Molson Coors Beverage Co (TAP) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2010 fourth-quarter and year-end 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 be given at that time. (Operator Instructions)

Before we get started, I want to paraphrase the Company's Safe Harbor language. Some of the discussion today may include forward-looking statements. Actual results could differ materially from what the Company projects today, so please refer to its most recent 10-K and 10-Q filings for the most 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. 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 Company's website, www.molsoncoors.com, and click on the Financial Reporting tab on the Investor Relations page for our reconciliation of these measures to the nearest US-GAAP measure results. Also, unless otherwise indicated, all financial results the Company discusses are versus the comparable prior-year period, and in US dollars. Now, I would like to turn the call over to Peter Swinburn, President and CEO of Molson Coors.

Thank you, Devon. Hello, and welcome, everybody. Thanks for joining us today. With me on the call this morning are Stewart Glendinning, our Molson Coors CFO; Leo Kiely, the CEO of MillerCoors; Gavin Hattersley, the 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's Controller; and Dave Dunnewald, Molson Coors's VP of Investor Relations. So on the call today, Stewart and I will take you through highlights of our fourth-quarter and full-year 2010 results for Molson Coors Brewing Company, along with some initial perspectives on 2011. Then we will open it up for questions.

So, let's get started. For Molson Coors, 2010 was a year of good progress in building our brands, innovating, reducing costs, strengthening our balance sheet, and generating cash. We introduced new brands and value-enhancing innovations in each of our businesses to drive the top line. We exceeded all our cost-reduction targets for the year, and used a portion of our free cash to fund our pensions and reduce balance sheet risk.

So, the headlines for 2010 -- we achieved positive beer pricing in each of our major businesses, and we finished 2010 with encouraging share trends in Canada and the UK, and with Coors Light, Blue Moon, and Miller Lite in the US. Cost-savings initiatives underpinned our financial performance, delivering $194 million of total reductions in 2010, which includes 42% of MillerCoors savings. Despite challenging economic conditions in all of our markets and continued input inflation, we grew net sales ahead of cost of goods sold per hectoliter. As a result, we increased gross margins and achieved double-digit growth in operating and pretax income.

We delivered global underlying after-tax earnings of $666.9 million for 2010, 5.7% lower than a year ago due to an unusually low tax rate of 1% in 2009, versus 16% in 2010. As a result, underlying earnings per share decreased $0.25, to $3.56 per share. However, 2010 operating income grew more than 10%, and underlying pretax income increased 10.6%, both driven by positive pricing and cost reductions.

In 2010, we also generated $924 million of underlying free cash flow. That's up 27% from the year before, and Stewart will give you more details on this in a few minutes. But we made additional contributions to our pension plans in the fourth quarter, totalling $285 million; settled the highest risk indemnities related to our former Brazil business; bought a controlling interest in our brewing joint venture in China; and made selective investments in brands, innovation, and systems across our Company.

Regionally, for 2010, in Canada, the biggest news in brands was that Coors Light became the best-selling beer in the country. Also, we successfully leveraged our sponsorship of the Vancouver Winter Olympics early in the year. We relaunched Molson Canadian, expanded Molson M into the Atlantic region, rolled out Rickard's Dark nationally, and introduced Keystone Light in the Ontario and West regions. In the first half, we completed the Granville Island acquisition, further increasing our presence in the highly profitable above premium segment. These new brands, combined with the strength of Coors Light and the rejuvenated Molson Canadian brand, helped us grow our national market share by nearly one full percentage point.

As a result of these achievements and favorable foreign exchange, Canada underlying pretax income grew nearly 10% in 2010. Additionally, we signed a substantial contract brewing arrangement that will help us leverage our fixed costs in the first half of 2011. In the US, MillerCoors exceeded its targets for cost reductions and achieved a 2.3% growth in domestic net sales per hectoliter. MillerCoors maintained a strong pace of brand building and innovation work, including the Miller Lite vortex bottle and Man Up ad campaign; Coors Light and Miller Lite Home Draft and the aluminum pint bottle; and Blue Moon's artfully crafted messaging on television.

As a result, Coors Light and Blue Moon gained share in 2010, and Miller Lite grew share in the fourth quarter. Additionally, MillerCoors formed Tenth and Blake, a company within a company, to drive its craft and specialty beer brands. With these efforts, we led the growth of the US craft beer segment with Blue Moon, and significantly improved our premium light share trends in the second half of the year.

Despite a very challenging beer market, the MillerCoors team grew 2010 underlying net income nearly 22%. Including equity adjustments, our US segment underlying income grew 18.5% for the year. US business also greatly increased its cash generation in 2010, as it completed the investments needed to capture synergies.

In the UK, we continued to drive our value over volume strategy, and increased net sales per hectoliter 10% in local currency, the fourth consecutive year of pricing growth for our UK business. We also added the Blue Moon and Singha brands, and reached an agreement to add Corona and other Modelo brands to our UK portfolio. In addition, we established a long-term contract brewing arrangement with Carlsberg to brew Tetley Ale for the UK market, beginning in 2011.

Underlying pretax earnings declined 6.3% in local currency, due to higher UK pension expense. If we exclude this increase in pension expense, UK underlying pretax earnings would have increased by more than 20% in 2010, driven by strong pricing and cost reductions. Our international team completed the joint venture with Si'hai Brewing Company in China, and signed a brewing and distribution agreement with Mahou San Miguel for Carling in Spain. The team also launched Coors Light in Russia and Vietnam. Corona and other Modelo brands will be added to our Japan portfolio, commencing in 2011.

