Molson Coors Beverage Co (TAP) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2007 second quarter earnings conference call. At this time, all line are in the listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (OPERATOR INSTRUCTIONS) . As a reminder the conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Leo Kiely, President and Chief Executive Officer of Molson Coors Brewing Company. Sir, you may begin.

Thanks, Matt. 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 Limited; Sam Walker, our Chief Legal Officer, Mike Gannon; our Global Treasurer; Marty Miller, our Global Controller; and Dave Dunnewald, Vice President of Investor Relations. This morning Tim and I will take you through some highlights of the second quarter for Molson Coors Brewing Company and put a little perspective on the back half of 2007. They then we'll open it up for questions. The second quarter 2007 we achieved double-digit earnings growth by delivering strong top line growth, substantial cost reductions, reduced interest expense, and a lower effective tax rate.

Let's look at some of the highlights. We grew total company volume led by market share gains in the U.S. and Canada. This represents our first Canada share gain in nearly four years, and the achievement of one of our most important goals leading into the merger. Although, overall global sales-to-retail declined 0.7%, due to a softness in the UK Beer market, our sales-to-retail in North America grew 1.5% in the second quarter. In fact, the UK market on and off premise channels each declined approximately 7% in the second quarter, driven by some of the wettest weather on record and cycling the 2006 World Cup Tournament. We continue our company wide focus on brand building and increased revenue per barrel and local currency in all three of our businesses. And we capture additional merger synergies and next generation cost savings in the second quarter to bring our year-to-date savings from all cost programs to $78 million. Results from these initiatives allowed us to off set more than 80% of the cost of goods inflation impacting our company in the first half of this year.

Both the synergies and the next generation cost reduction programs are on target for our 2007 goals. We successfully brought our new than Shenandoah Brewery online in the second quarter with analyzed cash savings of more than $30 million and P&L savings of approximately $14 million per year. We increased total company income from continuing operations nearly 45% in the quarter led by 39% pre-tax income growth for our U.S. business. Both of these results exclude special and other one-time items. And we reduced our go forward interest costs and effective tax rate by refinancing $625 million of our debt and refining our company structure.

Overall, we are pleased with our company performance in the second quarter, as our teams continue to focus on brand building and taking costs out of the business. So at this point I'll turn it over to Tim to review second quarter financial highlights and trends, and then we'll provide some perspective on the balance of 2007 for the Company. Timothy?

Thanks, Leo. Hello, everybody. Starting with the second quarter, financial highlights for the total company, we reported a consolidated sales volume of 11.5 million barrels, up 0.07% from a year ago, while total company sales-to-retail declined 0.0 7% in the second quarter. Volume growth was driven by brand strength in the U.S. and Canada, offset by weak market conditions in Europe. Net sales were $1.68 billion, up 5.9% from the second quarter of last year, while costs of goods sold increased 5.1% Marketing and G&A expense grew 1.9% in the quarter. We achieved income from continuing operations of $176.1 million or $1.94 per diluted share excluding special and other one-time items of the second quarter, which is up nearly 45% from $121.6 million or $1.40 per share a year ago. These results exclude a gain on the sale of our interest and House of Blues Canada this year and one-time tax benefits on net special charges in both years which are described in the earnings release we distributed this morning.

Foreign exchange movements increased our total company pre-tax profit by approximately $7 million in the second quarter, driven primarily by a 9% appreciation of the British pound and a 3% appreciation of the Canadian dollar versus the U.S. Dollar. And by the way, all the financial results we share with you today will be in U.S. Dollars unless we indicate otherwise. Please note that all our company earnings discussions today will be for continuing operations, that is excluding the Kaiser Brazil business that we sold last year in January.

In segment performance highlights, starting with Canada, we grew market share more than one-third of a share point versus the prior year. On the strength of this volume growth, along with cost savings initiatives and favorable foreign exchange rates, pre-tax income, excluding special charges and one-time items, increased 1.9% to $146.2 million in our second quarter. Favorable currency benefited Canadian pre-tax results about $5 million U.S. versus a year ago. Positive factors in the quarter were partially offset by inflation, increased brand investments and a $5.8 billion non-cash expense in the quarter related to mark-to-market adjustments on foreign currency hedge positions. These Canadian results exclude a $24.1 million non-cash special charge related to the termination of our Foster's U.S. license agreement, and a $16.7 million one-time benefit from the sale of our ownership interest in House of Blues Concerts Canada, which is reflected in other income.

