Molson Coors Beverage Co (TAP) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Molson Coors Brewing Company 2010 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 will follow at that time.

Before we get started, I want to paraphrase the Company's Safe Harbor language. Some of the discussion today may include forward-looking statements. Actual results could differ materially from what the Company projects today, so please refer to its most recent 10-K and 10-Q filings for a more complete description of factors that could affect those projections. The Company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. You should not place undue reliance on forward-looking statements, which speak only as of the date they are made.

Regarding any non-US GAAP measures that may be discussed during the call and from time to time by the Company's executives in discussing the company's performance, please visit the website, www.MolsonCoors.com and click on the financial reporting tap of the Investor Relations page for a reconciliation of these measures to the nearest US GAAP results. Now I would like to turn the call over to Peter Swinburn, President and CEO of Molson Coors. Mr. Swinburne, you may go ahead.

Thank you, Howard. Hello, and welcome, everybody. Thank you for joining us today. With me on the call are Stewart Glendinning, Molson Coors' CFO; Tom Long, President and COO of MillerCoors; Gavin Hattersley, CFO of MillerCoors; Dave Perkins, CEO of Molson Coors Canada; Mark Hunter, CEO of Molson Coors UK; Kandy Anand, President of Molson Coors International; Sam Walker, Molson Coors Chief Legal Officer; Bill Waters, Molson Coors Controller; and Dave Dunnewald, Molson Coors Vice President of Investor Relations. Leo Kiely, CEO of MillerCoors, could not be with us this morning, as she is recovering from surgery on a broken leg that he suffered over the weekend. We all wish him a speedy recovery. In Leo's absence, Tom Long will be providing commentary on MillerCoors' performance on today's call. On the earnings call today, Stewart and I will share highlights of our second quarter 2010 results for Molson Coors Brewing Company, along with some perspectives on the balance of 2010 and then we will open it up for questions.

Our second quarter financial results showed good progress against our strategic priorities of building grounds, driving value from innovation, and delivering on our cost saving commitments. Total company underlying earnings increased 14.2% on an after-tax basis, driven by double-digit net sales growth and positive results from our cost reduction initiatives, along with a lower tax rate and favorable foreign exchange versus a year ago. In the US, strong cost management and higher net pricing drove double-digit earnings growth.

In Canada, although underlying pretax income declined 3% in local currency, we grew volume and market share and reduced our cost of goods sold per hectoliter. In the UK, business profit declined due to a non-cash increase in pension expense. We achieved solid top line performance, growing volume and price in the quarter.

On brands, in Canada and the UK, our market share performance in the second quarter represented an improvement for both businesses versus earlier in the year. In the US, MillerCoors gave up a small amount of market share, but improved sales trends in all channels versus last quarter and leveraged the strength of its brands to achieve solid net price growth and positive sales mix in a weak market. Also in the second quarter, our international team grew volume by more than 24%. We launched Coors Light in the Moscow region of Russia, and agreed to form a joint venture in China, that will reduce our costs and increase the growth potential for Coors Light in the world's largest beer market.

The innovations we have brought to the market are driving competitive advantage for our businesses locally. In Canada, our innovations added significant volume in the quarter and contributed to the best quarterly market share performance in more than a decade. In the UK, our innovative packaging for Blue Moon, Coors Light, and Carling helped to drive positive volume in the quarter, and in the US, our innovations helped drive strong pricing for our leading brands.

On costs in the second quarter, we again exceeded our cost reduction targets, with $16 million of RFG2 savings and $72 million of MillerCoors cost reductions, underscoring our ability to meet or exceed these critical commitments. These cost reductions helped us to overcome input inflation to continue to build our brands and invest in innovations and grow earnings and cash in a weak economy. By staying focused on our strategic priorities, our brands, innovation, and reducing costs, we have increased profits, generated substantial cash, and strengthened our balance sheet. Most importantly, this focus has positioned our company to take advantage of growth opportunities while driving even better performance as the economy improves.

So with that as an overview, I'll turn it over to Stewart to review second quarter financial results and highlights of our brands, innovation, and cost reduction across the company and then we'll.

Thanks, Peter. Hello, everyone. I'll start with the second quarter financial highlights. On the bottom line, underlying [ark and tax of kimmel] of $234.5 million or $1.25 per diluted share increased 14.2% from a year ago due to higher net sales revenue, higher equity income from MillerCoors, a lower effective tax rate and favorable foreign exchange.

