Molson Coors Beverage Co (TAP) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Molson Coors 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to introduce your host for today's conference Mr. Leo Kiely, President and Chief Executive Officer of Molson Coors Brewing Company.

Welcome, everybody and thanks for joining us today. With me on the call are Tim Wolf, our Global CFO; Kevin Boyce, our CEO of Molson Canada; Frits van Paasschen, CEO of Coors Brewing Company; Peter Swinburn, CEO of Coors Brewers Ltd; Sam Walker, our Chief Legal Officer; Mike Gannon our Global Treasurer; Marty Miller our Global Controller; and Dave Dunnewold, our Investor Relations Director. Let's get started. This morning Tim and I will take you through the highlights of the first quarter of 2006 for Molson Coors Brewing Company along with the balance of year outlook. Then we will open it up for questions.

First I wanted to share a few thoughts regarding our progress as a company. As we head into our summer selling season for 2006, we certainly face some significant challenges in our core markets as do virtually all of our head to head competitors. These challenges related to very competitive operating environments and higher commodity and energy costs show up in our first quarter numbers and they're magnified in the performance metrics because the first quarter is seasonally the smallest profit quarter of the year for our business. Nonetheless, we feel good about the progress we've made over the last year towards building our brands and strengthening our financial foundation.

First, success in this business must start with strong brands, sales execution, and volume growth. That is top line strength, and we have solid momentum across our business in this critical area. Leading the charge is Coors Light which achieved sales to retail growth in all of our major markets during the first quarter and grew at mid-single digit rate globally. We have said that we must drive top line growth by reinvigorating Coors Light in Canada and the U.S. as well as stabilizing the Molson Canadian brand in Canada. We've done all three of those ahead of schedule for four consecutive quarters of double digit growth for Coors Light in Canada, several months of growth for Molson Canadian and four quarters of solid Coors Light growth in the U.S.

Looking at our top line strength another way, our two largest brands in Canada and the U.S. and our largest brand in the U.K. solidly grew sales to retail in the first quarter. Geographically we grew in 9 out of 10 provinces in Canada and eight of our top ten states in the U.S. This is important and encouraging for us because volume growth by our big brands and our big markets is critical to driving long-term profitability in this category.

Second, we're ahead of schedule in achieving our $175 million of merger related cost synergies and we're developing the next phase of cost reductions which we anticipate to deliver another $75 million of cost savings by 2008. Combined with our premerger cost reduction programs, these improvements have helped the financial performance of our company substantially in the past year and obviously will be a major driver of our results in the years ahead. Third, we resolved the strategic question around Brazil in January when we sold a controlling interest in that business but retained a minority interest to continue to tap upside potential of this market in the future.

Fourth, we're addressing our challenges in the U.K. head on with outstanding leadership team committed to transforming our business in the U.K. cost-wise as we continue to focus on driving growth and share gains behind the Carling brand and our lager portfolio. Finally, we have a new and stronger team in place across all of our business as we head into beer season 2006 with virtually all key positions filled. I believe this progress will serve us well as 2006 unfolds, no matter what challenges and opportunities we face and that we'll continue to improve our capability to provide attractive returns to our shareholders.

Turning to the first quarter numbers, our financial results reflect the positive top line momentum and cost achievements in all three of our businesses as I mentioned earlier. But earnings were negatively impacted by three factors. A very challenging U.K. operating environment, raw material and energy inflation, and higher corporate expenses much of which was temporary in nature or related to our company-wide efforts to improve capabilities in cost structure long-term. To summarize the specific financial results of our first quarter this year, in comparison to the pro forma first quarter of 2005, that is as if the merger were completed at the beginning of that quarter rather than the middle of it, we reported consolidated sales volume from continuing operations excluding the Kaiser business in Brazil of 8.6 million-barrels up 2% from the first quarter a year ago. Sales to retail for the Company were up 2.1% versus prior year with continued positive sales momentum in the U.S. and Canada.

We also improved sales volume in our Europe segment although continued margin pressure in the U.K. had a negative impact on profitability for that segment. Net sales were $1.2 billion for the first quarter of 2006, essentially unchanged from 2005. Cost of goods per barrel rose only 1.1% despite continuing cost inflation. Marketing, general, and administrative expense was unchanged globally. The first quarter after-tax loss from continuing operations excluding special items was $0.4 million or $0.01 per share versus pro forma income from continuing operations of $14.7 million in the first quarter of last year. The primary results include the negative impact of expensing stock options and other long-term incentive compensation which totaled 4.3 million pre-tax or $0.03 per diluted share after tax in the first quarter. On the other hand favorable foreign exchange movements increased our total company results by about $3.2 million pre-tax in the quarter. So at this point I will turn it over to Tim to review first quarter segment and corporate highlights and trends and then we'll provide some perspective on the balance of 2006 for our company. Timothy?

Thanks, Leo, and hello, everybody. In segment performance highlights starting with Canada, pre-tax income was $45.3 million in the first quarter, a 9.4% increase from the pro forma result a year ago. Favorable foreign currency movements, positive net pricing, sales volume growth and lower marketing, selling, and overhead expenses were offset partially by higher distribution and production costs. The Canadian dollar appreciated 6% year-over-year versus the U.S. dollar which increased Canadian pre-tax results by about $2.7 million per quarter. In Canada our sales to retail for the calendar first quarter of 2006 increased 3.9% from a year ago as our business benefited from our growth initiatives and strong industry trends in nearly all provinces. Mid single digit growth from the Molson Canadian brand along with double digit growth by Coors Light, Rickards, and our partner import brands drove that increase.

