Molson Coors Beverage Co (TAP) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2008 second quarter conference call. At this time all lines are in a listen only mode. Later we will conduct a question-and-answer session. 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. Peter Swinburn, President and Chief Executive Officer of Molson Coors Brewing Company. Sir, you may begin.

Thanks, Matt. Hello and welcome to everybody. Thanks for joining us today. With me on the call are Kevin Boyce, CEO of Molson Canada; Mark Hunter, CEO of Coors Brewers Limited; Sam Walker, Global Chief Legal Officer; and Dave Dunnewald, Vice President of Investor Relations. I also want to introduce two new leaders on our global finance team who are on the call with us today. First, Stewart Glendinning is our new Molson Coors CFO. Stewart comes to the global team from his role as CFO of our UK business. Prior to that, Stewart held leadership roles in global audit and finance consulting firms. Secondly, Bill Waters joined the global team as Controller in June, moving over from his role as CFO of our US business. Bill has more than 15 years of finance and accounting experience with our company in the US and overseas. On the call today, Stewart and I will take you through some highlights of our second quarter 2008 results for Molson Coors Brewing Company, along with some perspective on the balance of the year. Then we will open it up for questions.

So let's get started. With the creation of MillerCoors, we accomplished the most significant business combination in the history of US beer. This new venture fundamentally changes the game in the US beer industry by creating a stronger and more competitive company with the talent, brands, and scale to win in this critical market. MillerCoors is bringing new energy to the beer industry and will drive additional profitable growth for Molson Coors Brewing Company. This, in turn, provides important new financial resources for us to continue building our brands in our core markets and around the world.

Turning to financial performance in the second quarter, we benefited from another exceptional quarter by our US business, which achieved gains in sales volume and pricing and double-digit underlying earnings growth. Maintaining the strong momentum is particularly exciting as we launch MillerCoors. On a company-wide basis, our top brands continue to outperform the industry in the second quarter, and we achieve net pricing gains and substantial cost savings in each of our core markets. At the same time, however, energy costs and commodity inflation have become bigger challenges to our company and for the global beer industry. This cost inflation combined with our higher tax rate drove lower underlying earnings for our total company in the second quarter. In the face of these challenging economic conditions we continue to implement value adding strategies that will allow us to build our brands, achieve positive pricing, reduce costs, and grow profits and cash for our shareholders.

Let's review some total company performance highlights for the quarter. We grew Coors Light sales to retail nearly 4% globally. We achieved net sales growth of 4.8% driven by brand strength, positive pricing, and the benefit of favorable foreign currency. We grew net pricing in all three of our major markets on the strength of our brand building efforts. We captured $18 million of cost reductions as part of our resources for growth program in the quarter. These cost reduction programs allowed us to offset nearly a third of our cost inflation in the quarter. Excluding special and one-time items, underlying income from continuing operations declined 2% to $172.6 million in the second quarter due to a higher effective tax rate in the quarter, which Stewart will discuss in a few minutes. I'm now going to pass over to Stewart to review the second quarter financial results and trends, and then we'll cover the outlook for the rest of 2008. Stewart, over to you.

Thanks, Peter, and hello, everyone. I will start with the second quarter financial highlights. We grew total company volume 0.9% and net sales 4.8%. Meanwhile, our underlying pretax income grew 2.5% in a challenging cost environment. On the bottom line, underlying after tax earnings of $172.6 million or $0.93 per diluted share in the second quarter with 2% lower than a year ago. We will discuss our earnings performance today primarily in terms of underlying earnings, a common performance measure that excludes special and other one-time items from our US GAAP results. Also, unless otherwise indicated, all financial results we share with you today will be in US dollars. It is important to note that our second quarter underlying earnings exclude $103.9 million of special items. Nearly half of the total was a $50.6 million noncash charge to reduce the carrying value of the Molson brand sold in the US. The remaining items are virtually all cash charges that offer attractive returns on investment, including expenses associated with the formation of MillerCoors, restructuring costs in the UK, and transition costs related to an outsourcing contract. These adjustments to our US GAAP results are described in more detail in the earnings news release we distributed this morning.

Foreign exchange movements increased our total company pretax profit by approximately $6 million in the second quarter on an underlying basis, driven by an 8% year-over-year appreciation of the Canadian dollar versus the US dollar. In segment performance highlights, starting with Canada, underlying pretax income of $154.4 million in the second quarter was 5.6% higher than a year ago, driven by an $11 million benefit from favorable foreign currency. Positive net pricing was offset by fuel and commodity price inflation and lower comparable Canada market volume.