Turning to the fourth quarter. Underlying after-tax earnings for Molson Coors decreased 35%, driven by an unusually low tax rate a year ago. Underlying pretax earnings increased 8.1% in the quarter. The increase in pretax earnings was due to positive pricing and substantial cost reductions. The regional highlights for the fourth quarter. In Canada, we increased both net price and market share against 2009 comparisons. When combined with substantial cost reduction, this top-line performance drove Canada underlying earnings up nearly 8% in local currency for the fourth quarter.

In the US, unemployment amongst our core consumer base remains high, and US beer industry volumes continues to be weak. Nonetheless, the MillerCoors team maintained positive pricing and exceeded its cost-reduction goals again in the fourth quarter, to grow underlying earnings 38% versus a year ago. In the UK, underlying earnings declined 26.9% in the quarter, almost entirely due to higher defined-benefit pension expense. Excluding the increase in pension expense in the fourth quarter, pretax income decreased about 3% in local currency, as positive pricing was more than offset by lower volume and higher marketing expense.

Despite the challenging volume environment in the UK, the team strengthened its portfolio, improved share trends versus recent quarters, reduced costs, and began implementing new enterprise information systems. In our international group, we grew volume more than 55% in the fourth quarter and invested in selected markets around the globe. So, with that as an overview, I'll turn it over to Stewart to review our fourth-quarter financial results and trends in more detail, and then we'll cover the outlook for 2011. So Stewart, over to you.

Thanks, Peter. Hello, everyone. I'll start with the fourth-quarter financial highlights. Worldwide beer volume for Molson Coors declined 1.9%, driven by industry volume weakness. Total Company net sales per hectoliter increased 2.7%, and we achieved positive pricing in our three largest markets. On the bottom line, underlying after-tax income of $123.6 million, or $0.66 per diluted share, was 35% lower than the fourth quarter a year ago, driven by a negative 54% tax rate a year ago. Underlying pretax income increased 8.1% due to positive pricing and substantial cost reductions, which more than offset continued weak industry volume and input cost inflation.

For the second quarter, we achieved higher gross margins for the total Company, and across our Canada, US, and UK businesses. It is important to note that our fourth-quarter underlying earnings excludes some non-core gains, losses, and expenses, primarily related to our Foster's cash settled total return swap and MillerCoors integration costs. These adjustments to our US GAAP results are described in detail in the earnings release we distributed this morning.

In segment performance highlights, starting with Canada. Underlying pretax income in local currency increased 7.7% in the fourth quarter, driven by positive net pricing and cost reductions. In US dollars, Canada underlying pretax income increased 12.4% to $106.3 million in the fourth quarter, which included a $3 million benefit of a 4% year-over-year increase in the Canadian dollar versus the US dollar.

So, let's review some highlights. Our Canada sales to retail, or STRs, for the calendar quarter ended December 31 decreased 1.4% versus the prior year. Volume gains from our new brands, including Keystone, Molson M, and Miller Chill, were offset by declines in established brands. Coors Light declined slightly, and the Molson Canadian brands declined at a low single-digit rate in the quarter, as we continued to adjust price and volume priorities for these brands.

Our Canada business outperformed the industry in the quarter, and grew market share nearly a third of a share point versus a year ago. Total Canadian beer industry sales to retail decreased an estimated 2.1% in the calendar fourth quarter, primarily due to a continued weak economy. Our Canada sales volume was unchanged at 2.1 million hectoliters in the fourth quarter. Net sales per hectoliter increased 1% in local currency, driven by selective price increases taken during the year in all regions.

Cost of goods sold per hectoliter decreased 1.6% in local currency in the fourth quarter, due to the net effect of two factors. First, cost reductions, especially from our RFG2 program, reduced cost of goods sold per hectoliter by about 3.5 percentage points. Second, these reductions were partially offset by higher input costs, which increased the cost of goods sold rate by about 2 percentage points. Marketing, general, and administrative expense in the quarter decreased 1.4% in local currency, driven primarily by savings initiatives and lower commercial investment, as we cycled new brand launches in the prior year.

Moving to our US segment, underlying pretax income increased 31.3% to $67.2 million in the fourth quarter, driven by MillerCoors's results. Looking at the total MillerCoors P&L, fourth-quarter underlying net income increased 38% to $146.4 million, due to positive pricing, favorable brand mix, and continued strong cost management. For the fourth quarter, MillerCoors domestic STRs declined 2.5%, but showed trend improvements in premium light sales. Domestic sales to wholesalers, STWs, declined 2.2% in the quarter. MillerCoors total net sales increased 0.4%.

Domestic net revenue per hectoliter, which excludes contract brewing and Company-owned distributor sales, increased 1.7% in the quarter. Cost of goods sold per hectoliter increased 1.8%, primarily due to Coors Distributing Company's acquisition of Western Beverage in Denver. Domestic cost of goods sold per hectoliter were flat for the quarter, despite higher fuel and transportation costs, and mix shift to higher-cost brands. These were offset by synergies and other cost savings. Marketing, general, and administrative costs decreased 5.4%, primarily due to synergy savings and lower promotional and tactical spending.

Moving to our UK business. In the fourth quarter, underlying pretax income decreased $9.9 million, or 26.9%, to $26.9 million, driven by a $7 million non-cash increase in defined-benefit pension expense. These results were also reduced by $1 million, due to a 3% devaluation of the British pound versus the US dollar. Excluding the adverse pension cost, local currency underlying pretax income decreased 3%, with higher pricing offset by lower volume, higher marketing investments, and the impact of cycling a 2009 mark-to-market gain on natural gas hedges.