Total Canadian beer industry sales in the first quarter grew in line with our sales to retail trend driven by favorable weather, the return of professional hockey and increased promotional activity in certain provinces. As a result our market share was unchanged from a year ago which is the best share performance of our Canadian business in more than 10 quarters and a continuation of a trend toward improving our top-line performance in Canada. Sales volume in Canada totaled 1.6 million-barrels for the first quarter, up 1.6% on a comparable basis from a year ago. Net sales per barrel increased about 3% on a pro forma basis in local currency driven by increased net pricing, and positive sales mix toward our super premium domestic and partner import brands. Cost of goods sold per barrel increased 8% in local currency versus the pro forma first quarter of '05. It is important to note that more than half of this increase was due to nonrecurring factors including cycling of prior year benefit from change and recognition of distribution expenses into 2005 and year-over-year timing differences in quarterly over head costs. Excluding these nonrecurring factors cost of goods sold per barrel increased approximately 3% in local currency versus the pro forma first quarter of 2005 which is primarily the result of sales mix shift to higher costs but also higher revenue products in our super premium import portfolio.

It is important to note that other inflationary cost increases from labor, fuel, and utilities were offset largely by favorable achievements from our procurement, synergy and other operations cost reduction programs. So true conversion costs excluding again the impacts from the higher cost and higher margin products were effectively flat. Marketing, general, and administrative expense declined about 4% in local currency due to three factors. We're cycling about $9 million of one-time expense a year ago related to new accounting conventions following the merger, second, the quarterly phasing of marketing expenses this year versus last year, and third, lower overhead expense because of merger synergies.

Turning now to our U.S. business, first quarter pre-tax income excluding special items was $36.7 million, up 62.4% from the pro forma quarter a year ago. This increase was driven by sales volume growth, higher net pricing, additional progress on synergies and operations cost initiatives and the accelerated benefit of some of our commodity hedging activities.

Looking at U.S. highlights, sales to retail in the U.S. increased 1.9% in the first quarter on a pro forma basis. This was driven by low single digit growth for Coors Light in the quarter, strong double digit growth of Blue Moon and mid single digit growth of Keystone Light. U.S. volume to wholesalers grew 2.4% driven by sales to retail growth along with a small reduction in distributor inventories in the first quarter last year. U.S. net sales per barrel increased 1.5% in the first quarter due to higher front line pricing and more sales of import and craft brands through company owned distributorships partially offset by increased price discounting and negative sales mix.

U.S. cost of goods per barrel increase the 7/10 of 1% on a pro forma basis in the quarter driven by higher transportation, energy, and packaging material costs which were mostly offset by fixed cost leverage and continued progress on operations cost savings initiatives and merger synergies. In a very challenging cost environment, these programs offset about a third of the cost inflation impact in the U.S. business in the first quarter. Cost increases in the quarter were also offset partially by accelerated benefit of some of the Company's commodity hedging activities, without this benefit cost of goods per barrel would have increased about 2.6% in the quarter. We don't expect a benefit to be repeated later in the year. U.S. marketing, general and administrative expense decreased 2.4% on a pro forma basis in the first quarter as higher brand investments were more than offset by lower overhead costs.

Our Europe business reported a pre-tax loss of $13.4 million excluding special items, $6.5 million greater than the same period last year. Industry conditions continued to be challenging with ongoing pricing pressure in both on and off premise channels and factory brand and industry volume declines in the on-premise channel. Challenging trading conditions were offset partially by strong performance in our cost reduction programs.

Let's examine our Europe business performance in more detail. Our owned and licensed Europe brand volumes were up 1.4% versus the same period last year. This increase reflects strong off premise volume growth up more than 6% from last year and market share up slightly. Although our own brand volume in the on-premise channel decreased slightly, this was well ahead of the market as we gained a full share point many this channel from a year earlier. Pricing pressure has continued in both major channels. Europe net revenue per barrel and local currency declined about 11% in the first quarter driven by two factors. First, about 7 percentage points with the result of a change last year in our invoicing arrangements with one of our largest factory brand customers. Recall that factory brands are nonowned beverage brands that we deliver to retail in the U.K. This invoicing change resulted in a one-time decline of about $18 million in both net sales and cost of goods in the first quarter, but with no net impact on gross profit.

Second, the other 4 percentage points of the decline in revenue per barrel were due largely to the unfavorable owned brand net pricing and sales mix both customer mix and pricing were driven primarily by ongoing industry trends continued industry shift from independent to chain on premise acts and from on-premise to off-premise. Ongoing decline in the highly profitable flavored alcohol beverages. And third, pricing pressure from large retail accounts in both channels. Brand performance of our own beer brands was encouraging with mid single digit growth for the Carling brand in the on-premise and high single digit growth in the off-premise. Coors Fine Light continued to deliver double digit growth in both channels.

Cost of goods sold per barrel decreased approximately 9% in the quarter in local currency due mainly to the change in factored brand invoicing and declining factory brand volume. Excluding the impact of factored brands, cost of goods per barrel for our own brands was down nearly 3% from prior year in local currency driven by lower distribution costs and cost savings resulting from our supply chain restructuring program. Marketing and general administrative expenses cost in Europe decreased about 7% in local currency in the first quarter reflecting reduced promotional spending and lower overhead and labor related costs resulting from our restructuring and other cost reduction efforts in the second half of 2005 and the first quarter of 2006. Brand investments were even with a year ago.

