Molson Coors Brewing Company - Analyst/Investor Day

| About: Molson Coors (TAP)

Molson Coors Brewing Company (NYSE:TAP)

March 06, 2012 2:00 pm ET


Peter S. Swinburn - Chief Executive Officer, President and Director

S. F. Glendinning - Chief Financial Officer

David Perkins - Chief Executive Officer of Molson Coors Canada, President of Global Brand & Market Development and President of Molson Coors Canada

Unknown Executive -

Tom Long - Chief Executive Officer, President and Chief Commercial Officer


Unknown Analyst

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Peter S. Swinburn

Good afternoon, everyone. Thanks for joining us. I'm Peter Swinburn, President and CEO of Molson Coors Brewing Company. We showed you this video because it just gives you a concise summary of the past year for our company and the substantial progress that we made as an organization despite a number of headwinds. One accomplishment that I'd like to call attention to from the video is the strides that we've made in the area of corporate social responsibility.

We see this as an extension of our overall business performance. And I'm especially proud of our recognition by the Carbon Disclosure Project and our first ever listing on the Dow Jones Sustainability Index, where we were only 1 of 6 North American food and beverage companies chosen. As we'll talk about later today, we are focused on growing this business, but also growing it in the right way. We're proud of our progress in that particular area. With that as background, let's get on with today's proceedings.

As usual, before we start, I'd like to share our Safe Harbor language. Our presentation today contains forward-looking statements within the meaning of the U.S. federal security laws. Important factors that could cause actual results to differ materially from the company's projections and expectations are disclosed in the company's filings with the Securities and Exchange Commission.

Regarding any non-U.S. GAAP performance measures that we may discuss today, please visit the Investor Relations page on our website,, for a reconciliation of these measures to the newest U.S. GAAP results. All right, my purpose today is to give you an overview of how I see the business and where our collective priorities will be in order to drive top line and bottom line growth. I'll then turn it over to our group CFO, Stewart Glendinning, who will present our strategies designed to drive total shareholder return through business performance and optimal capital structure and efficiency.

Finally, we'll have a Q&A in which the business unit leadership will participate. Like last year, we will also have a reception with beers and appetizers after the formal meeting. That reception will run from 3:30 to 5:30 p.m. Several of us will be stepping out for about 30 minutes for today's closing bell ceremony, but after we complete that, we'll be back to share a beer and some informal discussion with you in the New York Stock Exchange lounge across the hall from this room.

I think most of you are familiar with the 3 pillars of our growth strategy. We realize that we have to maximize profits in our core markets by reducing costs and investing in brands and innovation. Additionally, we have to diversify our revenue streams by accelerating our growth in new and emerging markets and, at the same time, capitalize on M&A opportunities that deliver shareholder value. Today, I'd like to share my perspective on the specific platforms we are focused on to deliver near to medium-term growth.

The global beer market is changing. While global beer volumes, particularly in emerging markets, have been growing at a healthy rate for some time, the picture in developed markets is less rosy. In developed markets, beer as a percentage of total alcohol consumption is declining. Part of that trend is being driven by the great recession and record high unemployment. However, another part of that trend is driven by changing consumer preferences. Drinkers are making different alcohol choices for different occasions. And they are looking for more flavors and options, and I will show you how we're responding to this later in the presentation.

Despite these changes, we continue to believe that growth opportunities exist across all of our markets, developed and emerging. As we have said, we cannot save our way to greatness. So in our core markets, we have to continue to invest behind our power brands, deliver excitement and interest through value-added innovation and accelerate our current success in the premium and above-premium sector.

And in our developing international businesses, we need to grow our brands in our newest emerging markets. Successfully executing against these platforms is the way to bring top line growth back to our business. On our third pillar, M&A, we continue to take our long-standing view that we will only consider opportunities that deliver attractive returns in the medium-term of 3 to 5 years. So with that, let's move on to our key platforms for organic growth.

Our core business is heavily weighted towards developed markets, with the U.S., U.K. and Canada represent some of the largest profit pools in the global beer market. In fact, the U.S. and Canada alone represent close to 30% of the global beer profit pool. Premium and premium light represents far and away the biggest profit pools in these markets. Just a few facts to illustrate that point. 1/2 of all the beer sold in the U.S. and the U.K. and nearly 60% in Canada are premium or premium light beers.

The U.S. premium light category alone is 6x larger than the craft category. The #1, #2 and #4 beer brands in America are premium lights. We now hold the #2 slot with Coors Light. And within our U.S. operation, Coors Light and Miller Lite drive 56% of our overall volume. The top 4 brands in Canada are premium or premium light. Coors Light is #1, Molson Canadian is #3. These 2 brands alone in our Canada franchise make up 52% of our overall volume. The #1 brand in the U.K. is a premium and it's ours, Carling. A full 75% of our volume in the U.K. is Carling. And finally, the profit generated by premium and premium light for retailers and distributors across all of our markets is huge and absolutely drives the economics of the beer category.

If we get these segments right, we go a long way to generating growth in the category. And with core brands accounting for nearly 60% of our worldwide volume and an even higher percent of our profit, growing them, more than anything else, will have the biggest impact on our business. So how are we investing behind these power brands and their unique consumer propositions?

Coors Light continues to own ice cold refreshment in the premium light category. And because of its clear, relevant brand proposition, Coors Light has consistently achieved positive volume gains over the past 7 years, driving the brand to the #2 position in the U.S. market.

This builds on the brand's momentum across all our businesses, having become the #1 brand in Canada, currently growing at over 25% in the U.K. and in double digits in all other markets. In the U.S., we're also investing to win with multicultural beer drinkers. You will see it with a concentrated Hispanic and African-American marketing in key urban areas. You'll also see it with increased investment behind our Ice Cube TV spots, as well as activation around soccer.

Soccer is the sport of choice for the Hispanic consumer and represents an important passion point. To connect with these consumers and communities, Coors Light is now the sponsor of the Mexican Football Federation and is driving hard with Latino consumers through local market soccer innovations. These activities are driving premium light share gains for our brands with both African-American and Hispanic consumers.

