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Molson Coors Brewing Corporation (NYSE:TAP)

Q4 2008 Earnings Call Follow Up Session

February 10, 2009 2:00 pm ET

Executives

Dave Dunnewald – Vice President of Investor Relations

Leah Ramsey – Manager of Global Investor Relations

Jane Armstrong – Senior Analyst of Planning Analysis

Mark Ingebritson – Senior Direct of Global Accounting & Financial Reporting

[Ginich Bodoing] – Director of Strategic Finance

Greg Snider – Group Manager of Forecasting & Analyst

Jay Wells – Vice President Treasury & Tax

[Kara Row] – Group Manger of Tax

Phil [McFarland] – Chief Financial Officer Global Group

Analysts

Mark Swartzberg – Stifel Nicolaus & Company

Judy Hong – Goldman Sachs

Christine Farkas – Bank of America Merrill Lynch

Rob Hinchliffe – AIG

Operator

Welcome to the Molson Coors Brewing Company 2008 fourth quarter investor relations follow up session. 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 10K, 10Q and proxy filings for a more complete description for factors that could affect these projections.

The company does not undertake to publically update forward-looking statements whether as a result of new information, future events or otherwise. Regarding any non-US GAAP measures that may be discussed during the call, please visit the company’s website www.MolsonCoors.com for a reconciliation of these measures to the nearest US GAAP results.

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. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Mr. Dave Dunnewald, Vice President Global Investor Relations.

Dave Dunnewald

On behalf of Molson Coors Brewing Company, thank you for joining us today for our fourth quarter 2008 follow up earnings conference call. Our goal on this call is to address as many additional earnings related questions as possible following our regular earnings conference call with Peter Swinburn and Stewart Glendinning today.

We will use a standard question and answer format and we anticipate that the call will last less than an hour. So, let’s get started. With me on the call are Leah Ramsey, Manager of Global Investor Relations, Jane Armstrong, Senior Analyst of Planning Analysis, Mark Ingebritson, Senior Director of Global Accounting and Financial Reporting, [Ginich Bodoing], Director of Strategic Finance, Greg Snider, Group Manager of Forecasting and Analysis, Jay Wells, Vice President Treasury and Tax, [Kara Row], Group Manager of Tax and Phil [McFarland], CFO of our Global Group.

As Peter Swinburn mentioned on our regular earnings call earlier today 2008 posed many challenges for our company, particularly late in the year due to the stronger US dollar along with volume softness in our major markets and substantial commodity inflation across the business. Nonetheless, in 2008 we continue to build our strategic brands, achieved revenue per barrel growth in all of our markets, exceeded all of our cost reduction targets, successfully launched MillerCoors, pursued strategic initiatives in each of our businesses, strengthened our global organization and grew underlying earnings in a weakening global economy.

During the year we also reduced interest and overhead expenses, continued to improve our cash generating capabilities and strengthened our balance sheet. Looking forward we enter 2009 squarely focused on the fundamentals that drive results in this business in both good times and in bad. Our priorities are: one, building great beer brands and growing revenue per barrel; two, delivering cost savings on our ahead of our commitments; three, generating substantial free cash; and finally, growing returns to Molson Coors shareholders on a long term basis.

With that, we would now like to open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Swartzberg – Stifel Nicolaus & Company.

Mark Swartzberg – Stifel Nicolaus & Company

A question about your outlook comment where you talked about $115 million plus or minus in the MG&A number for ’09 for corporate and global market. Am I correct in thinking that number compares to the $137.7 million you reported for calendar ’08 or does it compare to the $100ish number you’ve had just for the G&A element of that segment?

Dave Dunnewald

Not just the G&A but it would be the full global markets and corporate and for the full year on that for MG&A I’m showing $137.7. That sounds like that ties with what you have.

Mark Swartzberg – Stifel Nicolaus & Company

In terms of for ex, I wanted to better understand the comments that you all made about a 15% to 20% hit to Canadian Dollar profits from the Canadian Dollar standing where it is presently, if it remains at that level for the rest of the year. Then you said 50% to 60% hedging effect that would be against that 15% to 20% negative number, is that correct? So, the number you’re really talking about on a net basis, assuming the Canadian Dollar doesn’t move is on the order of 8% to 10% negative?

Dave Dunnewald

Actually, let me give you the two pieces and then we’ll see whether we need to drill in to them once I’ve clarified them. First of all, the perspective that we provided for foreign exchange on the call earlier today was just to simply take last year’s earnings as reported and then apply the current fx rates to those. That gives you a percentage change you could say in those results. Obviously, it’s not a forecast of what we think we can do this year but it gives you sense of the potential impact in each of our business units and it was in the teens in Canada in the first three quarters and it was in the 20% in the UK business particularly in the second and third quarter.

