Molson Coors Beverage Co (TAP) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2006 third quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Mr. Leo Kiely, President and Chief Executive Officer of Molson Coors Brewing Company. Sir, you may begin.

Hello and welcome, everybody, thanks for joining us today. With me on the call are Tim Wolf, our Global CFO; Kevin Boyce, 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 Dunnewald, our Investor Relations Director. This morning, Tim and I will take you through the highlights of the third quarter of 2006 for Molson Coors Brewing Company, along with a perspective on the final quarter this year, then we'll open it up for questions.

Overall, we believe our third quarter results demonstrate that we're making consistent progress and strengthening the fundamentals of our company, even while we face tough competitive and cost pressures in all of our markets. Looking at the highlights, our Canadian business continues to achieve solid profit growths driven by positive beer pricing, cost reductions, and growth by key premium and above brands led by Coors Light. Our largest brand has grown volume and share in every quarter since the merger date.

Faced with ongoing price and promotional pressures in the market, we continue to balance competitiveness and profitability objectives with our strategic -- across our strategic brand portfolio. At the same time, we've delivered our synergy and cost savings commitments. In the U.S., volume gains, synergy achievements, and improved industry pricing contributed to solid profit growth in the quarter. We achieved a strong peak season volume performance, driven by Coors Light, which grew for the sixth consecutive quarter.

In the U.K., our teams are doing impressive work in a very competitive market, focusing on the factors they can control to minimize the impact of margin pressures and other challenging channel trends in the U.K. beer business. Net each of our businesses is focused on building our brands and making pricing decisions in realtime to remain competitive. At the same time, all of our teams are driving cost initiatives to generate the resources we need to invest in our brands and drive the top line. This is what it takes to win in beer today. Build brands, lower costs, and make smart pricing decisions.

So with that as a backdrop, let's turn to some of the financial performance headlines for our third quarter. Consolidated net sales were $1.6 billion for the third quarter of 2006, up 3.3% from 2005. Sales to retail for the Company declined 0.6% versus prior year with higher sales in the U.S. offset by declines in Europe and Canada.

Total company sales volume was unchanged from a year ago. Cost of goods sold rose 2.8% per barrel driven by a combination of significant inflationary cost pressures, especially in the U.S., partially offset by solid progress on merger synergies and other cost saving initiatives in all of our operating segments.

Marketing, general, and administrative expense was up 0.8% for the quarter. Pretax income excluding special items was $213 million in the third quarter increasing 21.2% from a year ago. Meanwhile, after-tax income from continuing operations excluding special items was $139.5 million or 1.61 per share, that's 8.4% lower than a year ago because of the one-time tax benefit of 43.5 million or $0.51 a share in the third quarter of 2005. Excluding this tax benefit a year ago, third quarter 2006 after-tax income from continuing operations, excluding special items increased 28.3% in the quarter.

At this point, I'll turn it over to Tim review third quarter segment and corporate highlights and trends and then we'll provide some perspective on the remaining three months of the year for our company. Timothy?

Thanks, Leo, and hello, everybody. In segment performance highlights starting with Canada pretax income was $161.1 million in the third quarter, which is a 22.7% increase from prior year driven by positive beer pricing, lower overall costs, favorable foreign exchange rates and income resulting from a reduction in our guarantee obligations of Montreal Canadian Hockey Club. The Canadian dollar appreciated nearly 7% year-over-year versus the U.S. dollar, which increased Canada pretax results by approximately $9 million U.S.

In Canada, our sales to retail or STRs for the calendar third quarter ended September 30, decreased 1.7% from a year ago. Continuing strong double digit growth by Coors Light, Rickards, and our partner import brands was offset by the impact of discontinuing the Molson Kick, and A Marca Bavaria brands last fall and declining volume for other premium unsupported brands stemming from intense competitive pressure, primarily in Ontario and Quebec.

Despite continuing competitive pricing activity, overall strategic brands -- and that's where we focus virtually all of our front end programming -- grew at low single digit rate in the third quarter. In fact, Coors Light just achieved it's sixth consecutive quarter of double digit growth following the merger and our largest brand grew both volume and share in all four regions of Canada during that time.

Molson Canadian, despite a low single digit volume decrease in the quarter has substantially slowed as the volume declined this year and has achieved improved brand equity measures. Total Canadian beer industry sales were virtually unchanged versus prior year third quarter. As a result, Molson Canada market share was about three-fourths of a percentage point lower than prior year, and that includes the impact of our discontinued brands, which accounted for more than one-third of that share decline.

Molson Canada sales volume totalled 2.3 million barrels for the fiscal third quarter ended September 24, which is down 2.5% from a year ago. The primarily difference between sales volume and STRs was lower contract brewing of nonowned brands exported to the U.S.

Net sales per barrel increased about 1% in local currency due to the flowthrough of selective front line price increases during the past year, which were partially offset by strategic price discounting focused primarily in Ontario and Quebec during the third quarter. Cost of goods sold per barrel decreased 3% in local currency versus the third quarter of 2005 driven by three primary factors.

First, inflationary cost increases across nearly all inputs drove about 3 percentage points of increase. One-third of this inflation was offset by synergies and other cost-saving initiatives with another third offset by lower input costs related to favorable foreign exchange currencies.

Lower employee-related expenses this year along with year-over-year timing differences and quarterly manufacturing overhead costs account for nearly all of the remaining 4 percentage points of cost of goods improvements in the third quarter. The timing differences in manufacturing overhead costs are expected to reverse by the end of this year. Marketing, general and administrative expense was essentially flat in local currency with two main components.

First, lower marketing spending driven primarily by the discontinuation of Molson Kick and Bavaria brands last fall and partly by an improvement in the efficiency of our investment spending. Additionally, to ensure our competitiveness in certain key markets, we strategically shifted some of our end market-directed investments to price promotion. These were offset by increased employee expenses, the timing of other expenses this year versus the prior year, and one-time contract costs incurred to achieve longer term information technology synergies.

