Molson Coors Beverage Co (TAP) 2007 Q3 法說會逐字稿

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

Thanks, Matt. Hello and welcome everybody and thanks for joining us today. With me on the call are Timothy Wolf, our global CFO; Kevin Boyce, CEO of Molson Canada; Peter Swinburn, CEO of Coors Brewers, Ltd.; Bill Waters; our CFO of Coors Brewing Company; Sam Walker, our Chief Legal Officer; Mike Gannon our global treasurer; Marty Miller, our global controller; and David Dunnewald, our Vice President for investor relations. This morning Tim and I will take you through highlights of the third quarter results for Molson Coors Brewing Company along with a perspective on the balance of 2007, and then we'll open it up for questions.

So let's start with some highlights for the quarter. We grew total Company sales at near 7% in the quarter, driven by brand strength across the business, positive pricing, and the benefit of favorable foreign currency. Coors Light grew more than 5% globally in the third quarter and we increased revenue barrel in all three of our businesses. Our U.S. business achieved very strong sales to retail growth, solid share growth, and a record third quarter profit. Molson Canada gained market share again in the quarter, driven by Coors Light and our other strategic brands. In fact, this is the first time in six years that our Canada business delivered year-to-date share growth through three quarters. Our businesses continue to deliver on our substantial cost-savings goals ahead of schedule, bringing our year-to-date savings from all cost programs to $109 million.

Excluding special and other one-time items in both years, we grew consolidated income from continuing operations 29% in the third quarter and more than 46% year to date. This substantial increase was driven by strategic brand growth, positive pricing, favorable currency movements, a lower tax rate, and results from cost initiatives and financial strategies to reduce interest and other expenses. In total we're pleased with the third quarter progress that Molson Coors Brewing Company has a achieved in both top-line and bottom-line growth, as well as in strengthening of the Company's competitive position and financial foundation.

At this point I'll turn it over to Tim to review third-quarter financial highlights and trends and then we'll provide some perspective on the fourth quarter and the proposed U.S. joint venture that we announced four weeks ago. So, Timothy?

Leo, thanks, and hello, everybody. Starting with third quarter financial highlights for the total Company, we reported consolidated sales volume of 11.2 million barrels, down 0.02% from a year ago, while total Company sales to retail increased 2.1% in the third quarter. Sales to retail growth was driven by brand strength in the U.S. and Canada offset by continued weak market conditions in the UK. Net sales were $1.69 billion, up 6.9% from the third quarter of last year, while cost of goods sold increased 8.8%. Marketing G&A expense grew 6.2% in the quarter.

We achieved income from continuing operations of $173.2 million or $0.95 per diluted share in the third quarter. This is up 29% from a year ago, excluding special and other one-time items. These results exclude one-time tax benefits and the premium we pay to repurchase $625 million of our senior notes during the third quarter. They also exclude a one-time benefit related to the Montreal Canadians hockey club last year and net special charges in both years. These adjustments are described in the earnings release we distributed this morning. Foreign exchange movements increased our total Company pre-tax profit by approximately $11 million in the third quarter, driven by a 7% appreciation of the Canadian dollar and an 8% appreciation of the British pound versus the U.S. dollar. Unless otherwise indicated, all financial results we share with you today will be in U.S. dollars and are for continuing operations, that is excluding the Kaiser Brazil business we sold last year.

In segment performance highlights, starting with Canada, pretax income, excluding special charges and prior year one-time items, increased 8% to $164.3 million in the third quarter, driven primarily by $11 million of favorable foreign exchange. Despite an increase in overall cost of goods sold per barrel, merger synergies and other cost savings largely offset inflationary cost increases this quarter. These results exclude a $43.2 million current year special charge related to the closure of our Edmonton brewery and a $9 million one-time benefit last year related to the Montreal Canadians. Our Canada sales to retail, or STRs, for the third calendar quarter ended September 30th increased 0.08% versus a year ago. Volume growth continues to be fueled by the Coors Light brand, which achieved high single-digit growth in the quarter. Rickard's, Creemore, Carling, and our partner import brands all grew at double-digit rates in the quarter, while Molson Canadian experienced a low single-digit volume decline.