The hedging that we have undertaken we’ve described it has hedging approximately 50% to 60% of our Canadian Dollar profit streams call it on an ’07 base although ’08 works reasonably well also because the pre-tax earnings from Canada did not change significantly between ’07 and ’08. So, we’re essentially hedging a number of inputs that effectively hedges 50% to 60% of our Canadian profit streams.

Mark Swartzberg – Stifel Nicolaus & Company

In the fourth quarter you noted an 18% or 19% hit to Canadian dollar profits from the Canadian Dollar having weakened, is that factually right?

Dave Dunnewald

In the fourth quarter of this year, 19%.

Mark Swartzberg – Stifel Nicolaus & Company

Can you just help me, I’m trying to understand that better because my math says that the Canadian Dollar was basically down no worse than that and I would have thought from your comments at the third quarter that you had some sort of hedge in there so that the effect would have been less significant than it in fact was. I’m just trying to understand why it was that order of magnitude.

Dave Dunnewald

The 50% to 60% call it hedge coverage for 2009, that is what that guidance was for that we provided last quarter, that is essentially a consolidated benefit and it flows through not only the Canada segment but the corporate segment, a piece of it, and it’s really made up of three pieces. One, is our debt structure, we have Canadian denominated debt of $1.5 billion to $2 billion. When the US dollar strengthens the cost of that debt goes down and so we show a benefit. In the fourth quarter that benefit was about $6 million and that flowed through the corporate segment not the Canadian segment. That’s the first hedge benefit.

Then, if you move to the Canada segment we essentially have two pieces, one is cost of goods, call them operations types of inputs that we’ve hedged with forward currencies and we had a benefit in Canada cost of goods of about $6 million in the fourth quarter. Then, if you move to Canada other income, you have some additional currency forward related to some other input streams and that was around $4.5 million. Again, these are all US in the fourth quarter.

If you rolled all that together I think you’d still get to something like 50% to 60% hedge of our Canada profit at least on an annualized basis. There’s some seasonality around that so if you’re just looking at the fourth quarter it won’t be exact but I think you will get to the right place if you crunch those numbers. Does that help?

Operator

Your next question comes from Judy Hong – Goldman Sachs.

Judy Hong – Goldman Sachs

I’m just trying to reconcile the MillerCoors number in the quarter and I guess one thing which is pretty confusing is because we just didn’t have the pro forma historical numbers to model off of. So, first of all is there any way you can help us kind of provide us the pro forma numbers for the March quarter?

Dave Dunnewald

We’ve looked at this sort of on a quarterly basis with the MillerCoors team to see if whether or not we’d be able to provide those pro formas. At this point we haven’t been able to do that but we’ll look at it again and see whether we can provide those but, not at this point. Essentially, we’re building a company here, each one is a carve out and there’s quite a bit to do from a financial standpoint. So, that’s why we haven’t been able to provide them at this time. But, you’re right the base of call it 2007 fourth quarter was a significant difference for people in their modeling of the business.

Judy Hong – Goldman Sachs

If you can’t help us out with the historical numbers, how do we think about really the underlying kind of the pro forma numbers? We know that we have the Millers numbers through March 31, 2008 and then we have your numbers obviously for Coors numbers and then are there any one-time costs related issues that kind of depress the ’08 pro forma numbers? How much is that and as we go forward how do we think about sort of those cost issues?

Dave Dunnewald

I know on the fourth quarter we did talk about some timing differences year-over-year related to calculating equity income. If you look at the percentage change in earnings for our US segment and compare that to the percentage change in MillerCoors results with the difference being in our US segment we’re comparing to Coors Brewing Company the year before. That difference in trend is driven by we said some accounting policy changes, going from Coors Brewing Company to Miller Coors, and we also talked about some timing differences year-over-year.

Those accounting policy changes we would assume would affect the next two quarters as well. I can’t give you a forecast of what that impact will be but that did reduce or let’s say give us lower results for the MillerCoors numbers relative to the Coors Brewing Company numbers just based on purely how its reported. Essentially, you’re comparing two different entities there. Coors Brewing Company was a different company from MillerCoors.

Judy Hong – Goldman Sachs

Is there a way to give us in the fourth quarter how much was the accounting policy change versus the timing difference?

Dave Dunnewald

Yes, I think we can give a little sense of that although you’ve got to know that there’s going to be some seasonality and they won’t necessarily flow through the year equally by quarter or what have you. In other words, the first quarter or second quarter of ’09 won’t necessarily have the same effect as you saw in the fourth quarter.

I would say that roughly half – if you look at the trend on the US segment and compare that down about $15 million and you look at the MillerCoors results, those were up I don’t remember how many millions, Greg might be able to tell us but the point is if the biggest chunk of that difference between the trend on the US segment and the trend on MillerCoors – Greg is showing me that $19 million is our 42% of the growth in MillerCoors results when you’re looking at pro forma for the prior year.

