Molson Coors Beverage Co (TAP) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Molson Coors Brewing Company third quarter 2009 earning conference call. During today's call 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), 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-U.S. 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 U.S. 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. Sir, you may begin.

Thanks very much. Hello and welcome everybody and thanks for joining us today. With me on this call are Stewart Glendinning, Molson's CFO, Bill Kiely CEO of Miller/Coors, Gavin Hattersley, CFO of Miller/Coors, Jay Perkins, the CEO of Molson Coors Canada, Mark Hunter, CEO of Molson Coors UK, Sam Walker, Molson Coors Chief Legal Officer, Bill Waters, Molson Coors Controller, and Jay Dunnewald, Molson Coors Vice President of Investor Relations. On the call today Stewart and I will take you through the highlights of our third quarter and year to date 2009 results. I also will give you some perspective on the fourth quarter 2009. As usual we will include a review of financial results for the Miller Coors, then we will open it up for questions.

Molson Coors had a successful third quarter with underlying earnings growing more than 22% versus a year ago. This headline profit has some nonoperating and unusual noise in the numbers due to the favorable resolution of tax positions partially offset by unfavorable currency and one off headwinds. Stewart will take you through the details but given the economic and industry challenges we are pleased with the performance of our Company in the third quarter. Our results reflect a high level of brand investment coupled with strong cost control and price management. We also show the effects of weak industry volume trends and continued cost inflation along with more promotional pricing activity in Canada.

In terms of our portfolio performance, total Company volume in the third quarter declined and worldwide Coors Light volumes were down slightly against a strong growth quarter a year ago. Looking at the regional headlines, in Canada comparable revenue per hectoliter and gross margin grew as frontline price increases outpaced growth in promotional activity and cost of goods sold. Lower volume and increased brand investment however resulted in a 2% decline in local currency earnings. Our UK team also reinvested higher revenue per hectoliter in its brands while growing pretax profit in local currency more than 20% in the quarter. Also the newly acquired Cobra brand got off at a good start in the quarter.

Miller Coors achieved its fifth consecutive quarter of strong double-digit profit growth in the U.S. driven by cost synergy delivery, solid pricing and lower marketing general and administrative spending. ,Equally important the US brand portfolio performed well in the peak summer selling season against its competitive set. We remain focused on building a diverse portfolio of extraordinary brands offering value enhancing innovation to consumers and achieving positive pricing to grow our topline and bottomline as the economy improves. In a few minutes I will give you a flavor for the investments we are making in brand building innovation across our business as we closeout 2009 and enter 2010.

We continue to achieve significant success in generating cash on leveraging our capital base to increase returns. At the end of the third quarter we have already achieved more than 90% of our $575 million free cash flow goal for the full year. In terms of leveraging our capital base we recently announced the sale of our ownership in trust in a Montreal Canadians hockey club and our intent to buy a Grandville Island Brewing Company of British Columbia. The Grandville Island acquisition which we expect to close early in 2010 will represent a high return addition to our super premium portfolio. When combined with our Ontario based (inaudible) brewery, the Grandville Island brands will position us for additional growth in the Canada craft and specialty segment.

So with that as an overview I will turn it over to Stewart to review third quarter financial results and trends and then we'll cover the outlook for the final quarter of 2009. Stewart.

Thanks, Peter, and hello everyone. I will start with the third quarter financial highlights. Worldwide beer volume for Molson Coors declined 2.9% from a year ago driven by industry weakness in our major geographies as well as our pricing strategy in the UK. On the bottomline underlying after tax income of $212.9 million or $1.14 per diluted share was 22.7% higher than the third quarter a year ago. As Peter mentioned, the headline profit result has some nonoperating and unusual noise in the numbers. So it's helpful to look below the surface. Headwinds in the third quarter included unfavorable year over year currency movements, a mark-to-market hedge loss this year and supplier negotiation benefits last year, both in the UK. These headwinds totaled more than $22 million pretax in the quarter with foreign currency making up $13 million of this total.

Meanwhile our underlying results which benefited from the favorable resolution of some unrecognized tax positions which increased $36.4 million versus a year ago. If we take these factors out of our underlying results to get a better view of the ongoing performance of the business, after tax earnings increased approximately 13% in the quarter. It is important to note that our third quarter underlying earnings do exclude some one time gains and expenses primarily related to our Foster's cash settle total return swap and Miller Coors integration costs as well as net special charges of $4.3 million. These adjustments to our US GAAP results are described in detailed in the earnings release we distributed this morning. Also unless otherwise indicated, all financial results we share with you today will be in U.S. dollars.