On Miller Lite, we plan to revitalize the brand with new positioning and creative, which will be debuted in just a few weeks at our Distributor Conference. Our "Man Up" work has run its course, and it's time to have a campaign that's more celebratory, hits a broader demographic and will deliver across the entire marketing spectrum.

Our new communication taps into what's essentially true about the beer itself. We brew Miller Lite differently from other light beers because we refuse to compromise on delivering taste with a light beer. We'll back this up with a full year of innovations, starting with the new grip can and our Taste Flow Can, which increases airflow resulting in a smoother pour. We're being smarter about our retail strategies, and we'll continue to be a major player reaching our drinkers where they live and play online and at home with ESPN, Fox, NBC, CBS, Facebook and Yahoo.

For multiculturals, we are also going to debut a standup comedy tour and increase our sponsorship investment with Chivas de Guadalajara, the premier team in the Mexican Soccer League. In short, we are making significant investments behind Miller Lite to turn it around. In terms of overall performance, the premium light segment has been challenged in the U.S. However, Coors Light continues to lead the overall segments and Miller Lite has outperformed the overall category since the middle of 2011.

In fact, 2011 was Coors Light's seventh successive consecutive year of volume growth in the U.S. And if we want to generate improved revenue growth, we simply have to achieve the same with Miller Lite. Facing, actually, a similar dilemma in Canada a few years ago, we took decisive action to turn around Molson Canadian. We repositioned this brand in conjunction with the Winter Olympics in Vancouver and grew share for the first time in 15 years.

You will recall that we actually increased our market investment behind this brand at the time to ensure that it had the wherewithal to achieve what we wanted it to. The positioning of the brand is anchored in the product truth: the best nature has to offer. Our brand speaks to its Canadian origins, 100% Canadian barley, pure Canadian water, emphasizing the locally grown credentials of our ingredients.

At the same time, we have been linking the brand with 2 other Canadian passions, hockey and the environment. Without a doubt, hockey is at the heart of Canadian culture. Our sponsorship with the NHL reinforces the positioning and identity of the brand. We'll be activating directly against consumers and supporting hockey at all levels, from the NHL all the way down to regional teams. In addition, our Red Leaf program is helping to reinforce the Molson Canadian brand promise by bringing Canadians together to make Canada even better.

This past year, thousands of Canadians across the country volunteered in over 20 communities. Let's just take a look at 2 advertising spots, one for the NHL and the other for Red Leaf.


We have built a consistent theme around Molson Canadian, from the brand promise to related sponsorships to the cause marketing around the brand. You can see from this slide, Molson Canadian comes out of 2011 as a strong and healthy brand, exceeding category norms on all key measures that we have identified, namely the head, the heart and the wallet, as drivers for building extraordinary brands over the long term. The momentum behind this important brand has continued, increasing share of total beer by 10 basis points and share of the mainstream premium segment by 40 basis points in 2011. We realized volume growth in Canada in the back half of 2011 and have restored revenue growth in a declining market.

As I mentioned, the other core brand in Canada is Coors Light. Its share has more than doubled since 2000 and became the #1 beer in Canada just 2 years ago. And we will continue to invest behind Coors Light in Canada to grow this leading position. 2011 has been a year of repositioning and transition for Carling, the UK's #1 selling lager. Moving forward, the brand will be based on 3 core qualities: refreshment, Britishness and aspiration.

Our communications, visual identity and innovations are guided by that simplicity and differentiation. Carling's visual identity has been transformed across all consumer touch points into a stylish, aspirational brand that shouts of quality, care and attention. The new design is driving purchase intent across the board and has pushed aspiration and quality appeal back into the brand. Let's take a look at our new spot that helps demonstrate the new feel and look of the Carling brand.


Indications are positive and driving performance. With the majority of the execution still to come in 2012, our post reignite performance is clearly indicating we're on the right track. In both the on and off-premise throughout the second half of 2011, Carling has driven value ahead of volume. And in the 12 weeks ending the 24th of December, saw Carling as the best performing mainstream lager, up 12% in volume and 15% in value, giving the brand its highest market share in 4 years.

We are a brand-building company, and innovation is central to our growth strategy because it allows us to do 2 things. First, it keeps our core brands relevant by sharpening our advertising, reinforcing brand equities, encouraging trial and providing talk value among loyal beer drinkers. It can also help us drive positive pricing and market share, and Coors Light is a great example of how this has worked for our brands. In fact, innovation has delivered more than $100 million of incremental gross profit for us over the last 3 years.

Secondly, it allows us to leverage the growth of the total alcohol category by meeting evolving consumer tastes and occasions, to which I referred earlier. This drives our innovation agenda. Let me now share some of our new innovations for 2012.

Over the past few years, we have become known for our leading edge packaging innovations that support our core brands. We are continuing this momentum with our new Aluminum Pint bottles for Coors Light, Miller Lite and Canadian.

By providing the added benefits, supportability and resealability, we believe this new packaging will help open up new outdoor occasions for the brands and help to grow the segment. We'll also unveil the Miller Lite punch top can at our distributor convention later this month. This new can design is preferred 3 to 1 by key beer drinkers over the current Miller Lite can. In addition, we have launched the new grip can, which uses tactile ink technology. The grip can features branding for the first division Mexican soccer team Chivas de Guadalajara, and in the fall, our Miller Lite grip can will feature NFL football team branding.

On Carling, we will be introducing a new aluminum bottle that will align with this new aspirational positioning. All of these packaging innovations, when applied to our core brands, help add excitement to the category, build brand equity and drive positive pricing and share. The message is that we have to grow our core brands if we wish to achieve acceptable revenue growth in challenged markets. And that is what we will do. Undoubtedly, Miller Lite remains our biggest challenge.

However, as well as keeping the core brands relevant, we need to introduce new brands. And to that end, I'm pleased to unveil for the first time Coors Light Iced T, which is due for shipping to our Canadian customers at the end of this month. This beer is a twist on refreshment, the organizing idea that is at the heart of Coors Light. Coors Light is the world's most refreshing beer. Iced tea is the world's most refreshing non-alcoholic drink. Inspired by this, we created a new and unique beer that builds on Coors Light's ownership of refreshment. We will be launching in Canada, and we'll be putting significant investment behind the brand over the course of the year. Coors Light Iced T will make a big splash this year in Canada. We will have samples of the new brand for you to try following our meeting this afternoon, but first, here is a video that shows how big this launch is for us.