So, that tells me that you’ve got about $23 million to explain of difference in trend and it’s about a) you have two different entities that you’re talking about that you’re comparing with in the prior year and we said that’s primarily driven by the timing differences year-over-year as well as the accounting policy changes. The difference is nearly half of that or roughly half of that is accounting policy change and the other half is timing differences in this quarter.

The timing differences will even out so there’s not much you can do to model that because the biggest part of that is just third quarter of ’08 versus fourth quarter of ’08 but the policy changes will likely have some impact going forward but I can’t give you a forecast of what that looks like right now.

Judy Hong – Goldman Sachs

Would the fourth quarter have been the biggest impact from the policy change?

Dave Dunnewald

I would say yes it would be a bigger impact than looking out in to ’09, yes.

Operator

Your next question comes from Christine Farkas – Bank of America Merrill Lynch.

Christine Farkas – Bank of America Merrill Lynch

A couple of questions on the US, it might be kind of trivial based on the boarder confusions but just with respect to US pricing, the JV posted 8%, I’m just wondering and I know if there could be a little more granularity on rate versus mix timing? Then also, if you could talk about whether or not there’s a timing shift with respect to Easter or anything like that in upcoming couple of quarters that we should be aware of in US results?

Dave Dunnewald

Yes, that’s an important question. Let me do a little math here, let’s see somewhat more than three fourths of that 8% change in domestic revenue per barrel, that was 8%, more than three fourths of that was net pricing. That’s a combination primarily of front line pricing which I think you heard about, we took most of the US up in the September/October timeframe and then in addition reduced some promotional discounts particularly around Miller Light in the fourth quarter.

That’s a smaller effect but you put the two together and you get more than three fourths of that eight percentage points driven by pricing. The rest of it would be positive mix, things like MGD 64 growth and geographic differences. As far as phasing goes, that’s very important as we look at call it fourth quarters in previous years, you’d see about less than half of our volume taking pricing in the range of 3%, 4%, something like that. In the fourth quarter of ’08 we took nearly all of our US volume, or MillerCoors did and the rate was comparable to some other time period.

What that means is you get almost double the benefit. So, in previous years you saw an average of 2% to 3%, most recent years 3% pricing on average during the year, well we saw a little over twice that in the fourth quarter of ’08 because of taking more market across the US. Now, the important thing to know about that going forward is normally we have taken additional pricing in the January and especially early to mid February time frame and once you’ve taken that pricing, then that gets you up to a relatively full price increase on an annual basis.

Since we’ve already taken most of the US in the fall and as Leo said on our earlier call, we don’t plan significant additional pricing in the early part of this year, that essentially you’ll settle back in to as of late February, settle back in to a more normal kind of year-over-year pricing difference.

Christine Farkas – Bank of America Merrill Lynch

Then depending on your strategy for fourth quarter ’09 when you’re lapping potential double the volumes, that’s just going to depend on your strategy for pricing at the end of ’09?

Dave Dunnewald

It will. But, barring any other increases and we’ll see how that goes, essentially you’d be looking at a more normal rate of change all the way in to or up to the fourth quarter and then it depends on what we do then.

Christine Farkas – Bank of America Merrill Lynch

Then I had a question also on the holiday timing in the second quarter, is there anything meaningful there?

Dave Dunnewald

I’m not aware of any significant holiday timing differences year-over-year. There may be a trading day difference in the STR numbers but of course, as always, that will even out if there is one. I haven’t gone in to the calendar to look. All you’ve got to do is count the number of Sundays and you can figure that out.

Christine Farkas – Bank of America Merrill Lynch

Then the last question I had, I’m not sure how you answer this based on the fact that you have hedges in place for commodities. If you didn’t have hedges and I’m looking for real big ballparks here given how much commodities have pulled off and many of your beverage peers have commodity hedges through the first half of ’09 not the full ’09 so I’m trying to get a sense of I guess looking forward in to 2010, should commodities stay where they are now? The kind of gap that you could see on the cost of goods, is there any kind of guidance you can give us there?

Dave Dunnewald

Not specifically on cost of goods because there are so many different moving parts but, I can give a little bit of perspective on the hedges. As we said on the earlier call today and then on the MillerCoors call very early today, essentially the US business is hedged through 2009. If commodity prices do stay where they are and that’s just on commodities right, there are other parts of the cost of goods line that are not hedged, non-commodity stuff - so as we move out of 2009 if commodities stay where they are then we would expect to see some benefit in 2010 and 2011 and Gavin Hattersley said that on the early call with MillerCoors.

In our other business units, our hedging we don’t say how much we’ve done but we’ve said that we do expect a few modest benefits in a few areas that are not quite so hedgeable in those markets. On the whole, it’s possible to hedge more commodities in the US than in our other major markets.