Our Europe pre-tax loss in the first quarter was reduced approximately $800,000 by a 7.4% year-over-year decline of the British pound against the U.S. dollar. Finally, as you know, we sold a controlling interest in the Brazil Kaiser business on January 13, 2006. Consequently Brazil results are reported as discontinued operations in one line near the bottom of our consolidated income statement. In the first quarter of this year the Brazil discontinued operations reported an after-tax loss of $11.7 million as a result of two factors. First, after establishing contingent liabilities for purchase related indemnity provisions, we recorded a loss of $2.8 million on this sale of our interest in the Kaiser business. Our portion of the Kaiser first quarter operating loss for the six-week period prior to the sale along with foreign currency and non-cash accretion of indemnity liabilities totaled a negative of $8.9 million in the quarter.

Now continuing with our first quarter P&L review, special charges totaled $26.8 million pre-tax or 21% per share after tax. In our business segment the special charges were as follows. In the U.S. results included a $21.7 million pre-tax net special charge related primarily to the planned closure of the Memphis brewery in the next five months. These charges included accelerated depreciation and write-offs of Memphis assets and limited restructuring expenses. In Europe a $7.8 million special charge is due primarily to accelerated cost reduction initiatives in the supply chain areas. We expect this work to be substantially complete by the end of second quarter. Based on the actions and results to this point we continue to anticipate a very attractive pay-back period of about a year on these restructuring initiatives.

The corporate special credit of $2.7 million is due to the quarterly adjustment to the cost of providing a floor price under the option for the Coors Executives who left under their change of control immediately following the merger last year. Corporate, general, and administrative expense in the quarter was $29.7 million, up 17.5 million from the pro forma of 2005. This increase is the result of four factors. $2.5 million related to our stock based long-term incentive plan including the effect of this quarter of adopting FAS 123-R accounting treatment for expensing equity based compensation. Second, about $4.4 million of the increase is related to nonrecurring expenses such as severance costs and additional legal fees. We do not expect these expenses to recur later in the year. Third, approximately $3 million of the increase is driven by carefully vetted and planned investments in projects designed to deliver our next phase of cost reductions, enterprise wide. These represent a portion of the follow-on initiatives up to our merger synergies that we discussed in March with an incremental expected benefit of at least $75 million by 2008.

These initiatives are designed to improve and standardize systems, processes and structures across the areas of operations, information technology, finance, and human resources while at the same time substantially reducing costs. These projects are also designed to capture incremental savings in procurement and warehousing efficiencies. About $2.7 million of the increase is due to the transfer of global cost from operating segments to the corporate center. Finally, approximately $5 million of the increase in corporate G&A is related to the new and ongoing cost of strong global center capabilities which include Sarbanes-Oxley compliance, corporate governance, tax, legal, commercial development, and human resources.

Corporate interest expense was $34.8 million in the first quarter, $5.6 million higher than a year ago due to the slightly higher cost of the long-term debt structure that we now have versus the low rate short-term bridge loan that we had a year ago along with higher market interest rates this year. Our effective tax rate for earnings from continuing operations was 33% in the first quarter and 31% excluding special items. These tax rates are higher than our long-term expected rate primarily because the lower profits in our Europe business which is a lower tax jurisdiction reduced the tax benefits for our total company tax structure. Net debt at the end of the first quarter was 2.5 billion net of cash on hand. Our company was a net user of cash in the quarter because the earnings seasonality of the business, the timing and interest payments, and most importantly because the incremental capital spending associated with our Virginia brewing and packaging projects.

Now I will preface the outlook section as usual by paraphrasing our Safe Harbor language. Some of what we talk about now in the Q&A may constitute forward-looking statements. Actual results could differ materially from what we project today. Please refer to our most recent 10-K, 10-Q and proxy filings for a more complete description of factors that could affect our projections. We do not undertake to publicly update forward-looking statements whether as a result of new information, future events, or otherwise in regarding any non-U.S. GAAP measures that we may discuss during the call, please visit our website which is www.molsoncoors.com for a reconciliation of these measures to the nearest U.S. GAAP results.

Looking forward, we estimate that corporate interest expense in 2006 will be approximately 31 to $33 million per quarter. Note this outlook assumes constant first quarter foreign exchange rates and excludes U.K. trade loan interest income. Including long-term incentive costs and new corporate center capabilities, we expect corporate, general, and administrative expense for all of 2006 to be in the range of 95 to $100 million, up 8 to $13 million from the $87 million in 2005. We anticipate that this increase will be driven by the following. About $8 million will be related to the new stock based long-term incentive plan including the effect this quarter of adopting FAS 123-R accounting treatment for expensing of equity based compensation.

Second, the balance of the increase will be attributable to investments in the projects and initiatives designed to deliver the next generation of cost reductions which I described earlier related to the first quarter. Due to the redesign of our long-term incentive compensation plan and new accounting rules for stock option expense, we anticipate the expense for our total company for the full year will be approximately $25 million which about $10 million of this is in the Corporate segment. As I mentioned in our last call, our new incentive plan relies primarily on performance shares that will not be awarded unless the Company achieves strong profit growth during the next few years. Aside from linking payments more closely to company performance, this plan will carry a lower long-term cost to the Company and its shareholders than the option focus plan that it replaced. We anticipate that our full-year 2006 effective tax rate will be near the upper end of our long-term range of 25 to 30% because of the geographic mix of our total company profit I mentioned earlier. At this point I will turn it back to Leo for a synergies update and a look ahead to 2006. Leo.

Thanks, Tim. I will start with an update on our merger related cost synergies and then I will review some of the key business drivers that we're focused on for the balance of the year. As of the end of the first quarter we captured an incremental $15 million of pre-tax cost synergies this year. Equally important we're on track to deliver another 15 million or more of cost synergies in 2006.