Other income in the third quarter improved $12.9 million if from last year, driven by lower equity losses and amortization expense related to the Montreal Canadian's Hockey Club and a $9 million U.S. benefit from a reduction of our overall financial guarantee obligations to the Club.

Coincident with the sale of our preferred shares in the Canadiens during the third quarter, we were released from a direct guarantee of Canadien's debt and as a result of the improved financial risk profile simultaneously reevaluated our other guarantees related to the team, which resulted in a $9 million income benefit, equally important, we retain our 19.9% equity ownership and remain staunchly committed in our support for this great team.

Turning now to our U.S. business, third quarter pretax income excluding special items was $74.3 million, which is 10.7% higher than a year ago. This increase was driven by sales volume growth, higher net pricing, and additional progress of synergies and operations cost initiatives partially offset by higher transportation, packaging material, energy, and labor costs. Let's look at a few U.S. highlights.

Sales to retail in the third quarter increased 1.4% driven by low single digit growth for Coors Light in the quarter, low double digit growth Keystone Light, and double digit growth of Blue Moon. Excluding our Caribbean business, which continues to be impacted by the weakness in the Puerto Rico economy, our 50 state sales to retail grew 1.8% from a year ago. In fact, we achieved our best peak season volume ever with Memorial Day to Labor Day sales to retail growth this year of approximately 3% versus last summer.

This balanced growth included contributions from all major channels, from convenience stores to restaurants to grocery stores and mass merchandisers. Coors Light achieved its sixth consecutive quarter of U.S. growth and grew share in the grocery and convenience store channels this past summer according to AC Nielson data. U.S. volume to wholesalers grew 3.0% in the third quarter, driven by sales to retail growth and an increase in distributor inventories of about 90,000 barrels to help them bridge the shutdown of our Memphis brewery and the movement of that production to other facilities in our North American brewing network.

U.S. net sales per barrel increased 3.0% in the third quarter due to higher front line pricing and reduced discounting versus the extensive price promotion coupon activity that we saw a year ago. Nevertheless, the overall industry environment continues to be challenging as price realization for all the major players continues to lag inflation on key cost inputs. U.S. cost of goods per barrel increased 5.0% on the quarter, a significantly improved trend from the second quarter. This increase was driven by the following four factors.

First, about 6 percentage points of the increase in cost of goods per barrel was due to inflationary cost increases of nearly all of the inputs to our operations, including packaging materials, freight rates, fuel, and various components of labor and labor-related costs. About three quarters of our U.S. inflation hit in the quarter is attributable to commodities with the balance being driven by rate and labor-related increases. Less than 1 percentage point was related to the continuation of innovative packages that were instrumental in our "taste the cold" campaign this summer, including our plastic bottled cooler box, cold wrap bottle, and the frost brewed can liner.

About 1 percentage point was for continued investments that will yield lower manufacturing costs throughout our system going forward. These include new co-packing and freight arrangements related to the sale of our Memphis brewery, which was completed on September 6. These additional costs will be more than offset by Memphis related savings in the third quarter.

Fourth, equally important, we continue to drive productivity in our supply chain through higher production volume and our operations cost initiatives and merger synergies, which reduced cost of goods per barrel by approximately 3 percentage points in the third quarter. This favorable impact was split about evenly between the volume driven fixed cost leverage and cost savings. The continued positive results from our cost initiatives offset nearly 30% of the total cost of goods inflation in the quarter.

U.S. marketing and federal and administrative expense increased 1.1% from a year ago driven by an increase in investments in our brands and by labor-related costs, including our new stock-based long-term incentive program.

Our total Europe business reported third quarter pretax income of $36.9 million U.S., excluding special items, up nearly 28% from a year ago. This profit improvement was driven by cost savings initiatives in both cost of goods and overheads, which offset continuing industry margin pressures, cost inflation, and negative trends in sales and mix. Improved profit performance from our trade team distribution joint venture and lower leasehold expenses versus a year ago also contributed to earnings growth. Let's examine our Europe business performance in a little bit more detail.

Our Europe-owned brand volumes were down 4.4% versus the same period last year, but this represented a slight market share gain for us as industry sales were particularly soft following the World Cup this year. Carling, our market-leading lager brand continued to outperform the market, although its volumes declined at a low single digit rate from a year ago. Europe net revenue per barrel in local currency declined about 4.7% in the third quarter driven by two factors. First, about 3 percentage points of the decline in revenue per barrel was largely due to unfavorable owned brand net pricing and sales mix.

Both customer mix and pricing were impacted negatively by ongoing industry trends which include the continued industry shift from independent to multiple on premise accounts and from on premise to off premise. Ongoing volume declines in the highly profitable flavored alcohol beverages and pricing pressures from large retail accounts in both major channels and from aggressive competition in the more profitable independent on premise.

Second, the balance of the revenue per barrel decline was attributed largely to a change last year in our invoicing arrangements with one of our largest factored brand customers and a continued decline in overall factored brand volume. This invoicing change resulted in a one-time decline of about $5.8 million in both net sales and cost of goods in the third quarter, but with no net impact on gross profit.

Cost of goods sold per barrel on our owned brands decreased approximately 5% in local currency driven by lower distribution costs and cost savings from our supply chain restructuring program. Partly offset by higher utility costs and decreased fix costs leverage as a result of lower beer volume.

Our U.K. supply chain cost initiative that began last year improved segment cost of goods results by about $5.8 million in the third quarter. Marketing, general, and administrative cost in Europe decreased about 14% in local currency in the third quarter driven by lower overhead and labor-related costs resulting from our cost reduction initiatives. These savings related to cost initiatives total approximately $5.5 million in the quarter.

