Molson Coors Beverage Co (TAP) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Molson Coors Brewing Company 2008 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) Before we get started I want to paraphrase the Company's Safe Harbor language.

Some of the discussion today may include forward-looking statements. Actual results could differ materially from what the Company projects today, so please refer to its most recent 10-K, 10-Q, and proxy filings for a more complete description of factors that could affect these projections. The Company does 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 may be discussed during the call please visit the Company's website at www.molsoncoors.com for a reconciliation of these measures to the nearest US GAAP results.

I would now like to turn the conference over to your host Mr. Peter Swinburn, President and Chief Executive Officer of Molson Coors Brewing Company. Sir, you may begin.

Thanks very much. Hello and welcome to everybody. Thanks very much for joining us today. With me on the call are Stewart Glendinning, the Molson Coors CFO; Leo Kiely, CEO of MillerCoors; Gavin Hattersley, CFO of MillerCoors; Kevin Boyce, CEO of Molson Canada; Mark Hunter, the CEO of Coors Brewers Limited; Sam Walker, Molson Coors Chief Legal Officer; Bill Waters, Molson Coors Controller; and Dave Dunnewald, Molson Coors Vice President of Investor Relations. On the call today Stewart and I will take you through some highlights of our third quarter 2008 results for Molson Coors Brewing Company along with some perspective on the balance of the year. As part of this review we will share our first financial results for Miller Coors then we'll open it up for questions.

Before we discuss our specific financial performance, I want to share a few highlights related to our third quarter performance. First, with the current state of the global economy and financial markets Molson Coors is in an enviable position. We are a brand led Company with a solid track record of building great beer brands in all of our major markets. We are a solid cash generating business with no significant debt maturing before 2010. Our balance sheet is strong after paying down substantial debt during the past several years. We have a track record of delivering cost savings on or ahead of our commitments. We are more than halfway through our $250 million resources to growth initiatives and MillerCoors is off to a great start on its $500 million synergies program.

Second the MillerCoors integration is progressing well with the first quarter of combined financial results coming in ahead of expectations and more than 28% growth in underlying earnings versus the pro forma results a year ago. MillerCoors announced today that it is accelerating its three year synergy savings targets by six months versus the original committment when the venture was announced more than a year ago.

The third point I'd like to make is our Canada business is performing well; however, competitive price discounting in Quebec along with continued steep commodity inflation held back our Canada profit performance in the quarter. As always, we remain focused on long term brand building but in the short-term, we have to take actions to protect our share.

Fourth the UK business has grown market share, and net sales per barrel on the strength of our brands despite facing a daunting array of industry challenges. This team also successfully implemented an interim price increase at the end of September.

And finally during the third quarter we accumulated an approximate 5% economic exposure to Foster's via the cash settled total return swap undertaken with Deutsche Bank as our swap counterparty. We recorded this swap in our financial statements for the third quarter including a mark-to-market gain of $13.6 million in our corporate other income. This is an interesting market we've been studying for some time and we viewed this as an attractive opportunity. Foster's operates in a profitable market. The exposure was available to us as an attractive price and it represents a prudent and appropriate level of exposure with low carrying costs and plenty of flexibility. So at this point, I'll turn it over to Stewart to review the third quarter financial results and trends and then we'll cover the outlook for the fourth quarter of 2008. Stewart, over to you.

Thanks, Peter, and hello, everyone. I'll start with the third quarter financial highlights. Our underlying pre-tax income increased 4.4% driven by the strength of our brands and cost reductions. On the bottom line, underlying after-tax income of $175.8 million or $0.95 per diluted share was 1.5% higher than the third quarter a year ago. We will discuss our earnings performance today primarily in terms of underlying interest, 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's important to note that our third quarter underlying earnings excludes some one-time gains and expenses, particularly related to the formation of MillerCoors and the Foster's swap position, as well as $24.8 million of net special charges. These adjustments to our US GAAP results are described in detail in the earnings release we distributed this morning. Foreign exchange movements decreased our total Company pre-tax profit by approximately $3 million in the third quarter on an underlying basis driven by a 7% year-over-year depreciation of the British pound versus the US dollar.