As we discussed last quarter, the new Modelo Molson import joint venture and the loss of Foster's US production contract affect the way that we report our Canada results this year in the following ways. First, the loss of Foster's contract has the effect through the end of the third quarter of reducing reported sales volumes about 4 to 6 percentage points while increasing net sales per barrel about 3 to 4 percentage points and increasing cost of goods sold per barrel about 2 to 3 percentage points. The effects in the fourth quarter this year are not significant, as we cycle the October 2007 contract termination. The negative impact on pretax profits in the first three quarters of 2008 is about $1 million per quarter. Finally, the loss of the contract has no impact on our STRs, since the Foster's US production volume has never been included in our Canada STRs. Second, the new Modelo-Molson arrangement has the effect of reducing our reported sales volume, net sales per barrel, cost of goods per barrel, and marketing expense because of the change to equity accounting. Our 50% share of the joint venture earnings are included in Canada cost of goods sold. In addition, sales to retail and market share results will now include our half of Modelo product sales for all of Canada. As I discuss Canada results, I will provide year-over-year changes that exclude the reporting effects of Foster's and Modelo Molson in order to provide more comparable results.

So let's review the highlights. Our Canada sales to retail or STRs for the second calendar quarter ended June 30th decreased 0.8% on a comparable basis versus a year ago, driven by unusually wet weather in our key major markets during the quarter. Molson's strategic brands which represent more than 85% of our Canada STRs continue to grow, including mid single-digit growth by Coors Light and double-digit growth by Rickard's, [Primo] Carling, and our partner import brands. Molson Canadian experienced a mid single-digit volume decrease compared to the prior year. Total Canadian beer industry sales to retail declined an estimated 0.7% in the calendar second quarter. On a comparable basis, our second quarter estimated Canada market share was virtually even with a year ago. Our Canada sales volume on a comparable basis decreased 1.1% versus prior year. Comparable net sales per barrel increased approximately 3% in local currency, driven almost entirely by positive pricing, along with a small increase from partner import brand growth. Cost of goods sold per barrel in the second quarter increased 9% on a comparable basis in local currency, when we exclude the impact of Foster's and Modelo changes as well as the benefit of cycling a $5.8 million unfavorable foreign currency adjustment last year.

This underlying cost of goods increase was due to the net effects of three factors. An 8% increase driven by higher commodity and packaging material costs, along with increased energy and transportation costs. Second, a 2.5% decrease from our resources for growth cost savings initiatives. And third, a 3.5% increase due to higher fixed overhead costs and the ongoing shift in sales mix to partner import brands. Comparable marketing and general and administrative expense in the quarter decreased 6.4% in local currency, driven by results of our cost savings initiatives and lower amortization and administrative expenses. Other income decreased $17.5 million in the second quarter, primarily due to the cycling of the $16.7 million gain on the sale of our interest in the House of Blues Canada business during the second quarter of 2007. This nonrecurring gain was excluded from our underlying non-GAAP earnings for the second quarter of 2007.

In the US, second quarter underlying pretax income increased 14.8% to $112.7 million. This increase was driven by strong sales volume growth and positive net price, partially offset by higher transportation and packaging material costs. Looking at the highlights, US sales to retail increased 5.1%, yielding solid market share growth in the quarter. Our US STR growth would have been about 2 percentage points higher without the impact of a shift in the year-over-year timing of the July 4th holiday within our fiscal calendar. This strong sales performance was driven by mid single-digit growth by Coors Light, high single-digit growth by Coors Banquet, and double-digit growth by Blue Moon and Keystone Light. Each of our four largest brands achieved accelerated sales and market share growth trends in the quarter. For the second consecutive quarter, we grew sales to retail in all major channels -- and in 47 out of 50 states, the geographic base that represents over 96% of our total US volume. We also continue to expand distribution with more than 70,000 US SKU placements of Coors Light and Keystone Light in the quarter.

US volume to wholesalers growth of 7% was not significantly affected by the timing of the July 4th holiday. Net sales per barrel increased 3.8% in the second quarter, driven by 3 percentage points of higher net pricing along with increased distributor fuel surcharges and new commercial sales from our US can joint venture. Excluding the commercial can sales, net sales per barrel increased 3.3%. Cost of goods per barrel increased 4.9% in the quarter, driven by higher fuel, transportation, and packaging material costs, as well as commercial can sales. Excluding the impact of the commercial can sales, cost of goods per barrel increased 4.1%. Price increases and cost savings more than covered the significant cost of goods inflation we saw in the quarter. Cost savings initiatives alone offset more than one-third of our US cost of goods inflation in the quarter. US marketing general and administrative expense increased 6.6% in the second quarter, driven equally by increased sales and marketing spending and incentive compensation related to strong performance in the first half of the year. All in, our US business entered MillerCoors with strong volume and pricing momentum and with continued cost control, all of which allowed the business to again achieve double-digit profit growth despite higher cost inflation.