Looking at fourth-quarter highlights for the UK, our UK-owned brand volumes declined 4.9% in the quarter, adversely impacted by unusually cold weather late in 2010. Market share performance was virtually unchanged in the quarter, with total UK beer industry volume decreasing approximately 5%. Net sales per hectoliter of our owned brands increased 8% in local currency, with about 5 percentage points from higher pricing and 3 percentage points primarily related to channel and brand mix, including growth in Cobra and Coors Light.

Cost of goods sold per hectoliter of our owned brands increased 8% in local currency, predominantly driven by the following factors. First, incremental pension expense represented 3 percentage points of this increase. Second, 4 percentage points reflected higher-cost channel and brand mix. Third, 2 percentage points were attributable to fixed-cost deleverage from lower owned brand volumes. Fourth, 1 percentage point related to cycling a mark-to-market gain on natural gas hedges in 2009. Finally, these factors were partly offset by 2 percentage points of input cost deflation and lower employee incentive expense this year.

Marketing, general, and administrative expense in the UK increased 13% in local currency, reflecting higher marketing investments and pension expense this year. In the international and corporate segment, the underlying loss for international and corporate combined was $65.9 million pretax in the fourth quarter, 13.2% higher than a year ago. In addition, corporate marketing and general and administrative expense increased $5 million, to $30.6 million, primarily due to higher project and incentive compensation expense. Fourth-quarter corporate net interest expense increased $1.7 million from a year ago due to foreign currency movements and lower capitalized interest.

Our international team grew volume more than 55% in the fourth quarter, driven by the addition of the Si'hai brands and strong growth in China, Europe, and Latin America. MG&A expense for international was $16.9 million in the quarter, an increase of $1.1 million versus a year ago, as we increased investments in our priority international markets, including China and Russia. Corporate other expense was $7.6 million, driven by a $9.3 million loss on the total return swaps and related financial instruments we arranged with respect to Foster's common stock. This fourth-quarter loss represents a partial offset to the third quarter to-date gain of $57.3 million we showed at the end of September. As usual, gains and losses on the Foster's swap are excluded from our underlying earnings.

Now, highlights of our cost-reduction initiatives. In the fourth quarter, we captured an incremental $11 million of cost savings as part of our Resources for Growth 2 program, RFG2. For the full year 2010, we achieved $66 million of savings. In addition to our RFG2 savings, MillerCoors delivered $60 million of cost synergies in the fourth quarter, bringing the total synergies realized to $505 million. As a result, MillerCoors achieved its three-year synergy goal more than six months early.

MillerCoors also delivered $31 million of cost reductions against its $200 million cost-savings programs to be completed by the end of 2012. 42% of MillerCoors cost synergies and other cost savings accrued to us. For the full year, MillerCoors delivered $306 million of synergies and other cost reductions in 2010, and our share of these savings is $128 million.

Moving beyond operating performance. Our fourth-quarter effective tax rate was 11% on a reported basis and 9% on an underlying basis. Our tax rate for the full year was 17% on a reported basis and 16% on an underlying basis, which are in line with our guidance on the last earnings call. These tax rates are lower than our long-term rates, due to higher deductible interest, one-time tax benefits in the year, and the mix of geographies and tax rates where our income is earned. As Peter mentioned, underlying free cash flow for 2010 was $924 million, up 27% from 2009, and $164 million over our original goal for the year.

Our 2010 cash generation was made up of the following; $750 million worth of operating cash flow, plus $323 million of exceptional cash uses that we add back. This includes the $285 million of additional pension contributions, plus $40 million of proceeds from the asset sales and the Foster's swap unwind, minus $178 million of capital spending, and minus $11 million of net cash contributed to MillerCoors. Higher underlying cash flow for 2010 was primarily driven by higher operating income, improved working capital, and some non-recurring cash flow sources, and a lower net investment of cash in MillerCoors versus 2009.

Recall that we increased our 2010 free cash goal during the year, from $760 million to $900 million, primarily due to non-recurring cash flow sources. One source of cash in 2010 was the proceeds from closing out our Foster's swap positions, which we had established in the third quarter of 2008. Several months ago, we began the process of unwinding these swaps and related financial instruments; and about three weeks ago, we completed the process, yielding total net cash proceeds of approximately $52 million in USD. We received $35 million of these cash proceeds in 2010, and $17 million in 2011.

So, with regard to the uses of our underlying free cash flow in 2010, we made additional voluntary contributions to our defined-benefit pension plans in the fourth quarter, totalling $285 million. This included $195 million in the UK, $48 million in Canada, and $42 million in the US, which is 42% of the additional contributions made by MillerCoors. This pension funding offers attractive returns on investment, and will have a favorable impact on our pension expense and cash contributions in the years ahead.

Other cash uses in 2010 included settling the highest-risk indemnities related to our former Brazil Kaiser business, which we sold in 2006. We also bought a controlling interest in the Si'hai Brewing Company in China, and we made selective investments in brands, innovation, and systems across our business, including Home Draft, aluminum pint, cold-activated window innovation, UK SAP implementation, global HR systems, and MillerCoors's purchase of Western Distributing. These 2010 cash uses strengthened our competitive position and our balance sheet, which provides a firm foundation to grow our top line and bottom line in the years ahead.

Total debt at the end of the year was $1.96 billion, and cash and cash equivalents totaled $1.22 billion, resulting in net debt of $740 million. Looking forward, we expect full-year 2011 MG&A expense in the corporate and international segment of approximately $200 million, plus or minus 5%, versus $172.2 million for 2010. This $28 million increase from last year is driven by higher brand investments in our international business, and the addition of 100% of our China joint venture expenses, with the minority owner shares subtracted from our consolidated results. We expect full-year 2011 corporate interest expense to be approximately $120 million, based on current foreign exchange rates.