Looking out to 2007, we fully expect to capture the balance of our $175 million merger, synergies commitment. As Tim mentioned a minute ago and we detailed in New York and Toronto and March, we're aggressively developing the next generation of cost initiatives and our early read points towards an additional cost savings of at least $75 million by 2008. Some of these efforts are well underway and others are in the formative stage. As we close in on more specifics, likely near the end of this year we'll update you on the form and substance of these efforts.

Now as we look forward to the balance of 2006, we certainly do not control all the success factors. Most notably pricing and commodity and energy inflation. This is showtime for our company. We are focused on the one-two punch that will drive our business performance in each of our markets for the balance of the year. That is growing volume and reducing costs. On volume we continue to strengthen -- excuse me, let's turn first to Canada. On Canadian volume, we continue to strengthen and build a consumer preferred portfolio. As we enter the key summer selling season, we believe our portfolio is substantially healthier than it was a year ago. Our investment focus remains on key brands, strategically investing for accelerated growth behind Coors Light, positioning our premium brands for recovery and modest growth, and continuing to fuel growth of our above-premium domestic and world class partner import brand portfolio including Corona, Heineken, and Miller Genuine Draft.

Coors Light continues to show consistently strong growth, and our above-premium brands are benefiting from strong focus and showing very positive sales trends. With both achieving double digit volume growth. Molson Canadian is showing signs of improvement with low single digit growth this quarter, the best in more than two years, building on flat year to year performance in the fourth quarter last year. Although the pricing landscape in Canada remains competitive, we're focused on moderate net sales revenue per barrel growth by achieving targeted pricing while ensuring the competitiveness of our overall portfolio.

On cost, we're aggressively pursuing merger synergies and other cost savings in the area of packaging materials, waste reduction, plant productivity, and distribution expense. These initiatives are expected to offset a significant portion of the cost of goods inflation that we anticipate this year. Plans are also in place to reduce general and administrative expenses to further offset inflationary pressures. On the whole our Canada team is starting 2006 in a significantly stronger competitive and financial position than a year ago. This is a great business with strong potential for both top and bottom line growth. In the first three weeks of April our Canadian sales to retail increased at a mid single digit rate. This is encouraging but keep in mind that three weeks is only a small portion of the quarter, and these trends could change and also remember that the summer weather last year in Canada was about as good as it gets.

Looking to the U.S. business, focusing on volume, the U.S. team intends to grow its business by building the most compelling and relevant beer brands. We've already achieved improved sales trends in the past few quarters particularly in Coors Light, Keystone, Blue Moon, Killian's, and the Molson brands. Drivers of these results include improved on-premise, ethnic consumer outreach, and category management. Our draft sales for example are outpacing cans and bottles for the first time in several years with recent on-premise growth about doubling the growth of our overall U.S. business. Coors Light Hispanic volume growth has more than doubled its overall growth trend.

In the past year we also increased by more than 50% the number of major national chains where we're the category captain. In addition this summer, Coors Light will feature a full menu of product news ideas for both the on and off-premise channels to take full advantage of summer merchandising opportunities. On costs our goal for the U.S. this year is to capture all the identified cost savings from merger synergies and our preexisting cost initiatives. Cost savings this year center primarily on procurement, brewery network optimization, and transportation improvements. In order to maximize our results from these programs we've accelerated the disposition or closing of our Memphis brewery by about six months versus the original time line. Our biggest cost challenge over the next several months will be managing our U.S. transportation and packaging material costs which we expect to be higher during our peak summer season.

Another factor to consider when assessing the outlook for our U.S. business during the remainder of the year is the beer price environment. When netted against fewer price increases last fall, the total price environment is positive but not as strong as two years ago. So far in the second quarter if we exclude some year-over-year volatility in our Caribbean business, our U.S. sales to retail increased at a low single digit rate in the first four weeks of the quarter while Coors Light grew at a similar rate to the first quarter. Turning to Europe we continue to execute against the growth and cost strategies we launched in late 2005. On volume to grow currently on our other focus brands we're continuing to invest strongly behind these brands in the media as well as in promotions and in new dispense technologies. With respect to media and promotional spending, we're well positioned with powerful campaigns targeted at the increased volume during the World Cup this summer.

Also we're commencing the roll out of our new dispense technologies that will enhance our position in the growing cold beer market. Carling extra cold is already in nearly two-thirds of all the outlets that serve extra cold lagers in the on premise channel in England and Whales. We expect these new dispense technologies to fuel further distribution growth and throughput performance. This more effective cooling equipment will ensure consistent delivery of quality cold product and distinctive above VAR fonts will improve consumer appeal. On European segment costs we've taken actions to transform our U.K. and Asia operations and remove more than $20 million from our cost structure this year alone.

A significant source of savings this year is from extensive restructuring of functional overheads completed in the back half of 2005. We also closed our Russia and Taiwan sales operations and have undertaken a supply chain restructuring that will be completed in the second quarter of this year. Substantially reducing operation cost going forward. In the first five weeks of the second quarter our Europe sales to retail have increased at a mid-single digit rate from a year ago.

To summarize our discussions today, the first quarter of 2006 was encouraging in terms of the progress we're making driving our big brands in our big markets which is how we'll win in this business long-term. We also made additional progress on our merger synergies and other cost initiatives despite the challenging business environment in each of our major markets. As we outlined earlier this year during our investor presentations in New York and Toronto our plans and strategies for 2006 are clear, and they all support the four strategic planks for building our base. First, be great brand builders. Second, continue strengthening our financial foundation. Third, build our global competitive capabilities. And fourth, build a winning and inspired culture from within. For the balance of 2006 we know what we need to do to win in our big markets. We know what we must achieve as a total enterprise and perhaps most important we know what we need to accomplish together to be a world class profitable and top performing global brewer.