Moving to our UK business, second quarter underlying pretax income of $21.5 million decreased to $19 million from a year ago, primarily due to higher levels of input inflation, increased pension costs, and lower sales volume. Our UK-owned brand volume outperformed the market in both the on and the off-premise channels. However, volumes decreased 2.6% year on year due to the smoking bans, Easter falling in the first quarter, and customer buying in advance of the 9% increase in the beer excise tax in the first quarter. Volumes in the off-premise channel grew by 6% as a result of selective but more visible promotional features, but volumes in the on-premise declined 9%. Net sales per barrel increased 3.4% in local currency, predominantly due to our acquisition of the Cameron's on-premise distribution business in July last year. Comparable net sales per barrel of our own products increased 0.6%, driven by higher on-premise pricing. This represents our sixth consecutive quarter of year-over-year growth in owned brand pricing. Cost of goods sold per barrel in local currency increased 11.9% in the second quarter, due primarily to higher Cameron's factored brand sales, energy and materials cost inflation, and higher pension expense. More than half of this increase was driven by higher input cost inflation and pension expense.

Marketing, general, and administrative expense in the UK decreased 0.8% in local currency. General and administrative expense increased due to the addition of the Cameron's business and higher pension costs. Excluding these year-over-year changes, our overhead costs declined in the quarter. Market expense in the quarter decreased as a result of reductions in spending to match the trading environment. In global markets and corporate, excluding the reporting effect of changing our Mexico business to a license arrangement this year, global markets grew volume more than 13% and increased investments in our developing markets around the globe, including China and Europe. MG&A totaled $35.1 million in the second quarter, including corporate, general, and administrative expense of $25.9 million, which is $3.7 million lower than a year ago. Corporate net interest expense declined $1.8 million from a year ago because of the benefit of debt restructurings we completed last year along with lower debt balances this year. These reductions were partially offset by nearly $3 million of incremental interest expense due to year-over-year foreign exchange movements. The underlying loss for global markets in corporate was $57.1 million pretax in the second quarter, a 3.4% decrease as a result of lower corporate G&A and interest expense this year.

Moving beyond operating business unit performance, our second quarter effective tax rate was 23% on a reported and underlying basis. This quarterly rate is higher than we expected earlier in the year, which I will discuss in a minute. Free cash flow for the second quarter reflected a net cash generation of $225 million, which is made up of positive operating cash of $287 million, plus $5 million of proceeds from asset sales minus capital spending of $67 million. This free cash flow result represents $133 million improvement this year due to both lower capital expending and higher operating cash flow versus the second quarter of 2007. Total owned debt at the end of the second quarter was $1.96 billion, excluding approximately $118 million of nonowned joint venture debt. Cash and cash equivalents totaled $284 million at the end of the quarter, resulting in owned net debt of $1.68 billion.

Now, I will preface the outlook portion of this call 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 do not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. Regarding any non-US GAAP measures that we may discuss during the call, please visit our website, www.molsoncoors.com, for a reconciliation of these measures to the nearest US GAAP results.

Looking forward, we continue to anticipate 2008 corporate net interest expense of approximately $100 million to $105 million on a reported basis. We expect full year 2008 corporate general and administrative expense of approximately $110 million, plus or minus 5%, which is in line with last year and our previous guidance.

Turning to our effective tax rate, we now anticipate that our underlying tax rates for full year 2008 and for the second half of the year will be in the range of 20% to 24%, assuming no further changes in tax laws. This 2008 guidance is higher than we provided on our last earnings call, because we now expect the closing or settling of certain tax years to be delayed until 2009. As a result, we also expect our 2009 effective tax rate to be below our long-term range of 22% to 26%. Note that we do not expect the completion of MillerCoors in the US to significantly affect our outlook in the areas of interest expense, G&A, and underlying effective tax rate. Our new capital spending outlook for 2008 is approximately $245 million, excluding the US in the second half of this year. As usual, this guidance excludes self-funded capital spending by our consolidated joint ventures, primarily the beer stores in Ontario. Our annual CapEx outlook for the Canada and US businesses, which is incorporated into this guidance, has not changed since our last earnings call.

