Molson Coors Beverage Co (TAP) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Molson Coors Brewing Company 2009 second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. (Operator Instructions)

Before we get started we 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 and 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 nonUS GAAP measures that may be discussed during the call, please visit the Company's website, 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 Mr. Peter Swinburn, President and Chief Executive Officer of Molson Coors Brewing. Sir, you may begin.

Thank you, Matthew. Well, hello and welcome, everybody and thanks for joining us today. With me on the call are Stewart Glendinning, Molson Coors' CFO, Leo Kiely, CEO of MillerCoors, Gavin Hattersley, the CFO of MillerCoors, Mark Hunter, the CEO of Molson Coors UK, Sam Walker, Molson Coors Chief Legal Officer, Bill Waters, Molson Coors Controller and Dave Dunnewold, Molson Coors Vice President of Investor Relations. And Dave Perkins also joins us for the first time in his new role as CEO of Molson Canada. Dave has many years of senior leadership experience in the brewing industry and brings extensive ground building expertise to our Canadian business, and we're delighted to have him in the new role. On the call today, Stewart and I will take you through highlights of our second quarter 2009 results for Molson Coors Brewing Company, along with some perspective on the back half of 2009. As usual, we will include a review of financial results for MillerCoors and then we'll open it up for questions.

So, let's get started. Overall, MillerCoors delivered a good performance in the second quarter with underlying earnings growing more than 20% versus the year ago. We grew local currency revenue per hectoliter and profits in all of our markets. Looking at regional highlights, In Canada, revenue per hectoliter grew as front line pricing increases in all major markets were partially offset by higher promotional activity across Canada. In the UK, our team drove 70% pretax profit growth by a strong pricing in all major channels and also achieved excellent cost management. MillerCoors continued to achieve strong double-digit bottom line growth in the US, driven by cost synergy delivery, solid pricing and lower marketing and general and administrative spending.

These positive results were due to excellent cost control and front line price management, underpinned by well-executed strategic initiatives. Our ability to build long-term brand value, manage costs and generate meaningful cash continues to deliver strong results. Meanwhile, tougher markets, poor weather and our strong pricing spend led to a 3.2% decline in overall Company volumes. But within this, we grew Coors Light volumes worldwide by 3%. We also face continuing cost inflation and unfavorable currency movements. The UK beer industry continued to post poor volume figures. And there was increasing evidence in both the US and Canadian markets of some consumers moving to enhanced value propositions. In other words, looking for value in brands, package configurations and channels.

Despite a difficult economic and competitive environment, we are very pleased with the progress we achieved in the first half of this year but we expect the balance of 2009 to present continued challenges as consumers continue to seek value and markets remain subdued. As in the first half, we will address these issues by continuing to focus on brand value, cost and cash generation. So with that as an overview, I'll turn it over to Stewart to review the second quarter financial results and trends and then we'll cover the outlook for the back half of 2009. Stewart, all yours.

Thanks, Peter. Hello, everyone. I'll start with the second quarter financial highlights. Worldwide pro forma beer volume for Molson Coors declined 3.2% from a year ago driven by industry weakness in our major geographies as well as our revenue generation strategy in the UK. Meanwhile our underlying pretax income grew 16.3% to $264 million. This increase was driven by strong earnings growth from MillerCoors in our UK business along with lower interest expense. Foreign currency movements decreased pretax profit by approximately $21 million in the second quarter. On the bottom line, underlying after tax income of $205.4 million or $1.11 per diluted share was 20.6% higher than the second quarter a year ago. It is important to note that our second quarter underlying earnings excludes some one-time expenses, primarily related to MillerCoors and our Fosters cash settled total return swap, as well as net special charges of $7.1 million. These adjustments to our US GAAP results are described in detail in the earnings release we distributed this morning. Also, unless otherwise indicated, all financial results we share with you today will be in US Dollars.

In segment performance highlights starting with Canada. Underlying pretax income in the local currency grew 2% versus a year ago, as a result of positive net pricing and the benefit of cost savings initiatives, which more than offset inflation impacts in the quarter. However, underlying income in US Dollars declined due to an $18 million foreign currency headwind. As on our last earnings call, to provide more comparable results in our Canada discussions, we will exclude the reporting effects in Canada of deconsolidating Brewers Retailing or BRI and of setting up MillerCoors in 2008.