Turning to our effective tax rate, we expect our full-year underlying tax rate for 2011 to be in the range of 17% to 21%, assuming no further changes in tax laws. We continue to expect our normalized long-term tax rate to be in the range of 22% to 26%. Our 2011 capital spending outlook is approximately $230 million for the full year, and this $52 million increase from last year is driven by brewing and packaging investments in Canada. As usual, this guidance excludes MillerCoors.

One important area of improvement in 2011, both in terms of expense and cash use, is our defined-benefit pensions. Due to the substantial contributions we made in each of these plans in 2010, along with strong asset returns and annual adjustments to plan assumptions, the funded status of our pension plans is significantly better now than a year ago. For 2011, while not final, our preliminary view is that UK pension expense will decline about $25 million, from $19 million of expense in 2010 to about $6 million of pension income this year. In the US and Canada, we currently anticipate that our 2011 pension expense will increase only slightly from 2010.

Taking these together, our total Company 2011 pension expense is expected to be approximately $60 million, which is about $17 million lower than 2010. Note that these pension numbers include our portion of MillerCoors's pension expense. From a cash standpoint, we currently expect cash contributions to our pension to total about $120 million in 2011, down from $384 million in 2010, with no required contributions to the UK pension plan in 2011 or 2012. At this point, I'll turn it back over to Peter for a look ahead to 2011. Peter?

Thanks, Stewart. In 2011, we'll continue to focus on building brands and reducing costs and generating cash. In Canada, we increased our market share almost a full percentage point in 2010, as our new brands benefited from strong consumer demand. For 2011, we will continue to launch innovative value-adding offerings to strengthen our portfolio. For example, last month, we expanded Molson Canadian 67 into Quebec. And next week, we will begin to roll out Molson M to Ontario and the western provinces. 2011 will be another year of innovation in Canada, though not at the same level as 2010. Early this year, Canada will be facing challenging volume and earning comparisons, due to cycling the one-off 2010 Vancouver Olympics.

In the US, we will continue to focus on greater efficiencies, and stay committed to investing in our brands and building brand -- on brand-building capability. We will drive growth by investing in premium lights, crafts and imports, single serves, cross merchandising, and delivering flawless execution. We'll focus on reenergizing consumers around MG 64 with the summer introduction of MGD 64 lemonade. Through Tenth and Blake, we will continue to drive craft and import growth, and accelerate Blue Moon with additional television activity, and focus on our Blue Moon seasonals. We will also continue to nurture and expand our new brands, like Batch 19 and Colorado Native.

We're excited about our second year in the market with Leinie's Summer Shandy. In premium lights, Coors Light will deliver its cold refreshment positioning in new and exciting formats, such as with its sponsorship of Mexico's First Division soccer league. Meanwhile, Miller Lite will continue to engage consumers with its focus on taste, positioning, and successful Man Up campaign, along with a summer push with Latino customers around the Gold Cup tournament and our new sponsorship of the Chivas Mexican team.

In the UK, the team continues to make substantial progress in improving underlying profitability through our value ahead of volume strategy. During the fourth quarter, we improved our market share trends, while achieving strong pricing growth. We also gained some key account listing in the on-premise channel, and signed an agreement to distribute Corona and other Modelo brands. The most recent development in brands was our announcement last week that we have paid approximately $30 million to acquire the award-winning Sharp's Brewery, Ltd., makers of Doom Bar cask ale, one of the UK's fastest growing beer brands. For those who are not familiar with cask beers, these brands in the UK are similar to craft beers in North America.

Founded in 1994, Sharp's brewery has grown rapidly to become the largest brewer of cask beer in the Southwest region of the UK. Its largest brand, Doom Bar, is already a number-one selling cask brand in the Southwest and in Wales, and the fastest growing cask brand in greater London. And it represents a tremendous opportunity for growth in volume and distribution. Along with brand building and innovation work on our current portfolio, we expect the addition of the Modelo and Sharp's brands to help drive improved market share trends in the years ahead.

We are also in the process of implementing a new UK enterprise information system in 2011. And while we expect moderate implementation costs in the near term, this system will drive efficiencies in future years. As Stewart mentioned, we also expect our 2011 UK pension expense to improve approximately $25 million versus a year ago. Nonetheless, we anticipate particularly challenging UK volume comparisons in the first quarter of 2011, due to the Easter holiday moving to the second quarter this year.

So, following on the most recent volume trends for each of our businesses early in the first quarter. In Canada, our sales to retail, for the six weeks ended February 5, decreased at a mid-single-digit rate. In the first six weeks of the first quarter, our UK STRs have increased at a low single-digit rate, due to unusually cold weather a year ago. In the US for January, MillerCoors STRs declined to a low single-digit rate. As always, please keep in mind that these numbers represent only a small portion of the first quarter, and trends could change in the weeks ahead.

In the area of cost outlook by business, in Canada, we expect our full year 2011 cost of goods sold per hectoliter to increase at a mid-single-digit rate in local currency, driven by the addition of our contract brewing arrangement with North American breweries. Note that this contract brewing arrangement will also increase NSR per hectoliter this year. Excluding the cost of contract brewing, we anticipate that owned-brand cost of goods per hectoliter will be largely unchanged from last year in local currency. In the UK, we expect 2011 all-in cost of goods per hectoliter to increase at a low single-digit rate in local currency.