Europe other income improved $3.5 million in the third quarter as a result of improved profit performance by our distribution partners, trade team, and lower expenses related to vacant leasehold properties. Our Europe pretax income in the third quarter was increased approximately $1.3 million by a 5% year-over-year appreciation of the British pound against the U.S. dollar. For our total company foreign exchange movements primarily in the Canadian dollar and British pound increased Molson Coors Brewing Company earnings by about $8.5 million pretax in the third quarter.

Now continuing with our third quarter P&L review, corporate general and administrative expense in the quarter was $27.2 million, which was up $4.1 million from a year ago. About half this increase was the result of expensing stock-based long-term incentives this year for the first time with the other half driven by severance costs and other labor-related costs. More important, this expense level was $1.1 million lower than that in the second quarter of 2006 and the third consecutive quarter where corporate G&A expense declined.

This trend underscores the work we are doing to reduce non-project corporate G&A expense now and throughout next year. Total company interest expense excluding U.K. trade loan interest income was $31.2 million in the third quarter, which is $3.3 million lower than a year ago.

This decrease was attributable primarily to debt repayments during the past year, and lower expense related to recording Ontario beer store interest rate swaps at market value. Debt repayments in the past year have totalled $360 million and include the final repayment of the merger related special dividend debt in early July this year and that excluding large excise tax payment paid the day after the end of the third quarter this year.

On a foreign exchange neutral basis, these debt repayments reduced the Company's corporate interest expense by about $5 million per quarter going forward. Early in the third quarter, we also restructured the Ontario beer store swap, so they now qualify for hedge accounting and no longer cause the significant P&L impacts that we've seen during the past 18 months.

Our effective tax rate for earnings from continuing operations was 31.0%, including special items in the third quarter of 32%, excluding special items, up from 5% and 11% respectively a year ago. Our effective tax rate last year was lower, as you may recall due to the nonrecurring benefit of elected APB23 tax treatment for our U.K. business and the resulting release of deferred tax liabilities.

This non-recurring benefit reduced our third quarter 2005 tax expense by $43.5 million and increased after-tax earnings about $0.51 per diluted share in the quarter. Cash flow available for debt paydown in the first three quarters of this year total approximately $260 million and again, that excludes the large excise tax payment that was due the day after the third quarter this year.

Although we usually generate only a small amount of free cash flow in the fourth quarter each year, we remain quite confident that we will achieve our 2006 goal of generating more than $300 million of free cash flow available for debt paydown. We are well on track with our cash generation goal despite our expectation that we will come in at the top of our full-year 2006 capital spending range of $400 million, plus or minus 5% excluding capital spending by consolidated joint ventures.

Our outlook is at the upper end of this range because of foreign currency movements during the year and because we are planning to accelerate 15 to $20 million of Shenandoah capital work into this year to take advantage of supplier efficiencies. This acceleration also reduces our capital spending outlook for 2007, which is broadly currently in the range of $300 million of the total company, and again, that excludes capital spending that we might make on consolidated joint ventures.

Net debt at the end of third quarter was $2.0 billion and that excludes approximately $104 million of non-owned joint venture debt and this debt figure is net of $179 million of cash that we had on hand at the end of the quarter. Special charges totalled $28.5 million pretax or about $0.20 per share after tax with a detailed description of these changes in earnings release that we distributed this morning.

Finally, we reported net income from discontinued operations of $13.4 million in the third quarter, which reflects a reduction of the fair value of indemnity guarantees related to Brazil Kaiser business. These liabilities were reduced now, were reduced because Kaiser participated in federal and state amnesty programs in Brazil to settle a significant portion of its previously recorded tax related liabilities.

I'll preface the outlook section as usual by paraphrasing our Safe Harbor language. Some of what 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 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. 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 anticipate the total company interest expense in the fourth quarter and this includes the 53rd week will be approximately 33 to $35 million based on the current level of interest rates and foreign exchange rates as well. Excluding the impact of the 53rd week we expect interest expense to be about $31 million in the fourth quarter.

We anticipate that full-year 2006 corporate general administrative expense will be approximately $115 million which is consistent with the midpoint of the range we provided on our last quarterly earnings call. We anticipate that our full-year 2006 effective tax rate will be in the range of 16 to 20% per GAAP earnings. We expect our full-year tax rate excluding special items to be in this range or slightly higher.

For the fourth quarter, we anticipate a tax rate similar to our rate for the third quarter, unless there are additional tax law changes. In the next few years, we expect our tax rate to be near the bottom of our long-term range of 25 to 30% depending on the timing of changes in tax laws and our company tax structure.

Now an update on our progress towards capturing merger related cost synergies this year. In the first three quarters of this year, we captured an incremental $43 million of pretax cost synergies.

As we mentioned in our most recent analyst presentation in September in Boston, we raised our 2006 full-year goal to more than $60 million of additional cost synergies. We've now completed nearly all the actions required to achieve our synergy commitments for both 2006 and 2007. As a result, we fully expect to capture at least $175 million of cost synergies within the first three years of the merger. We'll update you on our next generation of cost initiatives around the end of this year.

One additional factor that will affect our fourth quarter results is the extra week that we'll have at the end of our fiscal year 2006. We anticipate that this 53rd week in our year will yield about 1.5% of annual sales volume and 1% of annual pretax income using 2005 and that excludes special items as a base.

Because of the seasonality and margin structures of our businesses, we anticipate the affect of the 53rd week on pretax income will be slightly positive in Canada and slightly negative in each of the other segments. At this point, let me turn it back over to you, Leo, for a look ahead to the last quarter of 2006.

Thanks, Tim. Now as we drive to finish 2006 with positive momentum, our focus remains on growing volume, reducing costs, and making smart pricing decisions while we set up for a successful 2007.