Total Canadian beer industry sales to retail grew an estimated 0.05% in calendar third quarter resulting in the slight market share increase for our Canada business. This represents our second consecutive quarter of share growth, Our Canada sales volume totaled 2.3 million barrels for the fiscal third quarter ended September 30th, which is a decrease of 2.4% from a year ago. This decline is almost entirely due to a year-over-year difference in the timing of the Canada Day holiday in our fiscal calendar. Net sales per barrel increased approximately 1% in local currency, driven by increased sales mix toward higher revenue per barrel products, mainly our partner import brands. Net pricing was slightly positive in the quarter, as selective price increases over the the past year more than offset higher price discounting focused in Ontario and Quebec.

Cost of goods sold per barrel increased approximately 6% in local currency driven by the following: Less than four percentage points of increase attributed to input costs inflation was largely offset by three percentage points of decrease from synergies and other cost savings in the quarter; four percentage points of increase from sales mix shift to partner import brands, as I mentioned; and had finally, slightly more than one percentage point increase primarily from the impact of spreading fixed costs over a slightly smaller volume base, including additional costs associated with our new brewery in Monkton, New Brunswick. Marketing G&A expenses decreased approximately 9% local currency. Approximately one quarter of the overall decrease in MG&A expense was driven by the cycling of prior-year one-time contract costs incurred to achieve longer term information technology synergies.

For our U.S. business, third quarter pre-tax income was $80.5 million, which is up 8.4% versus a year ago excluding special items. This increase was attributable to sales volume growth, higher net pricing, and continued savings from our operations initiatives offset by continued significant inflation and higher G&A costs. Looking at the U.S. highlights, our 50-state sales to retail increased 6.9% in the third quarter, driven by mid single-digit growth for Coors Light, which achieved its tenth consecutive quarter of growth and posted strongest quarterly growth rate in more than seven years, along with strong double-digit growth by Blue Moon and low double-digit growth for Keystone Light. Coors Banquet grew at a high single-digit rate in the quarter and is also up on a year-to-date basis, driven by redesigned packaging and advertising creative. Each of our four largest U.S. brands achieved solid sales to retail growth in the third quarter and year -to date. Equally important, our U.S. brand portfolio showed broad geographic strength by growing 48 out of 50 states in the third quarter.

Total U.S. segment sales to retail increased 6.4% in the third quarter many when including our Caribbean business. U.S. volume to wholesalers grew 3.4% due to strong sales to retail growth partially offset by a difference in the year-over-year alignment of our fiscal calendar. U.S. net sales per barrel increased 2.5% in the third quarter due to solid pricing. Cost of goods per barrel increased 1.7% in the quarter due to higher packaging material, commodity and transportation costs. Our operation cost savings in the third quarter offset nearly half of our U.S. cost of goods inflation. Cost savings decreased in the third quarter from our year-to-date trend. As you'll recall we cycled the Memphis brewery closure from last year. U.S. marketing G&A expense increased 6.5% in the third quarter due to higher employee incentive compensation and brand-building and sales investments versus last year.

Now turning to our Europe business, third quarter pretax income was $23.7 million excluding special items, a decrease of 35.7% from a year ago. This decline was due primarily to a charge of $11.1 million to recognize increased liability for pension benefits with a charge allocated $4.7 million to Europe cost of goods and $6.4 million to marketing G&A expense. Including the impact of this pension change -- excuse me, excluding the the impact of this pension change, Europe pretax income declined by 5.5% driven by volume reductions as a result of unusually cool rainy summer weather, recently enacted smoking bans, and increased investments behind our brands. These factors were offset partially by higher revenue per barrel and $2 million of favorable foreign exchanges. Our Europe-owned brand volumes decreased 6.9% due to an extended period of unusually rainy and cool weather throughout the summer this year.

Net Europe -- total Europe net revenue per barrel in local currency increased by 9% in the third quarter with approximately five percentage points of this change related to non-owned [factored] brands that we delivered retail. In particular, we acquired the Camerons on-premise distribution business early in the third quarter. The addition of this business will raise our Europe net sales per barrel and cost of goods per barrel several percentage points for the next year due to a step-up in our factored brand sales. UK-owned brand net revenue per barrel in local currency increased nearly 4% in the third quarter, and this represents our third consecutive quarter of year-on-year growth in owned brand pricing, which is an encouraging turn-around from the previous two years. Total Europe cost of goods sold per barrel in local currency increased by 12% in the third quarter with approximately five percentage points of this change related to factor brand sales, including Camerons.

Cost of goods sold for the UK-owned brands increased about 7% per barrel in local currency. Without the pension charge, UK-owned brand cost of goods would have increased about 3% per barrel in the quarter driven by cost inflation and fixed cost deleverage as a result of slightly lower volumes. Marketing G&A expense in the UK increased approximately 10% in local currency. Marketing spending increased at a high single-digit rate due to the continued rollout of our new ad campaigns for Carling and C2 and relaunching Coors Light. G&A costs increased because of the pension charge, but without this charge G&A was unchanged when viewed in local currency.

