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Executives

Dave Dunnewald - Vice President, Investor Relations

Jay Wells - Vice President of Tax

Mike Gannon - Vice President and Global Treasurer

Analysts

Kaumil Gajrawala - UBS

Brett Cooper - Morgan Stanley

Jerry Rivera - SAC Capital

Bryan Spillane - Banc of America

Molson Coors Brewing Company (TAP) F3Q07 Earnings Call Follow-up November 6, 2007 3:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2007 third quarter earnings investor relations follow-up session. (Operator Instructions) I would now like to introduce your host for today’s conference, Mr. Dave Dunnewald, Molson Coors Brewing Company Vice President of Investor Relations. Sir, you may begin.

Dave Dunnewald

Thanks, Matt. Hello and welcome, everybody. On behalf of Molson Coors Brewing Company, thank you for joining us today for our third quarter 2007 earnings follow-up conference call. Our goal in this call is to address as many additional earnings related questions as possible following our regular earnings conference call with Leo Kiely and Tim Wolf earlier 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 Scott King, Director of Strategic Finance; Greg Snider, Group Manager of Global Forecasting and Analysis; Mario [Sisneros], Senior Analyst Global Forecasting; Mike Gannon, Vice President and Global Treasurer; Mark Ingebritson, Director of Global Accounting and Financial Reporting; and Jay Wells, Vice President of Tax.

Now, as usual, I’ll preface our remarks by summarizing our Safe Harbor language. Some of what we discuss this afternoon may constitute forward-looking statements. Actual results could differ materially from what we project today, so please refer to our most recent 10-K, 10-Q, and proxy filings for a more complete description of factors that could affect our projections.

We do not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. Regarding any non-U.S. GAAP measures that we may discuss during this call, please visit our website, www.molsoncoors.com, for a reconciliation of these measures to the nearest U.S. GAAP results.

As Leo mentioned on our regular earnings call earlier today, we are pleased with our progress in the third quarter and we are excited about the future for Molson Coors Brewing Company. We believe we have the right strategy, priorities and people to compete effectively in a dynamic global beer industry. We will win worldwide and on a local level by building strong brands and optimizing our brand portfolio. At the same time, we will stay focused on reducing costs to fuel both top line and bottom line growth.

By way of a follow-up to our earnings call this morning, I would like to offer a little bit of additional perspective on one question that we discussed on that earlier call. When we look at the effects of our convertible notes on our shares outstanding, it is important to look at both the economic and book accounting effects that these shares have in the pre-split price range of $109 to $140 per share. In this range, there is no economic impact and -- excuse me, there is no economic impact and no impact on basic shares outstanding as we described on the call this morning.

However, because of the way the warrant shares are handled and the way the accounting works around convertible shares, in the diluted shares calculation there will be temporary book dilution reflected in our diluted share count when our share price is between roughly $109 and $140 pre-split.

Now, at the current stock price levels, any book dilution would be minimal or non-existent at this point. But from an economic standpoint, I think the most important thing is to remember that the dilution will occur only at a price above the warrant price at maturity, which is about $140 pre-split. So we did want to just provide a little extra perspective around that by way of a follow-up.

So with that, we’d now like to open it up for questions, Matt.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kaumil Gajrawala from UBS.

Kaumil Gajrawala - UBS

Hey, Dave. Thank you, Matt. A couple of things, just I guess on my question from during the call. First in the U.S. business on the incentive payments, I guess there was a catch-up, given that you hit certain volume thresholds for the nine months into the year. How should we be thinking about that over the fourth quarter? And then I want to ask about LIFO.

Dave Dunnewald

The way to think about the U.S. incentives catch-up, if you look at the performance of the U.S. business it’s, certainly from a volume standpoint and really from -- in some other perspectives, it’s really accelerated during the year and as a result, we in essence adjusted our incentive -- anticipated incentive for the year and that’s what you see as a catch-up in the third quarter.

That’s worth several million dollars of catch-up in the third quarter, and so that’s what Bill Waters was talking about earlier, and then you would layer on $2 million or $3 million of additional LIFO accrual adjustment as well.

Kaumil Gajrawala - UBS

Okay, so if we look into fourth quarter, it wouldn’t be catching up -- it would just be a slightly higher rate?

Dave Dunnewald

Yeah, that’s right.

Kaumil Gajrawala - UBS

I’m trying to think about margins for the next quarter.

Dave Dunnewald

Yep, that’s exactly right.

Kaumil Gajrawala - UBS

Okay, and then one more thing is on the wholesaler inventories; your shipments were substantially higher than STRs last quarter, and now it looks like you’ve caught up a bit. Could you help us with where the inventory levels are in the U.S. and in Canada?