Turning to Canada, on brands, we'll maintain our investment focus on key strategic brands as we work to strengthen and build a consumer-preferred portfolio. Specifically, we'll continue to strategically invest for growth in Coors Light, Rickards, and our partner import portfolio as well as focus on improving our brand equities in Molson Canadian, export, and dry to position them for future growth.

We anticipate Coors Light, Rickards, and our partner import brands will continue to achieve very positive sales growth. Our end market activity continues to be deployed on a market by market basis to ensure that our brands remain competitive and leverage the momentum we've achieved to date.

In the first three weeks of October, our Canadian sales to retail declined at a low single digit rate on a comparable shipping day basis. This is due to recent industry softness driven by cooler weather and a continuation of competitive price promotion this year. Keep in mind that three weeks is only a small portion of the quarter and these trends may not be indicative of full quarter results.

On cost in Canada, we continue to aggressively pursue merger synergies and other cost savings in the areas of packaging materials, waste reduction, planned productivity, and distribution. These initiatives successfully offset about one-third of this quarter's cost inflation in Canada delivering on our attack cost strategic platform. Our goal is to hold Canada cost of goods per barrel in local currency to a low single digit percentage decrease for all of 2006.

After decreasing an average of about 0.4% in the first three quarters of this year, cost of goods per barrel in local currency is expected to increase in the fourth quarter, partially driven by a reversal of the timing differences in manufacturing overhead costs that we experienced earlier in the year. With the summer peak selling season behind us, the Canada team has continued to deliver a stronger financial result than a year ago. Continued competitive price and promotion pressure is expected for the remainder of the year, calling for a balanced approach between long-term strategic brand building while addressing short-term competitive activity.

Looking to the U.S., focusing on brands and facing a tougher -- and facing tougher volume comparables in the fourth quarter, the U.S. team is driving continued momentum by building our key brand equities and by taking these brands to retail with discipline. With this approach, we've achieved strong volume trends and strengthened our brands -- our brand trends throughout 2006, particularly for Coors Light, Keystone Light, and Blue Moon.

We'll continue to build on our momentum we've achieved with key accounts and improved alignment with our distributor network. To date, we've been appointed category captain by nearly 40 major chains, which validates the progress we're making with our key account group. Additionally, we've just completed our fall distributor communication meetings, and we are encouraged by our distributor's response to our 2007 plans. And of course, the fourth quarter brings football and we'll be focused on leveraging our Coors Light NFL sponsorship.

In Puerto Rico, the economic conditions have been quite challenging this fall, which has resulted in weak volume trends. In addition, the recently approved Puerto Rico sales tax will become effective in mid-November and we're monitoring this situation and the impact it may have on volume and pricing in this important U.S. market.

Overall, in the first four weeks of the fourth quarter, our 50-state U.S. sales to retail continue to grow at a low single digit rate. On cost in the U.S., we mentioned on our last earnings call that our third quarter cost challenges would be similar to the second quarter, but less severe and the results we reported this morning reflect this. We also said that the fourth quarter will bring many of the same challenges, but we would begin to see the benefits of some of our long-term cost initiatives, especially 6 to $7 million of all-in cost savings related the closing the Memphis brewery.

We expect the pretax cost savings from the closing of Memphis to total approximately $30 million annually. We now expect our full year U.S. cost of goods to increase approximately 4% per barrel, which is the midpoint of the range we provided in our last earnings call. As we've mentioned previously, we anticipate that our cost savings programs will offset more than half of the commodity in other cost inflation that our U.S. business will face this year.

Looking forward to next year, if aluminum and diesel fuel costs remain at today's high levels, our U.S. business will require net price realization closer to the average of the past several years to maintain profit growth for 2007. Additionally, as a reminder, in the first quarter of 2007, we'll be cycling the benefit of some accelerated commodity hedge gains a year ago.

The U.S. beer price environment this year has improved with each consecutive quarter and we anticipate continued favorable net pricing comparisons in the last few months. Going forward, we'll continue to take a very disciplined approach to pricing while sustaining our volume momentum.

Turning to Europe, we continued to execute against the growth and cost strategies we first launched in late 2005. On brands, we continue to invest strongly behind our strategic brands in the U.K., via marketing programs and retail innovations.

At retail, we're rolling out our new cold dispense technologies and distinctive above bar fonts with nearly 7,000 new cold dispense points installed this year-to-date. This roll out extends our cold platform beyond Carling for a broad group of our strategic brands as we aim to maintain our leadership in cold dispense. This leading retail innovation is driving sales with current retailers along with increased distribution via new retail outlets.

On brand innovation, we recently launched the brand C2 in the off premise. C2 is a great-tasting, mild strength lager developed in response to changing consumer preferences. As a result of our introduction of C2, we received a beer innovation of the year award given in 2006 by one of our largest customers, Tesco. C2 will leverage the brand equity of Carling among beer drinkers. Also, our new advertising agency for Carling will unveil a new add campaign for our flagship brand during the fourth quarter.

In the first five weeks of the fourth quarter, our Europe sales to retail have decreased at a low single digit rate from a year ago. On Europe segment costs, our cost reduction programs have successfully driven earnings growth in a very challenging industry environment. As we enter the fourth quarter, we'll begin to lap the initial savings from our cost reduction initiatives and ongoing year-over-year improvement will be more challenging.

Within the supply chain, the flow through of savings will continue into the second quarter of 2007. Also in the supply chain area, we recently announced to the workforce our next phase of plans for creating world class operations. And this will generate further savings over the next three years. We'll provide more details regarding these and other future cost savings programs during our annual analyst meeting in New York in March.

Industry pricing in the U.K. continues to be the most significant source of margin pressure in the beer business, both on and off premise. Our U.K. team continues to manage pricing by channel and the context of local competition while staying focused on our core strategy of building strong brands for the long haul.