Moving beyond operating business unit performance, corporate G&A expense in the third quarter was $26.8 million, which is $0.4 million lower than a year ago. Corporate net interest expense was $27.2 million in the third quarter, which is $4.1 million lower than a year ago, driven by our repayment and restructuring of our debt during the past year. Our third quarter effective tax rate was a -4% on a reported basis and positive 17%, excluding special one-time items. The one-time tax benefit in the quarter stemmed from a two percentage point reduction in the UK corporate income tax rate and other changes in UK tax law. These changes have the nonrecurring effect of reducing our quarterly tax provision by $13 million in the third quarter.

Free cash flow in the first three quarters of 2007 totaled approximately $35 million, but as I mentioned several weeks ago during the Lehman conference in Boston, our 2007 free cash flow was reduced by several significant one-time events totaling about $250 million so far this year. These include the one-time impact of buying back our UK kegs, extra CapEx to complete two new breweries, premiums to repurchase debt, voluntary pension contributions, and nonstrategic asset sales. As a result, the future cash generating potential of Molson Coors Brewing is much greater,with an estimated $550 million in 2008. Net debt at the end of the third quarter was $1.9 billion excluding approximately $110 million of non--owned joint venture debt.

Now let me preface the outlook session as usual by paraphrasing our Safe Harbor language. Some of it we'll talk about now in the Q&A may constitute forward-looking statements. Our actual results do 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 take to publicly -- we don't undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise and regarding any non-U.S. GAAP measures that we may discuss during the call, please visit our website. which is www.molsoncoors.com for reconciliation of these measure to say the nearest U.S. GAAP results.

Looking forward, we anticipate 2007 corporate net interest expense of approximately $112 million plus or minus $2 million, excluding the one-time cost of repurchases debt this year. This represents a $26 million reduction from last year. We forecast full-year 2007 corporate G&A expense of approximately $105 million, plus or minus $3 million, and this is a reduction of approximately $15 million from last year. As Leo mentioned, we're achieving solid results from our strategies to reduce interest and other costs. We now expect that the combined interest and corporate G&A expense for full-year 2007 will decline by approximately $40 million from 2006.

Turning to our effective tax rate, we anticipate that our full-year 2007 will be in the range of 19% to 22% and that excludes one-time benefits and special items and assumes no further change in tax laws. Note that the settlement of additional open tax years or passage of other tax legislation in the UK and Canada do could alter our tax rate outlook. We anticipate that our long-term effective tax rate on GAAP earnings will, as we've said before, be in the range of 23% to 28%. Keep in mind, however, that our quarterly and annual tax rates will be volatile, in part because of the effects of the new FIN 48 accounting rules.

Our capital spending outlook for 2007 is approximately $425 million, and that includes about $105 million for the acquisition of kegs in the UK this year, $85 million to complete two new breweries, and about $35 million of capital spending by our consolidated joint ventures. As I mentioned before, although our year-to-date free cash flow represents only one-fifth of our 2007 expected total of $170 million, we remain confident that we will reach this goal primarily because of year-over-year working capital timing differences.

Now a brief update on our class reduction initiatives. First, we are over delivering against our three-year $175 million merger synergy target and expect to complete the program at the end of this year with at least $180 million of savings delivered. In the first three quarters of this year alone we captured incremental $45 million of merger-related synergies. Second, we're off to a strong start with our three-year $250 million resources for growth cost reduction initiatives. We've achieved $64 million of savings during the first nine months of this program, and we anticipate capturing at least $76 million dollars of savings in total in this first year of the program. This is $10 million more than the initial 2007 target we shared just nine months ago. Combining both cost programs we have -- cost reduction programs we've captured $109 million in total savings through the third quarter, and we anticipate finishing 2007 with at least $130 million of total cost savings.

At this point I'll turn it back to Leo for a look ahead to the fourth quarter of 2007. Leo?

Thanks, Tim. In the fourth quarter and beyond we will remain focused on building strong brands and reducing costs in each of our businesses. Results year to date are encouraging. We have very strong volume and market share momentum in the U.S., our Canada portfolio has built volume momentum and is taking share, and in all three of our businesses, the strength of our brands is supporting positive pricing. To keep this momentum rolling in Canada we will invest behind innovative programming to continue the growth of Coors Light and our above-premium and partner brands and to stabilize our Molson-branded portfolio. Our Coors Light cold activated cans and the launch of Rickard's White are driving sales as is increased programming in the Maritimes.