So let's review the highlights. Canada underlying pretax income was $137.3 million in the second quarter, 11% lower than a year ago as local currency profit was offset by a 13% year-over-year decline in the Canadian Dollar versus the US Dollar. Our Canada sales to retailer STRs for the calendar quarter ended June 30th, decreased 0.5% versus a year ago. STRs of our strategic brands, which represent more than 85% of our Canada volume, increased almost 2% while sales of our other brands declined at a double-digit rate. Strategic brand growth was led by high-single-digit growth of Coors Light and solid growth by Rickard's. Molson Canadian declined as a mid-single-digit rate versus prior year.

Total Canadian beer industry sales to retail increased an estimated 1.8% in the calendar second quarter, yielding year-to-year industry growth of 0.5%. As a result, our estimated Canada market share decreased about 0.9% of a share point in the second quarter versus a year ago-- 0.9 of a share point. Our Canada sales volume was 2.4 million hectoliters in the second quarter, down 2.9% from a year ago. The difference between our volume and STR trends is driven by the timing of the July 1st Canada day holiday within our fiscal calendar along with a decrease in the retailer inventories of import brands. Comparable net sales per hectoliter increased 2.6% in local currency, driven by front line price increases in all major markets and improved sales mix, partially offset by promotional activity across Canada.

Cost of goods sold per hectoliter in the second quarter increased 1.7% on a comparable basis in local currency. This increase is due to the net effect of three factors: One, commodity packaging. Commodity packaging material distribution and other input costs increased COGS per hectoliter about 2.5 percentage points. Second, an increase of about 2 percentage points was driven by ongoing product mix shifts. And finally savings from our resources for growth initiatives more than offset inflation in the quarter reducing cost of goods sold per hectoliter by 3 percentage points.

Comparable marketing, general and administrative expense in the quarter decreased approximately 1% in local currency driven by lower overhead costs. Other income increased $3.9 million due to foreign currency gains.

In the US, underlying US segment pretax income increased 26.5%, to $142.7 million in the second quarter driven by strong underlying earnings growth by MillerCoors versus a year ago. Note that US segment results include our share of second quarter 2009 MillerCoors net income in various equity income adjustments which are then compared to the year earlier results reported by our legacy Coors business.

Looking specifically at the total MillerCoors P&L, second quarter underlying net income increased 16.4% to $325.3 million from the prior year pro forma MillerCoors results. This earnings growth was driven by strong net revenue growth, cost management and continued synergy delivery, despite continuing commodity cost pressures. In a soft beer market, MillerCoors' domestic STRs decreased 0.8%, versus the prior year pro forma quarter, due to a decline in Miller Light STRs and softness in above premium brands, mostly offset by positive results in five of our six focus brands in the US. Domestic sales to wholesalers declined 1.1% driven by lower STRs and a slight reduction in distributor inventories. MillerCoors total net sales increased by 1.6% to $2.14 billion versus the prior year pro forma quarter. Pricing remains strong in the second quarter, as domestic net sales per hectoliter excluding contract brewing and Company-owned distributor sales increased by 3% based on 2008 price increases.

Though MillerCoors continues to realize supply chain-related synergies and deliver savings from its cost leadership programs, cost of goods sold per hectoliter increased by 5.1% due to cycling significant prior year hop sales as well as increased brewing and packaging material costs this year primarily glass, aluminum and barley. Profits from hop sales were $24.3 million lower in the second quarter versus a year ago, when these hop sales were unusually high. Marketing, general and administrative costs decreased by 10.8% in the second quarter driven by synergies and other cost savings.

Moving to our UK business. In the second quarter we achieved underlying pretax profit for the quarter of $36.8 million, an increase of $15.3 million or 70% versus 2008. This solid quarterly performance was driven by positive results from the strategic actions of our UK team-- actions our UK team has taken in the past year including supplier negotiations and leveraging our contract brewing arrangement and brand building efforts, which allowed us to forego low margin volume. The benefit of these actions was partially offset by lower volume and higher marketing, general and administration expenses in the quarter. The UK team achieved this improvement despite the 22% devaluation of the British Pound versus the US Dollar which had a $10 million negative impact on UK underlying income. In local currency, second quarter UK underlying pretax earnings increased nearly 118% from a year ago.