In segment performance highlights starting with Canada, underlying pre-tax income of $151 million in the third quarter was 8.1% lower than a year ago. This profit decline was driven by three factors. First, increased cost inflation and price discounting this year. Second, cycling the final House of Blues Canada equity allocation and Foster's US contract earnings last year. And third, lower income from the Modelo brands resulting from a new joint venture this year.

To provide more comparable results as I discuss the Canada results, I'll provide year-over-year changes that exclude the reporting effects of discontinuing our Foster's US contract last year and of setting up the Modelo Molson joint venture and the impacts of the MillerCoors joint venture this year. So let's review the highlights.

Our Canada sales to retail or STRs for the third calendar quarter ended September 30, increased 3.7% on a comparable basis versus a year ago, driven by strong industry performance and high single digit growth of Molson's strategic brands, which represent more than 85% of our Canada STRs. Strategic brand growth was fueled by double digit growth of Coors Light, records and comparable partner import brand growth at a high single digit rate. Molson Canadian experienced a mid single digit volume decrease compared to the prior year.

Total Canadian beer industry sales to retail grew an estimated 3.1% in the calendar third quarter. On a comparable basis our third quarter estimated Canada market share increased approximately one quarter of a share point versus a year ago. Our Canada sales volume was 2.1 million barrels in the third quarter, an increase of 2.6% on a comparable basis versus prior year. Comparable net sales per barrel increased slightly in local currency as a result of favorable sales mix of our products, including sales increases of our higher revenue per barrel partner import brands.

Pricing per barrel declined approximately 1% in the third quarter as we face significant pricing pressure in Quebec and to a lesser degree in Ontario. Cost of goods sold per barrel in the third quarter increased nearly 7% on a comparable basis in local currency. This underlying costs of goods increase was due to the net effect of three factors. One, higher commodity packaging material and other input costs drove a 5% increase combined with a 2% increase due to higher fuel costs and incremental freight to supply Western markets while we upgrade our Vancouver brewery; second, these inflationary increases were partially offset by 2.5% of savings from our resources for growth initiatives, cost initiatives; and three, finally, an increase of slightly more than 2% due to the ongoing shift in sales mix, including increased sales volume in our higher cost partner import brands. Comparable marketing general and administrative expense in the quarter decreased approximately 1% in local currency, driven by lower amortization and administrative expenses. Other income decreased $2.6 million in the third quarter driven by cycling the prior year final income from the House of Blues Canada business which was sold in 2007. In the US, underlying US segment pre-tax income increased 13.7% to $92.1 million in the third quarter, driven by strong underlying growth by MillerCoors versus a year ago. Note that this US segment result includes our share of MillerCoors net income and various adjustments for the equity income calculation.

Looking specifically at the MillerCoors P&L in US GAAP, underlying net income for the quarter increased 28.2% to $190.8 million from the prior year pro forma result. This earnings growth was primarily due to strong pricing and reductions in marketing and overhead expenses which more than offset the impact of commodity inflation and lower shipment volume. During the quarter, MillerCoors US STRs rose by 0.7% after adjusting for the extra trading day in the period plus 2.3% on a non-adjusted basis. Due to continued growth from 7 of its 12 largest brands including Coors Light, Blue Moon, Keystone Light, Miller High Life and Coors Banquet. MillerCoors shipments to wholesalers declined by 0.5% due to reductions in distributor inventory levels in the third quarter. STRs for the Company's flagship premium Light brands were up 1.4% versus the prior year. Coors Light STRs increased an impressive 6.8% due to gains in both distribution and velocity while Miller like STRs decreased 3.6%.

MillerCoors total net sales increased by 2.1% to $1.95 billion versus the prior period. Excluding contract brewing, net sales were up 2.3% to $1.82 billion. Pricing remains strong as total Company net sales per barrel increased 3%. MillerCoors revenue growth outlook for the balance of the year is expected to remain strong as the Company implemented selective price increases on the majority of its beer volume in September and October this year. Net sales mix was virtually unchanged due to strong growth by the Company's premium Light, Craft and Import brands largely offset by cycling significant Miller Chill launch ramp up volumes in the prior year.