Our Canada sales-to-retail or STR for the second calendar quarter that ends June 30, increased 1.1% from the calendar quarter a year ago. Most of the strategic brands continue their mid-single-digit growth trend in the quarter fueled by Coors Light, Creemore, Carling and our partner Import Brands which all grew at double-digit rates. Coors Light, our primary growth engine in Canada has achieved double-digit STR growth in every quarter since the merger. In addition, Rickard's continued its high-single-digit growth this quarter while Molson Canadian experienced a mid-single- digit volume decline. Total Canadian Beer industry sales-to-retail grew estimated 0.001% in the calendar second quarter, so Molson achieved more than a one-third share point gain. Molson Canada sales volume totaled 2.3 million barrels for the fiscal second quarter that ended July 1, which is an increase of 4% from a year ago. Approximately 3 percentage points of this growth is due to the inclusion of the higher volume week leading into the Canada day weekend in the second fiscal quarter this year versus its inclusion in the third quarter last year. We expect this volume time benefit resulting from the year-over-year alignment of weeks to reverse in our next third quarter.

Net sales per barrel increased approximately 1% in local currency, driven by positive sales mixed toward higher revenue per barrel products, including Rickard's in our partner Import Brands. Approximately 3 percentage points of revenue per barrel from selected front line price increases was almost entirely offset by higher priced discounting focused in Ontario and Quebec. Cost of goods sold per barrel increased approximately 6% in local currency driven by the following factors. First, 2 percentage points of increase due to input cost inflation, which was more than offset by 3 percentage points of synergies and other cost savings within the quarter. A 3 percentage point increase from sales mix shift to higher cost, but also higher revenue, super premium partner Import Brands. 2 percentage points of increase from a requirement from mark-to-market in the second quarter certain foreign currency hedge positions, primarily related to future quarters, and finally, a 2 percentage increase from other one-time impacts, including incremental cost to supply the market as a result of the Edmonton Brewery strike. Marketing G&A expense decreased 1% in local currency, driven by reductions in G&A expenses which more than offset an increase in overall brand investments.

For our U.S. business, second quarter pre-tax income was $98.1 million, up 39.1% excluding special items a year ago. This increase was driven by sales volume growth, higher net pricing and continued savings from our operations initiatives. Looking at U.S. highlights. Our 50 state sales-to-retail increased 2.0%, and we grew market share again in the second quarter. This sales increase was driven by low-single-digit growth for Coors Light, which achieved its ninth-consecutive quarter of growth, along with strong-double-digit growth of Blue Moon and mid-single-digit growth of Keystone Light.

Also, we are encouraged by the performance of Coors Banquet, which grew slightly in the quarter by refocusing the brands positioning on its heritage, reinforcing a redesigned packaging and increased advertising investment. Including our Caribbean business total U.S. sales-to-retail increased 1.6% in our second quarter. Meanwhile, U.S. volume-to-wholesalers grew 3.1% due to strong sales-to-retail growth in the time of the 4th of July Holiday in our fiscal calendar. U.S. net sales per barrel increased 2.2% in the second quarter almost entirely due to higher front line pricing.

Cost of goods per barrel decreased 0.05% in the quarter, driven by over $22 million of cost savings initiatives and lower depreciation expense, which were offset by higher commodity transportation and packaging material costs. Our operation cost savings offset about two-thirds of the U.S. cost to goods inflation in the second quarter. U.S. marketing, G&A expense decreased 0.09% in the second quarter as higher brand building and sales investments were more than offset by a decrease in G&A administrative cost. Our Europe business second quarter pre-tax income of $38.9 million, excluding special items, increased 5.1% from a year ago. Driven by higher revenue per barrel, lower operations, administrative costs and higher pension income, along with favorable foreign exchange rates, which added approximately $4 million in pre-tax results in the quarter.