One important note on pricing, an area that's key to the profitability of all of our businesses. Our end market teams will continue to make prudent tactical pricing decisions necessary to be competitive by market, channel, and package. And always within the context of our strategic priority of building our brands and ensuring that our brand equities remain strong.

So as we complete the last quarter of 2006 and move into 2007, we have momentum in our businesses in the significant post merger achievements that we shared with you during our recent investor presentation in Boston. We've unleashed Coors Light in Canada. At the same time in Canada, we've shored up the growth of our strategic brand portfolio. In the U.S. we've re-established volume and share momentum behind Coors Light. We've continued to gain share for Carling in the U.K.

We will achieve the $175 million in cost synergies in three years. We've generated cash to completely repay the 526 million special dividend debt. We resolved Brazil by selling a controlling interest in that business, we've rebuilt our senior management team, we've strengthened our balance sheet, and reduced our risk profile, and we've identified the next generation of cost saving opportunities. To capitalize on this momentum, our teams across the country will continue to be focused on the fundamentals of winning in the global beer business, including strengthening our capabilities to be the world class brand builders and effective and efficient operators in the beer industry.

Just a quick comment before we open up to Q&A. Our prepared remarks will be available on our website via reference within a couple of hours this afternoon. Also at 3:00 p.m.

Eastern time 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 quarterly results. This call will also be available for you to hear via webcast and recorded replay on our website. So, at this point, we're ready to open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Kaumil Gajrawala from UBS.

Hey, guys. Could you talk a little bit about what the STR growth rates would look like in Canada in you adjust for the discontinued products and also some of the other brands that you're not supporting as much as you had in the past?

Sure, Kevin?

Our strategic brands grew in the quarter in the low single digit range. If you look at our share, we say lost about three quarters of a share point. Discontinued brands made up close to 30% of that share erosion.

Got it.

Just a touch under 40%, high 30s.

I also wanted to ask about the newberry, if the time line is the same, what you're going to be brewing there and what kind of cost savings you're looking for in Shenandoah.

Frits.

Shenandoah, we look at getting on speed in March and fully operational for the peak season in the summer. Savings, I think we mentioned in the text, was about 30 million on a cash basis, so not including depreciation. A portion of that will be achieved in the fourth quarter of this year and then the rest overall on an annual basis starting next year.

And that 30 is separate from Memphis or the 30 is related to Memphis and then there's an additional 30 from the newer one?

It's one and the same.

Same thing, great, thanks guys.

The number is the same, they're two different events. On an annual basis, we'll save $30 million for closing Memphis. As Frits said, we'll save $30 million plus from opening the Shenandoah brewery.

Got it. Thank you.

Marc Greenberg, Deutsche Bank.

Good morning. Tim, just to clarify. The effective benefit of the Canadien's hockey team, that $9 million. That was about $0.07 into your 1.61, so if I exclude that, that's 1.54?

Correct.

Great.

The 2 points -- I mean, one is its real cash, and two, the risk of having previously had to guarantee the cost of depot debt, the Gillette Group incurred to do the deal, we no longer have to guarantee. If you're sitting in my chair, that's a good thing, because the risk in our balance sheet has now gone down and we had to, obviously, value that and that's what generated the P&L impact.

Sure it's real money, appreciate that. Leo, my question relates to the U.K. Using your term competitiveness and profitability balance, wondering how you're thinking about the A&M spend overall in that marketplace? You're sort of at a point in time where a couple of the principal competitors are really gearing up.

You're seeing some share loss to Cider and RTD and yet you're trying to take costs out and outside of Carling, doesn't appear that there's a whole lot of spending going on. Against a lot of cross winds there, can you talk about restoring your profits longer term and what the right kind of profit bogey for the U.K. may be?

Peter, why don't you take that?

Sure, in overall spend, we spend about 70% of our marketing spend on Carling and Carling contributes about 70%, 72% of our -- the benefit of the business of the cost of the revenue to the business. That's pretty much in line. We will be spending this year about the same, roughly the same as last year on marketing and next year we plan to increase that. C2 has just gone outdoor in terms of advertising.

We'll be putting that on the TV in the new year. So certainly we would not be looking to cut back on our marketing. That's the last thing that we plan to do and it's sort of in line with the comments, I think Leo made that the -- this morning about maintaining our push behind building brands.

Okay. So if we're going to see a bump up in marketing and you're still trying to take some cost out of that business, maybe Leo or Tim, you want to talk about some of the ongoing things that are in progress there o get to those goals.

Do you want me to pick that up, Leo?

Sure, Peter.

Again, I think we mentioned in the commentary that we'll still see the benefits during the first two quarters of the cost saving initiatives we've currently got under COGS and G&A. Again, we've got a new initiative coming which we call world class production costs which we can't go into detail about, because in the U.K. we have to go through this negotiation and consultation with our people. Anything that we say about that could prejudice the outcome.

But again, that is something else that we're looking to do to take costs out of the business, so it's really an ongoing cost program we've got over the next three years to ensure we remain competitive and continue to take costs out of the business. We've obviously got head winds, as far as inflationary pressures are concerned, but again, we're looking to take those and absorb them within our bottom line going forward.

Great. Last question. Leo, just in terms of key input pressures for 2007, can you give us a sense of what those levers are and how they look to you right now?

Tim and I can sort of fric and frac this. We feel good about our -- volume obviously drives a tremendous amount of our leverage, particularly in the U.S. and U.K. And volume is the hardest thing to call, Marc, but we feel good about the momentum in our brands, and continue to seek to shore up the brands in the total portfolio, which we think is still an opportunity.

If you take a look at pricing, U.S., which is the most critical market on pricing and has been for the last few years, you'd have to say the outlook is encouraging. So that's also good news. And as you know, our own situation in terms of a full benefit of synergies really starts to show up starting in the fourth quarter this year in the U.S. P&L, which is a big deal.