In segment performance highlight starting with Canada underlying pretax income and local currency declined 2% versus a year ago. Positive net pricing and the benefit of cost savings initiatives were offset by declines in volume and higher MD&A expenses, driven by increased brand investment and the deconsolidation of our interest in the beer stores in Ontario's known as Brewers Retailing our BRI.

In U.S. dollars Canada underlying earnings of $139.3 million in the third quarter declined 7.7% due to an approximate 6% year over year decline in the Canadian dollar versus the U.S. dollar. The weaker Canadian dollar this year reduced Canada's segment underlying income by approximately $9 million in the quarter. To provide more comparable results in our Canada discussions today as we've done on our previous calls, we will exclude the sales and costs relating to exporting beer to Miller Coors as well as the reporting effects of deconsolidating BRI. So let's review some highlights.

Our Canada sales to retail or STRs for the calendar quarter ended September 30 decreased 3.2% versus a year ago. Coors Light continued to show growth while Molson Export and Molson Canadian declined versus prior year. Total Canadian beer industry sales to retail declined an estimated 0.7% in the calendar third quarter. Our estimated Canada market share decreased about 1 point in the third quarter versus a year ago. Our Canada sales volume was 2.5 million hectoliters in the third quarter down 1.8% from a year ago. Comparable net sales per hectoliter increased 2% in local currency driven by favorable net pricing led by price increases across all major markets partially offset by continued price discounting activity. Cost of goods sold per hectoliter in the third quarter was flat on a comparable basis in local currency.

This increase is due to the net effect of three factors. First, commodity packaging material distribution and other input costs including pension expense increased about 1%. Second, an increase of about 2% was driven by fixed cost deleverage related to lower export volume to the U.S. this year and third, these increases were offset by savings from our resourceful growth initiatives. Comparable marketing and general and administrative expense in the quarter increased 4.4% in local currency driven by higher brands and innovation investments.

In the US underlying US segment pretax income grew 16.6% to $107.4 million in the third quarter driven by continued strong underlying earnings growth by Miller Coors. Strong Miller Coors income growth was partially offset by cycling high equity income last year and one day of income for our legacy Coors business prior to the formation of Miller Coors on July 1, 2008. The equity income adjustments for our U.S. segment results are described in more detail in our earnings release distributed this morning.

Looking specifically at the total Miller Coors P&L, third quarter underlying net income increased 28.1% to $244.4 million from the prior year. Miller Coors is successfully delivering synergies, controlling costs and managing revenue for sustainable profit growth despite continuing commodity cost pressures. In a week U.S. beer market, Miller Coors domestic sales to retailers STRs were down 1.3% due to a decline in premium light volumes and continued softness in above premium and premium brands. Domestic sales to wholesalers FTWs fell 0.7% driven by lower retail sales. Despite the challenging environment, we are realizing the benefit of a well-balanced portfolio that offers consumers choice and variety in all segments.

In the third quarter during the key summer sales period Miller Coors had four of the six largest dollar growth brands in the scanner data. These brands are MGD 64, Coors Light, Miller High Life and Keystone Light. Miller Coors total net sales revenue increased 3.1% to $2.01 billion versus a year ago driven by domestic net pricing. Pricing remains strong in the third quarter as domestic net revenue per hectoliter, excluding contract brewing and Company owned distributor sales, increased 3.7% driven by sustained price increases taken in the Fall of 2008 and reductions in discount activity. Cost of goods sold per hectoliter increased 3.5% as benefits from synergies and other cost reduction programs were more than offset by higher brewing and packaging material costs under procurement contracts largely arranged prior to more recent commodity market price reductions. Marketing, general and administrative costs decreased 4.5% driven primarily by synergies and other cost savings.

Moving to our UK business in the third quarter. Underlying pretax earnings increased more than 20% in local currency from a year ago. This increase was driven by positive results from the strategic actions that our UK team has taken in the past year including leveraging our contract brewing arrangement and brand building efforts allowing us to forego low margin volume. The benefit of these actions is partially offset by the one time impact of a mark-to-market adjustment on natural gas hedges and cycling our one time supplier negotiation benefit of $6 million in 2008 combined with lower volume and higher marketing general and administration expenses in the quarter. In US dollar terms, third quarter UK underlying pretax profit increased 6.5% to $32.7 million versus a year ago. These results include the impact of a 13% devaluation of the British pound versus the U.S. dollar which reduced UK earnings by $5 million in the quarter.