Dave Dunnewald

As Bill Waters mentioned on the earlier call, inventories in the U.S. are a little behind where we would want them to be but it’s primarily just keeping up with very robust consumer demand. Beyond that, there may be a modest adjustment in the fourth quarter, say increase in distributor inventories. We definitely want to increase inventories a bit because of the robust growth that our U.S. business has been experiencing, and so we are working hard to get that done.

But as far as big differences between STRs and STWs, that’s unlikely to be a factor in the fourth quarter. The 53rd week is obviously an important adjustment you want to make but beyond that, we don’t expect any additional calendar, year-over-year calendar differences to drive much difference in the fourth quarter.

Kaumil Gajrawala - UBS

Is it fair to just take last year’s, the barrel numbers you gave us for last year and the extra week and then assume our own growth rate and make the adjustment that way, as we forecast next quarter?

Dave Dunnewald

The numbers that we gave you last quarter, I’m struggling to remember whether those were --

Kaumil Gajrawala - UBS

No, last year, for the 2006, you gave barrel numbers for the extra week.

Dave Dunnewald

Yeah, and I’m struggling to remember whether that was STRs or STWs that we gave you. I know it was 330,000 barrels.

Kaumil Gajrawala - UBS

I thought it was shipments.

Dave Dunnewald

Yeah, I think it was shipments as well.

Kaumil Gajrawala - UBS

The STR number you report in the fourth quarter will be adjusted, correct?

Dave Dunnewald

That’s right. We’ll give you apples-to-apples in the fourth quarter on STRs.

Kaumil Gajrawala - UBS

Okay, got it. All right, that’s all I have. Thank you, Dave.

Operator

Our next question comes from Brett Cooper with Morgan Stanley.

Brett Cooper - Morgan Stanley

I was wondering if you could help us out on the loss of the Foster’s contract in Canada, in terms of giving us the scope of how that is going to hit you guys.

Dave Dunnewald

Right. We gave a few key factors, Leo did, as I recall, in the call earlier. Essentially what you have there is a co-packing arrangement that we are running out of Canada for the U.S. market. And as with most co-packing arrangements, it tends to be relatively low margin.

When you essentially take that volume out starting in the fourth quarter of this year, it will tend to increase or obviously decrease your reported volume, has no impact on sales to retail because it wasn’t in there to begin with, and then we’re expecting that it will increase revenue per barrel, because again it is a relatively low revenue per barrel business, and also increase cost of goods per barrel, mainly because of lost fixed cost leverage that is not able to spread as much fixed costs over as much volume.

Brett Cooper - Morgan Stanley

So is the loss of the fixed cost leverage equal to or greater than or less than the profit you are making on co-packing?

Dave Dunnewald

Sorry, which loss?

Brett Cooper - Morgan Stanley

You’re saying that you are going to have an increase in, or your fixed cost leverage is going to decline. I’m just trying to figure out if it’s a net positive or a net negative on your profits, because you obviously were making something on the co-packing arrangement.

Dave Dunnewald

Yeah, to be sure, we’re making something on the co-packing arrangement so obviously it’s a negative for profit. The key is how much and how quickly do we adjust our cost structure to minimize that fixed cost leverage issue, and we closed the Edmonton brewery as part of that, so obviously the -- or I would say the Canada team is moving quickly to adjust to that eventuality. In fact, it wasn’t long after the announcement of the Foster’s arbitration ruling that the Canada team made the decision to close the Edmonton brewery.

Brett Cooper - Morgan Stanley

Okay, last question, just on the -- your 17% tax rate in the quarter, what was the driver? I don’t think that’s what you guys were thinking when you headed into the third quarter, or at least it didn’t seem like it.

Dave Dunnewald

As you know, our tax rate is relatively volatile these days, partly because of the new FIN-48 rules. As far as some of the puts and takes on why that rate, for example, is lower than the anticipated annual rate, even though we’ve taken out the one-time items in our reported rate -- I’ll defer to Jay Wells on that one.

Jay Wells

The general issue that we deal with handset is you can’t forecast when a government is going to close an audit and therefore, we get to take off some FIN-48 liability. So generally, FIN-48 is just going to add volatility because it’s an impossibility to forecast governmental actions and it’s mostly FIN-48 that dropped it down below what you thought it would -- just movement in the FIN-48 liability.

Brett Cooper - Morgan Stanley

Thanks.