The innovation agenda for Carling is also critically important to premiumizing and energizing the beer category in the U.K. In addition to a complete visual transformation of the base brand, Carling is introducing 2 new brand extensions, Carling Chrome and Carling Zest, to widen consumer appeal. Carling Chrome, which was launched late 2011, will this week be followed by the introduction of Carling Zest, a premium lager with a hint of citrus to stand out summertime refreshment. Carling Zest will be available for a limited time period, providing a compelling proposition for key summer occasions.

And in the U.S., MillerCoors is creating a real buzz among 25 and 35-year-old beer drinkers with Batch 19, a craft beer introduced by Tenth and Blake. Batch 19, inspired by our pre-prohibition recipe, is a bold, hoppy lager deriving its taste from a rare combination of hops. It's the beer that got beer banned. And it's got attitude that's as bold as its taste. All elements of the brand evoke nostalgia. Even the understated Batch 19 bottle brings to mind the spirit of an earlier time when bottles were characterized by their no-frills appearance.

This year -- sorry, the year 1919 is stamped into the neck of the bottle to recall the year that the beer was banned. Growlers, a throwback to the late 1800s, are used in the on-premise to drive velocity and sharing amongst consumers. Limited availability in select high-profile accounts is creating a feeling of authenticity and nostalgia for this brand. We exceeded our plan by 15% in 2011. We will continue to grow the Batch 19 buzz with additional rollouts beginning in April and the brand will be available in over 40 markets by fall.

The above-premium and craft segment, while still small, continues to experience tremendous growth across all our markets. Here again, we are very well represented, as well is a dedicated marketing and sales organization that we have to drive our brands across this segment.

In the U.S., Tenth and Blake grew by almost 15% last year, outpacing the overall craft market. In fact, Tenth and Blake is now America's largest craft brewer, selling 16% of the overall volume of craft beers in the country.

Blue Moon Belgian White is now America's best selling craft beer and captures 13% of the overall craft volume in the U.S. We will continue to drive momentum around Blue Moon with seasonals such as Blue Moon Spiced Amber Ale. We're also looking at extending the Leinenkugel's shandy brand with a version for the fall, and we'll continue to grow Peroni with a strong focus in the on-premise channel. We are absolutely committed to growing our share with craft and import by partnering with new winning brands to drive growth. And last year, we took our first step in establishing great beer partnerships by partnering with Terrapin Beer company of Athens, Georgia.

We also expanded our portfolio to include cider, with the recent addition of Crispin Cider Company. The Crispin brand gives us significant and immediate presence in a fast-growing category that pulls disproportionately from wine and spirit occasions. We will satisfy the American consumer's palate for ciders with Crispin. In Canada, the specialty segment we define as import, superpremiums and craft brands, has been growing at a CAGR of 7% over the past 5 years.

This segment has gained 5 share points in the last 5 years, and this momentum is expected to continue. To take advantage of this growth, last year we launched Six Pints in Canada, a new division established to sell in -- market and sell our distinctive Creemore Springs and Granville Island craft brands and to focus on new above-premium introductions.

Creemore and Granville have been powerful regional brands for over 20 years, but with minimal expansion outside their home provinces. In 2012, we are poised to fully expand the footprint of these brands across Canada. 2011 was a strong year for Six Pints, with over 10% growth, volume gains in every province, and we received 5 national brewing awards. Together, with our larger and growing Rickard's family of brands, we now have a compelling portfolio of above-premium brands in Canada that captures more than 35% of the overall specialty segment. Like craft beer in North America, cask ales are a valuable and growing part of the U.K. market. With this in mind, we have been building up our Cask portfolio. In addition to our Worthington's brand, early last year we purchased the Sharp's Brewery, home of the Doom Bar brand, which we have grown by 45%, launching it to the #3 position in the market.

While we are pulling all the levers in our core markets, we also recognize the need to further accelerate our growth in new markets, especially emerging markets, as another key pillar of our longer-term growth strategy. We are taking a different approach from most of our competitors. We are combining our strategic brand building and innovation expertise with interested and capable partners, who bring local infrastructure and connections. That means we do not have to use our cash to buy market share and build a complete end [ph] brand infrastructure.

Within Molson Coors International, or MCI for short, we are now focused on 4 strategic markets: China, Russia, India and Ukraine. Those 4 strategic markets are projected to be among the fastest growing beer markets. And on the brand front, MCI is focused on 3 strategic brands: Coors Light, Carling and Cobra. Over the past 2 years, our international business has nearly doubled in size, while reducing their investment per hectoliter by more than 20%. And MCI's volume growth is now contributing to the enterprise top line.

For example, last year MCI represented 3% of our worldwide volume but it contributed a full 16% of NSR growth for Molson Coors. Our short-term growth within MCI -- sorry, our short-term goal within MCI is to continue reducing our per hectoliter investment, while we build scale and enhance our route to market. Over the medium term, our vision is for MCI to become a significant contributor to both volume and profit growth for the enterprise by 2015.

Let's take a look at our progress in a few key markets, starting with China. Coors Light volumes have been growing at a 20% CAGR for 3 years running in China. We still have some issues to address, but looking ahead, we will be taking advantage of expected growth in the premium and mass premium segments using our China JV to deliver a broader range of SKUs. Building on the success of the partnership the U.K. team established with Lord Karan Bilimoria for the Cobra brand in 2009, we established the India JV in June of last year.

India is the world's fastest growing beer market with a 12% CAGR and is estimated to grow to 15 million hectoliters by 2020, putting it in the top 10 beer markets globally. This new partnership represents an opportunity for us to expand our footprint in Asia, especially with a partner we know well and with whom we have already achieved significant success.

Another good example of our accelerated strategy has been our entry into Ukraine with Carling. As the second-largest beer market in Eastern Europe, Ukraine represents an excellent opportunity for us to expand our footprint in this emerging region. Ukraine's beer industry has been growing at a rate of more than 8% for the past 5 years. The premium segment, which comprises approximately 3 million hectoliters per year, is growing fastest as consumers trade up for mainstream brands. With lower per capita beer consumption than neighboring European markets, there is strong growth potential for the market in the coming years by continuing to build on Carling's strong association with soccer. We believe that this is just the start for the Carling brand in Eastern Europe.