Looking at third quarter highlights. Our UK owned brand volume decreased 6.3% in the quarter due to declining industry volume and the Company's strategy to forego low margin volume. UK beer industry volume declined approximately 1% in the third quarter. Comparable net sales per hectoliter of our own products increased 21% in local currency driven by two factors. First, 17% was due to higher pricing in all channels as we benefited from our strategy to forego low margin volume. And, second, 4 percentage points were due to positive sales mix due to growth in draft Magner's cider, Cobra and favorable channel mix.

Comparable cost of goods sold per hectoliter of our own products increased 22% versus 2008 in local currency driven by the following; 6% was due to cycling the one time supplier negotiation benefit in 2008. 5% was due to input cost inflation. 4% was driven by growth in draft Magner's cider, Cobra and adverse channel mix. 3% was related to a mark-to-market adjustment on natural gas hedges which is expected to partially reverse in the fourth quarter. And 2% was due to the deleveraging impact of lower owned brand volumes. Recall also that our contract brewing arrangements effectively take up spare capacity in the production network to deliver sales revenue which contributes positively to the bottomline Company performance.

Marketing, general and administrative expenses in the UK increased 7.8% in local currency due to higher marketing, incentive compensation and bad debt expenses in the quarter: Along with sales related costs in our new Cobra business. In the international markets and corporate segment, our international markets team grew volume nearly 28% in the third quarter off a small base driven by China and Europe. MG&A expense for international was $12.7 million in the quarter, an increase of $1.1 million versus a year ago. In addition, corporate, general and administrative expense increased $7.7 million to $28.1 million, primarily due to higher incentive compensation, project spending and labor related costs this year: Third quarter net interest expense declined $3.7 million from a year ago with about $2.7 million of this reduction attributable to the deconsolidation of BRI and the balance due to foreign currency movements. Note that interest expense for the third quarter of 2008 has been increased $4 million retroactively in accordance with the new accounting rules for convertible debt.

Corporate and other income increased $49.1 million driven by a $59.3 million non-cash mark-to-market gain related to the total return swap we ranged with respect to Foster's common stock. As usual these mark-to-market gains on the Foster swap are excluded from our underlying earnings. The underlining loss for international markets and corporate combined was $57.5 million pretax in the third quarter, 7.1% higher than a year ago.

Now highlights of our cost reduction initiatives. In the third quarter we captured an incremental $18 million of cost savings as parts of our three-year, $250 million resources for growth or RFG cost reduction initiative. Savings from the RFG program during the past two and three-quarter years now total $246 million. In addition to RFG savings, Miller Coors delivered $73 million of incremental cost energies in the third quarter largely due to organizational savings. Our 42% share of these synergies is $31 million.

As we announced earlier in the year we are wrapping up the RFG program and locking down our next-generation cost reduction program called RFG two. This new program offers at least $100 million of permanent cost reductions over the next three years. The primary areas of savings for the new program will be in logistics, waste, utility, maintenance, systems and procurement. We plan to provide more details regarding RFG two during our annual New York analyst meeting this March.

Moving beyond operating business unit performance. Our third quarter effective tax rate was 9% on a reported basis and 4% on an underlying basis. These rates are well below our long-term rates due to a favorable resolution of unrecognized tax positions in the third quarter which was one quarter earlier than we anticipated at the time of our previous earnings call. Free cash flow for the first three quarters of 2009 reflected net cash generation of $490 million which was made up of $667 million of operating cash flow, plus $4 million of proceeds from asset sales, minus capital spending of $72 million and $109 million of investing cash contributed to Miller Coors. If we exclude one time cash uses by Miller Coors to capture synergies along with the return of collateral cash related to Miller Coors commodity hedges our underlying free cash flow totaled $534 million for the first three quarters of this year. As a result, we are more than 90% of the way towards our 2009 goal of generating $575 million of underlying free cash flow. Total debt at the end of the third quarter was $1.68 billion. Cash and cash equivalents totaled $565 million at the end of the third quarter resulting in net debt of $1.11 billion.

Looking forward, we continue to expect full year 2009 MG&A expense in the corporate and international market segment of approximately $160 million. We now anticipate full year corporate interest expense in the range of 90 million to $95 million at today's foreign exchange rates including the net effects of new accounting rules for convertible debt and for deconsolidation of BRI.

Turning to our effective tax rate. We now expect our full year underlying tax rate for 2009 to be close to zero, assuming no further changes in tax laws. In the fourth quarter this year we anticipate a significantly negative tax rate due to the resolution of additional tax years with a substantial reduction in unrecognized tax positions this year, we anticipate that our effective tax rate after 2009 will be less volatile and more likely to be in our long-term range of 22% to 26% for underlying earnings.