In the U.S. we'll maintain our increased supported for Coors Light, Coors Banquet, Keystone Light and Blue Moon. Our cold-activated bottle and frost-brew lined wide-mouthed cans continue to drive incremental sales for Coors Light and Coors Banquet. Our NFL sponsorship provides extra top spin through the Super Bowl, and we will focus on building on the strong momentum for Blue Moon and Keystone Light. As we roll into 2008, our new NASCAR sponsorship will help us win on a weekly basis.

In Europe in addition to strong marketing -- a strong marketing investment behind Carling, we'll support the relaunch of Coors Light and the expanded distribution of C2, our mid-strength lager entry from Carling. We'll also continue to roll out our new cold dispense technology and distinctive above-bar fronts, which support our whole portfolio with a cold story. In addition, we've been successful in securing a new distribution contract for Carling with [Marnstons], a major on-premise customer. We expect this new relationship to drive market share in the important on-premise channel.

In the fourth quarter there are a few additional considerations regarding will drive volume. In Canada we're off to a good start in the fourth quarter. For the month of October our Canada sales to retail increased at a mid single-digit rate, although as always it's hard to call the full quarter based on only a month of results. We expect fourth quarter sales volume to be lower than sales to retail due to the termination of our Foster's U.S. production contract early in the fourth quarter. This will result in lower reported sales volume but will have no impact on sales to retail. The Foster's termination will also increase net sales per barrel and cost of goods per barrel for the next four quarters and will result in lost fixed over head absorption in the fourth quarter. Finally in Canada for the fourth quarter we'll be recycling the benefit of the 53rd week in our fiscal 2006 calendar, which added about 130,000 barrels to sales volume and increased fixed profit -- excuse me, pretax profit by an estimated $10 million U.S. in the fourth quarter last year.

We're also off to a good start in the the U.S. in the fourth quarter. In fact, the first four weeks of the quarter our 50-state U.S. sales to retail increased at a high single-digit rate from a year ago, reflecting our steadfast focus on profitable growth. In the U.S. the 53rd week of our fiscal 2006 calendar added about 330,000 barrels to the fourth quarter sales volume and was approximately break even from the profit standpoint. In Europe we continue to face challenges from a weak UK economy, a highly competitive industry, and smoking bans in England and Wales. In the first five weeks of the fourth quarter our Europe sales to retail have decreased to the mid single-digit rate from a year ago. Finally, the 53rd week added about 140,000 barrels to fourth quarter 2006 reported Europe volume with an estimated negative impact on pretax profits of less than $1 million.

Regarding cost reductions, our teams continue to exceed their goals. Nonetheless the current inflation environment presents a large challenge. Also for the fourth quarter is a seasonally small profit quarter for us, which accentuates the margin impact of inflation. So looking at the cost outlook by business, in Canada we anticipate that reported cost of sales -- excuse me, in Canada we anticipate that our reported cost of goods per barrel will increase at a mid single-digit rate in local currency for full-year 2007. In addition, we expect that one-time costs related to the closing of our Edmonton brewery will be incurred in the fourth quarter and into 2008.

In the U.S. we'll realize no additional benefits related to closing our Memphis brewery a year ago. In the third quarter we benefit by more than $6 million of incremental Memphis cost reductions. With the current outlook for higher commodity inflation and recycling the Memphis plant closure, we expect U.S. cost of goods per barrel to increase in the range of 1.5% to 2% for full-year 2007 and at a mid single-digit rate in the fourth quarter. Our Europe team will continue to attack costs to offset input inflation and to provide fuel for our brand investments. While the flow through of cost initiatives implemented in the first half of 2006 will have less impact on the fourth quarter this year, additional cost reduction initiatives are under way.

In summary, we're pleased with our progress in the third quarter and we're excited about the future for the Molson Coors Brewing Company. We believe we have the right strategy, priorities and people to compete effectively in a dynamic global beer industry. We will win worldwide and on a local level by building strong brands and optimizing our brand portfolio. At the same time we'll stay focused on reducing costs to fuel both top and bottom-line growth.