Excluding the impact of factored brands and contract production of other brewers' products, which are not included in our beer volumes, we expect our 2011 owned-brand cost of goods per hectoliter to increase at a low double-digit rate in local currency. This increase is driven by product mix related to adding the Modelo brands, which increased the net sales and cost of goods per hectoliter on our treated [bios], as owned brands. Other drivers include input cost inflation, offset by cost savings and lower pension costs.

In the US, we currently expect MillerCoors COGS per hectoliter to be up slightly in 2011, with the biggest areas of volatility being in fuel and other commodity pricing, as well as US industry volume. Globally, we expect fuel, commodities, and other input costs to increase more in 2011 than in 2010. And as always, we have strategies to limit the impact of these increases on our financial results.

So, to summarize, 2010 was a good year of progress for our Company in building exceptional brands, driving value-enhancing innovation, reducing costs, strengthening our balance sheet, and generating cash. As a result, we increased gross margins, operating income, pretax income, and free cash flow, despite continued input cost inflation and weak industry volume. In 2011, we'll be more focused than ever on driving momentum on the top line and the bottom line, and growing substantial value for our shareholders.

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 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. That call will also be available for you to hear by webcast on our website. So, at this point, Devon, we would like to open it up for questions, please.

Yes, sir. (Operator Instructions) Our first question comes from Kaumil Gajrawala of UBS.

As you go around the world, is there -- would you be willing to provide us with a read on if the price increases and the productivity that you're taking are going to be enough to offset the total amount of COGS inflation that you're going to see? It sounds like, in Canada, that's probably not going to be the case, but maybe in the US and the UK?

Yes, are you talking about the fourth quarter? Were you talking about looking forward?

I'm talking about looking forward.

Okay. Yes, we can -- we can't give you precise details, obviously, but I guess the guys can give you a flavor. So, Mark, do you want to kick off? Mark?

Kaumil, I can just give you a quick capture across the world in terms of COGS. Clearly, our savings plans will continue to play into COGS as we look forward for 2011. We have given you some guidance. In Canada, we see mid-single-digit increase there. But, actually, if you remove the impacts of the contract brewing arrangements that we've signed this year, you see that Canada's actually largely flat against this past year.

UK, we're expecting to see an increase in low single digits, and some of that is influenced by Peter's comments around addition to Modelo, some are mix, so obviously, along with some general inflation. Then MillerCoors, we shared in the call this morning, as a result of some of the hedging again and cost-savings programs there, we see MillerCoors being up slightly for the year. Does that kind of help you?

And then, do you think you'll be able to get enough pricing to cover those increases?

I'll leave -- I'll leave that to Peter to answer.

Yes, we're not going to talk about specific price increases or what we expect our gross profit to be. But I -- I sort of refer you back to what we've achieved this year. And certainly, we've managed to grow our gross margin, our gross profit margin, quite -- quite satisfactorily this year. So, I think that's the best guidance I can give you on that one.

Okay. And then, secondly, is there a way you can quantify for us the impact of any deleverage from negative volumes on your P&L?

You mean looking forward? No. We haven't actually given any kind of guidance around that. You should expect -- we're sort of projecting forward, we don't want to give any specific guidance around volumes. And therefore, we won't speak to volume deleverage. But we will give you that update on a quarterly basis, as we report the results.

The only addition to that, as we said in the call, we will be implementing the contract brewing arrangement with North American breweries in Canada. So, obviously that will help our fixed cost to leverage quite a bit up in Canada.

I see. Maybe the impact that it had on 2010?

Well, yes, we managed that quite effectively in 2010, despite the volume decreases. Again, looking forward, you can sort of work that out yourself, I guess.

Okay, thank you.

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

The -- just, couple of questions on the Canadian market. First, just from an industry perspective, it looks like the fourth quarter was a bit soft, and then the decline accelerated into the first quarter. So, just wanted to get some color in terms of the industry softness. And then, from your brand perspective, you obviously focused on innovation and more spending to try to focus on share improvement. Just wanted to see where you think your brands are at this point. And then, if we look out 2011, is the focus going to be a little bit more profit versus share?

Yes, thanks, Judy. On the industry, no question that the economy is continuing to weigh on the performance that we're seeing there. I think consumer confidence and spending patterns in Canada are being impacted. We have had a harsh winter as well, up against quite a moderate winter last year. So, I think that we're seeing a weather impact, as well, for us. As we go into Q1, obviously, you've got the Olympic factor in there that will weigh in. So, as we progress through the quarter, that becomes quite a factor for us, because we saw really exceptional volume performance in Q1 of last year behind the Olympics.

In terms of the brands, I'm feeling really good about our portfolio at this point. I look at our new brands and I look at the brands that we've been investing to revitalize, and they are feeling good. Coors Light and Canadian came through 2010 with share growth, which is terrific. All the measures we're getting back from consumers around brand equity are feeling solid to us, and our new brands into the market over the last 15 months or so are continuing to perform very well.

So, the performance we saw in Q4 from innovation was every bit as strong as what we've seen in preceding quarters. So, I think going into this year, we'll continue to invest behind our brands, and we continue to adjust our volume and price balance to ensure that we're driving the bottom line. So, that will be our focus as we go through the year.

Okay. And then, Stewart, just -- obviously, the cash flow generation in 2010 was pretty encouraging. Any color in terms of how you think about 2011? And then, how you think about the use of cash sort of any differently, just given -- you've clearly improved the pension status at this point?

Yes, thank you for that, Judy. It just will underscore your point there, that we are really pleased with this year's cash generation, some of it driven by some one-times, but still a really great result. Our focus hasn't changed. I mean, we continue to be really focused around return across the three areas that we've talked about before, in terms of looking for opportunities to grow the Company, demonstrated a number of good ones last year -- the investment in Si'hai and Cobra and Granville Island, these all have offered us great returns.