In the quarter, we grew total company gross margins, as well as operating and after-tax margins. We also grew volume in all of our major markets outside the US. Nevertheless, our volume declined 0.7% from a year ago, driven by a weak US industry. It's important to note that our second quarter underlying earnings excludes some non-core gains, losses, and expenses, primarily related to changes in the values of our Foster's cash settled total return swap, as well as net special charges of $15.8 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 and results comparisons will be versus the comparable prior year period. In segment performance highlights, starting with Canada, underlying pretax income in local currency decreased 3% in the second quarter. Continued volume growth in operations cost reductions in the quarter were more than offset by the costs of our more competitive position this year, along with higher commercial and overhead expenses this year. In US dollars, Canada underlying pretax income increased 6.7% to $146.5 million in the second quarter, which includes a $15 million benefit of a 13% year-over-year increase in the Canadian dollar versus the US dollar.

So let's review some highlights. Our Canada sales to retailer SGRs for the calendar quarter ended June 30 increased 2.2%. In addition to volume gains from the recently introduced Molson and Keystone brands, Coors Light and Molson Canadian brands grew at low single-digit rates, along with positive growth from the Rickard's and Creemore brands. This growth was partially offset by a decline in Molson Export, Molson Dry and our nonstrategic brands. Innovative brand activity during the second quarter was focused on launching the Coors Light two-stage Cold Certified can and bottle, as well as expanding Miller Chill across Canada. These brand initiatives, along with the addition of brand volume helped us increase our market share more than 1.5 points versus a year. This market share growth was also partially driven by the cycling of our less competitive pricing and brand portfolio in the previous year, which we began to address in the second half of 2009.

General Canadian beer industry sales to retail decreased an estimated 1.8% in the calendar second quarter, driven in part by Easter holiday timing. Our Canada sales volume was 2.5 million hectoliters in the second quarter, up 2.6%. Net sales per hectoliter declined 1.3% in local currency, driven by cycling our less competitive pricing last year, along with the impact of participating in a more meaningful way in the value segment, which offers lower than average net sales per hectoliter.

Cost of goods sold per hectoliter decreased 1.8% in local currency in the second quarter, driven by the net effect of two factors. First, savings from our RFG2 program reduced cost of goods sold per hectoliter by 3 percentage points and second, higher input costs increased the cost of goods sold rate by about 1 percentage point. Marketing, general, and administrative expense in the quarter increased 8.8% in local currency, driven primarily by increases in commercial and innovation spending behind our brands, along with higher marketing and sales and administrative expenses and the addition of [Brand 11] overhead costs this year. Other income decreased $2.5 million in the second quarter, due to foreign currency movements.

Moving to our UK business, in the second quarter, underlying pretax income of $32.7 million represented a decrease of $4.1 million, or 11.1%, due to a $7.1 million non-cash increase in defined benefit pension expense. Our UK results in the quarter benefited from strong pricing and higher volumes, as we continue our brand building efforts and the leveraging of our contract arrangement. Our second quarter UK results were adversely impacted by $2 million of foreign exchange due to a 3% devaluation of the British pound versus the US dollar.

Looking at second quarter highlights. Consistent with our discussion last quarter, our UK volume trend improvement improved significantly, with owned brand volume increasing 0.7% in the quarter, versus a nearly 11% decline last quarter. As a result of our strategic brands being stocked up by all the major grocery chains this year, we grew strong volume and share in the off-premise channel. Our volume in the quarter also benefited from increased sales during June due to good weather and the FIFA World Cup. Our overall volume trend was closer to the market this quarter, with total UK beer industry volume increasing approximately 3% in the second quarter. This represents a positive step for us in the UK toward market share recovery. Net sales per hectoliter of our owned brands increased 9% in local currency, with about 5 percentage points driven by higher pricing and 4 percentage points as a result of positive sales mix, predominantly due to the impact of channel mix and the addition of COBRA beginning late in the second quarter last year.

Cost of goods sold per hectoliter of our owned brands increased 11% in local currency, driven by three factors. First, incremental pension expense represented 3 percentage points of this increase. Second, 6 percentage points are due to mix, driven by our higher percentage of off-premise sales and the addition of COBRA, and finally, 2 percentage points reflected costs related to a recall of a limited portion of our recently launched home draft packages. Marketing, general, and administrative expenses in the UK increased 14% in local currency, with 5 percentage points due to higher pension expense this year. The balance was due to higher marketing and information systems investments and the cost of adding the COBRA sales force.