Pension income of $4.7 million in the second quarter, up $1.8 million from a year ago. Reflected the improved funded status of our UK pension plans. These positive earnings factors were partially offset by cycling, a $5.5 million gain in the sales surplus land, which was reflected in other income for the second quarter of 2006. In more detail, our Europe owned brand volumes decreased 7.5% due to slight benefit from increased sales during the World Cup Soccer Tournament last year long with a extended period of very poor weather conditions this year. Recall that our volumes increased 5.1% in the second quarter last year, largely due to strong sales during the World cup which is played every four years. Our UK market share this quarter was impacted only minimally as other Brewers also faced difficult comparisons related to the World Cup last year and the poor weather this year. UK-owned brand volume net revenue per barrel in local currency increased just over 4% in the second quarter, due largely to higher owned brand net pricing with a portion of this benefit related to weak pricing a year ago during the World Cup.

This represents our fourth consecutive quarter of improving trends in owned brand pricing, which is an encouraging turn around from the previous two years. Cost of the goods sold for our UK owned brands decreased about 1% per barrel in local currency, driven by cost savings from our supply chain restructuring program and higher pension income as our UK plans benefited from improved funded status lower staffing levels this year. Marketing G&A expenses in the UK decreased approximately 1% of local currency. Marking and sales spending increased at a low-single-digit rate, as we continue to roll-out our new ad campaigns for Carling and C-2. G&A costs declined faster than front-end spending due to continued savings from cost initiatives and higher pension income.

Moving beyond operating business unit performance, Corporate G&A expense in the second quarter was $30.3 million, $2 million higher than a year ago, from one-time fees related to restructuring some our debt during the quarter. Corporate net interest expense, excluding UK trade loan interest income was $27.8 million in the second quarter, which is $12 million lower than a year ago, driven by our repayment of debt during the past year and the benefit of cycling $4.6 million of expense last year related to adjusting Ontario Beer store swaps to mark value. Our second quarter effective tax rate was 13% on a reported basis and 20% excluding special and one-time item. One-time tax items include, this year the nonrecurring benefit of a one-half percentage point reduction in the Canada corporate income tax, as well as a one-time adjustment to our liabilities for unrecognized tax benefits under the new FASB Interpretation Number 48 Tax Rules. These changes have the nonrecurring effects of reducing our tax liabilities on the balance sheet and quarterly tax provisions by $11.5 million in our second quarter.

Second, last year's second quarter reported results benefited from a 2 percentage point reduction in the Canada corporate income tax rate as well as minor changes in two provincial income tax rates as well. These tax rate changes have the one-time effect of reducing our deferred tax liability in the balance sheet and our quarterly tax provision by $52.3 million a year ago. Free cash flow in the quarter totaled approximately $93 million, driven by operating cash flow of $221 million and asset sales of $33 million, minus $161 million of capital spending. Well over half of this CapEx was due to the repurchase of our UK Keg Float early in the quarter. Net debt at the end of the second quarter was $2.0 billion and that excludes approximately $100 million of nonowned joint venture debt. This figure is net of $680 million in cash at the end of the quarter. Which was primarily the proceeds of the $575 million convertible debt offering that we completed in June. Early in the third quarter, these proceeds were then used to fund most of the tender offer from some of our -- for some of our higher coupon notes issued about seven years ago.

Special and other one-time items in the second quarter this year include two special charges, a gain on the sale on equity interest in a company and discrete tax benefit that I mentioned a moment ago, following our details in all but the last of these item. Special charges, net, totaled an expense of $25.4 million pre-tax or primarily due to the following.

In Europe, we recognize $1.2 million of special restructuring expense in the supply chain and other areas and Canada as we mentioned before, we impaired the value of our Foster's U.S. license agreement via a special charge of $24.1 million, which represents virtually all of our carrying value of this contract. Due to recent adverse Court ruling this contract will expire in the fourth quarter of this year. Also, Canada results benefited from $16.7 million gain on the sale of our 50% equity interest in the House of Blues Canada business during the quarter. This nonrecurring gain is reflected in other--- it is reported in other income net, but it is excluded from our underlying non-GAAP earnings for the second quarter. Finally in discontinued opposite during the second quarter, we reported net income of $600,000, due to favorable FX rate movements which more than offset a small increase in the indemnity estimates related to the Brazil Kaiser business.