Based on our year to date cash generation, we are confident that we will achieve our goal of generating $575 million of underlying free cash flow this year. As in the past, this goal excludes the one time Miller Coors impacts on our cash flow. This goal also excludes the benefit of Miller Coors using less collateral cash for commodity hedges this year. Our total free cash generation for the year will depend significantly on working capital timing in the fourth quarter.

As we mentioned last quarter, 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 2009 capital spending outlook is now approximately $130 million for the full year. As usual, this guidance excludes Miller Coors. At this point I will turn it back over to Peter for a look ahead to the balance of 2009. Peter?

Thanks very much, Stewart. Through 2009 we consistently said we will focus on brand building, reducing costs across our Company and generating cash. And that goes on. In Canada for the balance of 2009, we expect to continue a challenging environment due to overall weak economic conditions, soft beer industry volume, continued price discounting and the cost of offering enhanced value propositions to consumers. Our commitment to improve the brand portfolio in Canada is now gaining traction. In the fourth quarter we are launching Riccards Dark, Molson M, the first micro carbonated lager, and Molson Canadian 67 the lowest calorie beer in Canada. Also with the 2010 Vancouver Olympics approaching, we will begin to accelerate our promotional activity as the official beer supplier to the Vancouver 2010 Winter Olympic and paraOlympics games.

In the U.S. the first priority for Miller Coors is driving growth for our premium light portfolio. We believe we have the marketing platforms, tools and beers to do that. First, we are supporting Miller light with great football and soon holiday programming. We are driving its great taste message with the great Coors campaign, celebrating great sports moments. And we are injecting humor into the message with Love your beer spots that have just started airing. Secondly we believe that cold refreshment message will continue to drive Coors Light success and we'll continue to innovate and drive distribution and display just to make sure that happens. Finally we are stepping up display, sampling and education behind MGD 64.

In the UK we expect performance comparisons with prior year will become more challenging in the fourth quarter as we cycle the ramp up of our strategic initiatives, an extraordinary price rise increase in the Fall of 2008, a greater portion of our sales coming from higher cost off premise channel and a reduction in marketing spend in 2008. We also anticipate higher incentive compensation in the fourth quarter this year in the UK. This business is now on much firmer footing and has made substantial progress in improving profitability.

Our international business is increasing its investments in a number of new brand and market initiatives particularly in developing markets. As a result, we expect MG&A expense to increase significantly in the fourth quarter from a year ago. Following are the most recent volume trends for each of our businesses early in the fourth quarter.

In Canada, our comparable sales to retail for the first four weeks of October decreased at a high single-digit rate driven by weak economic conditions and poor weather especially around the Canadian Thanksgiving holiday leading to a decline in industry volume. In the first five weeks of the fourth quarter, our UK sales to retail have decreased at a low double-digit rate. In the U.S. for the first four weeks of the fourth quarter, Miller Coors sales to retail declined at a mid single-digit rate due to overall industry softness. As always, please keep in mind these numbers represent only a very small portion of the fourth quarter and trends could change in the weeks ahead.

In the area of cost outlook by business. In Canada, on a comparable basis excluding exports and BRI consolidation impacts, we now anticipate the cost of goods sold per hectoliter will decrease at a low single-digit rate in the fourth quarter 2009 due to benefits from our RFG cost savings program and lower overhead costs which we expect to more than offset input inflation and ongoing product mix shifts. On a reported basis, we expect our Canada cost of goods per hectoliter in the fourth quarter to decrease at a high single-digit rate in local currency due to local exports to the U.S. and the effect of deconsolidating BRI this year.

Our UK team is targeting more reductions as part of the resources for growth program driven by supplier negotiations and operation efficiencies. In a challenging industry volume environment, we expect our fourth quarter 2009 UK cost of goods per hectoliter to increase at a double-digit rate in local currency. Drivers include an increase in the high cost off premise channel as a percent of our mix, continued input cost inflation, product mix reflecting more Cobra and direct Magner's volume and fixed cost deleverage as a result of lower owned brand volumes this year.

In the U.S. Miller Coors has delivered $183 million in synergies to date this year bringing the total to $211 million since the beginning of operations on July the 1st, 2008. The US team now expects to achieve $270 million of cumulative synergies by the end of 2009, suppressing its original commitment of $225 million. As we previously mentioned, Miller Coors plans to deliver incremental cost savings above its $500 million synergy target and approximately $200 million of additional cost savings are now expected to be delivered by the end of 2012. These additional cost savings include efficiencies in production costs procurement and MG&A expenses.