From a balance sheet perspective, those, for us, we think have been very strong moves. Getting rid of the Brazilian liabilities was a big -- a big improvement in risk to our balance sheet. That was $100 million, could have cost us up to $200 million. We've also, as you pointed out, made investments in pensions. And I expect that, as we looked at this year, we'll -- we will see the benefits, obviously, of that investment, and we will be more cautious about making pension investments.

And then, of course, we don't forget our shareholders. And we have, over the last few years, have pursued three years of dividend growth. And as always, each quarter, we -- we'll cover various options with our Board and report back to you each quarter.

Okay. Thank you.

Thank you. Our next question comes from Christine Farkas of Bank of America.

Follow up on Canada, just for a second, with respect to pricing. The rate growth looked similar to the third quarter. But there were some headlines that kind of indicated, politically, there was a view that beer prices were too high. Are these just headlines, or are you seeing some structural pressure or anything in Canada, particularly Ontario, that might limit the upside in beer pricing?

Yes, thanks, Christine. The talk that I think you're referring to is probably some press that came about in Quebec as a result of some discussions around how the minimum price there should be indexed. I -- I don't see any kind of major pushback against what's going on, either the social reference price system, or pricing in Canada. So, I think it was really some media that was generated by an isolated situation.

Okay, thanks. That's helpful. And then just some clarification. On your cost of goods outlook globally -- which sounds, I guess, in totality, up low to mid single-digits. I just want to understand if that's in fact the same as what we heard in December, and it's really just structural, meaning it's the Modelo or the contract brands that are adding inflation, but your underlying input costs are still viewed to be pretty benign for 2011?

You're asking that on a broad --

Broadly, yes. Yes.

So, look, it's going to vary market by market, but I'm not sure I would use the word benign. I mean, we're seeing increases in packaging materials, which we've seen over the last year. We've seen increases in fuel prices, but at the same time, we -- we've been driving quite hard against -- against savings programs. So, it's quite difficult, without giving all the details of our COGS, to give you that split. It's really a mixture. Playing particularly into the UK, of course, this year, you'll see the impact, also, of that improved pension position, which -- which clearly impacted us to the higher side in 2010.

Okay, great. And then, just finally, with respect to your participation broadly in global M&A. Just because you've unwound the Foster's position now, and we're seeing JV investments in certain geographic focus, is that how you see your participation going forward? Where do you envision Molson Coors, with respect to size and global scope, in the next two or three or five years?

Thanks, Christine. I'll take that one. I think we've been pretty consistent. We've always said that we have a bias to use our cash to grow the business, but only if we can get the right opportunities. And really, that continues to be our stance. We -- we will look to infill in existing markets, and I think we've done that relatively successfully. We have, I think, as we mentioned on the call, increased our investment in international markets behind, specifically, Coors Light, and we'll continue to do that fairly judiciously. But really, our position hasn't changed. We have a bias to grow, but only if we can get the right opportunities, to give the right returns to our shareholders.

All right. Thank you very much.

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

Yes, thank you, and hi, everyone. I guess, one just housekeeping, could you repeat the January STR number you gave us for Canada and the UK?

Yes, I can, Mark. In Canada, for the first six weeks ended February 5, they decreased at a mid-single-digit rate. And in the UK, in the first six weeks of the quarter, the STRs increased at a low single-digit rate.

Great. Thanks for that, Peter. And then, focusing on the US for a moment, and then Canada for a moment. In the quarter, US net sales per hectoliter, up 1.7%. Third quarter, I think, the underlying number was up 2.4%. Can you -- can you talk a little bit about to what extent that's a symptom of dealing back some of the price increase in September? And, perhaps, give us some commentary on how this strategy of taking greater price increases on the subpremiums than on the portfolio overall, how you think that's playing out?

Well, I'll let either Leo or Tom take the US, and I'll let Dave take Canada. But the only point I would make is, obviously, the annual increase has a flow-through from the year-before price increase, and the fourth quarter has the flow-through from this year's price increase, which were different base. And also, in Canada, the headline, 1% in the fourth quarter, was affected by mix. So, we would have actually, from a pricing point of view, we enjoyed a better number than that. But Leo, Tom, do you want to embellish on the US and then Dave, you take Canada?

Well, I think the headline, Mark, is that we think the -- we think the strategy for closing the gap between the subpremium and premium brands has been very successful. It's been successful in generating trade-up, it's been successful in regenerating our most profitable brand growth, so we feel really good about that. Gavin, what's the sort of the mechanics of the pricing in the fourth quarter?

Well, it's up 1.7%, roughly half of that was mix-related, and the rest was front-line pricing and consumer incentives, price promotions.

If you think about this move, it's structurally just very important for the Company to make sure that we are taking share in the most important sectors of the business, in premium and premium light. And so, the effect on pricing is quite important. But we do want to remain competitive there, and take shares such that when this recovery comes, that the core parts of our business are in strong position, both with consumers and with the trade.

That's helpful. And if I could press a little there, because it's obviously a point of great interest in the investment community. I guess, two follow-ups. Number one, the level of pull-through, if you will, the rate of price increases we're seeing by the retailers on an all-retailer basis, isn't as robust in some CPG segments. So, that seems to indicate that either you all, as brewers, are helping them with that lack of pull-through, if you will. It might be a function of their own retail strategies. But when you see sequential deceleration in the net sales per hectoliter after a price increase of size, at least I understood it, you wonder how much dealing back is happening. So, obviously, we can't get into numbers; but just, any color on the amount of stick, if you will, of your price increase would be helpful.