Now I'll preface the outlook session as usual by paraphrasing our Safe Harbor Language. Some of what we talk about 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 don't undertake to publicly undate forward-looking statements, whether as 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, www.Molson Coors.com for reconciliation of these measures to the nearest U.S. GAAP results.

Looking forward, we anticipate 2007 corporate net interest expense of approximately $115 million, plus or minus $2 million and that excludes $24.5 million of one-time expense related to tendering our $625 million of our 6.38 notes, a very successful transaction that we completed in July. In the past few months, we have completed significant corporate projects to improve our company's structure and refinance a portion of on you higher coupon debt. We expect these projects to reduce interest costs substantially next year and I'll provide more details during the Lehman Back-to-School conference in Boston in about four weeks. We anticipate full year 2007 Corporate G&A expense of approximately $100 million, plus or minus $3 million, which is a reduction of approximately $20 million versus 2006. Turning to our effective tax rate, we anticipate that our full year 2007 rate will be in the range of 20% to 25%, assuming no further changes in tax laws. Note the UK government early in the third quarter approved changes in depreciation treatments and a corporate tax rate reduction from 30% to 28%, both effectively April 1, 2008. We have not yet finalized our examination of the impact of this legislation.

Also, the settlement of additional open tax years or passage of other tax legislation in the UK and Canada could alter our tax rate outlook. We now anticipate that our long-term effective tax rate on GAAP earnings will be in the range of 23% to 28%. Our capital spending outlook for 2007 is approximately $425 million to $450 million. And that includes approximately $105 million for acquisition of kegs in the UK this year. About $40 million of capital spending by our consolidated joint ventures.

Our current free cash flow outlook for 2007 is $170 million, and that's define as cash from operations minus capital expenditures, and that includes the one-time impact as I said before, of buying back our UK kegs. Plus any nonstrategic asset sales. This free cash flow outlook also includes $24.5 million of one-time costs related to tendering debt last month, and an incremental $50 million voluntary cash contribution to our U.S. pension fund in the second quarter and this increases our expected total pension contributions to approximately 220 to $240 million for 2007. These contributions have allowed us to fully fund our pension obligations, given today's assumptions for plan asset returns and interest rates. Our free cash flow plan excludes dividend payments and cash proceeds from stock option exercises with option proceeds exceeding $165 million in the first half of this year. To be sure, our cash generation shows dramatic fluctuations from one day to the next. But we are optimistic the business can achieve our free cash flow goal this year.

Looking forward, we see much greater cash generating potential in this business than we are showing this year, and we'll cover in this more detail in Boston next month. Now an update on our cost reduction initiatives which provide resources to invest for brand growth and a drop to our bottom line.

In the first half of this year, we captured an incremental $32 million of merger related pre-tax costs synergies. We also achieved $46 million of next generation cost savings during the first half of 2007 as part of the program to generate $250 million of additional savings by the end of 2009, which is our program we referred to in the past as resources for growth. Combining both programs we are on track to achieve our goal of total cost savings of $121 million in 2007. At this point I'll turn it back to Leo for a look ahead to 2007. Leo?

Thanks, Tim. Looking ahead, we will remain focused on building strong brands to grow the top line and reducing costs in each of our businesses to provide additional resources for growth. We'll also experience some cost to goods in other prior year comparison impacts. But i want to highlight for those of you who model our business, in Canada, we continue to focus on brand building and cost reductions. Our first priority remains investment for growth. We are focused on building the Company's strategic brands, and driving innovation behind those brands. In particular, we'll leverage our innovation on Coors Light, driven by our sub zero cold draft dispense systems, new SKUs and the introduction of the cold certified can.

Further we have extended innovation across our portfolio with the introduction of Creemore traditional Pilsner and new programming on partner Import Brand portfolio. Our marketing team remains focused on continuing Rickard's momentum and stabilizing Molson Canadian. Strategies will include the leveraging the introduction of Rickard's White which is adding incremental volume to the trademark as well as new programming and SKUs for the Molson Canadian brand. For the month of July our Canada sales-to-retail increased at a low-single-digit rate. Although it is important to note, that July's results are not necessarily indicative of third quarter performance. Due to year-over-year differences in our fiscal calendar, we expect third quarter sales volume to be lower than sales-to-retail. On costs in Canada we continue to focus on productivity across the business including merger synergies and other cost saving initiatives and operations in G&A to reinvest in our brands and offset inflation.