Cost per barrel increased 5.6% as reductions related to legacy Coors and Miller savings initiatives called Resources for Growth and project Unicorn were more than offset by increased commodity and fuel costs. Marketing, general and administrative expense decreased 9.1% reflecting favorability due to the non-recurrence of prior year Miller Chill launch costs which were partially offset by MGD 64 launch costs this year as well as a reduction in share based compensation expenses. Finally, depreciation and amortization expense for MillerCoors in the third quarter was approximately $70 million, and addition to properties and intangible assets totaled $67 million.

Moving to our UK business. Third quarter underlying pre-tax income of $30.7 million was $4.9 million or 19% higher than a year ago. This increase was driven by the benefit of supplier contract negotiations this year and a $4.8 million reduction in pension expense as we cycled the one-time $9.5 million increase in pension expense last year. Third quarter operating results also benefited from the Company's seventh consecutive quarter of year-over-year pricing growth. The introduction of Draft Magners Cider continuing cost reductions and profits from our new contract brewing arrangement.

Challenges in the quarter included lower sales volume and higher commodity and energy costs. Finally, a 7% decline in the value of the British pound versus the US dollar reduced underlying pre-tax income by approximately $3 million. We gained market share in the quarter as our UK owned brand volume decreased 3.1% year on year versus a total industry decline of more than 7% due to the poor Summer weather, continuing effects from smoking bans and a weakening economy in the UK. Carling, the largest UK beer brand declined at a low single digit rate and gained share in the third quarter.

Comparable net sales per barrel of our own products increased 2.5% in local currency, about two-thirds due to higher pricing in both the on premise and off premise channels and one-third driven by positive brand mix including growth in Draft Magners Cider. Comparable cost of goods sold per barrel of our own products increased 7.7% in local currency in the third quarter due primarily to higher energy and materials cost inflation. Comparable costs exclude a $6 million benefit from changes to supplier contracts related to the first half of 2008 as well as the benefit of cycling one-time pension expense in 2007. Marketing, general and administrative expense in the UK decreased 5.1% in local currency. General and administrative expense decreased due to a combination of actions to drive down the cost base and cycling the one-time pension expense last year. Marketing expense in the quarter decreased as management took action to reduce spending in line with 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 nearly 18%. MG&A totaled $31.9 million in the third quarter including corporate general and administrative expense of $20.5 million which decreased $5.7 million from a year ago due to lower incentive compensation and project spending. Corporate net interest expense declined $2.7 million from a year ago because of the benefit of debt restructurings we completed last year along with lower debt balances this year. The underlying loss for global markets and corporate was $49.7 million pre-tax in the third quarter and 11.9% decrease as a result of lower corporate G&A and interest expense this year.

Moving beyond operating business unit performance, our third quarter effective tax rate was 25% on a reported basis and 21% on an underlying basis. Free cash flow year-to-date through the third quarter reflected a net cash generation of $255 million which was made up of positive operating cash of $396 million plus $36 million of proceeds from asset sales, minus capital spending of $177 million. This free cash flow result represents a $220 million improvement this year due to both lower capital spending and higher operating cash flow versus the third quarter of 2007. Total owned debt at the end of the third quarter was $1.9 billion, excluding approximately $95 million of non-owned joint venture debt. Cash and cash equivalents totaled $335 million at the end of the quarter resulting in owned net debt of $1.57 billion.

Looking forward, we continue to expect full year 2008 corporate general and administrative expense of approximately $110 million plus or minus 5%. In corporate net interest we now anticipate 2008 expense of approximately 95 million to $100 million at today's foreign exchange rates.

Turning to our effective rate we continue to anticipate our underlying tax rate for full year 2008 and fourth quarter will be in the range of 20% to 24% assuming no further changes in tax laws. We also expect our 2009 effective rate to be below our long term range of 22 to 26% by about 6 percentage points because of the anticipated closing or settling of tax years. Our capital spending outlook for 2008 is approximately $220 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.