In our US segment, underlying pretax income increased 14.2% to $163 million in the second quarter, driven by MillerCoors results. Looking at the total MillerCoors' P&L, second quarter underlying net income increased 19.8% to $389 million, due to favorable pricing and continued synergy and cost savings delivery, which were partially offset by shipment volume softness. MillerCoors domestic SGRs declined 2.4%, driven by an unfavorable selling environment, affecting the entire industry. Domestic sales to wholesalers declined 3.5%, driven primarily by lower STRs. Total net revenue decreased 0.1% to $2.1 billion.

Pricing remains strong, however, as domestic net revenue per hectoliter, which excludes contract brewing and Company-owned distributor sales, increased 2.8% in the quarter. Cost of goods sold per hectoliter increased 1.6%, reflecting a significant trend improvement versus the first quarter. The increase in the second quarter was driven by higher freight rates, product mix, and increases in promotional packaging, which were largely offset by the continued delivery of synergies and cost savings. Marketing, general, and administrative expense decreased by 9.3%, primarily due to synergies and lower marketing spending.

In our international and corporate segment, the underlying pretax loss for international and corporate combined was $57.7 million in the second quarter, an increase of $5.6 million, driven primarily by higher interest expense due to year-over-year appreciation of the Canadian dollar versus the US dollar. Second quarter corporate net interest expense increased $5.1 million and corporate, general, and administrative expense decreased $2.8 million to $27.8 million. The decrease in corporate G&A expense was driven by lower incentive compensation expense this year.

Our international team grew sales volume more than 24% in the second quarter, driven by sales in China, Latin America, and Europe. MG&A expense for international was $13.1 million in the quarter, an increase of $0.5 million, due to brand investments in our priority international markets. Corporate other income was $23.3 million driven by a $21.9 million non-cash mark to market gain related to the total return swap we arranged with respect to Foster's common stock. As usual, mark to market gains and losses on the Foster's swap are excluded from our underlying earnings.

Now, highlights of our cost reduction initiatives. We achieved our Q2 goals in the second quarter, with $16 million of cost savings toward the program's three-year goal of $150 million. In addition to our RFG2 savings, MillerCoors delivered $63.8 million of incremental cost synergies and $8.6 million of other cost reductions in the second quarter. We benefit from 42% of the MillerCoors cost savings. Year to date, we have delivered $31 million against our three-year RFG2 program goal of $150 million, and MillerCoors has achieved $133 million of synergies and other cost savings. These cost reduction programs provide critical resources for building brands, investing in innovation, and growing profits and cash flow for our shareholders.

Moving beyond operating business unit performance, our second quarter effective tax rate was 18% on a reported basis and 17% on an underlying basis. With regard to our balance sheet during the second quarter, total debt at the end of the second quarter was $1.73 billion and cash and cash equivalents totaled $799 million, resulting in net debt of $935 million. Free cash flow for the first half this year reflected a net cash generation of $196 million, which was made up of $396 million of operating cash flow, plus $2 million of proceeds from asset sales, minus $96 million of cash paid to settle Brazilian indemnities, $51 million of capital spending, and $54 million of net cash contributed to MillerCoors.

After adjusting for the Brazil indemnities and other exceptional cash uses, our underlying free cash flow for the first half totaled $323 million, a $94 million improvement from $229 million a year ago. This improvement was driven by higher net income and lower net investment of cash in MillerCoors this year. Please see our website for details regarding our adjustments to arrive at underlying free cash flow.

As we anticipated on our last earnings call, we used cash in the second quarter for Brazil indemnities and to increase our dividends. In terms of P&L outlook, we continue to expect 2010 MG&A expense in the international and corporate segment of approximately $180 million, plus or minus 5%. We now forecast full year 2010 corporate interest expense to be approximately $105 million at today's foreign exchange rates.

Turning to our effective tax rates, we now expect our full year underlying tax rate for 2010 to be in the range of 14 to 18%, assuming no further changes in tax laws. This rate is lower than our previous guidance, primarily because of higher than expected deductible interest expense and one-time benefit this year. We continue to forecast our normalized long-term tax rates to be in the range of 22% to 26%

(technical issues). We're back now. Sorry for technical difficulties. I'm sure it gave you a few extra minutes for question development, so let's just go back, and back up a paragraph and pick up.