In addition to gaining a strong foothold in Ukraine, this partnership also provides a solid platform for further expansion for Carling in Eastern Europe, where we believe a significant opportunity exists for the brand over the longer term. Before I wrap up my comments, let's take a look at one of our Carling spots in Ukraine.


So as I said at the outset, we absolutely believe that growth opportunities exist across all of our markets, developed and emerging. So in our core markets, we have to continue to invest behind our power brands. We have to deliver excitement and interest through value-added innovation. And we need to accelerate our current success in the above-premium category. I've tried to outline all of those for you this afternoon. And in our developing international business, we need to grow our brands in our newest and emerging markets, and I've given you a flavor of what we're attempting to do there. Successfully executing against these platforms is the way to bring top line growth back to this business. To ensure our success, we already told you that in 2012, we will be investing incremental dollars in our marketing program. So let me turn it over to Stewart to walk you through the financial strategies that will support these platforms.

S. F. Glendinning

Right, thank you, Peter. And good afternoon, everyone. It's great to be here at the New York Stock Exchange with all of you. Peter has taken you through some of our strategies to grow the top and bottom line and those to generate long-term shareholder value.

I will use my time this afternoon to show you how these strategies have worked, along with our cash and capital strategies, to drive improved financial strength and performance for our company over the past few years, and how they will drive performance in the years to come. We are aligned behind driving total shareholder return through business performance, capital efficiency and optimizing our capital structure. As Peter mentioned, the most powerful driver of shareholder returns is the performance of our base business. This chart shows that our shareholder return or share price change plus dividends has outpaced the S&P 500 index over the past 6 years. Challenging markets notwithstanding, we continue to grow profit and, looking at this chart, pretax profit slowed in 2008, but then picked up the pace again with low double-digit increases in 2009 and 2010.

In 2011, our pretax income growth was driven by each of our core businesses, but slowed to 3% due to a more difficult volume and cost environment. From 2005 to 2011, our underlying pretax income increased almost 80%. And please note that this comparison is not affected by the volatility in our tax rate. In fact, with the additional benefit of a lower tax rate in recent years, underlying after-tax profits have more than doubled since 2005. Also, despite the volume challenge [Audio Gap] our global net sales nearly $500 million or 16% over the past 2 years. During the past several years, we've consistently exceeded our cost-reduction targets and this has been an important driver of our ongoing profit performance.

Since 2005, our results have benefited from $958 million of permanent annualized cost reduction savings. These cost reductions have provided vital resources to invest in our brands, offset inflation and grow profit and cash flow in a challenging volume environment. Cost reductions and positive beer pricing were 2 of the largest drivers of after-tax profit for our company in the past 3 years, along with foreign exchange and a lower tax rate.

We will continue to capture cost savings in order to ensure that we remain competitive and have the resources we need to fuel growth in our key markets. At the end of 2011, we were within $24 million of achieving our cost-reduction target in the Resources for Growth 2 program, RFG2. And we are very confident that we will meet or exceed that goal.

MillerCoors cost savings will be incremental to these results. Having already exceeded all of its cost savings goals, MillerCoors is now similarly focused on trying to find additional cost-reduction opportunities. Cost reduction has been and will continue to be part of our daily business. Cost reductions continue to be important in providing resources to grow our business. But looking ahead, we intend to drive more of our bottom line growth from top line, lessening our dependence on cost savings.

Toward this end, Peter mentioned that we plan to invest incremental marketing dollars in 2011. With the volume challenges in our largest markets, a frequent question from investors has been whether our investment levels in brand marketing are enough to drive top line growth. We believe that our brands are properly supported. But as we drive for improved top line growth, our specific innovation and brand initiative agenda for 2012 will require increased investment. In total, our investment in marketing as a percentage of sales is broadly comparable to other large, brand-led consumer products companies.

Finally to emphasize the importance of sales growth to long-term profit performance, this year we have linked our annual bonus program to delivering a mix of top line and profit growth. Profit will continue to be the primary bonus driver for our employees. Even after substantial investments in our brands and innovations, ours is a cash generative business. Here you can see the step up in free cash flow generation in the recent years. Our underlying free cash flow has grown from $532 million in 2006 to $924 million in 2010 and $635 million in 2011. It's important to mention that 2010 benefited from a number of one-time cash sources, and 2011 free cash was reduced by temporarily higher capital spending in the timing of working capital.

Molson Coors has generated $3.8 billion of underlying free cash flow over the past 6 years. And despite the free cash decline last year, this still represents a 90% cash conversion versus our 2011 bottom line.

Now this chart shows the drivers of our 2011 underlying free cash flow versus the year before. And as you can see with operating income up, we faced headwinds in the year from working capital timing, one-time items and the higher cash taxes in capital spending. Looking ahead to 2012, our goal for underlying free cash flow is $675 million plus or minus 10%. This target is 6% higher than 2011 actuals, driven by 3 main factors. We had significant one-time and temporary uses of cash in 2011, and we expect approximately $40 million to $50 million of timing factors to benefit the 2012 cash flow. We expect about $35 million of lower CapEx spending in 2012, and offsetting this will be about $50 million to $70 million of higher planned pension contributions in 2012, including our share of MillerCoors.

Obviously the goal, which also embeds assumptions around pretax earnings growth, changes in cash taxes, cash interest and some other factors. We've used some of our cash to build a much stronger balance sheet by paying down debt, funding pensions and reducing other liabilities, such as our out-of-the-money cross-currency swaps. Net debt to EBITDA leverage ratio has declined from nearly 2x in 2006 to only 0.7x last year, as the red line on this chart demonstrates.

While this may seem very low, the average -- the leverage ratio used by the rating agencies are much higher. For example, the blue bars here show the S&P reported debt to EBITDA ratio, which is much higher. I will point out that 2011 is our own calculation, not the S&P reported. But the ratios show much higher, and that's largely because they include a variety of other liabilities in the debt number, and they do not give us the benefit of our cash balances. In this case, we finished up the year with about $1.1 billion of cash.