I think Canada, the things we have to work on are real clear. To keep that momentum going against the strategic brand portfolio and we're very conscious of the fact that we need to continue to invest in the equities of our premium Canadian brands. If you look at the price gaps and brand momentum ability to overcome price gaps, Coors Light is doing just fine, and Molson Canadian is doing a lot better than it was doing a year, two years ago. But it really depends on the strength of your brand equities in terms of how you ride through those pricing differentials in the industry.

The COGS picture next year is going to be a challenge. It's going to be a challenge because of commodities. We've said that and tried to frame that for you, and that will be particularly critical in the U.S. sector because of our packaging costs. But those are the big pictures, otherwise we continue to grind away at G&A and you'll see a significant positive impact in our central business costs, in other words our overall corporate G&A. Is that what you were looking for, Marc?

Yes, thanks, Leo.

Christine Farkas, Merrill Lynch.

Thank you very much. Good afternoon.

Hi.

A question -- just a clarification on your synergy savings. Did you indicate that the goal was over 60 million for this year and you've reached 43 million for the nine months?

Correct. We feel pretty confident about hitting or slightly surpassing the 60 million for this year.

And a question for Frits or for Leo, with respect to your U.S. revenue per barrel growth of 3% and with what looks to be some negative mix, can you comment how much of that rate was offset by mix, if that's correct?

Actually, I think mix was a slight benefit and the overall benefit of 3% on revenue per barrel was pretty well split between price increase and reduced discounting.

Okay. And the benefit coming from the import brands into your wholly owned distributors or coming from your own product?

Primarily, a couple of things, Blue Moon as well as some relative geographic growth in markets where we have a slightly higher realized price.

Great. And then a question for Kevin on the Canadian market. With the overall industry being flat, I think I heard you say and some share declines largely explained by discontinued products, can you talk a little bit about the trends? Has there been a change, a deceleration or acceleration on the price value segment and what are you seeing there relative to how the year has progressed?

Kevin.

When you look at the total year, what you are seeing is a continued trend towards superpremium, and that's both domestic and import. You're seeing some stabilization of the value segment in total, but some shifting within that from what we call near premiums. Those are the brands if you look at the Ontario marketplace that would be around 30, $31 to push down to the cheaper brands.

A bit of a shifting within the value segment, and all of that is putting a little bit of pressure -- continues to put pressure on the premium segment. Growth in the above, some shifting in the below, and clearly premium is the area that everybody is targeting.

Okay, great. A final question, just back to the commodities and the outlook, Leo or Tim, can you comment on your hedging activity or your views on hedging, or can you quantify the level of exposure you have for some of this inflation next year?

A couple of things. Thanks for the question. As you'll recall last year, we unwound some commodity hedges, so we got a benefit in the earlier part of the year so -- excuse me, this year. As we move into next year, the year-over-year comparison will be a tough one.

We obviously don't comment on exactly how we protect and mitigate against risk and fluctuation, but we're -- to Leo's earlier point, we're seeing a slight mitigation in the impact on transportation costs, freight rates. That hits us hard because we move product in the United States much farther than our competition. So that's starting to ease a little bit. It's the packaging commodity area where we really got to be mindful next year, and the first part of the year we'll have a bit of a challenge to be sure.

And did you quantify the -- the gain from unwinding that commodity hedge earlier in the year?

I believe it was about 7, $8 million. So that's -- in effect, year-over-year, that creates a hole for us to overcome.

That's really helpful, thanks a lot.

Mark Swartzberg, Stifel Nicolaus.

Good morning, guys. A couple things. First on the cost synergies, Tim. When you say you're comfortable with that 175 for three years, can you put a finer point on it in terms of increment next year. I think you're at something like 119 or 120 or so if you get that 60 number this year. So 1.20 or so since the beginning of last year.

The running rate becomes circa 65 to 70. Basically the running rate for next year is pretty much the running rate and then a little bit more as we complete this year. And that's why we feel pretty darn good about -- I think Leo and I both said at least 175. And to the great credit of the entire team let by Cathy Noonan, who's our synergy head, there's no stopping on ideas.

Obviously a lot of the ideas have been crafted and put in place year one, year two, last year and this year, but we're still looking for ideas. And the running rate, as they say is in that 65 plus range. We're looking and feeling pretty good. The challenge now is -- and we've got a lot of folks working on this as well, the next generation of opportunities of financial benefits broadly construed.

Yes. Okay. It sounds like 65 or 70, incrementally it's something at a minimum you're comfortable with next year?

Correct.

And then as far as Canada, could you repeat or reframe these comments about the fourth quarter and the manufacturing overhead and how that's going to be reversing in a sense in the fourth quarter relative to what happened in the third quarter? I'm coming up with something like a $9 million, U.S. dollar-type issue. Is that about right?

Do you want me to handle that, Leo?

Sure, Kevin.

It's the fixed overheads. They've been -- if you go back to earlier in the year, there was a swing in the first quarter that was an increase that we talked about then.

It positively impacted us in the second and third quarter and in the fourth quarter it's coming back again. And it's a little bit less than the number that you quoted, but it's really a timing change throughout the year on the fixed overheads. I think the important thing for us is that we will beat on a full-year basis, we'll clearly push back and beat inflation.

And last one for you guys. Tim, the 53rd week, you said -- did you say 1% of pretax income?

Correct. Just a little bit less. Kind of a mid-low single digit millions of dollars number.

Perfect. Thank, guys.

More coy. You're welcome.

Robert Van Brugge, Sanford Bernstein.

Good afternoon. Kevin, I was wondering if you could comment and provide a little bit more color on the nature of the price pressures that you're facing in Canada. Is this mostly actions by Labatts in the premium segments, or are you still experiencing a lot of pressure from the discount brands like Breck and Lakeport?