Turning to our free cash flow outlook. We anticipate that incremental cash needs in 2008 related to MillerCoors will total approximately $150 million. These cash uses include retention, deal completion, integration and restructuring costs along with additional capital spending to capture synergies. In addition, Molson Coors paid approximately $22 million of one-time cash use for debt extinguishment early in the year. Including these factors, we now anticipate that our 2008 free cash flow will be approximately $375 million plus or minus 5%. If we exclude the one-time cash uses that I described we are on track for our original 2008 goal of $550 million of free cash flow for the year. Now, highlights of our cost reduction initiatives.

In the third quarter we captured an incremental $19 million of cost savings as part of our three year, $250 million Resource for Growth or RFG cost reduction initiative. We are on target to achieve our 2008 goal of $77 million of additional cost savings.

Looking to 2009, MillerCoors will absorb some of the RFG cost savings initiatives along with some pre-existing Miller cost savings initiatives and I'm pleased to report that our 42% share of these savings which are on top of the $500 million of committed MillerCoors cost synergies will allow us to deliver on the commitments that we have made. As Peter highlighted for you earlier, MillerCoors also plans to deliver its cost synergies six months earlier than anticipated with a three year delivery period commencing July 1, 2008. 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, reducing costs in each of our businesses and generating cash. In Canada, as with our other global markets we have a consistent track record under buyers to invest in and grow our trends. Recent price increases across the major Canadian provinces are expected to offset some of the price discounting activity we have been experiencing. Across all of our markets we will remain competitive while growing our strategic brands over the long term and we are well positioned to cross all brand segments with at least one strategic brand achieving double digit growth in each category.

In the US, MillerCoors began its brewery network optimization project to shift volume and grew both Miller and Coors products throughout its expanded network of eight major breweries. The project will be phased in over the next 18 months. These moves will reduce shipping distances and deliver products to market quicker which will generate substantial savings. The Company continues to integrate its information systems, to enable robust data sharing and analysis within the commercial enterprise to further improve efficiencies. The MillerCoors employee selection process is nearing completion and the full sales organization selection process will be complete by mid November.

Finally, the demand creation team is engaged in a complete review of the brand portfolio with a goal of sharpening the positioning and focus behind each major US brand with the first results due at the MillerCoors distributer convention in March.

In the UK, we anticipate a challenging trading environment to continue in the balance of the year due to the weakening UK economy. We do, however, expect our UK business to continue to benefit from the Magners Cider agreement, lease and supply of renegotiations and our contract brewing arrangement. Moreover, we are committed to pricing growth to at least cover the substantial cost of inflation we are seeing. Consequently, we implemented an additional price increase earlier this Fall.

Now, following are the most recent volume results for each of our businesses early in the fourth quarter. In Canada, our comparable sales to retail in October were virtually unchanged versus a year ago. In the first five weeks of the fourth quarter, our UK sales to retail have decreased at a low double digit rate driven by the retail load ahead of our late September price increase, excluding the effect of this inventory load, our STRs in the first five weeks decreased at a mid single digit rate from a year ago. Regarding cost reductions, we are on track to meet or exceed our goals in 2008.

Looking at the cost outlook by business, in Canada, we anticipate that our reported cost of goods per barrel in local currency will increase at a mid single digit rate on both a reported and a comparable basis for full year 2008. Comparable 2008 cost of goods in Canada excludes the impact of the new Modelo Molson joint venture accounting, the loss of the Foster's US contract, and $8 million full year benefit of cycling 2007 foreign currency adjustments and the impact of export sales to MillerCoors. Our UK team is targeting substantial savings as part of the Resources for Growth program driven by headcount reductions, supplier negotiations, and improvements in supply chain efficiencies. We're also reviewing opportunities to further reduce overhead costs. We continue to expect full year 2008 UK cost of goods per barrel to increase at a mid single digit rate in local currency.

So, to summarize our results and discussion today, we are really pleased with the overall position and direction of Molson Coors, especially in the current economic and global environment. Our businesses are performing well within the context of our market challenges. In particular, MillerCoors is off to a great start toward becoming an even stronger and more competitive business in the US. Clearly, we are hopeful that recent moderation in key global prices is sustainable, a change that over time could help to offset the recent and favorable impact of foreign exchange movements. Regardless of the volatility of the global financial markets and commodities, the fundamental of our business remains strong and we are very excited about the future of Molson Coors Brewing Company.