Following an increase in our S&P leverage ratio between 2006 and 2009, we have seen a decline over the past 2 years primarily due to the substantial improvement we achieved in the funded status of our defined benefit pension plans in 2010 and because of growing earnings. Because of historically low long-term interest rates at the end of 2011, our pension-funded status went against us by about $260 million, leaving us about 87% funded overall. Without this pension impact, our S&P leverage ratio would've improved last year due to paying off 1/4 of the out-of-the-money cross-currency swaps and improving our underlying EBITDA.

Despite the pension movements, Molson Coors has a very strong balance sheet. Our stronger balance sheet and cash generation have allowed us to increase the amount of capital that we return to shareholders. We've doubled our quarterly dividend since 2008. We had double-digit increases in each of the past 4 years. And last year, we also initiated a stock buyback program to repurchase up to $1.2 billion of our class B and class A common stock. And so far, we have repurchased, well, through year end, 7.5 million shares at a cost of $321 million.

Looking back at 2011, substantially all of our free cash flow was returned to shareholders. We are pleased to be in a strong position to increase cash returns to Molson Coors shareholders while preserving the financial flexibility to explore growth opportunities and to strengthen our balance sheet in the future. In all of our capital allocation decisions, we will always pursue the best returns for shareholders. So in summary, we're driving shareholder return through business performance, cash generation -- sorry, we're targeting total shareholder return through business performance, cash generation and optimal cash efficiency and structure.

Today we discussed our plans for investing in brands and innovation and our continuing focus on reducing costs to grow the top line and the bottom line. Our recent profit and cash performance has been driven primarily by cost reductions and positive pricing. In the future, although we still expect to capture significant cost savings, we plan to drive increased benefits from the top line with less reliance on cost reduction initiatives. With regard to capital structure, we strengthened our balance sheet by reducing liabilities and funding our pensions and continue to reflect strong investment grade rating.

In addition, we're focused on managing our working capital, limiting our CapEx and looking for opportunities to rationalize our fixed cost -- fixed capital base.

Reflecting back over the past 3 years, Molson Coors is in a much stronger financial position with greater financial flexibility, higher profits, increased cash generation and a stronger balance sheet. Increased flexibility has not impacted our cash back to shareholders, which has increased. All of this will allow us to generate increased financial resources, which we will allocate to the highest return opportunities in order to build long-term value for our shareholders.

Now I'll return the meeting to Peter to wrap us up. Peter?

Peter S. Swinburn

Okay, thanks, Stewart. In our quarterly earnings, we outlined some difficult year-over-year comparisons facing us this year in 2012. These are largely driven by increases in our pension costs and also a 53rd week comparison. The underlying health of the business, however, will be determined by our ability to grow the revenue and margin lines. The only way that we will do this is by investing behind our core brands, delivering innovation, the like of which you've seen today, and leveraging our above-premium portfolio and scaling our existing businesses in emerging markets. We've tried to give you a flavor of all of that this afternoon.

Our primary focus remains on the first of these 3 pillars as we continue to invest in our core brands and fill our innovation pipeline in our core markets. But to maintain the long-term health of the business, we will continue to accelerate our growth in emerging markets and capitalize on smart M&A opportunities as they arrive. We have confidence that these growth strategies, paired with disciplined cash use and cost management, will drive revenue, profit, cash flow and long-term value for our shareholders. So with that as an overview of our priorities and focus, we would now like to open up the meeting, take your questions, including our business leaders here with us today.

But before asking a question, can I ask that you put your hand up and wait for the microphone to arrive, so that the audience listening in on the web will be able to hear the questions as well. Thanks very much.

Question-and-Answer Session

Unknown Analyst

So, Stewart, you outlined the historical benefit you've gotten from cost-cutting over the last few years which has driven the pretax income. Can you give us some guideposts or magnitude going forward for how much you expect from contribution from cost-cutting?

S. F. Glendinning

Well, I think one of the things to have a look at is, obviously, look at that chart and you see the extent of the cost savings. We wish all of that had gone to the bottom line. As a matter of fact, a lot of it has been used to offset some of the more challenging times. So for me to look forward and tell you exactly what's going to hit the bottom line, I would say, is a bit challenging. Having said that, relative to our existing programs between some of our -- between our cost-savings goals in MillerCoors, so we've got still some runway to go in 2012 and, specifically, in RFG2. We've got another $24 million of cost savings coming up this year. Also, I would say relative to the cost line, which you might refer back to as our last quarterly conference call in which we did give the COGS guidance for this year, and I would say that's probably a good place to start. Any of our costs savings will be reflected in there.

Unknown Analyst

Okay. And it doesn't sound like there is larger discrete programs going forward that you think you'll be able to realize from a cost-saving standpoint.

S. F. Glendinning

Well, I wouldn't say that. I did say during the presentation as we go through this year and wrap up RFG2 and give you some guide to what we think the future is looking like. I think as a practical matter, we've had some debates about whether that's very helpful to you than not to give you a number, because unless you see that number translate directly to the bottom line, it's just a number. I think what -- again, I'd go back to what I said around COGS and some of our guidance around cost. We did give you some guidance for the corporate cost. We gave you some COGS guidance, so that you can get a more specific idea of where we think our individual line items are going to turn out. If you'd like more than that, I'd be happy to pick it up during the discussion time.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

I think you've said a number of times increased investments behind your core brands this year. So just if you can help us, what sort of magnitude are you thinking about in terms of step up in investments as it relates to this year? Are you thinking about this as being sort of resetting a base and off of that base, you can see stronger growth behind your brands going forward? And then separately on Coors Light Iced T, just curious why Canada and not U.S.?

Peter S. Swinburn

Okay, so the amount of marketing spent on -- I think we talked about this at the fourth quarter. And I think we give you a number then that actually said it would be a minimum of $30 million extra. It's difficult to give you a top number because a lot of this will depend on how the brands perform, especially the new innovations. But an absolute minimum of $30 million. It might be higher than that, depending on how individual innovations perform, but also how we manage to get maybe more things to market as well. Dave, do you want to take the one on Iced T?