It varies by province. I think some provinces are getting a little bit better and what you've seen in Ontario this year is a movement into cans as I think everybody is aware.

Lakeport and others have gone into cans at lower prices, which has obviously had some challenges out there. What you're seeing is an increase by everybody in the discount sector just to focus on that a little bit more. You're seeing a little bit more promotional activity in the beer stores and things like that. And you're seeing across all companies, including Labatts and Molson's, continued LTOs, limited tie offer discounts that last a week to four weeks type of things.

Sometimes they've extended to five weeks. They're $4 off a case or 28 for the price of 24, similar to that. And in the past, it probably, if you go back four or five years it probably was only Labatts and Molson that was doing that, but today Sleeman's, Moosehead, everybody seems to be participating who has a premium brand. You're not seeing the depth of those discounts increasing, so much as the frequency tends to be increasing a little bit.

Okay. And would you expect that pattern to continue into next year, or as you start lapping this, will the frequency basically start leveling off?

As Leo touched on in his comments, a lot depends on the strength of the brands equities. Brands such as Coors Light are performing very well even with pricing pressures in the marketplace.

Canadian has improved significantly from a year ago, but it's still declined a little bit in the quarter. We plans in place to strengthen the equity, but time will tell how successful those are. Clearly we've made improvements to the brand and next year a lot will depend on the strength of our equities as we go through the course of the year.

Okay, thanks.

Karim Salamatian, BMO Capital Markets.

Thank you, good morning to you out in Colorado.

Good morning.

A couple of things, but first I want to talk about volume and market share in Canada, so this is for Kevin. Just thinking about that going forward, in order to get flat volume or even positive volume growth, is it imperative that Molson Canadian grow in positive territory? Or another way to put it is, is it plausible that the gains in Coors Light and Rickards will ever be able to fully offset the declines in Canadian export and dry?

I think when you look at the size of the brands, Rickards is still a relatively modest brand. Although it's growing very well, the truth is it could never offset any declines we have on any of our bigger brands. So going forward, I think for us the issue will be stabilizing the Canadians, the drys and the exports, a two-pronged attack.

Stabilizing those and although we're experiencing both volume and share growth in our, what we call our supported our focused brands or whatever, and they're about 80% of our volume, perhaps we need to go back and retweak a little bit some of the things we're doing on that tail that accounts for 20% of our volume, and that's declining a little bit faster, if you like, than we would want given our focus on the other brands. It's probably a combination of shoring up our premium up brands, dry, export, and Canadian and getting them flattish and do a better job on managing the tail.

So in order to get Canadian export and dry stabilized or flat, are you spending the appropriate amount of money today, or does that need to increase next year? And then on the tail, is there room to rationalize some more brands and try and get those drinkers to move into your core brands?

So let me answer the last question first. This isn't a typical consumer goods industry where your tail is not very profitable. Our tail is pretty profitable. We have to manage that carefully. There would be some opportunities, but every brand interacts with other brands on a different basis. We have to understand if we lose certain aspects of our tail, is it staying with Molson or going someplace else, and that work is currently underway amongst our brand team.

With respect to the amount of support that we're putting behind the Molson brands, if you like, right now we're pretty happy with the amount of support, I think we need to do a better job of -- and certainly our marketing group this year has really challenged themselves to looking at what programs aren't adding value, some of our longer term fixed costs that we've had and some of our sponsorship areas, to be honest, when we looked at them, they weren't paying off the way we want. So we've made some tough decisions in that area, but I think they're the right decisions and we're moving forward. So I think the spend level there is about right.

Now, what about profitability? What does the profitability trend look like for Canadian export, and dry versus that of Coors Light and Rickards? I assume Coors Light and Rickards is experiencing some pretty dramatic profitability improvement but what about the other three Molson brands?

If you stay with Coors Light and Rickards, Rickards being super premium priced, yes, it's doing very well because it's benefiting from increased spend, but also it's getting a higher NSR per barrel. So that really helps out.

And when you've got the growth that Coors Light is doing, even with our increased spend, the profitability is going up at a fairly impressive rate. On the other hand brands, it's tending to fluctuate quarter to quarter and they're performing pretty well, but they're not growing at the rate or stabilizing at the rate we need them to in the long-term to get that share growth that you were referring to before.

Okay. Terrific. And then a couple of questions for Frits on the United States. Can you talk about the 3% volume growth in the quarter, what regions or what markets that primarily was driven by? Was that markets where Coors has historically been strong and has an above average share, or are you starting to see improved traction in some of the underpenetrated markets?

Sure. Let me take you on a walk through the U.S. to give you a flavor for that. As you look at the west, I'm looking primarily then at Washington, Oregon, California, and Arizona.

We see continued very strong growth throughout that area with some exception being in the Los Angeles area. California as a state has jumped around a lot relative to weather and other things, but it's been extremely strong for us as we've gotten into the third quarter. As you go to the south, really the two states to focus on are Texas and Florida.

Florida, for reasons I'm sure you understand has had some pretty weird comparisons based on the discounting that took place last September. Texas continues to be a strong momentum market for us. We really turned around the business, for example, in Dallas, but have seen the rest of the state also deliver much better numbers. As you look at the Midwest, probably our strongest region overall, and so to your question about underpenetrated markets, I think a great example of the part of the country where our share is below index, if you will and our growth is considerably above that, that's even more the case as you get specifically into Chicago.

As you go to the northeast, New York City continues to be strong for us, but the rest of the northeast is fairly soft and maybe particularly in Pennsylvania one of the few markets where we don't feel like we're gaining share overall or with premium light. That would be an historically strong market where a lot of the trends have gotten better over the last year or so, they certainly have a ways yet to improve.