Now, before we start the Q&A portion of the call, a quick comment. Our prepared remarks will be on our website for your reference in a couple of hours this afternoon. Also at 3:00 p.m. Eastern time today, our investor relation team led by Dave Dunnewald will host a follow-up call, essentially a working session for analysts and investors who have additional questions regarding our quarterly results. That will also be available for you to hear by webcast and recorded replay on our website. So at this point, we would like to open it up for questions, please.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Kaumil Gajrawala from UBS.

Hi, thank you. Could you give us a little more details on the Vancouver brewery how your progress is and when you expect it to be 100% up and running and then what type of savings could we see coming out of that?

We're up and running now. We're running the line in and so the line is fully in stalled and the savings are primarily going to be in the area in the short-term at least of reduced transportation from our Toronto brewery, so you should begin seeing that very soon.

So you got about a 2% incremental cost in the third quarter but that's something that probably we shouldn't be looking at for the fourth quarter; correct?

2%, you may see a little bit in the fourth quarter and not all of that is directly attributable to Vancouver because obviously, fuel has gone up, but you will see some reduction, yes.

Okay, thank you.

Thank you.

Thank you. Our next question comes from Judy Hong with Goldman Sachs.

Thank you. Kevin, I'm hoping to get a bit more color in terms of your profit performance in Canada in the quarter. If you can quantify how much of the decline was really one off items versus the heightened level of discounting that you've mentioned and can you just talk about what's really driving the higher discounting activity in the third quarter and it sounds like you talked about the fourth quarter trends seeing a bit of a moderation from a discounting activity perspective? So if you could just go through that in more detail I'd appreciate it.

Okay, Judy, let's start with one-time versus ongoing. The numbers that we quoted are all ongoing business. We've eliminated the one-time. So then if you focus in on the various markets I'd say in the short-term there have been price increases in both Quebec and Ontario and Alberta as well earlier in September. That will begin, we're seeing in Ontario not just the price increase of the premium brands but we have seen over the last six weeks movement up on the products that are the value brands which is encouraging and that continues today, so we're very encouraged by that. I'd say Quebec, although pricing has been taken certainly to date in this quarter it remains pretty competitive in that market and if you go back in time, this is really, it happens from time to time in our marketplace where certain markets get overheated and it usually works its way through in a period of time but this Summer was starting in the second quarter but really into the Summer was a particularly aggressive time amongst all competitors in the marketplace.

Just to clarify, Kevin, you said that none of the items were one-time but some of the items that impacted last year like the House of Blues equity earnings and the Foster's earnings being included in the last year, how much of that was really, drove the 8% decline in Canadian profit in the quarter?

Sorry, I was really referring to the cost inflation and the discounting. There were a couple of items but they were, without getting into specifics they were fairly minor in the overall scheme of things. The major items were the price discounting and the inflation.

Okay, and then Peter, the 5% equity exposure that you have on Foster's, how should we think about that from your cash used perspective going forward, I think a lot of people have been waiting for your free cash flow to be returned to shareholders in the form of either buyback or higher dividends and whether this move signals your intent to be a bit more acquisitive in taking in equity stakes in some of the brewers around the world or how should we think about that going forward?

Thanks, Judy. The two aren't really related. We've used a pretty efficient vehicle in terms of actually going to our 5%. We're not using cash, and we've got to a prudent sort of exposure which is pretty limited. And we just think the 5% represents a sensible position given our current balance sheet. Regards to how we use our cash in terms of buying back shares, the reality is, as you well know at the moment, getting cash in the marketplace is extremely difficult anyway so we don't really think at the moment it would be prudent to use our cash to buyback shares but the two issues I wouldn't relate.

Okay, thank you.

Thank you. Our next question comes from Christine Farkas from Merrill Lynch.

Thank you very much. A couple of follow-ups if I could. Kevin, first on Canada, you talked about early fourth quarter STRs being unchanged so that's a deceleration. Do you think that's on the back of stronger pricing in Ontario and perhaps Quebec or are you seeing maybe some trade down impact either away from or towards other categories? What are you seeing there in the early part of the quarter?