Four weeks ago we took a very important step consistent with this direction when we signed a letter of intent with SAB Miller to combine our U.S. and Puerto Rico businesses. This joint venture will create a stronger brand-led U.S. brewer with the scale, resources and distribution platform to compete more effectively in the highly contested U.S. beer market. The opportunities provided by this proposed joint venture are very compelling. The combination of complementary assets will create a stronger, more competitive U.S. brewer with an enhanced brand portfolio including many import brands. Greater scale and resources will allow additional investments in brands, innovation and sales execution. $500 million of annualized cost synergies by the third full year of the JV will enhance financial performance. Consumers and retailers will benefit from greater choice and access to brands, and distributors will benefit from a superior core brand portfolio, simplified systems, lower operating costs, and improved chain account programs. In sum this JV will provide tremendous momentum on resources for Molson Coors to compete in the global marketplace while offering substantial benefits to our U.S. distributors, retailers, and beer drinkers.

We're working diligently to complete this transaction. The Hart Scott Rodino form was filed on October 19, 2007, and the U.S. Department of Justice is reviewing this transaction. We will fully cooperate with the Justice Department in this review, including responding to a likely second question from the DOJ for more information, which is typical for a transaction of this nature. Pending completion of the JV, we will stay focused on delivering strong results, and a great example of this is U.S. sales to retail in the early weeks of the fourth quarter, which have grown even faster than in the third quarter. We have a strong, deep team globally and in the U.S., and we're confident in our ability to maintain momentum through this period of uncertainty and come out the other side stronger than ever.

Kevin Boyce, our Molson CEO, has his team tightly focused on driving profitable growth in our important Canadian market. Peter Swinburn will be coming to the U.S. at the end of the month to lead our Coors Brewing Company team. Peter's a strong, proven leader who has successfully taken his team through periods of transition and uncertainty on three previous occasions with Bass Brewers, as well as through the current UK competitive environment. At the same time Mark Hunter will be returning to the UK from Molson Canada where he's led our sales and marketing functions for the past two years as Chief Commercial Officer. Mark will lead our Europe team as CEO of Coors Brewers Limited.

Now before we start the Q&A portion of the call, just a quick comment. Our prepared remarks will be on our website for your reference within a couple of hours this afternoon. Also at 3 p.m. eastern time today our investor relations team led by David Dunnewald will host a follow-up conference call, essentially a working session for analysts and investors who have additional questions regarding our quarterly results. This call will also be available for you to hear via webcast and recorded replay on our website.

So at this point, Matt, why don't we open it up for questions?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Bryan Spillane from Banc of America.

Good morning.

Hey, Bryan.

Just a couple of questions. First, Tim, on the pension expenses that you included as ongoing in the UK in the quarter, are those -- was that a catch-up in an under accrual that was caught up and now you're going to be running at a higher rate going forward or is that a one-period cost?

Good question, Bryan. Thank you. Yes, most of it was catch-up. We will have slightly higher costs going forward, and again this was a catch-up that we reflected, as I share with you, in two different places; one in G&A of about $4.7 million and the other $6.5 million in cost of goods.

Okay. For the ongoing run rate it's maybe a couple of million dollars higher?

Yes, I think it will be about $2.5 million. I don't think we have a point number. We still have work to do with the actuaries, but I think it'll be in the $2 million to $3 million U.S. range.

Okay. Tim, with the debt restructuring there were convertible debt that looks like that they're hitting the -- or close to the strike price. Can you just talk a little about the dynamics, how that -- what the length of time that it takes before that will start to affect your diluted share count?

Well, that won't after effect your diluted share count until we get to about $140 a share. Recall that we basically bought an insurance program to cover off at about $108, $109. And again, you have to remember that what happens with that instrument is it's only the increment over that amount that gets turned into shares that the counter party will have to cover.

You are referencing pre-split prices, right?

I am, thank you.

I was just checking.

Thank you.

Since the convert was done pre-split.

Okay. So even with it now post split, you're at a point now where you're at that strike price, it doesn't sound like there is a meaningful potential negative impact from the stock price being higher basically?

Correct. That's correct. There's not a meaningful impact.

Okay, great. Thanks, guys.

Thanks, Bryan.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Judy Hong with Goldman Sachs.

Hi, everyone.

Hi, Judy.

I was hoping to get more perspective in the UK business. Clearly it has been a pretty difficult situation there. Just wondering from a volume perspective how much of the recent weakness is related to the smoking ban, the poor weather in the summer, as opposed to just weakening underlying fundamentals? And then secondly, if you can just talk about the competitive landscape there because it looks like you're getting pretty good pricing, and I'm not sure if that's hurting your volume performance there?

