higher energy and higher freight costs and the same thing with optimizing our footprint with the closure of Memphis . And we are having the same conversations with our suppliers in terms of not only what goes into the package but where they site it, where they send it from. We have had some very exciting wins that have some of our suppliers to start to reposition where they are sourcing us. That will save them money, that will save us money.

Right. And if I could just one more., Leo, how have you -- where do you stand now in terms of -- in terms of filling out your organization chart? You know you had some turnover shortly after the merger and just kind of -- if you can get an update of where you stand in terms of filling the open positions?

At the Corporate level, we are as of -- an announcement we will make later this week. We will be at full staff which is terrific. We have the top team together. We announced a few weeks ago that Dave Perkins would join the Corporate staff as our Chief Commercial Officer, which is essentially the -- the sales, marketing and partnership and strategy officer for the Corporation. So, you know from a global team at the top perspective, very good.

Tim has been -- been power building the finance staff. Obviously we've been pretty open about building the tax staff, but Marty has also been building the accounting staff and making really good progress to closing down the gaps we had there. As you know, we have got strong leaders in each of the divisions now.

I feel terrific about the leadership team around the -- the system and with just a couple of exceptions, those staffs are at full-strength. We still have a couple of internal positions in the U.S. But I will tell you, people filling those slots are terrific performers. So it's not like we are missing a lick on that. It is actually giving us a chance to go out and take the time necessary to find the talent we want to find. And so -- but feeling real good about it as we come into the turn and feeling real good about the team as we head into 2006.

Great, thanks.

Thank you. Our next question comes from Karim Salamatian from BMO.

Thanks. Good morning to you guys out West. Couple of questions. First one for both Kevin and Tim, talking about Canadian operations.

The margin improvement year-over-year in Canada's quarter was significantly better than what we saw in Q2. Can you maybe just quantify some of the issues going on there? Was it a function of more the synergies from the P-125 falling in this quarter than last quarter? Was it maybe more aggressive build-up in marketing spend last quarter versus this quarter? Can you maybe talk about some of these issues please?

I think it is a combination of factors 37. The first we are getting synergies. They are accelerating and capturing the P-125 as you mentioned, which is the old Molson cost program. At the same time, we did get some pricing through in the quarter, so that's favorable to us. So it is not one individual item. There is a series of items. And volumes are very good in the quarter

Okay. An then Leo, when you talk about the synergy target, $50 million and your belief that you will exceed that, I assume you are including the -- the full impact from P-125, right?

No. What we said is the synergy -- the synergy savings are incremental to the baseline programs in the division. So --

okay. Okay. And then -- in the United States, Leo, can you talk about some markets. You know at the time of the merger and since it has been completed, you were talking about markets where Coors Light was underperforming. Can you maybe go into a little bit more detail about some of those. Were those a source for the -- for the good performance out of Coors Light in the quarter and also maybe what the pricing environment in a couple of those markets?

Let me clear this one up, because I think the team has done a great -- great job over the summer season, but as you know, we were very concerned about a couple of our northeast markets a year ago, particularly at Pennsylvania and New Jersey, north Texas, and those were obviously very high share markets. We were under a lot of pressure, but Frits, why don't you give him an update there and around the horn as appropriate.

Sure. Thanks, Leo.

We have seen a very strong and sustained turnaround, particularly in the New Jersey and New York markets. Pennsylvania continues to improve and we would like to see that move a little bit along. In Texas we have seen the biggest swing from declines to growth and some of the markets there were probably a little bit stronger. California for a while has been fairly negative for the category as a whole and certainly not as strong for us. We are seeing some signs of life there, but we would love to see some more sustained growth in that area.

So in those markets that have been high volume for us and have been vulnerable, we have seen a pretty solid turnaround and not clearly just based on the numbers that has driven a lot of growth. I would say on the other hand we have continued to see a good improvement throughout the country and through some of our key accounts that cut across a large variety of markets.

Great. Frits in these markets where you are seeing improved results or turn around in your high share markets is there any indication from Budweiser and Miller that recently they are becoming more aggressive in price discounting these markets, which may curtail the longevity of these turnarounds.

I think it would be an understatement to say this was a pretty competitive summer, and I think that holds true for both the markets where we have been historically high share and have gotten some momentum back as well as other markets throughout the country. So it has been fairly intense through the peak season everywhere across the country really

Having said that, I was impressed the discipline our team in Texas has exercised on pricing. My read is these are not short-term gains. It is a fundamental performance change that took two or three years to architect which is a terrific job, and in the northeast, fundamental momentum led by Coors Light is pretty exciting.