I'd say from an industry perspective the 3.1 was a pretty heated industry and reflected a couple things. It reflected in Quebec a bit of an inventory build to be honest and it also reflected early in the quarter. You may recall last quarter I spoke about the timing of the Canada Day holiday so adjusting for that I think it's really the third quarter that's a little bit inflated rather than the fourth quarter. I'd characterize October as okay, not bad, not great, but in an industry where historically we've been about a 1% growth flattish for us is probably a pretty good performance given all of the circumstances in the marketplace right now.

Did you give us an indication of how much currency impacted the Canadian results this quarter?

No, we didn't but it was virtually negligible.

Okay, great. And then looking at the segment of the US or other or I don't know how we call this there was about 98,000 barrels of, sold under a US title. Is that a timing issue? Is that a Puerto Rico? What is that number and are we going to see something like that going forward?

Is that question directed at me Christine?

No, I'm sorry, Kevin, just in general on your statements or on the Molson Coors statements, I realize that the US numbers are pulled through the equity income but there is now a small segment of other. What is that number?

Well, we had one day of earnings prior to the commencement of the JV, so the JV essentially commenced one day into this quarter, so that $4 million represents the profit for that particular day.

Okay, got it. And then you didn't talk about early fourth quarter STRs for the US business. Is that something you can cover on this call?

Yes, this is Leo. There's a lot of noise in our October numbers. We do have our October numbers that are off marginally on sales to retail, but it really has more to do with pricing and buy-ins ahead of pricing market by market, I think than any trend change. So and as you know, one month doesn't make a quarter.

No, it doesn't. Okay, that's helpful, thanks so much.

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

Thanks, hi again, everyone. Kevin, a couple questions relating to Canada. Trying to kind of put the picture together here, looking out beyond the next quarter. You're seeing your gross margins start to decline there. You're saying pricing is picking up but the volume leverage is slowing down a little bit so any reason not to think gross margin will continue to be down year on year over the next few quarters given the relationship between price and the cost pressures? And that's a local currency question and then I had a question when we bring that back into US dollars.

So if you kind of look back there's a number of things that you've referred to. First, I think the third quarter when you reflect on it is a really strong volume quarter with some cost inflation issues which I think as you look at commodity prices, there was a lag as commodity prices went up and there will be a lag as commodity prices are coming down and there's a number of other factors in there, so we're very hopeful that that trend will continue and we'll obviously benefit from that. That's the first comment in that.

I think in the very short-term, the question about volume and things I'd go back to Leo. It's the first, this first month of the quarter does reflect as I said to Christine, there is some loading in Quebec on the price increase that I mentioned so that will work its way through so I wouldn't take that it's going to be necessarily a flat quarter. We're hopeful that it will kind of be what it has historically been at about 1%. I think going forward, COGS in local currency, our challenge that we put internally is to get to flat but there's some work ahead of us to be able to deliver on that but certainly it's a challenge we are taking on.

And is that something you think you can achieve? I hear you saying it's a challenge but is that something you're targeting in '09 or is this going to take longer than that?

A little bit is going to depend on what's going to happen in commodities to be honest because in the past, if you just look in this quarter, 7% would be very hard to offset. It depends on how much that moderates to be honest.

Okay, and then 4X is obviously an issue with the way the Canadian dollar has performed over the last month or so. Two questions in that regard. And if we, just for illustration assume that, not that you're saying this, your currency neutral profits are flat next year, operating income flat. What in your opinion is structurally there and let's say for illustration the Canadian collar is down 15% year on year versus the US dollar next year on average. What structurally is in place to cause that scenario to not produce a 15% US dollar profit decline? And then two, have you done anything hedge wise that might add to any structural protections you have?

I think on that I'm going to turn that over, because that's a translation to US dollar profit I'm going to turn that over to Stewart if that's okay with you. Great.

Yes, let me address this. As we have commented in previous quarters we really don't get into the details or specifics of our hedging. I can point, however, to the fact that there is an important moderating factor and that is the fact that we have a substantial amount of our long term debt denominated in Canadian dollars does present a natural hedge for us.