Based on current commodity rates, we now expect underlying full year cost of goods per barrel to increase at a low to mid-single-digit rate in local currency. That's excluding the mix impact of continued strong growth by our partner Import Brands, any incremental cost of the Edmonton strike, and the $11.3 million year-over-year impact of our requirement to mark-to-market certain foreign currency hedge positions. Without these exclusions, we anticipate that our reported cost to goods per barrel in Canada will increase at a high-single-digit rate in local currency for full year 2007.

Last week we announced the closure of our Edmonton Alberta Brewery to make our Canada business more cost competitive in an ever changing market. This action was based primarily on the loss of the Foster's US production contract and ongoing shift in marketplace demand from bottles to cans, as the Edmonton Brewery only has a bottle line packaging capacity. Other key elements in the closure decision with a competitive need to reduce further operating costs and a labor impasse at the he Edmonton Brewery. This closure will result in a third quarter asset impairment of about $37 million and other primarily non-cash charges of 10 to $12 million over the balance of this year, related to pension expense and other closure related costs. We also plan to offer affected employees fair termination benefits which led some cash costs to the closure but the impact of these benefits has not yet been determined. As part of the project our Canada team is working to ensure a smooth transition of the Edmonton production to other breweries in our Canada network. Turning to our U.S. business, our focus for the balance of 2007 is maintaining our current volume and share momentum and aggressively managing costs despite significant inflation. Our fundamentals remain strong and the year-to-date pricing environment is positive. A recall, we face tougher volume comparables on the back half of the year, and in the third quarter we'll begin to cycle more than $6 million of quarterly benefits related to the closing of the Memphis Brewery a year ago.

Our priorities for the balance of the year are in these four areas. First we'll continue to increase our investments this year behind Coors Light, Keystone Light, and Blue Moon at a low-single-digit rate versus last year. And continue our initiatives to develop our regional brands such as the refreshed Coors banquet packaging and ad creative. For Coors Light our priorities is to constantly deliver refreshment as cold as the Rockies. Our cold activated bottle and frost brewed lined can delivered Rocky Mountain cold refreshment in an innovative way. Second we continue to go to market with discipline, strengthening our key retail accounts business and leveraging our NFL sponsorship as the football season begins.

Third we'll strengthen our export markets while we remaining the leading share of the Puerto Rico Beer market the economic environment remains challenging in that market. Fourth, we are focused on improving three tier profitability and service. To that end our Shenandoah Brewery is now fully operational allowing us to diversify our brewing capability and reduce transportation time and costs to serve our East Coast customer base. We continue to expect U.S. cost to goods per barrel to increase approximately 2% for the full year of 2007. With the first half virtually flat and the second half growing at a mid-single-digit rate. With the current outlook if higher commodity inflation and cycling the Memphis plant closure, we expect our U.S. cost initiatives to offset only about one-third of the anticipated inflation in the second half of the year. In the first four weeks of the third quarter our 50 state U.S. sales-to-retail were up about 4% from a year ago particularly driven by unusual warm weather this year.

Finally, due to year-to-year differences in our fiscal 52 versus 53 week calendar we expect sales volume to be lower than sales-to-retail in the third quarter. In our Europe business we face challenges on four fronts. First, consumer spending in the UK economy continues to be soft across all categories. Largely due to higher consumer interest rates and taxes. Second, the competitive environment in the UK beer industry continues to be challenging, both on premise and in the take home channels. As we have noted in previous quarters the smoking bans in England and Wales have taken effect in the past few months and they are expected to adversely affect our volume and profit trends for the next year or two. And finally poor weather experienced across the UK during the second quarter continued into July and we expect this will have a negative impact on results in the third quarter.