One final note, our prepared remarks will be available on our website for your reference within a couple of hours this afternoon. Also at 3 p.m. Eastern time today our Investor Relations team led by Dave Dunnewold will host a follow-up conference call, essentially a working session for analysts and investors who have additional questions regarding our first quarter results. This call will also be available for you to hear via webcast and recorded replay on our website. At this point we would like to open it up for questions.

[OPERATOR INSTRUCTIONS] Our first question is from Judy Hong from Goldman Sachs.

Hi, everyone. Starting with Canada got some questions. First, can you just talk about the difference between the FTR growth and the shipment growth in the quarter and whether that trend should continue for the balance of the year? Just a difference between shipment and the FTR growth? Secondly you talked about increased promotional activity in some of the provinces. Can you elaborate on that and talk about whether that poses any risk in terms of achieving your revenue per barrel growth outlook in that region?

Let me take the first question with respect to the FTR. Basically, it has to do with where the calendar months line up versus the fiscal months. There is a little bit of inventory shifting as well. We expect that to begin to reverse itself out in the second quarter, but it was a bit of a difference during the first quarter, but that as I said should balance itself out. When you look at the promotional activity, we expect it probably to continue. What we are seeing is a greater frequency of promotional activities, but the depth of some of the discounts has not been as large as we have seen in the past. So I think they will balance each other out. So going forward we don't see a real risk to the revenue growth there.

And then, Tim, can you just go through this corporate expense number again? I know you talked about 95 to 100 million for the full year. How much of the increase that was nonrecurring versus how much is really ongoing?

Sure. Just to dial through it again, about $2.5 million is related to our stock option expensing and new long-term incentive. About $4.4 million, call it $4.5 is nonrecurring legal fees, severance fees, and then we've got about $3 million of investment in projects and we'll continue to have that investment in the next number of quarters, and these are really new enterprise ideas to save money in back office, how we buy stuff, how we set operation, supply chain standards. We've got about $2.7 million of costs that have been transferred from the business units that was much more appropriate to bucket in a corporate G&A corporate spending center, and then we have a little less than $5 million associated with setting up new global departments that I referenced.

Thank you.

Yes. You're welcome.

Our next question comes from Christine Farkas from Merrill Lynch.

Thank you very much. Looking for some clarification on the components of your revenue per barrel growth both the U.S. and Canada, specifically the contributions from rate, mix, and promotional activity I am a little surprised at the negative mix in the U.S. given the strength of Coors Light and Blue Moon. Can you just talk to those points? Thank you.

You want to take the U.S. perspective on that, Frits.

I don't think we break out specific numbers, but we have a pretty substantial benefit on the front line pricing in terms of revenue per barrel. Some of that obviously gets offset by discounting, in fact most of it does, and then the bigger other fees would be mix which also has a slight negative effect which just is a reflection of the fact that we see Keystone growing faster than the rest of the portfolio.

Sure but your revenue per barrel growth was positive 1.5% in the quarter so what was the -- if if rate is offset by promotions and mix is negative, what was the big driver of favorable growth?

A piece of it was front line growth. Some of it was the effect of higher volume through our own distribution operations in Colorado and in Idaho. And then a small amount of that was also fuel surcharge.

Okay. And in Canada?

Well, in n Canada what we have in terms of drivers of revenue were A, volume and B, we have got some mix benefit and we've got some pricing that was taking place in probably about half the country, not necessarily on every SKU in half the country, but there was pricing in quite a number of provinces in the first quarter.

Kevin, you talked about the depth and frequency of promotions. Can you talk a little about the trends in the discount value segment? Has that slowed and are price gaps appropriate now or do they look better than they used to?

They look a lot better than they used to. Yes, They have slowed. I am not saying the price gap is where we probably like it to be in the long-term, but we're continuing to make in-roads into that. There was a big switch a year ago on the first quarter in the deep discount segment where basically there were some price shifting amongst the big players and the industry kind of netted out down from the 23.70 they were at to 26.40 and that has held pretty constant since then. When you are looking at comparisons as we go forward, because 26.40 is now the legal minimum price in Ontario you will see easier comparisons on the deep discounts segment.

A question on the U.K., just a final question, there was a comment about how brand investment was flat, and then another follow-up comment that suggested that the Company continues to invest behind the brands. Given the challenges of the market, then, is it not worth picking up investment in the brands or are you offsetting an increase behind Carling Light with something else? How is your investment looking in the U.K.?

Our investment in the brand, Christine, is -- in our brand portfolio would be in line with muted inflation. We're keeping that basically in line. We're not extending it, no.

Okay. Thank you so much.

And thanks, Peter, incremental pressure really would be in the cold dispense, right?

Absolutely, right. We're putting investment in that, but that's not the top line brand investment I think Christine was talking about.

That's right, that's right, the flat brand investment. Thank you.

Thank you. Our next question comes from Marc Greenberg from Deutsche Bank.

Hi, guys, good afternoon. Wanted to follow-up on the U.K. First, I wonder, Peter, if you might comment on what kind of expectations you have for pricing in the remainder of the year, factoring World Cup and continued mix shift to off trade? Are there any contractual factors on rate increase or decrease in some of the on-trade accounts that could impact that full year assessment for rev per barrel?

No, there is no contractual use at all, Marc. What we're seeing in the marketplace in the first quarter is really a reflection just of the competitive nature of the marketplace presently. If the market improves hopefully that will ease a bit, but really there is no way that we can look forward and see what the pricing environment is going to be like. We know what the last quarter has been like. We've shown that. That's where the market is presently.