Anything else? I mean, that's nice but anything on top of that because relative to the size of the operating income, the interest expense is relatively small.

Yes, I can't really give you guys anymore details than that, I'm sorry.

Okay, thank you.

Thanks Mark.

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

Hi. Good morning. Peter, just wanted to get back on Judy's question relative to the Foster's swap. I mean, if I understand the logic behind buying the instrument, it's basically making an assumption that the Foster's stock price is going to go up and so I guess the question is why would Molson Coors be making that assumption and what other step is there that might be involved strategically beyond just taking a flier on the Foster's shares?

Thank you, Bryan. I guess there's two points that really are the important points. Why have we got this? I think that's pretty straightforward as far as we're concerned. The Australian market has been interesting to us, we've studied it for quite a while. Foster's is interesting. We had the opportunity to get into an economic exposure that, at an entry price to us was very attractive, and we haven't, we didn't want to put the business in a position where we had an overexposure, we haven't done that and what we've done is pretty prudent and sensible within that context. So that's really the background to it.

So fair to think of this as there is potentially a strategic reason to do this?

Yes, I mean, I don't want to misrepresent the Foster's management but I think they said that they were in a very fluid situation. So we'll continue to review our position and whatever we do we'll do in the best interest of our shareholders but I would caution that we could take the view that we keep, we stay where we are, we might move forward or we might move backwards and out so whatever we do will be in the best interest of our shareholders.

Okay, and then just to be clear, in terms of right now there's been no cash outlay for this swap?

I'll pass it over to Stewart, it is very limited--.

Yes, the economic exposures via the swap, it doesn't require any up front cash. Obviously the gain and loss moves up in direct relation to the stock and one of the benefits of that is apart from not having a lot of cash out the door is the fact that we don't have a big Australian denominated investment that would be subjected to movements in the Australian currency rates.

Okay, and then Stewart, just a follow-up on Mark's question on foreign exchange, I mean, in the seat that we're in, I guess the best that we can do without knowing whether you've done anything to hedge the translation is to just simply do the arithmetic on currency translation versus against whatever we're forecasting for currency neutral profits in the UK and Canada, offsetting it with the natural hedge you have on the interest. If you were doing the arithmetic sitting in our seat is there something else you would do differently?

I can't say that I would direct you to do things differently. I can tell you that we're not really in a position to discuss the specific hedging strategy that we've undertaken, and you guys will have to do the calculations as you would normally.

Okay, great. All right, thanks guys.

Thanks, Bryan.

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

Yes, good morning everyone.

Good morning, Carlos.

Just very quickly to follow-up on those questions on Foster's, do you foresee having any role either in the Board of Directors at Foster's or do you see any operational link ups that you can do beyond what you already have in the brand?

No. We don't see that presently Carlos. We have the economic exposure that we've announced today and we'll just continue to review what happens with the Foster's strategic review and what their management does.

Thank you.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Todd Duvick from Banc of America.

Yes, good afternoon.

Hi.

I had a question for you on your category exposure. Obviously you're focused on the beer category. Do you have any interest in getting into other spirits categories or other alcoholic beverage categories like wine that Foster's also has?

That's not on our strategic game plan at the moment, Todd ,

Okay and then just kind of following-up on that, stepping back in terms of acquisition policy in general, if you were to make an acquisition of another Company, how would you look to finance that and how would your credit rating play into how you would plan to finance it in terms of would you look to maintain an investment grade rating or how does that factor into your thinking?

Well, obviously, that depends on what sort of business we were talking about, but we are in a very comfortable position at the moment. We've got a strong balance sheet, we're throwing off cash and anything that we do anywhere will be, will have to be short-term accretive and it will be prudent and in the best interest of our shareholders.

Okay. And I guess just to follow-up on that, your leverage on your balance sheet as you mentioned are in a very strong position right now. Could you envision a situation in which you would do something similar to what [Pernell Ricard] did and forego your investment grade credit rating for a strategic acquisition?

Again, that's just pure speculation. I can't get into that at all Todd I'm afraid.

Okay, not a problem.

Okay, cheers. Thanks very much.