So to summarize our discussions today, our third quarter results include a significant nonoperating and unusual noise in the numbers. Regardless, Molson Coors grew earnings at a double-digit rate in the quarter. Looking at our year to date performance for Molson Coors Brewing Company, the first three quarters of 2009 have been positive in terms of both financial results and progress in our business. The highlights include total Company underlying earnings up more than 33% year to date. In Canada, the new members of the leadership team led by CEO Jay Perkins is improving our competitive position. They have begun to roll-out several portfolio building innovations and announce their intention to purchase (inaudible) in British Columbia.

Our UK business has posted strong financial results year to date with underlying pretax income up more than 75% in local currency achieving leveraging strategic initiatives to improve financial performance and now has finalized contracts with all its major on premise chain customers which offers solid platform to drive both volume and margin in the years ahead.

In the U.S. Miller Coors is delivering on its synergies commitments, controlling costs and managing revenue for sustainable profit growth. In a challenging economic environment, Miller Coors is also realizing the benefits of a well-balanced portfolio as evidenced by our outperformance versus the category this summer. Molson Coors achieved good performance year to date and as we look forward to the fourth quarter, we anticipate the global beer markets will remain soft and consumers will continue to look for value in a weak economy. To drive volume, price and profit we will continue to offer value to consumers in many forms including innovative brands and packaging as well as category leading advertising, retail promotions and service to our customers. In the fourth quarter there will be incremental investments related to these efforts and these will be most significant in our Canada, U.S. and international business.

In Canada, we are introducing three innovative brands. Molson M, Molson Canadian 67 and Riccards Dark. And accelerating our promotional activity as the official beer supplier to the Vancouver 2010 Winter Olympics. And in the fourth quarter we are also rolling out new advertising creative for the Molson Canadian brand. In the U.S. we are increasing our investment behind the fast growing MGD 64 and other brands as well as expanding distribution of our innovative home draft package. Also our latest Miller Light advertising which is hitting the airwaves now has received positive reviews from distributors and in consumer research.

International growth is a key part of our strategy going forward. And we are investing more behind our strategic brands in select markets in Asia and Europe. These fourth quarter investments are consistent with our brand led strategies and we expect them to drive topline and bottomline growth as we move into 2010. Equally important our innovation pipeline is full for 2010 with a wide range of opportunities to build brands and drive profitable growth in each of our businesses well into the future.

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 within a couple of hours this afternoon. Also at 2:00 p.m. 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 here by webcast on our website. So at this point we would like to open it for questions, please.

(Operator Instructions) Our first question, Kaumil Gajrawala.

Good afternoon. Thank you everyone. Stewart, on the free cash flow you're 90% of the way but you still have a quarter left. Could you give us a read on what we should be thinking about or if there's any reason why you haven't taken up the free cash flow target for the year?

Yes, good question, Kaumil. We are not going to give any guidance on where we are going to end up at the end of the year. That comes a little closer to the fourth quarter. But I think really it's a step back and it's really a positive for us. Given where we started the year, we set our targets, our earnings have come in stronger and the business is performing better than we had expected. And that's showing through to our cash and that's just got to be good news for the shareholders.

But there's nothing incremental in terms of uses of cash, incremental CapEx related to the new cost savings at Miller Coors, is there anything like that in there.

No, I think all that we've shared with you. Miller Coors is sort of at 84% of the one time cash, the 450, they will be at 90 by the end of the year. So there's that piece. The other piece we look at is our exposure in Brazil and as we updated you last quarter we are still in some discussions with them to decide how that will be resolved. But that is a potential use of cash. And I would go to our Q and you will see we have about $160 million of liability on the books. That's not all related to those specific, to that specific item. I would say probably in the sort of 85 to 90% is a number on our balance sheet related to that and that's the best guide for that particular issue.

Okay. Got it. And then last question. Every region pricing was very, net revenue per hec was strong but volumes were weak. How comfortable do you feel in your ability to hold on to strong pricing?

Hi, Kaumil, this is Peter here. A couple of things. I think we mentioned in the script. First of all in the UK we've locked out negotiations with all the major pub cos this year so those deals are three-year deals at least so the pricing is, the price increase mechanisms are locked in for those, that would account for roughly about third of our business in the UK. So we feel comfortable in the UK. If you were listening to the Miller Coors call earlier this morning I think that both Leo and Gavin talked about where the Miller Coors business was. They've got about 80% of the pricing through this year. Cost of goods looked a bit more reasonable going forward. So again I think we are relatively comfortable in the US. And in Canada, it's a slightly different perspective to be honest with you. I think we shared with you that we will be competitive in Canada. The team there is really getting its act together but we manage pricing by market by SKU there and across the piece to be honest with to you ensure that we are competitive. So I think that's the best summary I can give you if that's helpful.