At midyear we were on plan to achieve our 2008 free cash flow of $550 million, excluding any effects from MillerCoors. As we've shared previously, MillerCoors will have one-time cash outlays of approximately $450 million during next couple years to capture the $500 million of targeted cost synergies for this new company. This incremental cash will be divided about equally between one-time restructuring costs to reduce overhead expenses and net capital expenditures to reconfigure the MillerCoors supply chain. Leo Kiely's team is in the process of finalizing these integration and capital investment programs, and we plan to share more details next quarter.

Now, highlights of our cost reduction initiatives. In the second quarter we captured an incremental $18 million of cost savings as part of our three-year $250 million Resources For Growth or RFG cost reduction initiative. We are on target to achieve our 2008 goal of $77 million of additional cost savings, and we have already delivered more than 60% of this annual goal in the first half of the year. Looking beyond 2008, we're assessing how the formation of MillerCoors affects our RFG program. As with cash flow, we plan to provide more specifics on our next earnings call. At this point, I'll turn it back over to Peter for a look ahead to the balance of 2008. Peter?

Thanks, Stewart. In 2008, we remain focused on building strong brands and reducing costs in each of our businesses to keep our brand momentum going this year. In Canada we continue to focus on building our strategic brands. In the second half of the year we anticipate continued aggressive competitive pricing activity primarily in Quebec and Ontario. In the face of this activity, we're committed to remaining competitive while growing our strategic brands over the long term, including the introduction of new innovative packaging, promotions, and advertising creative. Building on our Coors Light Cold Activated Can launch last year we recently introduced Coors Light Cold Certified Bottles across Canada, strengthening our Rocky Mountain cold refreshment with consumers. We will continue to focus on capturing growth from to our super premium owned and partner import brands, including the addition of Corona in western Canada which has strengthened our national portfolio.

In the UK we anticipate a challenging trading environment in the second half of the year due to the weakening UK economy. Nonetheless, we expect our UK business to benefit in the second half from cycling the UK smoking bans, and we will begin to accrue the benefits of the Heineken contract brewing arrangement, the Magners cider agreement, and recent supplier renegotiations. We will also cycle a one-time $9.5 million increase in pension expense in the third quarter last year. In addition, we continue to roll out our new Cold Dispense technology for [canning] with 20,000 new installations year to date as well as the Cold That You Can See thermo-chromatic packaging on our compact draft system. Coors Light volume is also showing encouraging growth driven by solid retail partnerships and increasing consumer demand for lighter, more refreshing beers.

Based on the strength of our brands, and considering the challenging cost environment in each of our businesses, we are reevaluating our pricing plans for the balance of the year. As always, we will make market by market pricing decisions that are consistent with our goals of building our brands and shareholder value. Following are the most recent volume results for each of our businesses early in the third quarter. In Canada, our comparable sales to retail in July, including 50% of Modelo brands for all of Canada in both years, increased at a low double-digit rate. In the first five weeks of the third quarter our UK sales to retail have decreased at a mid-single-digit rate from a year ago. In the US, with respect to the first few weeks of the third quarter for MillerCoors, we really like our execution over the 4th of July weekend on our plans heading into Labor Day. Because it's very early days in the financial reporting of this shared venture between two parent companies, we're not in a position to discuss volume more specifically for this particular straddle quarter but we do look forward to having Leo Kiely and Tom Long at our next earnings call to discuss the performance of the US business.

Regarding cost reductions, we're on track to meet or exceed our goals in 2008. Looking at the cost reduction outlook by business, in Canada, we now anticipate that our reported cost of goods per barrel in local currency will be virtually unchanged for full year 2008. We expect comparable cost of goods sold per barrel to increase at a mid single-digit rate in local currency. This is up from the guidance of low single digits on our last earnings call. Comparable 2008 cost of goods in Canada excludes the new Modelo Molson joint venture accounting, the loss of the Foster's contract, and an $8 million full year benefit of cycling 2007 foreign currency adjustments. This guidance implies improved Canada cost trends in the back half of this year -- in particular, in the fourth quarter. Despite a challenging commodity cost environment, this outlook is primarily due to cycling higher material costs and additional expenses related to closing our Edmonton brewery and starting up the Monkton brewery last year.

Our UK team will continue to attack costs and maximize and return on our production assets. We are targeting substantial savings as part of our resources for growth program driven by headcount reductions, supplier negotiations, and improvements in supply chain efficiencies. We are also reviewing opportunities to further reduce overhead costs. We currently expect full year 2008 UK cost of goods per barrel to increase at mid single digit rate in local currency.