This is largely driven by working closely with our wholesalers and being, you know, very strong and executional on the ground and if anything, we have been able to hold share and volume growth while being less aggressive on price in those areas according to our analysis at least.

Okay. Terrific -- terrific, thank you.

Thank you, our next question comes from Carlos Laboy from Bear Stearns.

Good afternoon. On Canada, I was hoping you would comment on SKU rationalization. On Brazil, we are hearing that there is talk of a tax amnesty law in the Brazilian legislative pipeline.

Can you comment on it and whether your reserves assume his amnesty law going through or would you have too much in the reserve account if it went through? Also on Brazil, will Femsa being distributing your beers in January. And if not, what do you have in mind?

Kevin, actually you want to take the Canadian -- Kevin, are you there? Well, we will come back to the SKU, Carlos. On the tax amnesty, well, we have also heard rumors of -- of some potential tax amnesty. I guess 30, 60 days ago. We don't know the specifics.

I will tell you we just updated our -- our assessment of those liabilities, and we feel very comfortable with what we have on the books today, comfortable meaning that we think it's still the appropriate number, and that's something that we would change with a longer-term perspective when we had solid information about state-by-state activities.

Regarding our relationship at Spal, the Femsa and Kaiser are continuing negotiations to determine what is best for both companies there. And those talks go on, and we'll -- we'll share the outcome when we have some -- some news.

We heard their bidding out those Sao Paolo routes. That they will not be distributing in January, is that true?

I would say nothing has changed at the moment. We are still in discussions, active discussions with Spal, so I am sure we are talking about lots of different things so no actions have been taken.

Thank you.

Thank you. Our next question comes from Caroline Levy from UBS.

Hey, Caroline.

Hi, can you hear me?

Yes, we can.

Great. A couple of questions. You -- can you give us any guidance on the input cost outlook for '06, just because in talking to Suttering Companies, they seem a little less concerned of the rate of increase in '06 than '05. That will be the first question.

Well, Caroline, we are not making any presumption about the energy environment and its consequent impact on -- on freight cost or aluminum cost getting any easier. So we're -- we're planning tight. In every single business, and I think Leo and I referenced in our remarks cost consciousness is the order of the day. I mean it is -- probably in the top line it is job 2.

And -- and so we're -- we're hoping for the best but planning for the toughest. So, , there's nothing in our crystal ball that says, oh, energy prices, this will all be solved in the next couple of months. We don't think it will be, and we are taking steps from a -- a Capex standpoint have as well as a sourcing standpoint to minimize and manage our energy costs as best we can.

Okay. Second question. You talked about being very confident about $50 million plus in synergies this year. Can you talk about the $40 million estimate you have for next year. Does that still look like a good number?

I would say we feel good about all the numbers on the synergies. So our experience so far is that the teams are doing a terrific job, but savings are coming in faster than -- then we had originally forecast. That's good news. And -- so -- I think as Tim characterized where those -- where the synergies will be coming from next year but we feel very good about the number. Tim?

Yes, the other thing Carolyn, and I think Leo and I said this pretty consistently from the get-go, the longer we work as one Molson Coors team, the more ideas we find.

And, yes, part of it is the toughness of the energy environment, but also very importantly, it's good folks across all different borders working together and finding new ideas, and frankly, we are really enthused about the leverage -- the further leverage we can achieve as -- as the merged company in terms getting cost reductions in the years ahead.

Good. And then I have I was wondering if Kevin came back on the line, I am not sure, but certainly if Frits could do maybe a little walk-through of what opportunities he sees to be more effective with marketing in the U.S. and Kevin to just touch on what the NHL coming back could mean -- how that actually will impact Molson in Canada.

Kevin, are you there?

Yes, I am.

All right.

Okay. On the NHL, it is very hard to put a specific number on it, but -- because when we talked in the past, we talked about significant changes with respect to smoking bans and discounting, but clearly as we look over last few weeks as hockey has been back, you can see we are very encouraged by what we are seeing on Canadian.

The whole beer industry I think will benefit from it as will Molson, but to actually give you a specific number is very hard to do because there are so many different factors that are playing into that.

Okay. And then if Frits could comment on some changes in marketing in the U.S.?

Yes, so -- starting with Coors Light, our objective would be to continue with what we've seen to be very successful over the course of the summer, and that is really relating back to some of the core equities around the Coors Light brand, namely Rocky Mountain Cold Refreshment and really using the Silver Bullet in some other ways to continue to communicate that.