Operator

(Operator Instructions)

Dave Dunnewald

Matt, I will cover one thing while we are waiting to see whether there’s an additional question. Kaumil did ask about inventories in Canada and I didn’t cover that piece. Our expectation of inventories in Canada on the fourth quarter are really for minimal change or impact on our numbers. We are roughly where we want to be there, in a nut shell.

Operator

We do now have a question. It is from Jerry Rivera from SAC Capital.

Jerry Rivera - SAC Capital

Just had a quick question on the U.S. GAAP between STRs and STWs. Do you pay sales on STRs and did the gap there potentially have something to do with the lower-than-expected margin?

Dave Dunnewald

Actually, our sales reflect sales to wholesale, not sales to retail, so no, there would be no effect there, at least that I can see.

The margin difference was a number of factors that Bill Water went through on the earlier call. Primarily inflation -- we did have those catch-up items that he mentioned, which are pretty important and not as ongoing, perhaps at least for the balance of this year, as we would expect inflation to be. Specifically, those were the U.S. incentives catch-up as well as LIFO adjustment.

Beyond that though, I guess the question you would have on a longer term basis is do you expect inflation on all the key commodities in the U.S. business to be going at the same range they’ve been going this past year. Looking at the run-rates that we’ve given and the guidance on the various calls, you get over $120 million of inflation in the U.S. business this year and I guess from a modeling standpoint, what do you expect going forward?

Those are the factors that we’ve looked at that may have challenged, or did challenge the third quarter, particularly in the U.S. business from a margin perspective.

Jerry Rivera - SAC Capital

And what was the earnings benefit from stronger currency, both in Europe and in Canada?

Dave Dunnewald

In Canada it was about $11 million pretax. In Europe, it was about $2 million pretax, and those are both benefits because those currencies increased relative to the U.S. dollar. And then there’s a $2 million to $3 million give-back in the corporate segment because substantially all of our long-term debt is now denominated in Canadian dollars, and so that’s in a sense a natural hedge against our exposure to Canadian dollars through the Canadian business, and as I say in the third quarter, that was worth a little over $2 million. That would be a negative.

Jerry Rivera - SAC Capital

So 11 in Canada and what was Europe again?

Dave Dunnewald

Yeah, let me finish the equation for you; it was a positive $11 million in Canada, a positive $2 million in the U.K., and then minus a couple of million in the corporate segment related again to the denomination of our debt in Canadian dollars, for a net impact in the quarter of positive $11 million.

Jerry Rivera - SAC Capital

Okay. Thanks.

Operator

Thank you. Our next question comes from Bryan Spillane with Banc of America.

Bryan Spillane - Banc of America

Good afternoon, Dave. Just a couple of short questions, one just a follow-up on what Jerry just asked, and maybe I missed this as you were going through, but were your marketing expenses accrued to the higher STR number relative to the sales to wholesalers?

Dave Dunnewald

Ah, sales curve accounting -- let’s see, our marketing dollars -- I could use help from one of the accounting types. They are spread over STRs or STWs? Scott King says STWs, so -

Bryan Spillane - Banc of America

Okay, all right. So the marketing accrual would have matched the shipments, not the STR?

Dave Dunnewald

Right.

Bryan Spillane - Banc of America

Okay, and then Dave, when we look at the cost of goods per barrel, and maybe if you could talk about this -- I don’t know if it’s helpful for you to talk about it separately between U.S., Canada and the U.K., or just in the aggregate, but if you can give some indication or give us some feel for which -- what are the -- which commodities were giving you the most pressure and which were giving you the least? I guess we’re trying to get a sense for whether or not the soft commodities especially are pressuring you incrementally here in the second half.

I understand the dynamics that you have. You’ve got cost savings that are offsetting some of the costs of the actual commodities. I’m trying to get a sense for what the underlying commodity inflation has been.

Dave Dunnewald

No, that’s a fair question. When we look at specifically cost of goods inflation, because that’s really the main one we would track in any case, you are looking at -- let’s see, I mentioned over $120 million of inflation on the year. In the quarter, we’re talking -- let’s see. I think I can get you a little more specificity --

Mike Gannon

Dave, while you’re looking for that, I can give just a little context. This year, it’s really been [packaging] on the canned side and bottles as well, where those input costs are quite substantial. Looking forward, it becomes more of an energy cost concern based on certainly where oil is today.

Bryan Spillane - Banc of America

Thanks for that. What about the soft commodities? We’ve heard from a few brewers over the last week or two about barley costs and just the soft commodities actually being more inflationary, and maybe that’s more looking into ’08 than it is right now, but any insight or context you can give, that would be helpful.

Mike Gannon

Sure, yeah, absolutely it becomes a bigger factor next year, given what brewing materials are doing in general. But just keep in mind that that’s quite a small component of our cost of goods sold, relative to our packaging side, for example.