David Perkins

Yes, I'll certainly talk about the Canadian portion of it. So we've done a fair amount of work in Canada on the opportunity. We've seen strong consumer interest in the refreshment space and in flavored beers. And it gives us a lot of confidence that there's a good opportunity here. It builds nicely off the Coors Light brand. Coors Light is a very healthy brand in Canada, the #1 brand, and clearly stands for refreshment with the consumers, so Iced T is a natural extension of that. Leading in Canada works well for us given our portfolio needs and our opportunities for this year. I'm sure that Tom will be watching with interest.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

And then just, Stewart, on the cash flow guidance for this year, to clarify, is there a cash swap settlement that is included in that number?

S. F. Glendinning

I'm sorry, Judy, is there a...

Judy E. Hong - Goldman Sachs Group Inc., Research Division

The settlement of the cash swap that is a...

S. F. Glendinning

Is the settlement of the cash -- no, that's not. That is not part of that number.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Is there a about a hundred...?

S. F. Glendinning

So in other words, it'll be a $100 million will come off that number when we have to pay that down. This really looks more like debt than really, a free cash flow item.

Unknown Analyst

A couple of questions. First, just as a clarification when you talked about the change in the bonus scheme to include top line and profit. Is it top line revenue or is it volume?

Peter S. Swinburn

It's revenue, absolutely.

Unknown Analyst

And then in terms of profit, is it EPS or pretax profit?

Peter S. Swinburn

Yes, pretax, yes. That's for the short-term incentive scheme. For the long-term incentive scheme, it's EPS.

Unknown Analyst

Okay. And then in listening to -- just listening to your description over what's evolved over the last few years, Molson Coors has relied a lot on cost savings to drive pretax profit, not need to drive the top line is -- assuming that these are flattish markets, right, the U.K., Canada and the U.S., is it implicit in your goals or in your model that you have to grow market share, volume and value share, assuming the markets continue to be in the trajectory that they're in? Just some color on that.

Peter S. Swinburn

Yes, all of the above, I guess, but certainly value. We got to grow both the volumes and the overall margins. So that's core to what we need to achieve. And I mean, if you look back over the last 3 years, I think 2 -- these things don't sort of turn on a dime. So the innovation program that we've outlined in particular, if you go back maybe 4 years ago, apart from I would say, Tom, the U.S., we really we didn't have a very good innovation pipeline in the system at all. That innovation pipeline now is so full that actually we've got to try and find ways to actually get more of it to market more quickly. So we're feeling very good about that.

Secondly, there's an awful lot of stuff that we've had to do in the organization. So Mark spent most of last year putting in a new SAP implementation. And really that meant we couldn't do anything with our brands for nearly 7 or 8 months. So we cleared a lot of that debris out of the way of the organization. That gives us a pretty free run now to actually concentrate on our core brands, on our innovation. And similarly in the international markets, there's a lot of foundation-laying you've got to do. I mean, Kandy only joined us just 2 years ago. We didn't have an organizational structure. We had no infrastructure. And we didn't achieve that in a period of -- that short period of time, we've gone into Russia. We bought businesses in China, bought businesses in India. We've gone into the Ukraine. We've gone into to Spain. We've gone into Vietnam. We've done all of that. Now we can just put our foot on the brake a little bit and make sure that what we've got, we make work. And so hence, the -- whilst we will still trade in other parts of the world, we'll focus on the markets that will make a substantial difference to us if we get it right. So it's all about focus. Focus on our core brands: Coors Light, Carling Canadian, Miller Lite. Focus on the core growth markets: Russia, India, China, Ukraine. And I think the organization is now in a position to be able to do that. You top that up with innovation around our core brands, which obviously supports the first point, but also to address the fact that someone else is eating our lunch in the alcohol space, and we've got to actually respond to that, hence things like Carling Zest, 67 Sublime, Iced T. So really that's the package, and we drive the whole organization behind that.

S. F. Glendinning

I'd just add just a couple of comments. Just to understand the balance between those things. As I mentioned during my presentation, profit is absolutely the primary driver of the short-term incentive plan. The difference here is that people won't be able to get their full bonus by simply cutting costs. They'll have to deliver the shape of the plan to achieve the absolute target, which to me is a much harder standard to meet than just having a single bottom line.

Unknown Analyst

Can you just touch on the pricing environment. I think on the fourth quarter call, in the U.K. you said COGS actually are up high single digits with about 1/2 of that from input cost inflation. We saw aggressive pricing in the fourth quarter. I don't think we've seen pricing come through, at least in take-home channel. And then in Canada, you had mid-single-digit COGS inflation. I think ex the NAB contract, sort of, low-single digits. Can you just talk about the environment and whether you're going to be able to get enough pricing to offset input cost inflation.

David Perkins

I'll talk about Canada first then. The pricing environment has been competitive, no question, across the country in the fourth quarter. We did see a fair amount of activity. Within that, though, we've seen progress in pricing. So we have seen movement up over the last 3 months in each of our major markets. So I would say overall, the environment is one where we are seeing prices coming up, and we're seeing continued short-term promotional activity. And that's that not unusual, I don't think, in our environment. But overall, I feel reasonably good actually about what I've seen in recent months, just recognizing that consumers are continuing to respond to the promotional activity.

Unknown Executive

From a U.K. perspective, I think I talked in the fourth quarter call, we've had about 17 quarters of pricing growth. The last couple of quarters, that's principally been mix driven and net pricing was actually down slightly. We took price in the beginning of 2012, and all of that has gone through. So I think price and managing our margin, ensuring that we're driving value ahead of volume, where necessary, has just become part of the way that we do business in the U.K. The pricing environment itself has probably got more competitive in the last 12 months. And you've seen some of the performance numbers from the major multiple grocers in the U.K. They're clearly finding the whole trading environment tough from a consumer disposable income perspective. So some of that comes back against the suppliers. And customer consolidation continues to be one of the challenges that we deal with. So I don't see the pricing environment getting any better, but I think we've been dealing with it pretty adequately over the last 3 or 4 years in particular.

Unknown Analyst


Unknown Executive

I can't comment on the competition. And when I talk price, I'm talking about our cost price into trade. What happens from a retail price perspective is really up to the retailers themselves.