Just in terms of what we would think of as front line rate increases, I wonder if you might talk about typically how those things play out in the U.K. the extent to which you start to see an improvement in volume?

When you say front line, can you just expand a bit for me?

Just I guess the comparable in the U.S. would be seasonally following the selling season, the Brewers typically take pricing, and I am wondering if it is that kind of a mechanism?

It is a different market to the U.S.

Yes.

We will be really open to the same competitive pressures as we were in the first quarter. The only price increase that I think you might be talking about in terms of front line price increases we took in the first quarter of this year was in line with inflation. GT Exclusive. And that was substituted into what we call the independent free on trade, in other words the non-contractual trade. That's already been taken.

Okay. Tim, I wonder if you could on the U.K. business give us any kind of a sense you have on perspective currency impact in the remaining quarters of the year. Was this the worst of it?

Marc, if you and I both had that FX crystal ball, we would probably be trading currencies, not selling beer. Just looking at what's happened to the British pound since the end of the quarter, it is doing better, so I would like to think that the worst is over, but that is purely a guess. The Canadian dollar continues to do well, all in if you think about the impact on EBIT in the U.K., it obviously reduced the loss, if you will because the lower pound, conversely or similarly the interest expense that we pay in British pounds came down, same dynamic on interest expense vis-a-vis the Canadian debt we have or the debt we pay in Canadian dollars, so all in we had about a $3.2 million benefit in this quarter. You take all those factors, impact in EBIT on the one hand, impact on interest expense in the other, and we generally look at that as, the way we forecast anyway is basically flat quarter to quarter. So that's the best we can do at this point, but I continue to be a little bit optimistic about the impact on the pound going forward.

Great. Last question, I wonder if you might provide an update on some of the market specific cost programs in the U.K. I know you talked about taking 20 million out on the supply chain. I am wondering if in the current year if you believe these coupled with continued volume improvement can deliver full year profit growth in the U.K. market.

The 20 million is actually more than just supply chain. That's the total cost savings we're looking to take out this year. In terms of whether we'll end up showing growth at the end of the year or not, quite frankly so much is driven by how the market performs. It is just impossible to say. The market has been worse in the first quarter than we expected, specifically in the higher margin on trade which was down nearly just under 5%, admittedly that's got the Easter piece into it. It is really difficult. So much depends on factors that to some extent about our -- with our control, and in fairness in the U.K. sort of reflect the general high street demise as well that we've seen from retailers generally.

Great. Thanks very much.

Thanks, Marc.

Thank you. Our next question is from Karim Salamatian from BMO Nesbitt.

Couple of questions. I guess the first one, since we're on the U.K. I will start there. Leo, can you maybe talk about your long-term expectations with respect to timing in that marketplace? I know it is extremely challenging and the numbers show that and you're trying to cut costs and do what you can, but that can only take you so far if the fundamentals don't improve. What's your long-term view towards that market and then maybe as an add on to that is there money that you can save by rationalizing that portfolio of beer brands over in the U.K. dramatically?

I will let Peter take the second half of that. Obviously we're going through a tough patch in the U.K. Part of it is beer industry related. Part of it candidly is, Karim, is consumer products related. As I talked to colleagues around consumer products world, U.K. is just in a tough cycle right now. We're not at all doom and gloom about our prospects there. We've stated a specific number in terms of productivity that we'll yield this year. But the cost transformation that that team is going through right now is significantly an advance of that number we'll save this year because the COGS impact will largely hit in future years. We are reconfiguring our asset base and we know we need to do that to weather this cycle and the transition going on in the business, and we believe that long-term the game is lager and the game is brands. What we'll continue to do is invest in Carling in as the lead horse, growth in Coors Fine Light as the portfolio and disproportionately put our investment dollars there. This is stay the course, some of this is broad country consumer product trends, and we'll see when it comes back up. Peter, vis-a-vis rationalizing the portfolio, a comment there?

Yes, sure. I think you've sort of set it up nicely, Leo. The reality is that 85% of our volume is basically in Carling, Grolsch, and Coors Fine Light which are the three brands we concentrate on and over 94, 95% of our revenue investment goes behind those brands so in terms of focus really with that. In terms of cost through the supply chain and production, the reality is that in the profitable, independent free on sector our customers there still require a full portfolio fix, they look forward to stock shop, and therefore we do need to handle a number of ales and other products so that we can realistically supply that customer base with a full portfolio. Really, that's why those brands are there and equally they're still profitable. We have the normal review of brands and indeed SKUs on an ongoing basis, and when they drop below a certain line we just get rid of them.

Karim, in fact if anything our 20/20 hindsight over the last 24 months is that maybe we were too aggressive in trying to throttle that back. Maybe a little counterintuitive, but I think Peter is right on.

In the past also part of your initiatives in the U.K. have been trying to exit unprofitable business relationships. Is that something that you can do more aggressively going forward, Peter, or has that lifting--?

Are you talking about with customers?

Correct.

Yes, we judge customers along a number of different axises, although in fairness you might look at one major customer and say that the unit margin on that particular customer might not be too high, but if they have got excellent distribution base, then that's got a marketing investment value to it as well. It is quite difficult just to take it on one axis. Yes, we obviously don't and will not trade with anyone that it doesn't make sense to trade with. As you may be referring to at the back end of last year we chose not to get involved with certain customers.

Leo, I think in your prepared comments you mentioned closing of some offices in Taiwan and Singapore. Should we read into that that maybe the global growth aspirations for Coors Light and/or Fine Light are somewhat different today than what they were not so long ago?

