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

Nov. 6.07 | About: Molson Coors (TAP)

Molson Coors Brewing Company (NYSE:TAP)

F3Q07 Earnings Call Follow-up

November 6, 2007 3:00 pm ET

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

Operator

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

Dave Dunnewald

Thanks, Matt. Hello and welcome, everybody. On behalf ofMolson Coors Brewing Company, thank you for joining us today for our thirdquarter 2007 earnings follow-up conference call. Our goal in this call is toaddress as many additional earnings related questions as possible following ourregular earnings conference call with Leo Kiely and Tim Wolf earliertoday. We will use a standard question-and-answer format and we anticipate thatthe call will last less than an hour. So let’s get started.

With me on the call are Scott King, Director of StrategicFinance; Greg Snider, Group Manager of Global Forecasting and Analysis; Mario[Sisneros], Senior Analyst Global Forecasting; Mike Gannon, Vice President andGlobal Treasurer; Mark Ingebritson, Director of Global Accounting and FinancialReporting; and Jay Wells, Vice President of Tax.

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

We do not undertake to publicly update forward-lookingstatements, whether as a result of new information, future events, orotherwise. Regarding any non-U.S. GAAP measures that we may discuss during thiscall, please visit our website, www.molsoncoors.com, for a reconciliation ofthese 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 aboutthe future for Molson Coors Brewing Company. We believe we have the rightstrategy, priorities and people to compete effectively in a dynamic global beerindustry. We will win worldwide and on a local level by building strong brandsand optimizing our brand portfolio. At the same time, we will stay focused onreducing costs to fuel both top line and bottom line growth.

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

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

Now, at the current stock price levels, any book dilution wouldbe minimal or non-existent at this point. But from an economic standpoint, Ithink the most important thing is to remember that the dilution will occur onlyat 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 ofa follow-up.

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

Question-and-AnswerSession

Operator

(Operator Instructions) Our first question comes from KaumilGajrawala from UBS.

Kaumil Gajrawala -UBS

Hey, Dave. Thank you, Matt. A couple of things, just I guesson my question from during the call. First in the U.S. business on theincentive payments, I guess there was a catch-up, given that you hit certainvolume thresholds for the nine months into the year. How should we be thinkingabout 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 youlook at the performance of the U.S. business it’s, certainly from a volumestandpoint and really from -- in some other perspectives, it’s reallyaccelerated during the year and as a result, we in essence adjusted ourincentive -- anticipated incentive for the year and that’s what you see as acatch-up in the third quarter.

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

Kaumil Gajrawala -UBS

Okay, so if we look into fourth quarter, it wouldn’t becatching 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 wholesalerinventories; 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 theinventory levels are in the U.S.and in Canada?

Dave Dunnewald

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

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

Kaumil Gajrawala -UBS

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

Dave Dunnewald

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

Kaumil Gajrawala -UBS

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

Dave Dunnewald

Yeah, and I’m struggling to remember whether that was STRsor 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 beadjusted, correct?

Dave Dunnewald

That’s right. We’ll give you apples-to-apples in the fourthquarter 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 MorganStanley.

Brett Cooper - MorganStanley

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

Dave Dunnewald

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

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

Brett Cooper - MorganStanley

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

Dave Dunnewald

Sorry, which loss?

Brett Cooper - MorganStanley

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

Dave Dunnewald

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

Brett Cooper - MorganStanley

Okay, last question, just on the -- your 17% tax rate in thequarter, what was the driver? I don’t think that’s what you guys were thinkingwhen 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 onwhy that rate, for example, is lower than the anticipated annual rate, eventhough we’ve taken out the one-time items in our reported rate -- I’ll defer toJay Wells on that one.

Jay Wells

The general issue that we deal with handset is you can’tforecast when a government is going to close an audit and therefore, we get totake off some FIN-48 liability. So generally, FIN-48 is just going to addvolatility because it’s an impossibility to forecast governmental actions andit’s mostly FIN-48 that dropped it down below what you thought it would -- justmovement in the FIN-48 liability.