Some of the bumps we saw over the course of the summer we believe can directly contribute to that focus. Included to that is making sure that as we go through our demand creation spending that we are as tight as we -- as we can be in making sure that everything that we spend reinforces those equities.

As you look across the other portfolio brands, our objective there has been to equally focus. But they're primarily on those markets where those portfolio brands are most important and have momentum. An example of that would be the Molson family of brands and the focus we continue to make on the seven or eight markets in the U.S. which constitute a large majority of the volume there.

Okay. Thank you very much.

Thanks, Carolyn.

Thank you. Our next question comes from Jamie Spinner from Black Rock Capital.

Actually Black One Capital. Just a quick question on Canada. Specifically what are you seeing the future looking in terms of pricing? Do you see more discounting with the mainstream brands as we saw in Q3?

Q3 didn't have -- it had the same amount as last -- as the quarter before that in terms of the actual floor pricing and things like that. Right now when we look at it, we are not anticipating a whole lot of difference in the sense of we are trying to build our brands. We are investing in our brands --

Kevin, are you still there?

Hello?

You are cutting off from time to time. Sorry about that.

Did any of the answer come through or --

I think about the first half did, yeah.

Let me restart it. If you look at pricing, the third quarter and the second quarter even, there haven't been a dramatic change in the pricing of the discount sector if you like that state relatively constant. The lat versus the previous year and we expect those comparisons in the fourth quarter to get better when we look at the real acceleration in Ontario took place in the first quarter of 2005. That will clearly help us as we enter into the fourth quarter.

Okay. And have you seen any response to the increase in price floor? It has only been, I guess, about a month but --

Changing the price floor really haven't changed pricing because the pricing in the marketplace was above the social reference point. So that has no effect in the pricing in the marketplace that the consumers are paying.

Okay. Thanks.

Thank you. Kevin, while you are on, want to go back and pick up Carlos' question on SKU rationalization? Hello?

Can you hear me?

Now I can.

I am having a number of programs that we have throughout the country regionally. We are pulling them together over the next three to six months. I think you'll see quite a focus on SKU rationalization within our organization.

Thank you. Back to you, Matt.

Thank you. Our next question comes from Mark Swartzberg from Legg Mason.

Hey, Mark.

Hey, Tim, good morning, guys. Two-part question for Canada. Firstly, Tim, I believe, or Kevin, did I hear you correctly during the Q & A? I got the impression that some of the margin upside or improvement in Canada was because some expenses that had been there moved into Corporate unallocated. If I heard you correctly, can you give me a sense of order of magnitude and then aid follow-up on the relationship between shipments and STRs in Canada.

Tim, do you want to take the --

There's a bit of that, but it's -- it's -- we have moved some of the expenses that were Molson, Inc. that happened to be in the Molson operating P&L obviously out of Kevin's P&L. It doesn't make sense for them to be there. But it is relatively small. It is not -- it's not the -- the most significant factor at all in improving Kevin's margins. I think the -- the -- the dominating factor was the overall cost consciousness, especially in the operations side that -- that really improve the margin.

Great, great. And then Kevin, and I believe it was Tim's comments in the prepared remarks. We heard a little bit about the relationship between shipments and STRs in Canada in the third quarter where they obviously outperformed pretty nicely relative to STRs. Can you elaborate a little bit on what was going on there beyond what we heard? And give us some thoughts on what you think that means for the relationship in the fourth quarter?

If you look at a year ago, the main driver is inventory -- of the change is really inventories that we have in retail in the TBS, and it was really that we were soft at the end of the third quarter in 2004. We are now at levels that we think are appropriate, so going forward, that -- we don't see it as having a dramatic change.

So they should be performing in line?

More in line with this quarter certainly.

Great. Thank you.

Thanks Mark.

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

Hi, thanks. Frits just a question for you on Coors Light in North America. Is your advertising or marketing spending behind the Coors Light brand up or down versus last year?

It's up. Not hugely, but it is up right now against Coors Light.

Okay --

-- that would be a U.S. number. You asked the question North America so you have to split out Canada or Mexico.

Just U.S. North America. And are there plans to introduce more or additional new advertising copy in the next six months?

Yes, we continue to look at that. So absolutely.

Okay. All right. Thank you.

Thanks, Bryan.

Thank you. I am showing no more questions at this time.

All right, thanks, Matt. Thanks, everybody. We appreciate you being with us, and appreciate your interest in Molson Coors. We will be back after the fourth quarter to share the year. Have a nice day, everybody.

Thank you.

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