Now, looking at second quarter highlights. Our UK owned-brand volume decreased 12.4% in the quarter due to a soft industry and the Company's strategy to forego low margin volume. UK beer industry volume declined approximately 5% in the second quarter, reflecting the weak economy in that market. Comparable net sales per hectoliter of our own products increased 19.8% in local currency, with approximately three quarters of this driven by higher pricing in all channels as we benefited from our strategy to forego low margin volume. The balance of the revenue per hectoliter increase was the result of positive sales mix, primarily due to growth in Draught Magners Cider and favorable channel mix. We achieved pricing growth ahead of input inflation resulting in improved gross margins. Comparable cost of goods sold per hectoliter of our own products was virtually unchanged versus 2008 in local currency, reflecting higher input cost inflation and fixed cost deleverage as a result of lower volumes offset by favorable channel mix and cost reduction savings. Marketing, general and administrative expenses in the UK increased 10.1% in local currency, due to higher marketing and incentive compensation expenses in the quarter.

In the Global Markets and the Corporate segment, Our Global Markets team grew volume more than 18% in the second quarter on a small base, driven by China and Europe. MG&A expense for Global Markets was $12.6 million in the quarter, an increase of $3.3 million versus the year ago. In addition, Corporate general and administrative expense increased $4.7 million to $30.6 million, primarily due to higher incentive compensation and project spending this year. Second quarter Corporate net interest expense declined $7.9 million from a year ago, with about $4 million of this reduction attributable to foreign currency movements and nearly all of the balance due the deconsolidation of BRI. Note that interest expense for the second quarter of 2008 has been increased $4 million retroactively in accordance with the new accounting rules for convertible debt. Corporate other expense increased $6.2 million, driven by a $12.9 million noncash mark-to-market expense related to the total return swap we arranged with respect to Fosters common stock. The underlying loss for Global Markets and Corporate combined was $52.1 million pretax in the second quarter, a 14.6% improvement driven by lower interest expense this year.

Now, highlights of our cost reduction initiatives. In the second quarter, we captured an incremental $32 million of cost savings as part of our three year, $250 million resources for growth or RFG cost reduction initiative. Savings from the RFG program during the past two-and-a-half years now total $229 million. In addition to RFG savings, MillerCoors delivered $60 million of incremental cost synergies in the second quarter, our 42% share of these synergies is $25 million.

Moving beyond operating business unit performance, our second quarter effective tax rate was 20% on a reported basis and 22% on an underlying basis. Free cash flow for the first half of 2009 reflected net cash generation of $191 million, which was made up of $353 million of operating cash flow, plus $3 million of proceeds from asset sales, minus capital spending of $45 million and $119 million of net cash contributed from MillerCoors-- contributed to MillerCoors. If we exclude one-time cash uses by MillerCoors to capture synergies, along with a return of collateral cash related to MillerCoors commodity hedges, our underlying free cash flow totaled $229 million for the first half of this year. As a result, we are 40% of the way toward our 2009 goal of generating $575 million of underlying free cash flow. Total debt at the end of the second quarter was $1.63 billion. Cash and cash equivalents totaled $296 million at the end of the second quarter, resulting in net debt of $1.33 billion.

Looking forward, we now expect full year 2009 MG&A expense in the Corporate and Global Market segment of approximately $160 million, plus or minus 5%. We anticipate full year Corporate interest expense of approximately $85 million to $90 million at today's foreign exchange rates, including the net effect of new accounting rules for convertible debt and the deconsolidation of BRI.

Turning to our effective tax rate, we now anticipate that our full year tax rate for 2009 will be in the range of 10% to 14%, assuming no further changes in tax laws. This rate is lower than our previous guidance, due to some adjustments in our inter-Company financing to reflect recent changes in the global interest rate environment. Within the quarters, however, our tax rate will be volatile. We currently anticipate underlying tax rates in the range of 21% to 25% in the third quarter, and negative 15% to 19% for the fourth quarter this year. The negative fourth quarter rate is driven by the anticipated favorable resolution of unrecognized tax positions in that quarter. We continue to anticipate that we will achieve our goal of generating $575 million of underlying free cash flow this year, plus or minus 10%. As in the past, this goal excludes the one-time MillerCoors impacts on our cash flow. This goal also excludes the benefit of MillerCoors using less collateral cash for commodity hedges this year.