No, not at all. There were two tactical decisions. One is -- one was in Taiwan, and we just didn't have it right. We tried for what two or three years, Peter, and--.

Yes we did. And in fairness to get it straight, we closed our sales office. We haven't stopped selling in Taiwan. We just set up a different structure with a distributor there. The on cost of having a sales office and feet on the street is gone, but we still are selling Coors Light there.

And the situation in Russia really was a situation where our distribution partner got purchased, and we weren't very far into that. It was a good chance to come back out and recheck our cards there. No, it really doesn't change our long-term posture towards what we want to do.

Peter, will you be spending more time looking at developing these brands globally as a way to offset the weak fundamentals in the U.K.? Is there something maybe materially we should know of in the next twelve months with the global development of the brands?

No. Presently where we were established in Asia, we will continue and those businesses are going very much as planned. We'll move out with Coors Light into markets when we can afford to invest sensibly behind them. There is nothing great in the pipeline right now, no.

Sorry, my last question for -- I am going to switch gears and go to Kevin in Canada. You talked about the improvement in the Molson Canadian trends. Can you just answer if that was accompanied by an improvement in the profitability of that brand?

In the quarter you're talking about?

Yes.

Yes, spending was -- we said last year that we were investing strongly behind the brands, so last year we were over investing. If you're looking at short-term, yes, it probably was accompanied by an increase in profitability, but that was really built upon some heavy lifting we did a year ago to turn it around. If you take the longer term view, we're still investing strongly but in the short-term it is paying itself off quite well, thank you.

So for the balance of the year we might not see the same improvement in the profitability of that brand even if volume trends continue to improve?

Are you reflecting a more advertising or promotional spending is that what you're concerned about?

Just if we look at the net contribution of that brand.

Well, we did say -- we said in past meetings that we were doing a reinvestment behind the brand last year and this year we were going to more normal levels of spending if you like. I think your answer is there.

Thank you.

Thanks.

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

Good afternoon. I am trying to get more clarity on the cost of goods sold trends in Canada. You mentioned that currency was maybe up about 6% and that underlying cost of goods sold per barrel was up about 8%. It seems that the number is actually a little bit higher than that. Is there some kind of change in the allocation between cost of goods sold and SG&A in Canada?

Robert, let me ask Tim Scully to jump in and answer that for you. He is our CFO in Canada.

Thanks.

Robert, to begin with, we had a couple nonrecurring factors that occurred in cost of goods sold in the first quarter. The first one is we were cycling a benefit that we received in the first quarter of last year in our distribution costs, and that was premerger and it was included in our pro forma for calendar, '05 and the second was some timing of some year-over-year differences in our manufacturing overhead costs. Those two combined contribute to over half of that increase, that 8% increase. The other component is we do have a higher mix of our super premium imports, so that is embedded in higher cost of goods sold. You're seeing the higher revenue line as well on a revenue per barrel basis, but we do have inflationary cost increases that are occurring but they're largely being offset by our merger synergy savings, and some of the cost reduction programs that we've got in place for calendar '06.

Could you maybe give us the pro forma cost of goods sold number again for last year because some of the disclosures you made last year seem to suggest something around 155 million. Is that correct?

About 160 million, yes.

About 160, okay.

About 162 here, Robert.

162 pro forma.

Yes.

Then actually turning to cost of goods sold in the U.S., you mention that you have some hedging gains that lowered your cost of goods sold. Are you also anticipating that in subsequent quarters in this year that the commodity cost pressures are going to be as bad from a year-over-year comparison point of view or should it get a little bit better?

I think it goes a little bit to Tim's answer on the foreign exchange hedging activity. We don't have clear insight into that, but I think all indications would be that we are going to continue to see cost of goods pressure on the raw materials side and that will plague us for the rest of the year.

The underlying pressure should be about equal with what we saw in Q1 at current rates?

Yes, our rough estimate of what the underlying rate of inflation is looking across the industry at our own costs is probably somewhere in the low 4% range and it's probably not an unrealistic number to project out for the rest of the year, but as I said that's anybody's guess.

Got it. Actually one more clarification then on the Canadian cost of goods sold.

Robert just before you move off that, needless to say we are really, really happy that we're building out Shenandoah because the bulk freight savings that we forecasted for that project go up every day as the price of diesel and the price of rail carry goes up, so that good decision is proven out even more so by the environment we're in.

I hear you. Actually one final thing on the cost of goods sold in Canada. To the extent that it is timing of overhead expenses, should we expect to recover some of that in future quarters or is that more having to do with last year's timing?

It is in terms of the timing differences you will recover some of that in future quarters.

Yes.

Great. Thanks.

Thanks, Robert.

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

Hi, everybody. A couple of things. Can you start off with the 2.7 million of expenses that came out of operations, how did that break out amongst the U.S., Canada, and the U.K.?

Caroline, are you referring to the--?

It went into corporate expense, I believe, the 2.7 million?

Yeah, I think it is roughly two-thirds U.S., one third Canada, maybe a little bit more U.S.

Okay.

That's not supply chain or marketing. That's finance, HR, legal--.

Some technical.

And some technical.

That's ongoing, right?

Correct.

Okay. And is this a small quarter, that number would be big in bigger quarters. Right?

No, overall it would be for that one in particular 2.7, that will be flat during the course of the year.

Okay. The 3.2 million was the currency benefit to the bottom line of everything together, is that correct?

Correct. Realizing that the good news in Canada as we get more EBIT with the exchange rate being stronger. Bad news is cost of interest is higher, so you net it out and do the same math in the U.K.

Was the Canadian -- when you said you were up over 9% in Canada, did that include a currency benefit?