Brett Cooper - MorganStanley

Thanks.

Operator

(Operator Instructions)

Dave Dunnewald

Matt, I will cover one thing while we are waiting to seewhether there’s an additional question. Kaumil did ask about inventories inCanada and I didn’t cover that piece. Our expectation of inventories in Canadaon 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 SACCapital.

Jerry Rivera - SACCapital

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

Dave Dunnewald

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

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

Beyond that though, I guess the question you would have on alonger term basis is do you expect inflation on all the key commodities in theU.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 variouscalls, you get over $120 million of inflation in the U.S. business this yearand I guess from a modeling standpoint, what do you expect going forward?

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

Jerry Rivera - SACCapital

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 wasabout $2 million pretax, and those are both benefits because those currenciesincreased relative to the U.S. dollar. And then there’s a $2 million to $3million give-back in the corporate segment because substantially all of ourlong-term debt is now denominated in Canadian dollars, and so that’s in a sensea natural hedge against our exposure to Canadian dollars through the Canadianbusiness, and as I say in the third quarter, that was worth a little over $2million. That would be a negative.

Jerry Rivera - SACCapital

So 11 inCanada 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 acouple of million in the corporate segment related again to the denomination ofour debt in Canadian dollars, for a net impact in the quarter of positive $11million.

Jerry Rivera - SACCapital

Okay. Thanks.

Operator

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

Bryan Spillane - Bancof America

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

Dave Dunnewald

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

Bryan Spillane - Bancof America

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

Dave Dunnewald

Right.

Bryan Spillane - Bancof America

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

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

Dave Dunnewald

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

Mike Gannon

Dave, while you’re looking for that, I can give just alittle context. This year, it’s really been [packaging] on the canned side andbottles as well, where those input costs are quite substantial. Lookingforward, it becomes more of an energy cost concern based on certainly where oilis today.

Bryan Spillane - Bancof America

Thanks for that. What about the soft commodities? We’veheard from a few brewers over the last week or two about barley costs and justthe soft commodities actually being more inflationary, and maybe that’s morelooking 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 thatthat’s quite a small component of our cost of goods sold, relative to ourpackaging side, for example.

Bryan Spillane - Bancof America

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

Mike Gannon

That’s right.

Bryan Spillane - Bancof America

Okay.

Dave Dunnewald

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

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

Bryan Spillane - Bancof America

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

Dave Dunnewald

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

Bryan Spillane - Bancof 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 customerbase in the Northeast is larger than everything that plant can produce, so itbehooves us to max it out.

Bryan Spillane - Bancof America

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

Dave Dunnewald

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

Bryan Spillane - Bancof America

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

Dave Dunnewald

Yeah, that’s the capacity.

Bryan Spillane - Bancof America

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

Dave Dunnewald

Well, there will be continuing efforts to improve line ratesat the facility, and so there may be some things we can do but I wouldn’texpect dramatic differences there.

Bryan Spillane - Bancof America

And then did you see much of the -- I’m assuming then thisquarter 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 - Bancof America

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

Operator

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

Kaumil Gajrawala

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

Dave Dunnewald

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

Kaumil Gajrawala

Okay, and then the -- how would we break that up? Do we usethe same percentages that you gave us in the press release between COGS andSG&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 bothin the Europe segment and they add up to a total of $11.1 million total forthat segment, exclusive of special items. There was an additional special itemof $3.9 million, but again that’s on a different line.

Kaumil Gajrawala

So we could use that same -- those same weightings as we putthese 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 nofurther questions at this time.

Dave Dunnewald

Okay, great. Thank you, Matt. In closing, I would like tothank all of you for your interest in Molson Coors and for joining us today. Ifyou have additional questions that we did not cover during our time thisafternoon, please call me on my direct line or at the main number here atMolson Coors, which is 303-279-6565. Thank you again and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’sconference. This does conclude the program. You may all disconnect. Have agreat day.

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