Thank you. (OPERATOR INSTRUCTIONS) We have a follow-up from Christine Farkas.

Thanks so much. I just wanted to clarify based on your earlier statements about not pursuing a share buyback at this time. Is that strictly based on the challenges of the current market and accessing capital or is it because you might think you'd rather keep these dollars earmarked for other strategic initiatives? I mean it was always part of your plan to really study that return in the form of a buyback so I'm curious what's changed?

Not at all Christine. We've got, as you know, we are building cash. We don't have a huge amount of cash yet but we are in the process of continuing to build cash and we have a number of options of how we use that cash so it continues to be one of the options that's on the table. It's not the only one but it's on the table, we haven't taken it off the table. Does that answer the question?

That's a little more clear. Thanks a lot.

Okay, thanks.

Thank you. Our next question is a follow-up from Mark Swartzberg.

Thanks again. A question about the JV mechanics. If I'm reading the numbers from the press release correctly, the amount of cash that was funneled back up to you at Tap was about $59 million versus equity income of $106.5 million. Is there anything unusual about this particular period, any reason we shouldn't be thinking that from quarter to quarter at least typically you're going to be getting all of the cash flow back to you or I guess -- well, I guess part of the answer has to do with the CapEx that occurs there at the JV, but how are you thinking about the relationship between what you get back and what the JV actually generates?

Yes, thanks for that question Mark. That's a complicated question, only because obviously, the JV is going through a period of trying to drive those synergies, we've been pretty clear that to achieve the 500 million of synergies they are going to have to spend about $450 million. That doesn't come in any sort of a ratable way. I can tell you that from a shareholder, as a shareholder of the JV, we are in a place where we are looking to get the cash from our joint venture as rapidly as possible, and we do have a process that we go through each month which looks to minimize any cash that's actually held at the JV, so to the extent that we don't get cash, it's because we're putting the cash to good use in the joint venture itself to drive those synergies.

And is there anything contractual there that obliges them or is it all based on kind of mutual consent?

Well, I think we do have a fairly clearly laid outset of contracts that explain how and what the mechanics will be around the cash transfer.

Great. Thanks guys.

Thank you. Our next question is a follow-up from Bryan Spillane.

Thanks. Stewart just to follow-up on pensions, so this balance sheet for the quarter shows that the pension liability down to 400 million versus 677. I'm assuming that's the transfer of the US pension plan to the MillerCoors JV?

Yes, that's correct. You'll see a lot of obviously big movements in the balance sheet that all relate to stripping that out of our balance sheet and putting it in essentially one line as an investment in the JV.

And then as we're looking at pension expenses and pension funding going forward, given the return in the market, can you just give us some thinking now how we should start thinking about funding status for pensions going forward and also how pension expense may be affected by that?

Sure. Let me give you a couple pieces. I mean it is hard to give a very precise answer here because obviously at current equity performance levels, expense would likely be higher next year. It's very difficult to say precisely what number that will be and I can just tell you from previous years this stuff moves around a lot, obviously while equity may be down, discount rate is up, and it's so very difficult for me to give you any guidance around that and my best advice is to wait until year-end.

As it relates specifically to cash requirements of the pension plans, those are driven by, mostly by various regulatory bodies and in the case of Canada and the UK, that's sort of a tri-annual valuation and depending on where that falls, that may or may not drive increased contributions and I would say the last thing which is a moderating factor for us is that in the last couple of years, we have been going through a process of trying to derisk those pension plans by shifting assets from equity based instruments into fixed income instruments. So mix all of that together and you'll have to wait really for the end of the year to get a better picture for what that will look like.

Bryan, the thing I would add is that derisking that we did was before the recent sharp declines in the equity markets.

So higher proportion of fixed income before the equity markets went down?

That's right. If you look at our year-end 10-K you'll see all of our major plans, call them defined benefit plans were in the range of half equities which was a substantial reduction from before we did the derisking.

Okay, all right thanks guys.

Thanks, Bryan.

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

Okay, thanks, Matt. Thank you, everybody for joining us, and thank you very much for your interest in Molson Coors Brewing Company. Thank you.

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.