Another factor that could affect the Company's free cash flow this year is the potential to resolve some of the contingent liabilities related to our former Brazil business. During the second quarter, the Brazilian Government enacted a tax amnesty that may accelerate the resolution of some of these liabilities which could result in a use of cash.

Our capital spending outlook for 2009 continues to be approximately $140 million. As usual, this guidance excludes MillerCoors. At this point, I'll turn it back over to Peter for a look ahead to the balance of 2009. Peter.

Thanks. Okay, so in 2009, we'll continue to focus on the things we've been doing in the past, which is building strong brands, reducing costs in our business and generating cash. In Canada, for the balance of 2009, we expect a challenging environment due to weak economic conditions and a continuation of consumers seeking value propositions. In addition, we will address our market share on a national basis as we move forward, by ensuring that we remain price competitive while increasing investments in our brand equities and in innovation.

In the US, during the key summer selling season MillerCoors remains focused on driving the great taste platform of Miller Light while accelerating Coors Light growth with the new Rocky Mountain cold refreshment messaging and cold-activated packaging. MillerCoors is also working to add new legal age drinkers to the Premium Light category by driving repeat purchases of MGD64. As we continue to see shifts in both segments and channels, we will be leveraging our full brand portfolio to meet changing consumer and customer needs. So finally, MillerCoors is committed to driving sustainable net revenue growth.

In the UK, we believe the challenging trading environment will continue through 2009 due to a weak local economy with cost inflation also being a challenge. However, we believe that our UK business is now on much firmer footing as it benefits from our contract brewing arrangement, the Magners Cider agreement, supplier renegotiations and our strategy of foregoing low margin volume.

In the second quarter, we were also pleased to announce the formation of our partnership to markets that produce the Cobra Beer brand in the UK. Cobra is a great investment in our UK brand portfolio, it gives us greater access to ethnic retail accounts.

Going forward, performance comparisons with prior year will become more challenging in the second half as we cycle the ramp-up of our strategic initiatives. By contrast, second quarter comparisons this year were against relatively weak results a year ago. Our UK team has made great progress in improving profitability but we recognize that further improvements will need to be made to achieve acceptable shareholder returns in that market.

So here are the most recent volume trends for each of our businesses early in the third quarter. In Canada, our comparable sales to retail in the first three weeks of July decreased at mid-single-digit rate versus a year ago, and this was really primarily driven by lower industry volumes on the back of poor weather. In the first four weeks of the third quarter our UK sales to retail have decreased at a low-single-digit rate. In the US for the five weeks ending July the 25th, which eliminates year-over-year timing differences related to the July the 4th holiday, MillerCoors sales to retail declined at a low-single-digit rate amid a soft US beer industry. As always, please keep in mind that these numbers represent only a very small portion of the third quarter and trends could change in the weeks ahead.

In the area of cost outlook by business, in Canada on a comparable basis, cost of goods sold per hectoliter increased at a low-single-digit rate for the first half of 2009. We expect this trend in comparable COGS per hectoliter to continue in the second half of the year. On a reported basis, however, including exports and BRI deconsolidation impacts, we expect our Canada cost of goods per hectoliter in the second half of the year to decrease at a mid-single-digit rate in local currency due to lower exports to the US and the effect of deconsolidating BRI.

Our UK team is targeting more cost reductions driven by supplier negotiations and operational efficiencies. In a challenging industry volume environment, we expect second half 2009 UK cost of goods per hectoliter to increase at a double-digit rate in local currency. Drivers include input cost inflation, expected stabilization of channel mix trends, in other words, we expect the off-trade to actually perform better in the second half of the year than in the first half of the year, and fixed cost deleveraging as a result of lower volumes this year. Also, we have the impact of cycling one-time supplier negotiation benefits in the second half of 2008.