What did change, and we sort of referenced this earlier in the morning is the trade clearly changed its year-one recession strategy and year-two recession strategy, in terms of the mix of brands they had on promotions. So -- and we saw some of that impact in the fourth quarter. The -- what went back to their promotion strategy was to get more aggressive on the imports and the premium lights. And you can see that pretty specifically across most of the major retailers. And that's -- that does impact spendback on those brands. So -- and there was an increase in price offer spendback, right, and consumer incentives in the quarter. But, gee, had a pretty healthy rate, actually. We feel good about the yield on it.

Fair enough. That's great. One last one for you. I'll get back in the queue after that. But just quickly on Canada, just continuing the dialogue here on the pricing environment. There, it seems like pretty good numbers, Peter, you kind of highlighted there. But Quebec, specifically, it seems like sequentially things are a little better, perhaps, than they were going into the fall. Is that a fair characterization? Any update specifically on the pricing environment in Quebec?

Do you want to take that?

Yes, sure. I would characterize the environment in Quebec as stable. I think, generally, the prices are -- as with the major grocery channels, are still at or near the social reference price. But we're seeing good stability there; and across the country, the environment continues to be competitive. But really, no major developments through Q4.

Great. Thank you, gentlemen.

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

Good morning, everyone. Peter, on the strategic M&A side, if you could get more ownership of the US joint venture, would you want it? Is the US among the M&A opportunities to grow that's under your range of consideration?

Yes, Carlos, I think it's the same answer. We have got a bias to grow the business and use cash to grow the business, if we see the right opportunity. But I think people like you are much better at speculating on these things than we are, so I'll leave that to you, okay?

In terms of process, Peter, for management appointment at the JV, does SABMiller get the right to appoint management at some point this year? And do you -- have you worked out how that's going to happen?

Yes, I'll pass that on to Sam, who is our Chief Legal Officer, to make sure that I don't mislead you in public.

Sure thing. Hi, Carlos. So, the operating agreement, which is public, specifies the process by which appointments take place. We're really not in a position to comment any further on that. We're very pleased with the management that's in place, and beyond that, really aren't in a position to address it.

Okay, thank you.

Thank you. Our next question comes from James Watson of HSBC.

Hi, everyone. I had a question about the increasing CapEx. It's a pretty large increase, about 30%, and you said a lot of that was in Canada, around brewing and packaging. But I was just wondering if you could give a breakdown of that, in terms of what's supporting growth opportunities versus maintenance. And if a lot of that is going to potential growth opportunities, where you're seeing the growth that would justify that sort of increase in CapEx, in terms of brands, regions, or segments. Thank you.

Yes, thanks for that, James. Look, this is a return-focused organization, and that $50 million is really aimed against growth opportunities that accounts for, really, two things. One is, the CapEx that's necessary to prepare our breweries to service a contract brewing arrangement. Clearly, that contract brewing arrangement is intended to bring profit back to the business. The other is, to replace can line, and that can line really is addressing both -- partially the contract brewing arrangement, but also the increasing demand for cans in the Canadian market.

Okay. And can you just give me a little more detail on the contract brewing arrangement, and what that would do to you guys in terms of capacity that you have now, and helping you in the marketplace as well?

Yes, I'll pass that on to Dave.

Yes, sure. Let me handle that. The contract brewing arrangement is for up to about 1.5 million hectoliters of product that is for shipment to the US. So, in terms of its impact on us in the market here in Canada, there is none. It will take us to a very, very high level of capacity utilization. So, that's an addition of in the range of 15% to 17% on our current volume base, which is meaningful and really does utilize the excess capacity we have.

Great. Thank you very much.

Thank you. Our next question comes from Karen Lamark of Federated Investors.

Hi. A few questions. Just to follow up on the Canadian investment, do you expect to spend it all in 2011, or will it be some carryover into 2012?

Karen, you're talking about with respect to the CapEx investment?

Yes.

Yes. So, the numbers I've given you are specific to 2011, and we expect that to be completed in 2011.

Okay, thanks. And, with respect to the UK, if you can share your outlook for industry growth in 2011, and remind us where you are with respect to renegotiating and rationalizing your contracts.

Mark?

Yes, we're back on. Apologies about the technical issue, ten minutes or so ago. Well, the UK industry outlook remains pretty challenging from a volume perspective. We've seen in the last three years the industry down 5.5%, down 4%, and then last year, down 4% again. And, it's difficult to look to any particular factors that would suggest that that would be any better through 2011, particularly on the back of the increasing VAT, which comes on the back of a further increase in excise duty, which is running at 2% ahead of RPI. So, my sense is that industry volumes will continue to be circa 3% to 4% in decline through 2011.

And on your contract --

With regard to the contracts, really not prepared to -- or in a position to talk of any specific details there. I think it's fair to say that these contracts come up on an ongoing basis. They've all been negotiated over the last 24 to 36 months, and we'll start that process again towards the end of 2011.

Okay. And then, one last question related, I guess, to the industry conditions. Are you seeing any improvement in demand on-premise versus off? Maybe you can talk to that regionally. Thank you.

Do you want to go first on that, Mark?

Yes, can do. We've seen, if you go back over kind of 10, 15 years, we've seen a constant 1% shift from on to off in the UK. That's slowed a little bit over the course of the last couple of years, but the underlying trend continues to point to a move towards the off-premise. So, the market's around about 50/50 now, and it's unlikely that that underlying trend will change. I think what we will see is a smaller on-premise over time, a higher quality on-premise, with more of a food focus, and a requirement for more specialty beers. And that's one of the reasons we've been expanding our portfolio. Stewart and Peter mentioned the acquisition of the Sharp's brewery. So, there's been a pretty transformational change in the breadth and depth of our portfolio over the course of the last 24 months, so we feel pretty well-placed to really flow with and exploit that continuing shift.