All right. Thank you.

Thank you. Our next question comes from Judy Hong of Goldman Sachs. Your line is open.

Thanks. I guess my question is really about looking at Canada more closely. Your share decline has gotten worse in the quarter. Maybe you can shed a little bit more light into sort of the competitive activity in terms of what's going on there. It sounded like in the beginning of the year really the discounting was more limited to Quebec and I'm wondering if that's spreading out into other regions, what's causing sort of the heightened competitive environment and at what point do you think that you may have to take more aggressive steps just beyond some of the innovation things that you're doing to really extend the market share loses in that market?

I will thrust the main body of the question on to Dave but I think you hit one of the main points of the agenda, Judy, is that that we see the market being managed in totality and we've been pretty open in the past saying that we weren't happy with our overall portfolio in Canada. We believe we are making very good steps, great strides in fact to sorting that out with the innovations that we've got coming into the marketplace and the new creative with Canadian which we are very excited about. Dave, you want to address the main body of the question.

Thanks, Peter, and thanks, Judy, for the question. Judy, as I look at Q3 and our year to date share result obviously we are not where we need to be. I think it's valuable to go a little bit below the surface in looking at our Q3 share results. We did actually make progress in our competitiveness and our share results in our major markets in Quebec and Ontario and I feel good about what I'm seeing starting to happen there as we get to a better balance of price and volume. We are dealing with challenges and opportunities in the remainder of the country. I think as we went through the quarter we also saw some progress which felt good to me but no question we saw smaller regional brewers in each market grow share at the expense of two major brewers combined and that's something that we will continue to be focused on.

As we heard we are really taking action now to strengthen our market position and our brand portfolio in a variety of ways. We feel very good about the innovation we have coming up with Molson Canadian 67, Molson M and Riccards Dark. I the understand the announcement regarding Grandville Island brewing is another commitment to strengthening the portfolio and particularly in the above premium segment there. So it's a well known, well regarded brand in BC that we think has the ability to travel and we are excited by that.

We also have work underway to strengthen Molson Canadian as Peter referenced and we have the upcoming Olympic platform and we will certainly leverage that fully. And finally as we noted we continue to improve our competitive position in finding that right balance between price and volume. So I would say as you go below the surface in the quarter, there are some encouraging signs. Certainly the entire team here is focused on the share challenge because we know we need to step into that and feel good about the activity in fact that we have in front of us there.

Okay. Just following up on your comment about the smaller regional brewers getting more competitive outside of Quebec and Ontario. Can you maybe tell us what sort of are the factors that are driving that competitive behavior in those markets?

Yes. A lot of it is in fact price or value related. I would say though that during Q3 there was in fact some innovation activity lime entries that in fact did get fairly high trial. They have subsequently diminished. But they did get high trial. But generally what we are seeing is small brewer pricing activity that we need to deal with.

Just clarification when you said the Canada STR was down high single digits so far in the quarter, can you tell us what the industry volume has been during that time?

Yes, we believe what we are seeing in October is largely related to industry. There does appear to be during October a fairly significant drop off in industry. Last year I would tell you that we had particularly favorable weather and so we believe that that's a factor in it. Tough to know what all the factors are. I mean there's even impacting Canada related to the flu going around. You look at the various factors and there's probably a combination of weather, economy and other factors that are at play.

Okay. Thanks. Then just my question for Stewart. On the free cash flow side of the equation, clearly it sounds like you are pretty pleased with the cash flow generation performance. And even if you are to use a portion of that to settle some of the tax liabilities in Brazil, it seems like you are going to be left with still a pretty ample cash flow. So I'm just wondering why not again sort of commit to some of that going to shareholders at this point?

Great question, Judy. We are in a place I guess where if you looked at our cash holdings, the cash balance at the end of this quarter, about $575 million. So we are, we are in a place now where we feel good about our cash balance. I will reiterate the point we've made in previous quarters which is that on a quarterly basis we review this with our Board. And there's a range of cash options that we could look to. If you look at some of the places we have put cash this year we made 2 great purchases of smaller brands this year, well, we haven't completed the purchase of Grandville Island but we made effectively a down payment on that. We also have purchased the Cobra. So we are trying to use cash first and foremost in ways that will grow shareholder value. We will also look then at ways to take liabilities off our balance sheet and the tax would be an example of that. Last year you saw use of funds for pensions. And then we will look at what our dividend policy is and consider buybacks and again we have our Board meeting next week so we will go through that with the Board and if there's any change to any of that we expect to update shareholders in the next quarter.