In the US, MillerCoors is aggressively working to deliver against its stated goal of achieving $500 million of cost savings in the first three years of combined operations. The integration of MillerCoors' business process and systems to enable faster local decision making and streamlining of costs is preceding well. MillerCoors achieved $60 million in synergies in the second quarter, largely due to network optimization savings from moving production of the Coors brands into former Miller breweries, continued organizational savings and marketing synergies, I'm sorry, and continued organizational savings and marketing synergies. Year-to-date, MillerCoors has delivered $110 million in synergies and now expects to achieve $260 million of cumulative synergies by year end, surpassing its original goal of $225 million. And while the timing of synergy delivery has been accelerated, our goal of $500 million remains unchanged.

So to summarize our results and discussion today, our Company is off to a solid start in the first half of this year. Molson Coors grew underlying earnings 75% in the first quarter, or more than 20% in the second quarter, reflecting the strong benefit of-- sorry, the benefit of strong brands, strategic initiatives and cost reduction programs. We achieved positive pricing and local currency profit growth in both quarters in each of our major markets which helped to offset the impact of lower global volume, cost inflation and unfavorable currency movements. In the balance of 2009, we expect all of our markets to present challenges in the areas of competitive pricing and cost inflation. But, as before, we will continue to address these issues by staying focused on brand building, reducing costs and generating cost-- cash while driving shareholder value.

Now, before we start the Q&A portion of the call, a quick comment. Our prepared remarks will be on our Web site for your reference within a couple of hours this afternoon. Also, at 2:00 PM Eastern time today, our Investor Relations team led by Dave Dunnewold 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 via Web cast and on our Web site. So at this point, Matthew, we would like to open it for questions. Thank you.

Thank you. (Operator Instructions) Our first question is from Judy Hong of Goldman Sachs. Your line is open.

Thanks, good morning, everyone. My first question --

Judy.

Is on Canada and I was wondering if you could give us a little bit more color in terms of the industry volume trends? It looks like in the second quarter the volume trend was actually pretty strong for the industry as a whole and then it sort of weakened in July, so I'm just wondering if you can give us a little bit more color in terms of what's happening at the industry level? And then it sounds like as you looked out in the back half, you are trying to address your market share issue in Canada more broadly. And so I wanted to get a little bit more color there with respect to the promotional activity that you're seeing, both within Quebec and outside of Quebec, and as you think about the back half whether I'm interpreting it correctly that you're thinking about stepping up promotions more actively?

Well, I'll toss it over to Dave in a minute, Judy, to take the detail but maybe sort of a general point. We recognize, despite the fact that we think our figures are good and strong for the first half of the year, that there's some things we've got to do in all our markets. We need to get Miller Light moving in the direction we want to moving in in the US and that's looking good at the moment but we've got much more work to do. We recognize in the UK we've got to address the off-trade. But we've built a really solid base for ourselves to do that and we're confident we can do it. And similarly in Canada, I think the issue there is that we really do need to offer our consumers more options in terms of value propositions, and we've got plans to do that and you'll see more of that happening in the second half of the year. But with that as background, I'll pass it on to Dave.

Yes, thanks, Peter. So Judy, on the industry, you'll remember in the first quarter it was down about 1.2% and then up 1.8% in the second quarter. So year-to-date is a half a point up and I think that's probably a decent reflection. There's noise in between the two quarters so I would tend to look at it on a year-to-date basis. What I've seen since coming back to Canada is that boy, the weather sure seems to have deteriorated over the years. It is a cool summer and I think that's the biggest factor that we're seeing in July. It's anybody's bet obviously on how that plays out through the rest of the summer.

On the market share, I'd comment, picking up on Peter's point, no question in the current economy, we see consumers watching their pennies. And they're really responding to the value propositions out there and we have seen a pickup on that front and so I think the challenge for us going forward is really to find that right balance between pricing, volume and brand equity. That's what we'll be focused on for the second half.

On the competitive activity, Dave, just to follow up on that, it sounds like up until maybe the first quarter, the competitive situation or competitive-- heightened competitive activity was really more limited to Quebec. And are you now saying that you're seeing that sort of spreading out to other provinces in Canada more broadly?

Yes, I would say the second quarter activity was certainly up from prior year and I think that is a reflection of the consumers' interest in these value propositions.