Nonetheless, our UK team has done a great job staying focused on building brands for the long hall and cutting costs wherever possible. On building strong brands we continue to manage our price promotions to optimize profitability. We plan to adjust the positioning of Coors Light in the UK to break this bland closer to its global profile. A name change from Coors Fine Light to simple Coors Light along with new brand positioning and a new marketing patrol program. We'll increase the investment behind Coors Light continue to actively support C-2, our mid strength logger entry from Carling. We continue to roll-out new cold dispense technology and distinctive above bar font which support our whole portfolio. We completed 20,000 installations during the first half of 2007 and currently expect a further 28,000 over the balance of the year. We continue to see sales uplift from these installations. Managing costs we'll continue to attack costs to provide fuel for brand growth and to offset cost inflation. While the flow through of cost initiatives implemented in the first half of 2006 will have less impact in the second half of this year, additional cost reduction initiatives are underway. It is important to recognize these cost reductions are being achieved while we are investing more to build our brands. In the first five weeks of the third quarter, our Europe sales-to-retail have decreased at a mid-single-digit rate from a year ago, largely due to continued poor weather across the UK.

In summary, our second quarter results show the ability of our company to deliver on the promise of a merger. While global challenges we face have not lessened, the teams across our company have built success one quarter at a time by staying focused on the key drivers of shareholder value in this business. We've consistently worked to build strong brands and attack costs to provide further resources for growth in both sales and earnings. Our most recent results show we are investing to build our brands and growth share consistently, and we are exceeding our cost reduction goals and growing profitability for our shareholders at a double-digit rate. Looking ahead, we are confident our teams can build on that momentum and win the all important summer selling season while we make more progress building great brands, attacking costs and becoming a top performing global Brewer.

Now before we start the Q&-A portion of our call, a quick comment. Our prepared remarks will be on our website for your reference within a couple of hours this afternoon. Also, at 3:00 p.m. Eastern Time today our investor relations team, lead by Dave Dunnewald will host at follow-up conference call, which is essentially a working session for analysts and investors who have additional questions regarding our quarterly results. This call will also be available via to here via webcast and recorded replay on our website. So Matt, at this point, let's open it up for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Judy Hong with Goldman Sachs.

Hi, first just a couple of questions on Canada If you could update us on the competitive landscape, particularly in places where you have seen discounting activity pick up a little bit. And in terms of your effort to stabilize Molson Canadian, in the quarter it was down again in the mid-single-digit pace. If you could about whether you are seeing any tangible progress on that effort.

Yes. So first if you look at the discounting as you asked, it varies from province-to-province, region-to-region if you like. Historically, we have spend most of our time talking about Ontario. And that is the biggest market. So I would say that the second quarter has been pretty aggressive from all companies, not just the majors, but also the local players as well. Historically, in our market, the first half of the year is a little bit heavier in discounting than the second half of the year so it's been competitive. We did get some pricing through earlier in the yearly but by and large the pricing has been dealt back. In terms of Molson Canadian we are seeing some stabilization in Ontario. We have a little bit of weaker western part. We have new areas we are investigating for the back half. Clearly, the segment the Molson Canadian participants in the premium segment is being attacked by all side and when you look at the growth the fantastic growth we are getting on Coors Light, that, too a degree, is affecting our Molson Canadian brand in the English part of Canada.

Okay. And then secondly. Just in the U.S., can you just clarify where the distributor inventory level is at the end of the second quarter? Because in the quarter I think the shipments were ahead of STRs and you ended the first quarter with higher distributor inventory. So can you just help us understand where we are and how we should think about that either being reversed for the balance of the year or any other factors to consider? Yes. Sure.

This is Frits. The short answer on your question is our inventories essentially flat compared to a year ago. The slightly more technical answer to the question is if you look at your sales versus removal the first three quarters of the year, there is a lot of noise in that data. I would urge you not to use that as a comparison in order to determine or try to derive your own inventory levels. And I say that because we have the effect of the 53rd week. The fact the 4th of July spanned two quarters. We have the Memphis build up and frankly, we had some pretty strong momentum in the marketplace. As you look into the third quarter you will see a shift where our sales will be below removal as opposed to where they have been the first two quarters.

Okay. And then just finally, on the free cash flow generations, looking out next year, Tim, I guess is now appropriate to think about the pension being fully funded though you really don't get the increment the pension contribution next year? So you really get a much bigger swing into next year than we were previously expecting?