It did. Correct.

Did you give the amount of that, the percent?

It is a little more than half.

Okay. Half of the 9%.

A little more than half. So the impact on EBIT in the quarter of the roughly 6% appreciation in the Canadian dollar was about $2.7 million but then we paid higher interest because of the same impact on the Canadian dollar of about 1.5 million. So the net there just for Canada is 1.2 million. The net for the U.K. is just about 2 million U.S. That's how you get all in your 3.2 million.

Okay. If you look at the 5 million on global infrastructure spending in the first quarter, is that also a flat ongoing number per quarter going forward?

Correct. Correct.

So it is not one time in terms of '06, it is going to go on for awhile?

Those are the cost of the departments that we've set up.

I see.

And it will be flat -- over time, we absolutely believe we can leverage. Leverage that and bring it down. One of the reasons we're spending that $3 million in investment is to see how we can combine back office for example activities, global platform, that will certainly have the impact over time of bringing down that expense not only in the business units but also bringing down that $5 million that I referenced for the Corporate segment.

Okay.

Make no mistake, our objective is that that range of 95 to 100 is to bring it down. We think we can bring it down. Obviously you don]t do this in a day or a quarter. It takes about a year, year-and-a-half, and that's our objective.

Right. Can you talk to me about what's in the equity loss of 3 million?

The equity loss of 3 million?

The low pre-tax.

I think you're referring to the credit that came back to us from the earnings, the stock floor on the 7,350 for the 13 Coors executives who left the Company. I think that's the item. You will recall since last year that's been going up and down. We record a hit or income on that depending on how the stock price goes up or down.

Is Kaiser in the equity line?

No.

Okay.

You're talking about minority.

You quote minority interest. I am sorry.

I'm sorry. I tell you what, why don't by take it off line.

Fine. Can I also just ask Leo, you talked about the strong top line opportunities and one of the push backs we always get here is you're operating in three material markets where domestic beer is declining. It was interesting to hear you characterize that as strong and maybe, particularly if you could talk to Canada about how sustainable you think the kind of growth we saw in the first quarter might be.

Well, I think there are all kinds of factors, and I wouldn't speak for Kevin. I would headline it by saying the first quarter was a strong quarter for the whole category, Caroline. It was an unusually strong category quarter, and remember last year was the strong summer. When I talk about being bullish on volume in Canada, I'm really referring to the opportunity to grow Coors Light and grow it in tandem with our Canadian franchise brands, and also capitalize on our import portfolio which like in the U.S. has real strength, and we've got a very nice portfolio as you know. We feel good about that. Kevin, I am talking for you. I should not be.

I think you explained it pretty well. The industry was very strong in the first quarter particularly in the first couple of months and remember that there was a shift in the Easter timing. The numbers were quite impressive as an industry. We wouldn't expect that to continue for the rest of the year and as Leo has mentioned a couple times today, summer was particularly in eastern Canada very strong last year starting in June, and we have those numbers to anniversary, but we have a lot of momentum behind Coors Light and we've always said stabilizing Canadian will enable the Company to grow through its other activities not just behind Coors Light but behind our super premium portfolio and we're seeing that come through. We need to continue to, for us it is a mature market and share growth is going to be critical and it was nice to see share stabilization in the first quarter and we look to continue to try to improve on that.

And just lastly, Kevin, could you just reiterate the question came up on SPR's lagging, shipments lagging SPR's. Is there any need to ship a little extra in the second quarter? Are you exactly where you need to be on inventories?

No. The bigger part was actually just simply timing of the change in weeks year-over-year, so we would expect to see that kind of rebound back. There wasn't a huge shift in inventories. There was a modest shift in inventories. We wouldn't have to do anything unnatural. It will naturally flip itself back, we believe.

Thank you.

We can take one more question.

One more question.

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

Good afternoon, guys.

Hey, Bryan.

Just one question and then one head's up for Dave on his later call. In terms of question, Leo, can you talk a little bit about the impact that gasoline prices had or didn't have on the consumer? I guess in the U.S. and in Canada in the first quarter? I guess gasoline prices were somewhat more favorable year-on-year in January, have gone up significantly since then, and are you seeing any pressure on any parts of your business because of the higher gasoline costs?

What do you think, Frits?

It is hard to separate these things out. Certainly there was more disposable income I think in January than as time went on. Whether that really affected the overall category, I think very hard to separate from the rest of the business, so not clear that there was a huge effect. Obviously had some effect on our cost structure. That's not something we've gone into.

Nothing in April as you have seen gasoline go up in April has it affected your convenience store business or any of the more gasoline sensitive channels?

Not meaningfully. Our convenience store business as a matter of fact is pretty healthy right now relative to a year ago. Having said that, that's a channel where historically we played under our weight and I think the progress has more to do with work we're doing on the key account side than on overall demand pull through the channel for the category.

All right. Kevin, any impact in Canada as well? Same issue?

No, I think similar to Frits but remember that we don't have, except for Quebec a huge convenience store business, so it would be rare to see a change in purchasing patterns based on pricing of gasoline to be honest.

Great. Thanks. Dave, just for the later call, nonrecurring was kind of a theme here, and I think it might be helpful if you can at least layout some of the sort of quirks in the history or in the prior year comparisons over the next couple of quarters so we get an idea of kind of where the upsides and downsides are and the unusual things in the quarters.

Not to mention it will be nice not to have to use the word pro forma comparison.

Great. Thanks, guys.

Thanks, Bryan.

I think that's it, folks. Thanks very much for being with us. Thanks. Appreciate it. We'll be back to you when we've got news from the summer front. Have a good day, everybody.

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