Since the new MillerCoors business in the US will be critical to our future financial performance and shareholder value, I want to provide you an update on the progress to date. Leo Kiely and his team have filled virtually all the top positions in the company. I believe that they are truly taking the best talent from both the Coors and Miller organizations, and building one of the strongest teams globally. MillerCoors has hit the ground running on integration and marketplace effectiveness, including their commitment to deliver $500 million of cost synergies. As an example, they are already making the adjustments to their supply chain to improve service and lower costs. The extensive planning over the past 10 months is paying off, and as we move to peak season these efforts will gain even more momentum.

From a financial reporting standpoint, MillerCoors results will flow to our P&L in a new equity income line above operating income. This will be pretax income and corporate income taxes on these results will be paid at the parent level. For greater visibility, we also plan to provide a full MillerCoors income statement each quarter in US GAAP, along with selected balance sheet and cash flow information. These results will be released by the parent companies Molson Coors and SABMiller, on the same day as the Molson Coors earnings release, starting with our third quarter release on Wednesday, November 5th. We will have MillerCoors results to discuss in future quarters, and Leo and others of his top team plan to participate in our earnings call to provide perspective on the US business. We will provide more details on MillerCoors strategies and plans on our next earnings call, along with the first quarter results from this exciting new company.

To summarize our results and discussions today, in the second quarter we created the most significant business combination in the history of US beer, a new company that will make us stronger and more competitive in the US. MillerCoors offers tremendous potential in resources and value for Molson Coors and our shareholders. On a company wide basis, our top brands continue to outperform the industry, and we achieved net pricing gains and substantial cost savings in each of our core markets. At the same time, however, energy costs and commodity inflation have become bigger challenges. This cost inflation combined with a higher tax rate drove lower underlying earnings for our total company in second quarter. In the face of these challenging economic conditions we continue to implement value adding strategies that will allow us to build our brands, achieve positive pricing, reduce costs, and grow profits and cash for our shareholders. The fundamentals of our business remain strong and we're more excited than ever about the future for Molson Coors Brewing Company as we strive to become a top performing global brewer.

Before we start the Q&A portion of the call, a quick comment. Our prepared remarks will be on our website for your reference within a couple of hours this afternoon. At 3:00 PM 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 our quarterly results. That call will also be available for you to hear by webcast and recorded replay on our website. So at this point, Matt, we'd like to open it up for questions, please.

(OPERATOR INSTRUCTIONS) Our first question comes from Mark Swartzberg from Stifel Nicolaus.

Thanks, good morning. Peter, couple questions on Canada, just clarification. Did you say it was up, volumes were up mid single digits, or STRs up mid single digits in the month of July? And if so, can you tell us what's happening local currency on net revenue per barrel? Then also on Canada, Molson Canadian down mid single digits in the quarter. Can you give us an idea of how that played out by region or at least by Quebec and Ontario on that brand?

I'll let Kevin jump in, in a minute, to give you probably more detail on the -- on some of the questions. What I actually said on Canada for July is that the STRs were up low double digits. And that basically is -- represents a bounce back in July from really what was unprecedented bad weather in the Canadian market in the quarter that we just experienced. We won't give guidance on where we are in terms of margins, but Kevin, do you want to pick up on the Canadian question? Sorry, the Molson Canadian question?

Yes, Mark, Molson Canadian is not sold in Quebec, it's sold in the rest of Canada. It had a good period in the Atlantic, and broadly speaking the rest of the country was pretty consistent, about mid-single-digit decline in the quarter.

Kevin, on that low double-digit increase in July for all of your brands, do you put all of that on weather or is it getting more promotional?

To be honest, the weather wasn't super in July, either. I think we've had a couple of good weekends early in the month. We've got a couple of extra shipping days in Quebec but basically I think the country has decided -- this is a little bit anecdotal, but the country has decided that it's time to have summer, that there was enough rain in June, and we can see shipments from an industry perspective are quite strong in July. And broadly speaking, it had to happen. There's no indications that the industry is in decline or anything like that. It was just some pretty bad weather for a prolonged period of time in May and June, which as I said has extended into July, but a little bit of it would be promotional. But most of it I think is simply returning to normal levels where the industry has historically grown year-over-year at about 1%.

When you say up low double digits, are we talking the same number of selling days in each period or are you getting the benefit of the selling days in that number?

In Quebec, for example, you would get -- there's a couple extra shipping days, and that's -- in Quebec our STRs are measured by shipping days. So there's a little extra dance in there, but most of it would seem to be, or at least half plus would seem to be the industry strength and us participating or more than participating in that.

Okay. Great. Thank you.

Thanks.

Thank you. Our next question comes from Kaumil Gajrawala of UBS.

This is [Zach Palmer] standing in for Kaumil. Quick question for you guys. Could you comment on whether there were any cost savings opportunities in the US that you guys ended up delaying in the quarter waiting for the closing of the MillerCoors JV?