Okay. Thank you.

Our next question comes from Mark Greenberg of Deutsche Bank. Your line is open.

Thanks, good morning. Just to dig a little deeper on Judy's question around shareholder value, Peter, can you comment more broadly with regards to what kind of a dividends pay out over the long-term you think is appropriate for a business like Molson Coors and if shareholders would be more significantly enhanced by repurchase and as an adjunct to that what kinds of net debt to EBITDA levels are gearing this kind of business should have over the longer term?

Thanks, Mark. I hate to disappoint you by saying, no, I probably can't give you all of that. But I think you have to look at our track record. We've increased our dividend by a pretty substantial rate last year and this year. And so I think the important thing or the way that we look at it is that we need to come to our shareholders and hold our heads up in terms of how we've used their cash. And I think as Stewart said in the recent, the last 12 months we put $100 million into the pension scheme in the UK. We've got very, very good returns from that investment over this year. We've made a couple of really smart acquisitions I think with Cobra and Grandville Island. Although you guys get quite excited about it we are not sitting on a ton of cash. We are in a comfortable position. We continue to look at the options out there that will give us the best possible return for shareholders and that will include dividends obviously. It will include share buybacks. It will include other options in terms of strengthening our balance sheet as well. That's just an ongoing dialogue that we have with our Board as Stewart said.

Great. A quick follow up on the UK business, nice to see the operating profit trending up but it's still at least based on your 2002 pro formas below what CBL earned eight year ago so I guess it's been kind of a long road there. I wonder as you look at that business today what kind of sign posts you look at to gauge the success of that business? How might we properly characterize progress there sort of beyond the obvious metrics?

I will let Mark take most of the question but I think my initial response is that you put a couple of sort of sign posts out there that we look at and most importantly the sort of cost of return on capital we get on that business has got to be acceptable to shareholders. I think we made good progress this year. We are not where we want to be. The percentage that we would achieve in the net sales percentage we are achieving is still not where we want to be but again I think the team is making real good strides in that direction and most importantly for this year and probably last year as well it's been about developing a platform that allows us to address those issues. And I think, Mark, you can probably speak to that more effectively than I can in terms of the strategic initiatives and new pricing strategy.

Yes, I certainly can, thanks for the question, Mark. We've been very clear in our business that currently our return on invested capital is below our (inaudible) rate and we said as part of our three-year plan and mission is to return our invested capital plan ahead of our (inaudible) rate. And so we start growing shareholder value. Our return on sales have improved significantly over the last 18 to 24 months.

I'm just not very clear on mission for the business to start to generate returns which get them back to where we were in the early part of the 2000s. All of the activities that you are seeing taking place through the latter half of 2008 and through 2009 are very consistent with that ambition and number one has been to reset our pricing and net sales always support to support those ambitions. That job is almost complete as we go through 2009. We've continued to invest heavily behind our brands. We've been investing growth rate which is low double-digit on a per hectoliter basis as we move our pricing up. As we move into 2010 we expect to see pricing continue to move forward and we expect to see our share performance start to rebound having reset pricing. All of that relative to an ambition that we set forth organization on a 36 month time line.

Mark, just briefly how would you characterize the market environment heading into the important winter holidays?

The market environment remains challenging. If you look at where industry volume was as we left 2008 the market finished down about 5.5% on a year to date basis, the market is still tracking down about 4.3%. (inaudible) has improved but it's still declining in a mid single digits. Off trade has been extremely volatile up until Q3 of this year. We've seen four straight quarters of pretty substantial decline. That rebound is slightly in the third quarter. So it's still enormous volatility. And certainly no tailwinds from an industry volume perspective and that's why our focus on not chasing any low margin volume, focusing on revenue growth, a time when we've got very high asset utilization because of our contract brewing deal, all of that I think is in a pretty good position as we move into Q4 and then into 210.

Thank you.

Our next question comes from John Faucher from JPMorgan. Your line is open.

Yes, good morning, thank you very much. Want to talk a little bit about the Canadian pricing again. Strong revenue per barrel growth. Can you talk about what the industry revenue per barrel growth was. So how do you guys compare? And then also looking at the quarter to date trends, you talk about your being down I think it was mid single digits in Canada. And can you compare that? You said it's an industry issue. So I'm assuming the industry is basically in line with your quarter to date trends. Is that correct?

Yes, the quarter to date would be largely industry related so you're correct on that. With regards to the NSR for the industry I wouldn't have data on that. I only obviously have ours. So not able give you the comparison.

Can you give us a rough idea in terms of whether you think the rest of the categories, I'm not looking specifically I'm looking sort of general trends whether you feel the rest the category is up a similar amount?