Peter S. Swinburn

Tom, anything to add?

Tom Long

We demonstrated pretty fundamentally the capability to get -- driving that revenue. We are driving value ahead of volume. And we got that through brand mix and a combination of front-line pricing. The fourth quarter and in our last quarterly discussion for January, we demonstrated our capability to hold that price.

Unknown Analyst

There's been quite a bit of talk about marketing spend. And you sound, I guess, content with your percentage of sales marketing spend, and that it's in line with some benchmarks that you look at. But in the United States, you have a competitor with almost a 50% market share, with almost double the margins. Isn't that an argument for your percentage of sales or your percentage of marketing or marketing as a percentage of sales being much higher than about in line with the average.

S. F. Glendinning

Well, you'd have to really come along and talk about it broadly on an amalgamated basis, a group basis. But I think you if you look at our U.S. cost on a per hectoliter basis. They are much higher, and they reflect the fact that, a, we're smaller, and we don't get as much marketing leverage across our portfolios as ABI does on theirs.

Unknown Analyst

Okay. And then if we can talk about Canada a little bit. And over the last few years and still to this day, there has been a lot of concern about regionals and value brands and those sorts of things. I know the rollout of Keystone had potentially been one of those things that was going to help fight that. Could you give us a progress report on how that's going?

David Perkins

Keystone has done well for us. It's certainly exceeded our expectations, and it goes hand-in-hand with Carling, which actually competes in the value category in Canada as well. The value category is where we have our lowest development, but we have increased share there over the last 2 years consistently, so we're making progress. I think it's important, though, to recognize the way we compete in the market, even with value players is what we're doing in innovation and what we're doing in our mainstream brands, where we're revitalizing our power brands, because what you're trying to do is keep people choosing those brands rather than defaulting to a price offering. And so when you strengthen Canadian, then you strengthen Coors Light. Or when you put innovation in the market like Coors Light Iced T, that helps create interest that stops people defaulting to the value category.

Unknown Analyst

Two questions on the U.S. market. First, can you talk a little bit about what you're seeing in C-stores. General takeaway seems to be that despite rising gas prices, we're seeing slightly higher sales inside the store. And then secondly, going back to the comment about how you have the largest craft volume. Can you talk a little bit about what you're seeing from a retail shelf space standpoint. I think one of the things we're struggling to deal with is, okay, higher penny profit per 6-pack relative to the velocity. How do you think retailers are viewing the penny profit versus the overall velocity, particularly versus premium lights?

Tom Long

Thank you. On the C-store business, you're right. The C-store business has picked up. It's fragile. And I think gas prices would affect that. They have historically. The MillerCoors portfolio is advantaged in C-stores relative to other channels, and so that trend has been important to us. So I think your observation is right. That, that's fragile, and a substantial increase in gas prices could affect that. In terms of retail shelf space, you have to kind of start from the beginning. We have massive new amounts of supply of beer in the American market, 500 new brewers this year, taking the number of brewers up to 1,700. With that kind of supply coming on, naturally, retailers are interested in new items. And so they -- as the most over stored market in the world, driving traffic in a recession is really important, and new items have historically been a way to do it. And so there's naturally a great deal of interest from retailers in all of these new items, whether they're craft or otherwise. The reality is that, you're right, the gross margin per unit is not being offset with velocity. And so retailers, even given their desire for traffic, are having to find that they have to justify the space. We believe that big brands that pull are really important and will continue to be important, and that those brewers who build brands that have pre-sold consumer demand will win. And we believe this dialogue of rational assortment is getting stronger and louder every day, as more and more new brands take up space and don't justify their space. We think that advantages brewers like us, who brew beers with a long-term intent to create pre-sold demand. Beers like Batch 19, beers like Blue Moon and, of course, beers like Coors Light and Miller Lite.

Unknown Analyst

Stewart, just a quick question on the free cash flow guidance. When you look back to the original, kind of, 2011 guidance around the $750 million number plus or minus, and then you talked about the one-time impact in '11, which didn't come to that, and now with this new guidance of $675 million plus or minus 10. I mean the low end of the '11 guidance and the, kind of, high-end of this guidance is kind of the same place. I mean is that, kind of, maybe how should we should think about for fair run rate because -- or are some of these one-time impact potentially going to come back over time? I'm just trying to, kind of -- between last year's discussion and this year's discussion, kind of, the change there, considering some of it was construed as one-time. But it doesn't seem to all be coming back.

S. F. Glendinning

Yes. So insofar as a fair run rate, I won't make any comments relative to guidance around the income piece, which is an important driver. I mentioned it in my presentation. Obviously, that's one of the pieces that we do take into account in our free cash flow. But broadly speaking, I mean, year-over-year, we don't expect to see this thing looking like a yo-yo. I do think that last year we had a 53rd week. We had some unfortunate working capital impacts that weren't expected, hence being out of our range.

Our income was lower than we expected last year. That pushed us down towards the bottom of the range because -- and that was -- obviously, you saw in our fourth quarter call, a discussion of lower incentive comp expense. Relative to this year, I think we've given you a good target. We feel comfortable with it, and we're going to try to get some of that timing back. But if your question is do I expect to see that bouncing back again the following year, at this point, I don't think so. But I did -- that's one other thing to mention.

We do have a strong focus on the balance sheet internally. And working capital is a place that we've got a firm grip on. Having this surprise last year wasn't comfortable for us, and it's not our plan to allow that to happen again.

Unknown Analyst

Just a couple of follow-up questions. The focus of resources on the core brands, aside from total marketing spend being up, is there also resources being allocated from other areas into those core brands?

Peter S. Swinburn

Not excessively. But our focus very much is to make sure that whatever we need to put behind our core brands in terms of resources is there. So if -- I mean, we don't feel this. But if we felt that we didn't have the necessary resource behind those core brands, then, yes, we would move it from less important brands. But at the moment, we're comfortable. As Stewart said, I mean, our expenditure as a percentage of net sales is pretty consistent with most packaged good companies. So with there or thereabouts, the increased marketing expenditure really is to make sure that the innovations that we've got coming to the marketplace have got the necessary fuel to be successful because they -- as our innovation platform program has grown and got bigger, you've got to actually allocate more marketing dollars behind that to give them a fair chance at success.