In Canada, on the on-premise, the on-premise is much less developed in Canada than Mark has reflected in the UK. It would be about 20% to 25% of total beer sales. Long-term, the shift has been to off-premise and away from on-premise. We continue to see that playing out in the marketplace, and I think the current economy plays into that. So, we're seeing off-premise performance stronger than on-premise.

Tom, Leo, have you got anything to add for the US?

Really stable, in terms of mix. The economy aside, there isn't a big change going on there. There is -- there is a move to chain, more chain, more consolidation of ownership in the on-premise side, but still a pretty -- pretty complex business and focused in the major markets.

Thanks.

Our next question comes from John Buescher of JPMorgan.

Thanks. Wanted to follow up a little bit on the additional corporate investment in the international business. Is that -- is that a one-time issue? Is that a raising of the base level of an investment? And, can you talk with us a little bit about how we should expect to see returns from that additional investment, as we look out?

Certainly. I mean, one of the things that we're trying to do as quickly as we can, but again, as judiciously as we can, is to increase our exposure to developing markets. And most of our investment in the international front does that. Obviously, we had the acquisition of the Si'hai Brewery, and the costs of that now will be borne, essentially, this year. So, that's probably the biggest lump of the increase that you're seeing.

In terms of how we look at it, we look at it very much on a hub-and-spoke basis. So, we look at major markets -- so for Asia, China would be the hub, and then spokes would be places like Vietnam. And we have a normal return criteria that you would expect us to have, in terms of the investment levels for each of those markets. The bigger markets tend to take more investment, obviously, and the returns tend to come over, something of a longer period of time, but they tend to be higher. And the smaller markets, the returns are much quicker, but tend to be slightly lower.

Okay, thanks.

Thank you. And we have a follow-up question from Mr. Swartzberg of Stifel Nicolaus.

Yes, thanks again. A few things here. Stewart, free cash flow, I think last year you characterized the underlying number as having a 7 in front of it, $700 million plus. What do you think is a good number, as we think about this year, for underlying free cash flow?

Yes, Mark, so typically we share this number at the Analyst Day, which is coming up in March. And that's what we're going to do again this year; so if you could be patient and wait a few more weeks, you'll have your answer.

Okay, fair enough. And then COGS, I guess -- I don't know how to phrase this, but I guess what I'm trying to get at is, if we think about 2012 -- and obviously, it's a fair time from now, but your level of pressure in any one of your three major markets seems less than what you would guess, based purely on what's happened out there with key commodities.

So, I guess, two-part question. A, is that a -- is that a fair characterization? Do you have some particularly beneficial hedges or contracts that are impacting any one of the three regions, COGS increases this year? And then, B, as we think about life beyond 2011, if indeed those are significant benefits, is it fair to think that you would see kind of an acceleration in rate of pressure in 2012, in an unchanged commodity environment?

So, Mark, I wouldn't -- so, first of all, I don't think that hedges are playing through particularly in terms of a huge benefit to us. I think the -- and also, I think we need to characterize the nature of those hedges, right? They are generally going to smooth the commodity price changes over time. We saw it at MillerCoors, obviously, a couple of years ago, when we had some fairly high priced ones. I think this year, we probably felt, as -- as aluminum rose in the back part of the year particularly, we would have seen some benefit from that smoothing.

I think it's more important for you, as an analyst community, to think about the different businesses and how the mix of COGS affects each one of those because we do tend to get pretty myopic about the specific commodities. And whilst those do have an important impact on our COGS, there are a lot of other costs that go into really driving our COGS. And my recommendation is that, perhaps, as part of the afternoon session, that maybe Dave just remind you, as a group, of kind of how that breaks down. Because it's quite different region by region.

Great. Fair enough. We'll come back to that, Dave. Thanks for that. And then finally, Peter, I don't know if March is a premature occasion for this, but with the year-end having just wrapped up, it seems like a good time to at least re-raise the topic of long-term guidance. You guys, as a Company -- not only within beverage, but within the larger CPG space -- and for that matter, in the larger market, are unusual in that you don't have long-term earnings guidance. Can you -- can you speak to where your head is on that topic, or when we might see the Company decide to offer that kind of view of their long-term performance, putting aside any particular year's performance?

Mark, it is a good question, and sort of accepted. It's something we discuss internally very often. And at the moment, we are deciding to stay where we are. But it's one that we're happy to engage with the investor community on a continuous basis. I think it is a fair push. It is one of internal discussion; but at the moment, we are where we are.

Thanks.

Mark, I'll just pick up on that, on Peter's point, for a second. Not addressing the longer term, which is what you asked about. But I will say that at least for the shorter term, the difference that you will have this year, in this part of the call today, we did give you MG&A guidance broadly for the Company for 2011. And so, that -- Dave? I'm sorry, Dave's going to correct me here.

It was actually just for international and corporate, that one segment.

On that one segment. Oh, I'm sorry. Take that back, Mark.

Okay. Well, we'll -- we'll stay tuned on that topic, because I think it is a -- it is of particular interest here, and perhaps -- perhaps an opportunity for you guys.

Yes, we hear you. Thanks, Mark.

Thank you, guys.

Yes.

Thank you. I'm showing no further questions at this time, sir.

Okay. Well, thank you very much, everybody. Thank you for your interest in the Company, and look forward to speaking to you when we get to our first-quarter results. Bye, now.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you, and have a nice day.