Yes Judy, this is Tim. I'm presuming you are talking about cash flow specifically. And as you can see from this year and the last few years, last two years since the merger, we have put a lot of money into the pension plans no question about it. I'll share a little bit more detail on this in Boston. But we are at a.now where we feel really good about the funded status of all three of our pension plans. Obviously we are responsible for all three. With that said, I think that the amount of cash contribution we place into the pensions can moderate, obviously, this year, 2007 is -- will have been a very, very heavy CapEx year. The purchase of the keg, the completion of the Boston Brewery, the completion of Shenandoah, a very, very aggressively roll-out of cold dispense units in the UK that Leo mentioned. So we are lacking forward to a very strong delivering on the promise, so to speak cash flow, for 2008. And again, I'll go into that and don't forget, also in 2007 we have the additional pension contribution. We settled it last year when we closed Memphis. This is the year that we have to pay the pipe and actually make the cash contributions. So all in, when you think about all the cash hits we have had this year, I think the critical point of the underlying free cash flow performance of Molson Coors is better than ever and we are rolling into 2008 with really good momentum.

Great. Thank you.

Your welcome.

Thank you. Next question from Robert van Brugge from Sanford Bernstein.

Good afternoon. First of all, UK pricing certainly goes a lot better than what we had seen in previous quarter do you expect this trend to hold? In other words are your competitors following on the price increases at this point?

Hi, Robert. It's Peter. We have actually shown some improving trends on pricing over the last four quarters, so this is something of what continuum. Obviously the comparisons with last year wern't as tough because of the pretty aggressive pricing around World Cup. As far as the competitors concerned really there is just a lot of volatility in the marketplace. We will try as best as we can to play the profit optimization route as far as both term volume and pricing is concerned. Certainly this quarter we seem to have called it more right than wrong. But we continue to take the judgment calls on that as we move forward through the year. So far so good, I think.

Okay great. Thanks.

Thanks, Robert.

Thank you. Our next question comes from Mark Swartzberg, Stifel Nicolaus.

Thanks, good morning, everyone.

Hi, Mark.

I guess Kevin, two questions on Canada on a local currency basis. Firstly on Coors Light, was pricing net sales per barrel for the brand up in the quarter year-on-year?

Yes, it was.

Can you give us an idea of how much?

Net sales per barrel, I would say very low-single-digit.

Okay. Great. Something with Molson Canadian, sounds like it was down. Was it down mid- single- digit. What level of decline in terms of local currency was it down?

In terms of net sales per barrel or absolute?

Yes. Net sales per barrel local currency.

It was probably up a touch.

Up a touch? Okay. And you feel like both those brands, because of the first half being more competitive you'll see improvement in the second half.

It is always hard to tell. If you look historically at the industry, a lot of the push, if you like, has come in the earlier part of the year but I guess it depends on the plans that everybody has and where they are relative to their target.

Great. And those numbers were total region, right?

Total country, yes.

Great thanks, Kevin.

Okay. Thanks, mark.

Next question from Christine Farkas with Merrill Lynch. My question has been answered, thank you.

Thanks, Christine.

Next question comes from Brian Spillane with Bank of America.

Couple of questions. If you could just touch on working capital. And I might have missed this in your prepared remarks. But just working capital in the quarter seemed awful high.

Yes. Absolutely. And it was high. Obviously building inventories, gobbled up a bunch of it. But we had timing differences in payables and receivables in the UK. Obviously there is a big, big swing there, given the size of some of our customers there. We had higher bonus payments this year than last year. Last year they were meager. This year they were stronger. So there is high her payments there. So we had a lot of working capital movement the wrong way if the second quarter. But again, I would focus you and others on the underlying performance. Virtually all the working capital use, if you will, in my mind, is timing. And if anything, if you look at how Shenandoah operating, how our plants are operating, how our Canadian supply chain will work pre and post Edmonton closure, if anything our objective will be to cycle tighter faster, use less working capital and I think we've got the plans and directions in place to do just that.

Okay and then a follow-up on Judy's questions on pension. On the P&L next year, given the amount that you've put into your pension now, will pension expense become a point of positive leverage next year?