In terms of P&L outlook we continue to expect full year 2010 MG&A expense in the international and corporate segment of approximately $180 million, plus or minus 5%. We now forecast full year 2010 corporate interest expense to be approximately $105 million at today's foreign exchange rates. Turning to our effective tax rate, we now expect our full year underlying tax rate for 2010 to be in the range of 14% to 18%, assuming no further changes in tax laws. This rate is lower than our previous guidance, primarily because of higher than expected deductible interest expense and a one-time benefit this year. We continue to forecast our normalized long-term tax rate to be in the range of 22% to 26%.

Our 2010 capital spending outlook remains approximately $150 million for the full year. As always, this guidance excludes MillerCoors. At this point, I'll turn it back over to Peter for a look ahead to the balance of 2010. Peter?

Thanks, Stewart. As we move through the second half of 2010, our focus will continue to be on brand building, innovation, and reducing costs across our company. In Canada, we were encouraged by our volume and share results, with our share growth rate accelerating over the past three quarters. These results are being driven by our plan-led focus, especially the product innovations we initiated towards the end of 2009 and earlier this year. We have now cycled the step-up in discounting activity in Quebec last year, and we will ensure going forward that our brands are competitive across Canada.

We continue to see growth in Coors Light, as well as good volume and share results from Molson Canadian's first quarter relaunch and new advertising. These innovations and other actions have positioned us well for the summer season. In the UK, the team has continued to make substantial progress in improving profitability. We have maintained our value ahead of volume strategy, which continues to strengthen our overall position within the UK market.

In the on-premise, we have renegotiated nearly all major customer contracts over the past two years, with annual price increases included in contracts, carrying terms of up to three years. In addition, as a result of our access to establish profitable trading deals with all major off-premise retailers, we are confident that our UK share trends will continue to improve in the second half of the year. Most important, the actions of our UK team in the areas of brands and pricing are improving their profit potential of this business.

In the US, we grew profit at a double-digit rate despite a challenging selling environment in the second quarter. Our industry volumes remain soft, and we expect 2010 to be a difficult year for the industry. Recent trend improvements do give us grounds for cautious optimism going forward. We are making moves to ensure that we capitalize with brand innovation and a sharpened focus on crafts and imports. We will soon be running national TV and other marketing support for Home Draft in August. The Coors Light aluminum pint is due for launch in September, and initial orders are very strong. And the new brand called Batch 19 has been doing very well in test markets.

We also see a great deal of opportunity in crafts and imports. After taking a hard look at the best way to proceed, we decided to create a new company with a specialized, knowledgeable sales force to drive these brands. In a challenging US beer market, we are continuing to invest in our brands to win now, and in the longer term.

The following are the most recent volume trends for each of our businesses early in the third quarter. In Canada, our sales to retail for the four weeks ended July 24 increased at a mid single-digit rate due in part to favorable weather during the month. In the first five weeks of the third quarter, our UK SGRs have decreased at a double-digit rate, due to retailer inventory reductions following the FIFA World Cup. In the US for the four weeks ended July 24, MillerCoors SGR's declined at a low single-digit rate. As always, please keep in mind that these numbers represent only a small portion of the third quarter and trends could change in the weeks ahead.

In the area of cost outlook by business, in Canada, we continue to cost of goods sold per hectoliter to decrease at a low single-digit rate in local currency driven primarily by the delivery of RFG2 cost savings. In the UK, we continue to expect 2010 cost of goods per hectoliter of owned products to increase at a high single-digit rate in local currency. Drivers include a step-up in defined benefit pension expense this year, a low-single digit increase in input cost inflation, which is a substantial improvement over last year, and a shift in our sales mix towards the high cost off-premise channel, as well as product mix reflecting more COBRA volume. We expect our UK cost of goods comparisons to be less challenging in the second half of the year than in the first half, due to less fixed cost deleverage and cycling the COBRA acquisition in June.

In the US, MillerCoors remains on track to deliver its synergies and other cost saving targets by the end of 2012. The US team is nearing the end of its initial product transitions within the brewing network. Going forward, the team will focus on further network optimization to peak season to nonpeak season sourcing changes. As well as opportunities for increased efficiency and new capability through capital projects. We continue to expect US COGS per hectoliter to be up at a low single-digit rate for the full year 2010 and approximately flat for the second half of the year.