But just to build on that, Judy, as well. I mean the-- I think the Quebec issue was specific to one competitor. But if you look across the whole of Canada, when you look at how the market share movements are going, the third players are actually with the lower prices are doing quite well as well. So this is a broad sort of response of consumers to available pricing out there.

Okay. And then, Stewart, a couple of questions. First, on the tax rate, I understand this year you're getting the benefit of some resolutions and it's coming in at 10%, 14%. How should we think about that in the context of your long-term tax rate of 24% to 26%?

Well I think, Judy, just to answer your question, I don't think that we're going to see a change in the long term but we try to give you some specific quarter guidance this year because of the kind of volatility that we expect.

Okay. And then Stewart -- Yes.

Sorry, go ahead.

And on the cash flow outlook, Stewart, you've cited some of the potential cash uses that you're not including as part of the $575 million underlying cash flow target. Can you quantify how much the potential cash uses on those other items could be this year?

Well, let's just take it in two pieces. I mean first of all we -- a couple of things I mentioned, we excluded last year from our cash flow and will exclude them this year. So for example, we are taking a benefit this year from the MillerCoors aluminum hedges, which are now being closed out, we had to post a cash collateral at year end. That's coming back in a benefit to our cash flow. We have not counted that in achieving our $575 million. So we took that-- we're taking the same treatment as in last year.

The piece that I mentioned in terms of additional potential cash use was related to a tax liability that we have in Brazil, our old business-- Look, it's great news. We've got a liability down there. The Brazilian Government have come out with a tax amnesty program. Our shift in our balance sheet from long-term liabilities to short-term liabilities reflects our belief that this will be resolved in the shorter term. But with respect to the specific amounts, I can't really point to an amount at this point in time because those are liabilities where which we-- in which we guarantee a third party and we're still in the midst of discussions with that third party to try to resolve the actual amount.

Is the amount potentially large enough that you may be rethinking about maybe a potential use of cash from your cash flow, whether it's share buyback or other uses of cash?

I'd say for all these things, Judy, we've got an ongoing dialogue with the Board. There are always movements in the cash balance and at this point we don't really have a perspective on exactly what the number is, so it's very difficult for me to answer that question. I would suggest that obviously when you get a chance to see our Q, that you look at some of the footnotes. I think that'll help give you a little bit of color.

Okay.

(Inaudible) Judy, I think we've been pretty consistent that we will look to use our cash in the very best interest of our shareholders and to resolve this ongoing liability, we've got the opportunity to do it in the right way, would be an excellent use of cash.

Okay. Thank you.

Thank you. Our next question comes from Kaumil Gajrawala from UBS. Your line is open.

Hi. Good afternoon, everybody. Peter, some of your commentary on Miller Lite and the new campaign is that you're seeing some positive signs but we're not seeing volumes improve. In fact, sequentially they appear to be getting worse. So what are some of the things that you're seeing and what you're studying that we're not as it relates to reversing trends in the brand?

Okay. Well, I'll pass it over to Leo to give you the fine detail but there's no doubt that in the core purchase pattern of Miller Lite, we are seeing improvements, which is always a good sign. It's really too early I think to get any sort of brand equity scores back on the advertising, but certainly it's resonating in terms of top of mind to a much greater extent. But I'll let-- I mean there's a lot that's been done to that brand in terms of pricing and so on to stabilize it but Leo, can I pass it over to you to take that further?

The trends haven't changed materially for I think pretty understandable reasons. We got into the second quarter, there was particularly in some segments of the country a year ago, very aggressive discounting going on in the big trade segment. So overlapping that has had an effect. Our pricing, however, since we moved last October, has been very steady and our level of discounting continues to show productivity. Which I think in some sense when you start to look at the non-promoted brand trends come up underneath it are an indication of just how big this franchise is and how responsive it is, once you get things moving in the right direction. So -- but, hey look, it's early days. We've got work to do on the copy front to sharpen the message, we know that. We know the message is resonating from a top line awareness point of view and we'd hope to see progress as we come out of this year and go into next year.

Got it. Thank you.

Thank you. Our next question is from Christine Farkas of Merrill Lynch. Your line is open.