Terrific. Just real quick, as a follow-up to that what about the pricing activity of these four markets? Where are you seeing a greater potential for positive pricing?

It's pretty much across the board. Meaning, as you go through the west and the northeast and even the south, feedback from the marketplace is encouraging. So far the price increases in the fall have been equally ahead of what our expectations might have been.

I do think and we mentioned this in the text, though, that we're still not seeing GPIs anywhere near what our factory input costs are increasing. The real health of the category can be measured on the basis of whether that trend starts to get more equal over time.

Okay. That's terrific. Thank you.

Bryan Spillane, Banc of America.

Good afternoon, guys.

Hi, Bryan.

Just a couple of points for clarification. In the fourth quarter, Tim, you're still expecting 6 to $7 million of savings from the Memphis plant closure?

Correct. About 30 million on an annual basis, but previously we weren't expecting to close it until the first quarter. We closed it a whole quarter earlier. So we get -- there's still some conversion costs, but basically it's 6 to $7 million of new savings, if you will.

And then in the fourth quarter, when we're looking at the U.S. again, on input costs, your aluminum prices reset in October, is that right?

I don't think we actually comment on that.

Yes, we don't comment on that. It is a backward looking formula, but that's about all we'll comment on.

Okay. And then finally, just on debt reduction, Tim, you're down to a level I'm assuming now where you're probably thinking about alternate uses of free cash flow next year?

Yes, sir.

So if you could prioritize for us debt -- dividend increases, share repurchase. And if you think about share repurchase, how you'd think about that. Would it be opportunistic or would it be a more structured program?

I think opportunistic. Obviously you can't buy back stock without your Board's support and approval and at the appropriate time, we go to our Board for that approval. Suffice to say, I think if you look at our tenure and our bias and we've shared this time and time again, first and foremost, we want to put our cash to work to build our business, to be more competitive, to sell more beer, to drive out costs, to invest where it makes sense.

And sure, we expect by late spring, early summer to be accumulating cash, having paid off all the short-term debt, revolving debt, commercial paper that we can and from time to time, opportunistically, selectively, yes, we'll buy a little stock back, but the first focus is really to drive the business and drive value, and I think that's what you'd want us to do.

Great, thanks, guys.

We've got time for one or two more questions.

Carlos Laboy, Bear Stearns.

Good afternoon. A couple of clarifications on Canada. The first one was, Labatts indicating that changes in the Canadian excess taxes at the Federal and the provincial levels turned out to be a wash, but that the timing of when these was enacted is giving them a one-time boost on revenue per hectoliter in the quarter. Did you have a similar one-time boost in revenue per hectoliter Canada?

Kevin? Did you get the question, Kevin?

Yes, the answer is there was a one-time boost and it was very modest a quarter.

Would it account for the revenue per hectoliter growth you had, or was it smaller?

Smaller.

Much smaller than that.

And the second issue was, you made mention of timing of COGS in Canada during the third quarter, was hoping you could elaborate on that.

It has to do with the fixed overhead expenses and it's really not just the third quarter, it has to do throughout the year. If you go back to our report on the first quarter, our fixed overheads were higher and drilled some increased COGS. As the next two quarters went through they were beneficial and as for the fourth quarter, that will come back and they will be higher than a year ago. Throughout the course of the year, it's really just timing, the course of the year our COGS will be better than inflation in total, but there is some timing noise in there, if you like.

Carlos, this is much ado about nothing. Because what this is taking some of your operations, fixed costs, overheads, and you spread it. And in the quarters where you have lower volume, it's going to hurt you. In quarters where you have higher volume, that helps you because you're leveraging it. This is really a spreading issue and in terms of real economics, this is a very little consequence. The fact is, Kevin and his guys have just been dogged in taking cost out, and I think you're seeing that overall.

Thank you.

You're welcome.

Any other questions, Matt?

We have one more question. Todd Duvick from Banc of America.

Good afternoon, how are you?

Very good.

Real briefly if I could just touch base with you on the debt balance, I think you indicated there's a $2 billion net debt balance, that's net of $179 million of cash on the balance sheet. Do I have that correct?

You do. The reason I mention that is we did use some of that cash right after the quarter was over to pay a -- as we always do, the excise tax bill in the U.K.

So in terms of the 525 million or so of merge-related debt, that was all paid off as of July?

Correct.

And in terms of other short-term debt you have on the balance sheet, is there anything material at all?

No, there's not a lot left.

Okay.

As I mentioned, fourth quarter virtually all our businesses tends to be a net working capital user and so we'll -- as I mentioned, we feel really good about meeting or exceeding our $300 million all-in cash flow target, but, yes, we're -- we'll have a bit of short-term commercial paper revolving like facilities left and the first quarter is really more of the same, the small volume quarter, we start using working capital and building working capital for peak seasons. That's why -- I hope I'm conservative in saying by early summer, late spring we'll be in an accumulating cash posture.

Then just one final question. In terms of investing your free cash flow going forward to build the business. Acquisitions, there's been a lot of activity in the space but how do you look at acquisitions? Obviously you're seeing things come to sales from time to time, is that a priority or is it something that you're really not considering at this time?

Our priority is, I think we -- our priority is we -- I think we've pretty clearly said, Todd, is focused on our core businesses right now and there may be some relatively small opportunities in local markets as we did with Creemore in Canada last year. That's not to say that in the long run we wouldn't be looking at acquisitions, but we know that our first job is to get our core businesses running the way they ought to be running, and that's what we're doing. Obviously the best posture we can have is to be ready if an opportunity comes up. Appreciate it.

Very good. Thank you.

Thank you so much.

Okay, are we clear?

Yes, we have no further questions.

All right. Thanks everybody. Thanks for being with us. Thanks for being patient. We ran over a little bit, but really appreciate your interest and we will see you in March, I hope. Or not. Have a nice day.

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