Hi, Zach. I'll take that. The short answer is no. We ran the business as we would. We got the cost savings that we wanted out, and the MillerCoors people are working very hard at the moment putting together their plans to make sure they get the cost savings and synergies out as well. What you would expect really.

Thanks.

Thanks.

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

Good morning, Peter. I guess one of the things that we're sort of struggling with on this side today is visibility, and seeing that the cost inflation expectations have changed sequentially from the first quarter to the second quarter and now looking out into next year, and I think there's about a 35% to 40% difference in the range of consensus estimates for next year between the high end and the low end. Can you talk a little bit about as much as you can, on some broader themes -- first, where you stand today relative to past statements that management has made on share buybacks? Also, is the language on your expectations for the phasing of the cost savings from the MillerCoors JV the same? Meaning is it still $50 million in year one, the first fiscal year after the JV closed? And then also, if you could talk a little bit about your expectations for the continuing of cost savings programs and resources for growth savings in the UK and in Canada beyond this year.

Yes, okay, Bryan, I'll try my best to answer all of those for you. I'll let Stewart jump in as well to help out. First of all, can I just, before I address the specifics, can I just say, we appreciate that this particular quarter is slightly unique. MillerCoors as a business is less than five weeks old. And so we simply are not in a position to provide with you with the sort of information that we would like to provide you with and which we will provide with you on an ongoing basis. So our apologies for that, but it's just realpolitik and I'm sure you'll understand why that is the case. In terms of your specifics, on share buybacks we really want the same visibility as you want on MillerCoors and what is likely to be our expenditure and cash needs going forward. We'll have that by the end of the next quarter, and that will give us -- that will put us in position where we can discuss that particular issue with our board clearly. So that's where we are on that one. In terms of the synergy savings, yes, everything is still in line with the numbers that we've given you previously, $50 million in the first year, and so on. Again, Leo and his team will be able to update you on that at our next quarter announcements. And in terms of the cost savings, our resources for growth program is [banging] line in Canada, banging line in the UK. I think we've said in the announcement we are banging line with hitting the numbers that we've already given you for this year. And again the MillerCoors people are working on their numbers and we'll have greater visibility on that at the end of the third quarter, but the moment certainly we're very confident that we're in line with our cost savings program.

The only thing I would add to that, Bryan, is that if you looked out for RFG this year, we delivered 60% of the numbers already. We feel confident about this year. We've taken a look at next year in concert with MillerCoors. On that subject we feel quite confident that to the extent that there are any detrimental effects from the MillerCoors joint venture, that that will be offset by additional savings they had realized on their side.

Okay. Great. Thank you, guys.

Thanks, Bryan.

Thank you. Our next question comes from Carlos Laboy from Credit Suisse.

Good morning.

Hi, Carlos.

Could you expand on the importance of the Corona brand in Canada? You mentioned it briefly, and for your growth. With Modelo on the block -- if Modelo goes to InBev, how do you hang on to the brand? And if you lose it, how does it affect your Canada earnings?

I'll let Kevin jump in on the detail of it. You're well aware we're not going to speculate on anything that might happen in the future. We've got no more view on that than you do, to be honest. Kevin, do you want to talk about the Modelo brand specifically in Canada?

The Modelo brand -- it's hard to give comparisons because we've added Modelo Western Canada this year, so it obviously distorts the numbers, but it is a sizable brand that continues to enjoy good growth, both in the eastern and western part of Canada. We've had long relationship with Corona and the creation of the joint venture for us and for them, we think, is a great opportunity to continue to grow in the country.

How important is it to your portfolio and to your growth? It's a pretty important brand in the portfolio, no?

Yes, it's within our -- one of our top ten brands. It's not our biggest but certainly not our smallest. As I said, it's -- I'm trying to give guidance -- I'm trying to give you a size without giving the actual share here. But it is -- I think it's fair to say it's one of our more meaningful brands after, obviously, Coors Light and Molson Canadian. But it's a very substantial brand and it plays a very important role in our super premium portfolio.

Thank you.

Carlos, just to clarify, maybe we didn't make it clear, our agreement with Modelo for the Corona brand in Canada is a long-term agreement, so there's no question of us losing it, if that's what you're really trying to get at.

That's the concern.

No, no. If that answers your concern, hopefully we've done so.

Thank you.

Cheers.

Our next question comes from Judy Hong from Goldman Sachs.