Hi, Judy, Peter Swinburn here. Let me take the first part of your question. At the moment we're finding it really difficult because of the amount of noise in the marketplace, specifically the very poor weather we had over the summer to really get a handle on the smoking ban. We're talking to all our major retailers and they're finding it, I think, equally as difficult. We know it is effecting the on-trade, but we actually can't put a number on it, and I don't think we'll number a position to do that probably until -- into the new financial year at least, so I can't be specific on that. The overall market is weak, has been weak for awhile. We've seen this before in the UK Historically we've had declines like in the early '90s, the late '90s and they've lasted between about two to three years and the market's leveled off. That's the only history we've got to go on and we're pretty confident that the market will come back,

And that's really to take your second point why we're taking the stance that we are taking. I think I've made it clear probably over the last 18 months to two years that when the market's in a position it's in we've a very strong bias to try and get pricing. Our pricing has been extremely strong all year. We've continued to push that button because of the leverage it gives us on EBIT. Our EBIT performance is strong year to date as a result of that and we are in a position, if at any time we wish to do so, to step in and play the price card and then move back out again. Importantly for us, brand health is what really matters going forward, and maintaining our pricing is a real indicator of our brand health going forward, but we [comfort it all] that we're in the the position that we can make the decisions, and we can decide how we want to play the market rather than the other way around.

And then just following up on the UK and the increased factor brands that you've talked about, that basically increases your net sales per barrel and cost per barrel, and is there any benefits in terms of the profit numbers?

There is a slight benefit in as much as it is really generated by the fact that we bought Cameron's free trade business, so to the extent that contributes towards the profit that we bought, yes, there will be a benefit coming through, but it's relatively small in terms of factor brands.

Okay, thank you.

Okay.

Thank you. Our next question comes from [Camille Gotruala] with UBS.

Thank you. Hi, everybody.

Hi, Camille.

If you could help us a little bit on the margin leverage, particularly in the U.S.. Looks like volumes are ahead of expectations, STRs clearly ahead of shipments, but should we expecting some increased margin leverage if STRs stay at this mid single-digit type growth rate?

Why don't I let Bill Waters tackle that for you, Camille.

In the quarter as we've had really strong and volume and pricing growth, that is really helped us to the margin level. However, we did have two dynamics hit us in the quarter. One was a year-to-date true-up on some incentive comp and also we had some -- a LIFO true-up, so if you adjust those factors out, we'd be running at really our year-to-date operating level of about mid-20s percent year-over-year growth.

Just to add to that, I think the good thing about that from an investor standpoint is that these are incentives that kick in because the volumes are doing so well, And so what happens for next year is the base is that much higher, obviously that incentive goes away. So we begin to incent our employees now and executive at a higher level still raising the bar. To Bill's point, this is really I good things because it sets the table for stronger performance next year.

Got it. And now if we could move quickly to Canada. There's probably a quick answer to this question, but in the press release you mentioned -- or it sounded like the cutting back of some marketing and sales investments, which I was under the impression it was the opposite, you were spending more on marketing and sales, so can you maybe just walk through what's in that?

Kevin, what we've done is shifted in the quarter some monies out of -- mostly our sales promotion budgets and put them into some discounting to be competitive in the marketplace, so if you added what we call TPRs, put all those together, our spending was up slightly.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Mark Schwartzburg from Stifel Nicolaus.

Thanks, operator. Good morning, guys.

Hey, Mark.

In the U.S. could you talk a little bit more about the relationship between STRs and shipments in the fourth quarter? I guess it's to an extent to Camille's question, but these STRs are great, and one would think that your trade inventories are lower than you might have predicted at the end of the third quarter. I might have missed it in your prepared remarks, but is it reasonable to expect a more narrowing, if you will, between the rate of shipment growth and the STR growth, of course ignoring the effect of the 53rd week here?

Yes, coming out of Q3 we ended up slightly lower than we would anticipate because of strong consumer demand. Going into Q4 we anticipate those being -- becoming normalized sales and removals trends, so -- and we'll get them back to seasonal norms, so those should come back together as we go forward into Q4.

Can you give us any idea of magnitude in terms of barrelage or percentage points or something like that?

Yes, it's fairly small. It shouldn't be significant in the grand scheme of things.

Thanks, guys.

Thanks, Mark.

Thank you. (OPERATOR INSTRUCTIONS) Mr. Kiely, I'm showing no further questions.

That's great, Matt. Thanks for being with us, everybody. We really appreciate your interest in Molson Coors and look forward to talking to you after our next quarter comes in. Have a nice day.

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