Thank you very much. A couple of questions. Firstly on the UK, can you talk about the sustainability of this huge increase or price increase year-over-year? What does the underlying rate look like on a comp basis? And will we see this 19% for the second half of the year?

Well, again, I'll sort of take it first and I'll pass it on to Mark in a minute. I mean, obviously, we're not going to, we're not going to project, excuse me, the-- what our pricing's going to be for the second half of the year, but you will remember that we took a price increase in September last year in the UK, so we have to cycle that. And the only other thing I would point to is that with some of these price agreements, with the major on-trade retailers, they are actually long-term price agreements so they run for three years and they've got step-ups, so they're all locked in to that extent. But Mark, do you want to put more color around that?

Yes, hi Christine, it's Mark here. I think what you've got to remember is we've now seen ten consecutive quarters of price improvement and the step up that we've seen, to Peter's point, was because of the additional price increase that we took last year. And that was really to drive us into a position where we're starting to see gross margin growth which we hadn't seen in our business. So we've now seen three consecutive quarters of gross margin growth. I wouldn't expect to see the magnitude of pricing continue at the rate we've seen for the last couple of quarters as we lock the additional price increase from last year. But in market that continues to shrink and with the continued pressure we're seeing around responsible drinking, our view that continuing on this path and staying true to our strategy is absolutely the correct thing to do.

Now, correct me if I'm wrong, but industry data coming out for the second quarter showed that on premise volumes appeared to have been slightly less bad than the second quarter, is that fair? Are you seeing such trends?

Yes, I don't think we'll call a party because things are going less bad, but certainly the trend has improved. The interesting thing is really since the middle of last year, so Q3 of 2008, we've now seen four consecutive quarters of decline in the off-trade, ranging from 5% to 10%. On-trade has improved but still in the second quarter it was still ticking down at just under 5%. So total industry remains very challenging, on a year-to-date basis volumes are down about 6%.

Okay. Thanks for that. And moving to North America, looking at the Canadian first half industry growth of a half a point versus the US down about a point, I'm just wondering how when you look at the two markets, perhaps one is lagging the other, perhaps one is seeing greater price strength than the other. Can you maybe talk about why the Canadian market has held up a bit better than the US so far?

Well, I can't really provide the comparison to the US. I know as we look at what's going on in Canada, I think, frankly, some of the promotional value that is being delivered to the consumers is in fact helping with industry volume.

Leo, have you got any comment on the US?

No, I wouldn't have a sense of why there'd be a difference, Peter.

Okay.

To be honest with you Christine, I mean these things if you look at the sort of four weekly cycles or the quarterly cycles, they do move around quite a bit. So Canada has been a bit stronger. It's not significant, I wouldn't think.

Okay, thanks for that. And then Peter, I'll ask the question as I did last quarter with respect to your Foster's stake, has there been a change at all in your indirect ownership in that or has your perspective changed of the Australian market?

No, no our position has not changed at all. And I think we've been pretty consistent in our commentary on Fosters. And if I were to repeat it, I'd just be saying what I've said in the past, Christine.

Okay, thank you very much.

Thank you. (Operator Instructions) Our next question is from Mark Swartzberg of Stifel Nicolaus. Your line is open.

Thanks. Good afternoon, everyone. I guess first, Stewart, as relates to FX transactionally speaking in Canada, I think in the first quarter it was a net negative, how those hedges worked out for you. Can you tell us was it a net negative in terms of dollar impact on the US Dollar profits in the second quarter? And then as you look at the balance of the year, how do you think, given where rates are right now for FX, what do you think kind of impact we'll see from those hedges transactionally?

Okay. Well, I think if you just reflect on our quarter for our hedges, actually our hedges would have been positive this quarter. But let's just -- let's just look at the top level of this thing. Canadian Dollar down about 13%. Impact overall, just from FX for the quarter, about $18, about $18. I think if you looked at the outlook and looking forward for the rest of the year, as we've shared with you, we do have an active hedging program which hedges certain currency flows between Canada and the US. We also have a large proportion of our debt is denominated in Canadian Dollars which does provide a natural hedge against that. And if you take all that into account, you should expect that we have about 50% of our Canadian profits for the back half of the year are hedged. Also, I think if you looked forward and looked at where current rates sit, as against the rates last year, you'll find current rates are about 4% lower than last year and I think you'll find that the fourth quarter we start to cycle that and you see actually current rates being stronger than they were in the fourth quarter last year by about 12%.