Unknown Analyst

So the non- -- so we don't have to worry. There's not an over -- or a concern about the non-core brands decelerating while the core gets the focus, I guess.

Peter S. Swinburn

You can lay awake at night worrying about it if you want to, but I'm not.

Unknown Analyst

And then just 2 follow-up questions relative to the U.S. One -- and I think it's great that you're addressing the other alcohol choices more directly because I think as an industry, the beer industry has done a poor job, in the U.S. especially, of addressing that. I guess, the question though, it comes back to -- since the recession, since 2008, the price gap between beer and spirits has changed, right? Beer has taken -- raised prices more. And so does that price gap at all play into trying to win back share of growth or do you feel like it's more of a marketing, a positioning thing? How do we think about that?

Tom Long

If we try to very broadly look at the root causes of volume decline in beer, in our portfolio, let's leave it with our portfolio, we would put about 1/2 of it down to economy and absolute price rises. And then the other half in terms of just consumer choice that's changing and our ability to catch up and deliver against those occasions. It's really interesting though. Our job is to build brands that consumers want to satisfy their motivations to drink. And well over 60% of the occasions are refreshment occasions or social occasions. And yet, the supply in the market has been on comfort occasions and indulgence occasions. And the retailers have been chasing comfort occasions and indulgence occasions. And the fact of the matter is there's been a dramatic reduction in refreshment beers on display, cases on display, number of displays. And we're seeking with retailers to make sure that we've got balance, both in our portfolio and retailers are having their inventory mix consistent with those motivations or the number of absolute occasions. And we believe when retail gets that right, and brewers get that right, the beer category has got a much better chance to expand right now, than it does right now.

Unknown Analyst

And then just one last follow-up and it's early, I know. But Bud Light Platinum, the market share, looks like they've done pretty well, at least in terms -- on limited distribution in terms of gaining share. Your thoughts in terms of where that volume is being sourced from. And also, do you think that proposition at all is having an impact on spirits and wine?

Tom Long

Yes, it's really -- there's much I could say and much I won't say. And I'd just suggest it's really too early. Third, fourth repeat is really when you get a early read on what these brands can do and where you source from. So I'd watch. We're watching very carefully.

Unknown Analyst

When you think about the U.S. beer market and how it's struggled the last couple of years, the industry overall, what do you think gets it going again to the growth you hope for? Is it simply unemployment, I mean do you need to battle spirits more effectively. Can you just talk about how you help the category again?

Tom Long

Yes, I think that it's a very important question for the industry to think about. And for the U.S. beer business, I think that we have to recognize what is the root cause of decline. And you might say, well, it's not interesting enough brands. You might say it's not enough variety. Well, I can assure you it's not an absence of variety. The U.S. beer business has delivered an extraordinary amount of variety in the last 3 years. The craft explosion has demonstrated that really powerfully. I think what you have to do is have both brands that consumers are aware of that create pre-sold demand as people walk into a store, and you have to have the right kind of assortment. And I think that the U.S. beer business has to offer a brand-oriented approach because it's quite different than wine. If we keep going down the way where the industry is headed now, beer will look more like wine than it does like a branded business. And that's not good for the industry. And I think that there's recognition there that's beginning to occur that really there's some settle down at retail that we need to offer brands that consumers want and brands that really pull and drive pre-sold consumer demand. We need to drive exciting and recurring innovation in the business. And I think you're beginning to see the industry do that. But right now, I think consumer retail is a little out of whack. And you have to get that right.

Peter S. Swinburn

What I would add as well is that we need to make sure that we change the reference point. And though the beer market might be struggling a bit, but the alcohol market is actually growing. And so as I say, somebody else is eating our lunch. And whilst we're not going to move -- make a big, knee-jerk change in that direction, as Tom references, there are need states, and consumer occasions we're obviously not meeting with our existing portfolio. We need to rise to that challenge, whilst at the same time doing everything Tom is talking about, making existing brands relevant, but also getting retailers to understand where their profit flows really come from.

Unknown Analyst

Can I ask a question about the international strategy generally? And this might sound a little strange question, but can you just tell me what we're actually trying to achieve? Are we trying to make a bunch of money? Are we trying to improve our brand portfolio in some way? Are we trying to learn about the beer business around the world? It just doesn't seem like we'll ever be able to be really relevant in any of the important major markets, particularly given our starting point and, secondly, because of the -- maybe the thoughts of the controlling shareholders.

Unknown Executive

Our international strategy, at this point of time, is built around our core brands. So it is built around Coors Light, Carling and Cobra, and taking these international brands and making them really relevant in the premium segment, in the key markets that we've decided we want to go into. While we're doing that, we want to build businesses that, over a period of time, have enough scale within the premium segment that they can start contributing overall to our business within the 5-year timeframe that you spoke about.

So, yes, we're not getting into the international strategy at this point in time, buying large market shares, betting crazy multiples, as has been the approach of some of the competitors. We are looking at it as branded businesses, going into premium segments, into key markets, and then riding the wave of growth as the middle class and the upper-middle class start getting into these segments. So it's a little bit more longer-term strategy, but we believe it's a strategy that will work for us.

Peter S. Swinburn

Yes. I mean just to add to that. It's like everything else in life. You don't start at the end. So there's a number of things we need to do. We need to build our understanding and knowledge of how to operate in emerging markets, which we don't have. We're not going to do that by placing a huge bet in those markets because it's too risky with the shareholders' money, so we're not going to do that. But at the same time we can learn about the markets. We've got Coors Light -- as we define international brands, Coors Light is the fifth biggest in the world and the fastest-growing. It seems to me a pretty good property to have. We've looked at Carling as a great example of not starting at the end. We took Carling into Ukraine. It's the first place we've taken it outside of the U.K., and by any stretch of the imagination, it's been an unbelievable success. That opens up potential for us in Eastern Europe, which maybe we haven't thought about before. So as I say, you just don't start at the end. But certainly it's a brand-building exercise, and it's a revenue-generating exercise.

Okay. Looks like we've worn you out. So why don't we go and try some Coors Light Iced T, I think, in the room behind us. And then we can continue these discussions. Thanks very much everybody.

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