So, to summarize our discussions today, our second quarter financial results showed good progress against our strategic priorities of building brands, driving value from innovation and delivering on our cost reduction commitments. Our brand and innovation strategy supported total company pricing growth, while cost savings provided a resource to grow profitably, despite challenging economic and beer industry conditions. Our strong balance sheet and cost discipline allowed us to invest in brands and innovation while driving positive financial performance in tough times, and leave us well positioned to take advantage of growth opportunities, while driving exceptional performance as economic conditions improve. So now before we get to re-start the Q&A portion of the call, just a quick comment. Our prepared remarks will be on our website for your reference within a couple of hours this afternoon.

Also, at 2 PM Eastern Time today, our Investor Relations team, led by Dave Dunnewald, will host a follow-up conference call. It's essentially a working session for analysts and investors who have additional questions regarding our quarterly results. This call will also be available for you to hear by webcast on our website. So at this point, Howard, could we open it up for questions, please?

(Operator Instructions). Our first question or comment comes from the line of Miss Judy Hong from Goldman Sachs. Your line is open.

Good morning.

Good morning, Judy.

First question, on Canada, obviously the volume and share performance in the quarter was pretty encouraging. Can you maybe just talk about any competitive responses that you're seeing as you've gained market share in that market and then as you think about sort of balancing your share and profitability, where do you stand in terms of looking at your share trend? Are you at a point where now you can kind of start to think about focusing a bit more on profitability in that business, or is it really just your intentions to continue to focus on driving volume improvement and just keep this momentum going in that market.

I'll just give a brief overview, Judy, but I'll let Dave give you the specifics. I think if you look at the way we've run all of our businesses and what we continue to say to you, we are a brand building, long-term brand building business and that means for us that all of our brands have to be profitable. We have to get a balance between volume and price, but it is a staged process and I think if you look at what we've done in the UK over quite a period of time, we've got ourselves in a position that we want to get ourselves in. We've come from some way back in Canada. We're very pleased with our progress, but we do recognize there is some way to go on that front. Dave, do you want to pick up the specifics?

Yes, sure, Judy. Let me give you a little bit of background on what's driving our share performance in Q2. First and foremost, we've had a really strong innovation pipeline and program that is delivering meaningful results for us. We've had increased participation in the value segment, with Keystone in the second quarter. We are seeing improvements behind Molson Canadian with our renewal effort there. Granville Island is obviously playing a factor in that and we have an improved position in our Quebec grocery channel with competitors positioning in profitable Maxi Loblaws.

As we look at what's driving the growth, is really is a combination of a number of factors that are all going well for us. I think you look back to last year, we didn't have any of those factors going for us. So some really good year-over-year improvement.

Going forward, we continue to look at our price and volume balance. Recently, we have been taking some price increases. We want to ensure that we're going after the revenue opportunities that exist for us. We'll continue to do that, with a focus on building our brands and continuing to build our portfolio behind innovation. So does that help you?

Yes. Just following up on that, any changes in terms of the competitive behaviors that you're seeing as you've stepped up your investment behind innovation and have gotten more price competitive? And then can you give us the magnitude of the price increases that you're taking in Canada broadly?

Yes, the price increases are generally in line with CPI. They are on selected brands, selected SKUs in different markets. As far as the environment that we're competing in, I would have to say consumers continue to pay attention to value offerings, but I don't see anything materially different in our Q2 environment than I saw in Q1. So reasonable stability. I mean it's an intensely competitive market as always.

Okay, and then the mid single-digit volume trend in the quarter to date number, is that continuation of the share improvement, or has the industry also gotten better?

Well, we actually don't know that. We only get volume numbers at this point and share doesn't come along for a couple of more weeks. I would say that we're certainly benefiting from some warm weather in the major eastern market. During the second quarter, we also had some poor weather in Western Canada, which has corrected itself. So very difficult to give you a breakdown at this point.

Okay, and then Stewart, just in terms of any update and thoughts on your free cash flow generation this year? Obviously we're halfway through the year and then just in terms of the use going forward obviously you've taken care of the Brazilian tax liability. In the past you've talked about maybe shoring up the pension issue. Any updated thoughts there would be helpful.