Okay, helpful. And from a-- zeroing in specifically on this transactional issue which seems to swing from quarter-to-quarter, which is-- whether it's beneficial or adverse, very understandable. But knowing what you know right now about how those hedges are priced and given where the rates are right now, do you expect that that's going to be a net positive or a net negative of any -- at least of any size in the second half for your Canadian profits, dollar denominated, US Dollar denominated?

We don't-- Mark, I don't think we've given anybody any specific pricing on our hedges. And I think, again, I'd go back to the comments I just gave you. If you looked at our rates for the third quarter, it will still be slightly down on last year fourth quarter looking a lot better.

And Mark, this is Dave Dunnewold. You know that our hedging program is essentially designed to mitigate volatility in our earnings to the extent we can. So when Stewart mentions that we expect a very slight FX headwind from a translational standpoint in the third quarter, that means the hedges ought to provide just a little bit of benefit, right? And then in the fourth quarter when that flips a little bit of a tailwind from a translational standpoint, then you'd expect the hedges to provide a little bit of headwind, in other words, take a little bit of that benefit off. We can't give specifics but I think that's the philosophy.

Excellent. Thank you, thank you, guys. And if I could just shift more to the business in Canada, Dave your-- other Dave, you're new there, running that business, you talked a little bit, we've heard a lot-- a little from you here about your intentions with value offerings. But could you give us kind of a broader kind of report card on what you're seeing there, kind of in terms of how you guys go to market that you think needs to change? And then operationally, incentive compensation, anything else about how you guys actually run your business and motivate the people running the business to achieve better results going forward?

Yes, thanks, Bob. Some of-- I think the, really the key opportunity for us in Canada going forward is around the long-term brand building. And as I come back into the business in Canada, and I look at the things that we have that we can leverage, I mean, we have an incredible portfolio there that plays against all consumer needs. We have a corporate reputation that's really strong and we have passionate employees that I think would go through a wall for the Company. And for me, it's really around taking the portfolio to the next level. And I think that's around the sorts of things we talked about as an enterprise, innovation that we do behind our key brands, continuing to leverage Coors Light, which is really critical to us and doing very, very well in Canada, and addressing Molson Canadian, which I think we've acknowledged in the past is a brand that requires some work. And I can tell you that our marketing team has shared with me in recent weeks some really exciting thinking they're doing on the brand that will come to fruition over the next six months or so. And that's around the positioning on the brand and the programming. And I've been around Molson Canadian for many, many years and this is some really solid thinking and so I feel good about that.

So for me it really is continuing to drive against taking our portfolio to another level. As far as the people aspect of this and incentives, I feel good about what we're doing there. I think our employees are clearly aligned behind what we need to do. With value brought in line and with continuing to add excitement on our brands, I think we'll be in a really good place. So I don't see the need for changes in that aspect of it.

Great. And if I could, one last thing. On the competitive landscape, in my opinion, I don't know if this is accurate, it's been somewhat in balanced, the number of commodity benefits you versus Labatt and others have had over the last 12 months. Of course you're not sitting inside their P&L, but as you kind of look out and think about how the commodity hedges have affected behavior over the last 12 months and might affect behavior on price over the next 12 months, what-- do you have a sense of how much of a leveler playing field that's going to create our not leveler playing field it might create over the next 12 months?

No, that-- I mean that'd be a very difficult thing for me to comment on. I think I'd go back to the consumer, Mark, and from my perspective we're seeing the consumer responding to value propositions. I think as the economy tracks along, we'll likely see that adjust. And so the way I'd look forward, I think on this, is that it will come from the consumer.

Fair enough. Thank you, guys.

Thanks, Mark.

Thank you. At this time, I'm showing no further questions from the phone lines.

Okay. In that case, Matthew, we'll call it a wrap. Thank you everybody for taking an interest in the business and we look forward to talking to you again when we disclose our third quarter results. Thank you very much, everybody.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.