Well, if what you are asking is are we seeking pension income? The answer is no.

Okay.

Our objective is to have, I mean, have our operating businesses generating more profit as a result of good investments, growing our business, we are a beer company not a pension income company.

Right.

So our job on the pension side is to mitigate risk, moderate and lower the amount of cash we have it put in, because our pensions are well-funded and returning adequately at a very, very acceptable level of risk, so to me, the way I look at the business and our CFO look at the business is pension income is nice. But that is not what we seek to do. We seek to sell more beer. The going in proposition for 2008 is we will have less. I'll go into some of they this detail next month. But to have less pension income per se and more risk mitigation and less need to put more cash into our pension funds.

Okay. Great. One last if I could. On the Shenandoah Brewery, did you operate this quarter did you operate at full capacity this summer? And then, looking ahead, do your cost savings assumptions assume any ramp down in production or in your investment in Golden? I guess meaning id Shenandoah ramps up the full capacity it leaves open the possibility to start reducing the cost and shrinking your footprint a bit in Golden. Is that part of what is in your cost savings estimates going forward.

Yes, Brian, this is Frits. To be clear, Shenandoah is fully up to speed. It has had a few weeks operating at more than 100% of what we anticipated its ability to perform that is both in brewing and in packaging. We are actually thrilled with the performance of that facility and invite everyone to come down and look when they have a chance, The first part of your question is Shenandoah up and running? Absolutely and in great shape. The second part of your question relates to are there further cost savings coming through Golden? I would answer that a little bit more broadly. That is first of all as we grow the business, we'll continue to have to put out quite a bit of volume through our Golden Brewery operations. But having said that, we continue to invest and find ways to make the most of that facility to automate where we can and drive efficiencies. And yes, those kinds of savings are absolutely built into our cost projections for the year.

Brian, just this is Tim. This is an add on to Frits and Dennis puffer modesty if you look at the way Shenandoah operating, it is about 50%, about 47% last look more productive than Golden on a per person per barrel basis. And what they are achieving is by having brewing and packaging capacities in obviously close proximity, the packaging capacities, which already were among the most efficient in the world, are operating at even higher levels with higher level efficiencies. So the story is not completely told yet in terms of how high is up but I think Frits and Dennis's teams have done a spectacular job in beginning to squeeze even greater savings of over and apart from just the freight savings out of the Shenandoah decision.

I'm just going to build again on what Tim's saying. I want to call you back to what Leo read in the prepared remarks. As we get to the second half of the year, we won't be in the position of anniversary the Memphis closure a year ago. So the savings we achieved in the first half of the year are certainly better than they will be in the second half.

Great. Thanks, guys.

(OPERATOR INSTRUCTIONS). Our next question from Michael Wallace of UBS.

Can you talk a bit about what is behind some of the growth in Keystone and what it is as a percentage of your portfolio now it's been growing double-digits for six months or so?

Yes. You know there are two drivers to Keystone right now. One is we think we have found a real chord with below premium drinkers around our positioning smooth even when you are not. And based on the substance, that we think Keystone is the Keystone Light is the smoothest of the below premium beers and that is a great place to be with the product. But in addition to that, because of the velocities we have enjoyed through that positioning, our distribution growth that be ahead of even what we had hoped for and that was one of our stretch objectives for the year. And given the relative share of Keystone Light compared to the other major below premium brands and the consequent lower distribution that we have today with Keystone, that distribution growth is an opportunity that we see paying off for the metroplex several years. I don't think by any means an accident. It is a relationship between great positioning and frankly a terrific product and very focused efforts around gaining distribution which we see as a long-term opportunity. That is useful.

Can I just drill a little bit deeper can you talk about channel a little bit as it relates to Keystone?

We are seeing growths across channels both in c-store, key accounts and grocery. I think the growth has been terrific, actually for us. Great. Thank you. Mr Kiely I'm showing no further questions.

Thanks, Matt. Thanks everybody for being with us. For those of you who will be in Boston, we'll see you soon. For chose of you who won't, we'll talk to you at the end of the third quarter. Thanks for your continued interest in Molson Coors and have a great day. Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day.