Hi, good morning. Kevin, a couple more questions on Canada, particularly focusing on the pricing environment there. If I look at revenue per barrel in the second quarter, it looks like it was more moderate growth than the first quarter while the fuel and commodities outlook has worsened. I'm hoping to get a little bit more color in terms of the competitive promotional activity as well as your promotional activity, and with commodity outlook getting worse, your confidence level in taking more pricing to offset the commodity inflation there.

In the second quarter we still got pretty good pricing in the marketplace. Our pricing grew about -- our NSR grew about 3% per barrel, which is pretty good growth. The first quarter was a little bit better because we had taken pricing a little bit earlier in the year than in previous years, so our comparables versus the precious year were a little better. But if you look at it on an ongoing basis, obviously we are facing a challenging cost environment. There's still a province or two where we have yet to take pricing this year and obviously will be looking very seriously at those quite soon, but given all the cost pressures, we will be going back even to markets where we've already taken some price this year, and look at those markets and say should we be relooking at our price for this year and ongoing to try to offset some of these cost increases.

And what are you seeing from your competitors and their pricing?

Well, I think they're right in there with us in terms of -- it's a pretty aggressive marketplace. One of the things with the weak industry in May and June -- it's caused people to chase volume a little bit and worry about what the summer was going to be like. What you're seeing out there now in a couple markets is some pretty aggressive discounting, probably more aggressive than a year ago right now as people are chasing a little bit of volume. This market has historically gone in some of those cycles. We would expect that things will work their way through. Everybody is facing the same challenging cost environment, but right now it's pretty aggressive out there.

I think your MG&A in Canada was down 6% if you exclude some of the factors that affected the comparability. Is that more of a timing issue where cost savings help the MG&A line or is your brand spending actually declined in the second quarter?

Well, our marketing and sales, if you look at MG&A on a comparable basis year-over-year, is about flat.

Okay. And then a couple of questions in the UK market. You talked about second half potentially getting better as you cycle the smoking bans a year ago. Are you seeing any evidence that that is indeed happening? You said sales to retailers were down mid single digits in July, so it doesn't look like it got a whole lot better. Secondly, on pricing, it seems like that you got a little bit more promotional in off premise outlets, and I'm wondering if this is something that we should look forward to going forward. And are you pleased with the returns that you're getting as you ramp up promotional spending in that part of the channel?

Hi, Judy. It's Mark Hunter here. With regard to the industry, what we've seen is basically the industry volumes have accelerated from a declining perspective through the second quarter. So second quarter was down about 4.6%, the first quarter was down a couple of percent. The total market at the half year is down just over 3%, and we would expect the market for the full year down about 3.5% in total volume terms. There still is a little bit of uncertainty associated with it because although we'll be cycling the smoking ban from last year, clearly the UK economy is not in great shape, so consumer spending and disposable income is clearly under a lot of pressure. We are currently forecasting total market volume to be down pretty much in line with where the market is at the half year, about 3.5%. With regard to pricing, we intimated at the start of this year that we wanted to be more selective in some of our promotional activity in the take-home market. We lost share as a business last year, and as we've come through the first two quarters of this year, we've managed to achieve both pricing growth and market share growth, which is really the formula that we're looking to repeat on an ongoing basis. Our pricing growth was a little bit lower in the second quarter, principally because the take-home market, the off-premise market took up a larger proportion of the overall volume in margins and the take-home market are generally lower than they are in the on-premise market. But we'll continue to push for selective promotional activities through the balance of this year.

Okay. And then just my last question, clarification on the cash flow outlook for this year. That didn't change even though the tax rate guidance went up. Is that correct?

That's correct, Judy. That tax change won't affect us from a cash flow perspective.

Thank you.

Thanks, Judy.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Christine Farkas from Merrill Lynch.

Thank you very much. Couple questions if I could. With respect to your Canadian market where your cost of goods or the raw material inflation was up 8 points, and this was offset by 2.5 points of your cost savings -- this ratio seems a little lower than what you reported in the past with your cost savings program offsetting a lot of the inflation. Can you talk about, firstly, is that ratio correct going forward, given the inflation pressures that we're seeing? Then with respect to North American raw material, specifically on your packaging inflation, and your ag input -- we can all see what fuel is doing. What's your hedging position and outlook on those two particular components? Thank you.

Christine, it's Kevin. I'll take those. Let's start with, yes, the inflation has been higher than in previous quarters, obviously. Peter mentioned, or Stewart may have mentioned that for the rest of the year we see more mid single-digit increases. A lot of what you saw in this quarter has been driven by a combination of agriculture, but obviously fuel is an important part of our business as we have a DSD delivery system in some provinces and we share a system through either BDL or [TBS] with some other brewers. So we've seen some dramatic increases. Some of that going forward will depend on what's happening. Right now oil is moderating somewhat, which is good news for us, but we are forecasting that it's not going to get a whole lot better. It's certainly for the balance of this year the agricultural products we've built in today's pricing as well as oil. So if there's any upside in that, it would be in the sense of if there's some substantive movements downward in oil.