Bryan Spillane - Banc of America

Okay, so for now, right now, the most inflationary pieces are really the packaging and then secondary is energy?

Mike Gannon

That’s right.

Bryan Spillane - Banc of America

Okay.

Dave Dunnewald

Yeah, to put a little more around that, Bryan, the inflation in the third quarter was roughly, in the U.S. business, was roughly a fourth of what we are looking at for the year, so that’s not abnormal. And it leans heavily toward packaging materials and especially aluminum. In fact, over two-thirds of the inflation that we had in the third quarter was packaging materials, and so you can tell that roughly half-ish would be in the area of aluminum.

And then as far as soft commodities, fuel, corn, barley, those are all important factors but as you can tell, not nearly as large as packaging materials but somewhat more volatile on a quarterly basis.

Bryan Spillane - Banc of America

And then, can you give us some view or some idea about how much -- you were running the Shenandoah Brewery at full capacity in the third quarter and assuming that you shipped a lot of beer out of that brewery, how that impacted utilization rates in Denver, and I guess what I’m after is -- or in Golden -- I guess what I’m after is at this point, you haven’t really given up the Golden brewery yet. You are brewing out of Virginia and so there’s some efficiencies that sort of haven’t quite been realized yet because both footprints are still there. Is that fair?

Dave Dunnewald

I think it’s fair to assume that there’s some of that. I think it would be hard for me to put a number on it.

Bryan Spillane - Banc of America

Yeah, that’s fine. But you did run Shenandoah at all out, you weren’t holding back at all?

Dave Dunnewald

That’s right. It’s our most efficient plant and our customer base in the Northeast is larger than everything that plant can produce, so it behooves us to max it out.

Bryan Spillane - Banc of America

Any number, like what percentage of your volume went through that brewery in the quarter? Any sort of indication?

Dave Dunnewald

Yeah, it’s in the range of slightly over a third of the total U.S.

Bryan Spillane - Banc of America

Okay, and that’s been roughly in line with what you thought?

Dave Dunnewald

Yeah, that’s the capacity.

Bryan Spillane - Banc of America

Okay. And as you move into the fourth quarter, was there anything that held you back? Could you have produced more beer there? I’m just trying to get a sense for whether or not it’s the first full quarter that you are running the plan and were you doing anything to sort of -- that would have impeded you from even brewing more beer there?

Dave Dunnewald

Well, there will be continuing efforts to improve line rates at the facility, and so there may be some things we can do but I wouldn’t expect dramatic differences there.

Bryan Spillane - Banc of America

And then did you see much of the -- I’m assuming then this quarter also would have begun to reflect some of the transportation benefits, transportation cost benefits?

Dave Dunnewald

Absolutely, yes, partially offset by increased depreciation.

Bryan Spillane - Banc of America

Okay. All right. I think that’s all I’ve got. Thanks, guys.

Operator

(Operator Instructions) Our next question is a follow-up from Kaumil Gajrawala.

Kaumil Gajrawala

Just quickly again I wanted to ask about pension. I believe Bryan asked about it earlier this morning but the $11 million catch-up, I think you said $2 million to $3 million going forward, that’s incremental to the current cost base, correct?

Dave Dunnewald

Let’s see -- the go-forward view is actually only about $1.5 million a quarter of additional expense. So other than that, all of the $3 million is a -- you could call it a catch-up.

Kaumil Gajrawala

Okay, and then the -- how would we break that up? Do we use the same percentages that you gave us in the press release between COGS and SG&A?

Dave Dunnewald

Yeah, we gave you the actual numbers, which was I believe $6.5 million in MG&A and $4.7 million in cost of goods, and those are both in the Europe segment and they add up to a total of $11.1 million total for that segment, exclusive of special items. There was an additional special item of $3.9 million, but again that’s on a different line.

Kaumil Gajrawala

So we could use that same -- those same weightings as we put these numbers in going forward?

David Whitehouse

Yes, that’s right. Basically pension expense follows people, and that’s the way it weighted out for this particular group of retirees.

Kaumil Gajrawala

Okay, got it. All right, perfect. That’s all for me.

Operator

(Operator Instructions) Mr. Dunnewald, I’m showing no further questions at this time.

Dave Dunnewald

Okay, great. Thank you, Matt. In closing, I would 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 me on my direct line or at the main number here at Molson Coors, which is 303-279-6565. Thank you again and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Have a great day.

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Source: Molson Coors F3Q07 (Qtr End 9/30/07) Earnings Call Follow-up Transcript
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