Thanks for that, Judy. I would just start by saying we're really pleased with how our first half cash generation has gone. I would echo the comments I've made before in terms of our strict financial discipline in terms of looking at use of cash in terms of either investing in the business, bolstering our balance sheet or sharing cash with shareholders. I think, if you look back at the first half, you pointed at a couple things, you'll see some of that behavior actually in practice in terms of investing in the business. You saw us close the Granville deal. We've invested to award a joint venture in China and we've also invested behind MillerCoors to drive some of the synergies. We've seen a fair bit of business investment.

As you also pointed out, we did take the step in this past quarter to resolve the Brazilian tax credit issue and that was spent roughly $100 million. And we increased the dividend in the last quarter. So, as we look forward, we'll continue to consider all of those, pensions among them. And we'll use the same kind of discipline that we've used in the first half.

Okay. Thanks.

Thanks, Judy.

Our next question or comment comes from the line of Mr. Mark Swartzberg from Stifel Nicolaus. Your line is open.

Thanks. Hi, everyone.

Hi, Mark.

On Canada, I was hoping to advance some of the conversation, the Q&A back and forth with Judy. Just starting, Dave, can you give us color from a consumer perspective, just what are you seeing perhaps drawing distinction by region and can you speak more about what you're seeing in the value segment?

Yes, what we're seeing from the consumer is, number one, an interest in innovation, which is really encouraging. I think the new value that comes along with new ideas is resonating with consumers. We're seeing people continuing to keep a pretty tight grip on their wallet, so industry year to date is up 0.4%. Not a bad performance, but clearly not at the historic level that we would have seen, and you see consumers continuing to show an interest in the value offerings. And that's not really a change. The thing that encourages me most is to see the interest we're seeing in the innovation front.

Okay, fair enough. And you remarked that you're taking some pricing recently. Can you give us some parameters on level of increases you're talking about, and whether that includes Quebec, and give us some color on provinces we're talking about?

Well, through the first six months of the year, we've taken some level of price in nine of our provinces, so it's fairly extensive. It is focused on different SKUs. We're looking at where we believe there are revenue opportunities by brand. So, for instance, Molson Canadian 67, which you'll remember we launched in our fourth quarter, we recently, in about three of our markets, taken that to a 5% premium over the main stream brands.

And that would be an example of the sort of thing we're doing. Miller Chill, which is performing well as a line entry in the market. We've held firm on pricing, which is taking our share of value up on that brand as we see competitors dropping their prices somewhat. So holding firm there, it's generally an orientation to go after the revenue opportunities that we identified.

So that's historically speaking, if we think about September, when we often see price increases, and some of that's been getting dealt back. Do you think there's an opportunity in Quebec to take some pricing and have it kind of show up for the consumer as well, or do you think we're still in a tough enough competitive and consumer environment where that really can't happen?

Well, really hard for me to predict the outcome, obviously, Mark, but clearly, we'll be looking for the opportunities, continue to look for the opportunities that are out there for us. As to whether they'll fit, that's something to be determined in the future.

Okay, fair enough, thanks Dave.

Our next question or comment comes from the line of Carlos Laboy from Credit Suisse. Your line is open.

Good morning, everyone.

Hi, Carlos.

Peter, I was hoping that you could give us some more insight on brands in the US. Any insight you can give us on brand strength indicators for the Miller Lite brand here? And relating to its brand equity, do you think that the brand equity is strong enough here to hold both market share and price parity next year, given the pricing environment and the outlook that we are expecting from AVI?

Sure. We've got Tom Long on the phone, so I'll ask him to comment in detail, but just as a general overview, we've been encouraged by the sequential improvement in Miller Lite. When you talk about the brand health scores, again Tom can talk in detail about that, but the ones that we regard as most important and moving in the right direction, we have been helped by some channel mix as well. But we always said this was going to be a long-term turnaround, but we're encouraged with the progress that we're making I think and Tom, can you answer that?

Yes, the metrics as we talk about for brand equity, behavioral and attitude on Miller Lite have been improving sequentially. The channel where it has most relative strength, as you know, is on-premise, which has been the segment that has had the most improvement in volume and which is encouraging. We're not ready to call that brand turned around, Carlos, but you'll also know that is the brand in the portfolio we have actually raised price most on since the beginning of the JV.

Do you think this brand can take parity pricing with Bud Light next year and hold market share, given that 6%-type price increase that they seem to be looking at?