Do you hedge where you can on these inputs?

Judy -- Christine, sorry, just to cover that point, we don't as a rule get into our specific hedges, but all of our hedging is taken into account in looking at our going forward COGS for the rest of the year, which we've outlined at mid single-digit rate.

Great. Just a follow-up question on the UK. With respect to the higher pricing, you talked about a buy-ahead, ahead of the higher excise taxes in the UK. Your pricing was up on core brands 0.6%. Can you talk about whether you can pass on more pricing there to offset potentially some of the volume decline?

Hi, Christine. Mark here. We're currently reviewing pricing options for the balance of this year. It's going to be a combination of our SKU mix and driving more profitable packs, and we are currently reviewing whether there's any room for a more blanket price increase. But that's still work in progress.

Okay. Great. That's all for me. Thanks.

Thanks, Christine.

Thank you. Our next question comes from [Patricia O'Donnell from Kingdon]. Ms. O'Donnell, your line is open. Our next question comes from Bryan Spillane from Banc of America Securities.

Thanks for taking the follow-up. I just wanted to get a little perspective on the UK. There's been a pretty, I guess an accelerated level of pub closures, like I guess in the last year or so. I think I read one story where there's maybe 1,400 pubs closed last year, and they're closing at a rate of two or three per day right now. So two questions related to that. One, are your volumes in sales being influenced or affected by sort of a reduction of inventory in the trade, if you've got fewer customers -- there's not only just less throughput but maybe less stock in the trade? So maybe like a de-stocking effect? Then the second thing is does it still make sense to spend the capital on Cold Dispense equipment right now if the [on-trade] is declining at the rate it is? I think Carlsberg said this morning that 2Q on-trade was down something in the neighborhood of 9% in the second quarter. If you could talk about that and how that's affecting your numbers and maybe affecting your thinking going forward?

Hi, Bryan, it's Mark. With regard to the pub closures, clearly that's a concern for the long-term viability of the pub industry in the UK. I think what we're seeing at this stage is that the pubs are closing tend to be the smaller volume pubs, so pubs you would describe at the tail end of the market. So their impact on our overall market performance relative to the industry is pretty small at this stage. So I would really -- a material issue in the short term but clearly as we look at longer term, pub closures generally and on premise performance is a concern for us. With regard to CapEx, we will continue to invest in those outlets that we think can generate material return for us, so we're very selective with regard to where we are installing Cold Dispense. It's all being driven on the back of our core brands, and brands that we see having a long-term future. So it's important that those brands represent themselves effectively. But this isn't a ubiquitous approach across all customers. It's a selective approach, and we look to invest where we can maximize the returns. It tends to be with those customers who are investing in the retail proposition and where our brand positioning is reflected at the point of purchase.

Great. If I could follow up on the, again, in the UK, on the pricing, was the -- were the excise tax increases passed through by retailers? Or did they not pass that, the excise tax increases through to consumers?

It would certainly appear that within off-trade market, the excise is increases were not passed through. So we've seen very little movement in off-trade pricing. And on-premise, most of the excise tax increases seem to have been passed through.

Does that potentially raise the question or a flag that there could be some more aggressive regulatory action taken? I mean, part of the owe my impression is part of the reason why excise taxes were increased were to raise revenue but part of it is public policy action to try to curb consumption. It seems both in beer and wine that the off-trade has ignored the suggestion that retail -- shelf price ought to move up. First of all, am I on target with that? And if so, is there a chance that maybe there's going to be potentially more aggressive regulation to try to ensure that you don't get the same level of discounting in the off-trade?

That's a good observation, Bryan. You have to connect up two things. The first thing you need to connect up is the commentary from the current UK government and other interested bodies about their concern relating to aggressive promotional pricing in take-home, and the need for something to change. And then you have to connect that to the fact that there's going to be an election in the UK probably in the next 18 months. So the likelihood of the current government putting through a material change that affects retail pricing I would suggest -- and this is a pure personal perspective -- would be pretty limited. There is a lot of discussion around this topic, and we are waiting to see whether there will be any movement from the government. But I would just set in the context of a forthcoming general election.

Great. Thank you very much.

Thanks, Bryan.

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

Okay. Thanks very much, Matt. We'll call that a wrap. Thank you everybody for joining us and thanks for your interest in Molson Coors. We look forward to speaking to you again at the next quarter.

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