Well, we certainly are -- achieving the kind of balance we want on price and volume. So I would say we are not dramatically out of line with what would be happening within the industry. But it is really difficult obviously to the get more precise than that.

Okay. Thanks.

Thank you. Our next question comes from Mark Swartzberg of Stifel Nicolaus. Your line is open.

Thanks. Good morning, everyone. Canada on the cost side of things, Stewart or David, we heard from Miller Coors this morning they described their costs per hectoliter view for the US next year being essentially flat on '09 levels. Can you share with us given where your hedges are and where the commodities are and your mix how you think your costs per hectoliter will shake out next year versus this year's levels?

Mark, I will take that. I think Miller Coors did give some of that sense of 2010. For the Molson Coors business normally we would give that kind of guidance early in the next year and I think that's what our plan is.

Can you give us any directional feel at this juncture?

We can't give you any guidance on that. I can say though that I think that team has done a terrific job in terms of managing cost if you look at this past quarter and keeping costs flat on a year over year basis I think was a great result.

Can you just remind us about your strategy in terms of hedging for commodities?

Well, for us like any hedging program and you can certainly see some of those disclosures in our Q that we have a declining hedging balance so you'll have more hedging in the early in periods than the later periods. And then so obviously in any kind of a rising price market you will be slower to see some of that rising prices coming through. In a declining price market will you obviously be a little bit slower to see some of that benefit coming through. I should also point out Mark, that we did at least give guidance for the fourth quarter which shows Canada to be down low single digits in terms of the COGS. So combine that together with performance in the third quarter and I think you will probably get a good answer for next year.

Great. Thank you, Stewart.

Thank you. Our final question in queue comes from [Ross Turner] of [Pelham]. Your line is open.

Hi, it's (inaudible). Just looking at the Canadian business. You obviously reported 2% increase in revenue per hectoliter but if you actually look at your revenue divided by volume it actually would decline. Now (inaudible) is due to the import side of the Canadian business. Can you give us a feel about how the mix that you've seen in the Canada business from your import and how much that declined specifically?

So -- let me just pick up the first part of that. Just on, you are better off looking at some of the comparable numbers that we've given you because there's a little bit of noise in there as we look at the impact obviously of FX that's going to be one impact. I think the other you are going to see is the Molson, I'm sorry, the Blue Moon that we stopped producing in Canada has a negative impact on a reported basis, on our NSR of about 3%. So we stopped producing Blue Moon last year in Canada. We have that year over year comparison issue. So best to really stick with the comparison--.

The way I'm looking at it to be honest Molson Canada is actually look at your Q2 sales this year and your Q3 sales and divide that by your volume for Q2 and Q3. I know there's seasonal effects I'm sure but even then looking at three months sequentially it's down 3 or 4% in Canadian dollars per hectoliter.

I think one of the things you are going to see is potentially the impact of exports and I think that was the seconds part of your question which perhaps Dave can pick up.

I'm sorry, Stewart, we didn't hear the original question.

The question was basically that obviously you said that on a comparable basis sales per hectoliter in Canada increased 3%. Looking at i sequentially from Q2 to Q3 '09 if you look at revenue per hectoliter on Canadian dollars it actually declined 3 or 4% and I'm guessing that's due to imports because you exclude imports when you look at this on a comparable basis. I want to understand how much were your imports down and what effect this is going to have going forward?

This is Dave Dunnewald. Ross, the answer to the question is essentially you had a flip of the impact that Stewart mentioned related to exports to Miller Coors. In the second quarter the -- essentially the accounting for those exports increased revenue per hectoliter as well as cost of goods per hectoliter in the third quarter, again, on a year over year basis the exports to Miller Coors reduced the revenue per hectoliter and the cost of goods per hectoliter and that's why when we present comparable analysis of our Canadian results we strip those outside. Because it's basically just noise in the numbers, change in the way we account for the beer that we sell to Miller Coors. Now subsequent to the formation of Miller Coors and subsequent to the moving of Blue Moon product production from Canada to the US.

Okay. Going forward this should be this sort of noise won't be there?

Actually in the fourth quarter you should see a similar effect to what we saw in the third quarter and then more normal thereafter.

Okay.

Thank you. I have no other questions in queue. I would like to return the program to the presenters for any concluding remarks.

Thank you very much, and thank you everybody for joining us this morning. And this afternoon. And your interest in the business. We look forward to speaking with you again next quarter. Bye, now.

Ladies and gentlemen that you for your participation on today's conference. This does conclude the program and you may now disconnect.