Christine Farkas – Bank of America Merrill Lynch

Okay so a little bit less coverage with respect to Canada and the UK on commodities?

Dave Dunnewald

Yes, that’s right and broadly speaking, our strategy on hedging activities is to limit volatility in our P&L so that we can focus on what we do best which is selling great beers. What that means is we tend to layer on hedges over time so you’re likely to see a little more coverage in the near term and less coverage in the further out years call it.

Operator

Your next question comes from Rob Hinchliffe – AIG.

Rob Hinchliffe – AIG

I wanted to follow up on that cost of goods line of questioning. You kind of went through on the earlier call by region what cost of good inflation would be in ’09. Could you go through what it looks like in the UK again? With the contract manufacturing and what not I’m not sure that I quite got all that.

Dave Dunnewald

In the UK we gave specific guidance on the earlier call so I’ll start by giving you that. We said in essence that our UK owned brand cost of goods per barrel in local currency, we expect it to grows at a low double digit rate. I can see what that’s a little bit of an eye opener, essentially that’s mid single digit inflation so 5% give or take a little and then plus some production mix changes.

Remember that we have a number of call them new initiatives going on, we have things like our contract brew arrangement with S&N UK, you have Magners cider that we are growing essentially from a zero base in mid ’08 and that’s going well and that will have an effect on the cost of goods per barrel rate. And also, the mix shift channel shift if you will in the UK market will tend to affect cost of goods per barrel, that is if we produce more beer in small pack configuration such as cans and bottles and less in kegs, that will result in higher cost of goods.

The first two things that I mentioned though the contract brewing and Magners cider, those are changes that will tend to also increase net sales per barrel and on the whole those production mix changes won’t have much impact on gross margin unlike inflation which obviously creates a headwind which we have to offset or overcome through either the combination of pricing and cost reductions.

Rob Hinchliffe – AIG

That’s for owned brands is low double digit but all in its not quite as ominous as that sounds as a headline?

Dave Dunnewald

No, that’s right. We tend to look at this very much on an owned brand basis because nearly half of our cost of goods in the UK is factored brands, those are beverages that are owned by other companies that we take possession of and deliver to the pubs and also off premise in some cases. Because we take possession of them we have to consolidate them and you’re right, those won’t grow nearly as much as the owned brand cost of goods. On the other hand, it’s not in our barrels so to the extent that they do move, that will be accentuated because the barrels don’t move whereas the dollars may increase or decrease.

Rob Hinchliffe – AIG

Then what’s the inflation for cost of goods in MillerCoors? I don’t remember hearing that number.

Dave Dunnewald

We didn’t provide a specific breakout, they said it was 6% cost of goods increase in the fourth quarter and that’s a combination of inflation plus some mix changes minus cost savings. Although, I must say, most of the cost savings in the fourth quarter flowed through MG&A. If you think about the sort of phasing of the synergies that MillerCoors is going after, you’re going to see more overhead costs in the early costs and more of the operations costs a little bit further back in the three years – or let’s call it the first two years is where you have to essentially make all the changes.

Rob Hinchliffe – AIG

Then for ’09? We talked UK, you gave Canada too, was there a cost of goods inflation number for MillerCoors for ’09?

Dave Dunnewald

No. On the earlier call they did ask and we’re not providing specific or even sort of general guidance on MillerCoors cost of goods for ’09 per barrel. However, we did provide I think some pretty good visibility on what the hedge exposure is, in other words we’re largely hedged for ’09 and at the same time I think you can just sort of take that and then factor in the rest of the P&L and come up with a point of view.

The cost of goods trend in that US business whether its Coors or Miller has tended to be in a mid single digit rate in recent years. But, we have not provided forward guidance on that.

Rob Hinchliffe – AIG

I guess the last one, I don’t know how significant this is, but moving Blue Moon out of Canada, your production out of Canada, is that significant, one? And two, is that already in sort of the cost saving numbers?

Dave Dunnewald

Is it in the MillerCoors numbers is that what you’re wondering?

Rob Hinchliffe – AIG

Yes, is that incremental cost savings or is that just sort of all part of the big overall plan here and its already in all the numbers?

Dave Dunnewald

Let’s just say that has no impact on the synergies numbers for MillerCoors. It does have an impact on Canada because that’s a significant piece of contract production for the Canada business and they have already taken actions to right size the cost structure in Canada to adjust for that.

Operator

Mr. Dunnewald, I am showing no further questions.

Dave Dunnewald

Then we’ll go ahead and wrap it up. In closing I’d like to thank all of you for your interest in Molson Coors and for joining us today. If you have additional questions that we did not cover during our time this afternoon, please call Leah or me on our direct lines or at the main number here at Molson Coors which is 303-277-3500. Thank you again and have a great day.

Operator

Ladies and gentlemen thank you for participating on today’s conference. This does conclude today’s program. You may now disconnect.

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