Carlos, you can appreciate we're not going to talk about pricing going forward. I think what we are saying is that we are comfortable with the brand, the brand performance where it is. We've seen slow and sequential improvement, but that's exactly what we expected and we've seen some good indicators in terms of the brand health and we're very satisfied with that position.

Thanks.

Thanks.

Our next question or comment comes from the line of Miss Karen Lamar from Federated Investors. Your line is open.

Hi, couple questions. Going back to Judy's question about capital allocation, with some of the one-time items behind us and your operating cash flow being so strong, at what point do buybacks take priority?

Well, look, I think I would just reinforce the point I made earlier, which is we've got three ways of deploying cash, which is investing in the business, bolstering our balance sheet, or sharing cash for shareholders. The point which any one of those raises its head above the parapet is really dependent on that point in time and every quarter we go through a sort of cash planning cycle, we use a strict financial discipline and what we think is the best return for shareholders where we deploy the cash.

Okay, and then separately, I think you've suggested that you're expecting the US to remain challenging, but also suggested that recent trends were encouraging. Is that something company-specific, or were you commenting on the general industry trends, whether it's on-premise or off? Thanks.

I think really it's both company and industry, covers both. So we've seen an overall improvement sequentially in the second quarter from the first quarter and industry volumes, and so I think that was the point of that comment. But we still see the economy being challenging, specifically because of the levels of unemployment. Tom, anything to add?

No, Peter. I think that is precisely our view.

Okay.

Well, thank you.

Thank you.

Our next question or comment comes from the line of Miss Christine Farkas from Banc of America. Your line is open.

Thank you very much. I had a question on the UK, if I could. Looking at your volume growth of 0.7%, and then the share gains in the off-premise channel, I wonder if you can describe for us the dynamics in the on-premise, wondering if the World Cup had a different impact on that channel and what was it that suggests a loss of market share there?

Mark, would you like to take that?

Sure. Thanks for the question. I think the interesting thing, just to bear in mind, is if you look at the second quarter and industry level, obviously the industry had a strong second quarter, but all of that growth came in the month of June, where the off-premise grew by around about 30% in that one month, that's from an SGR perspective. So most of the benefit from both improved weather and the World Cup really came through the off-premise channel. And within the on-premise, we've seen really a continuation of underlying trends where the on-premise is continuing to decline right at about 6 or 7%. So no real significant change and the channel that really won most on the back of the World Cup and the weather was simply the off-premise, but principally in the month of June, first couple of months for the quarter weren't significantly better than the trends that we've seen earlier in the year.

Okay, and then your brand in terms of Carline did the share trends change at all on premise?

Well, in terms of our share trends on premise, I think we mentioned last year that we, on the back of our value over volume strategy, basically come out of a couple of major customers. We were about to start cycling that volume loss. We were very pleased with how Carling is performing in non-premise. Its throughputs are holding up very strongly and continuing to grow at distribution and we will start to cycle a couple of major customer losses that we had last year, but general pricing on the brand has been very, very strong and that's very much in line with our volume strategy.

All right. Fair enough. Thank you.

Our next question or comment is a follow-up from Mr. Mark Swartzberg from Stifel Nicolaus. Your line is open.

Hey again. Stewart, your long-term tax rate of 22 to 26% has been that way for a while. Any thoughts on likelihood it comes out on the upper end of even revises higher overall, given kind of what you're seeing in terms of the dialogue in Washington, or is it simply too soon to really comment there? Looking for any color you're getting from what you're hearing from Washington.

Yes, so we just talk about income taxes and not excise taxes. I think that, from where we sit, we think that the range is a good range. It's very difficult at this point in time, Mark, as you point out, for me to say, will we be at the low or high end of the range. I think that's part of the reason for the range. You'll also notice that there's been a fair degree of volatility, depending on the year and depending on various tax actions that we take. We believe based on the current vocals we've heard from Washington, that we're well prepared for the changes that could take place and that given what we've heard, that this rate, that this range looks good. Now, if something new comes up, obviously then we'll provide that guidance at that time. But for the moment, we feel confident.

Great, thanks, Stewart.

(Operator Instructions). I'm showing no additional audio questions at this time.

Okay. Well, thank you, Howard. Thank you, everybody. Thanks for the interest in the company. I look forward to speaking to you all at the end of the third quarter. Have a good summer.

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