Molson Coors Q1 2008 Earnings Call Transcript

| About: Molson Coors (TAP)

Molson Coors Brewing Company (NYSE:TAP)

Q1 2008 Earnings Call

May 6, 2008 12:00 pm ET

Executives

Leo Kiely III - Chief Executive Officer, Director; CEO of Coors Brewing unit

Timothy V. Wolf - Global Chief Financial Officer

Peter Swinburn - President, Chief Executive Officer of Coors Brewing Company

Mark Hunter - President and Chief Executive Officer - Coors Brewers Limited

Kevin T. Boyce - President and Chief Executive Officer, Molson Canada

Analysts

Mark Swartzberg - Stifel Nicolaus

Anthony Bucalla - Credit Suisse

Bryan D. Spillane - Banc of America Securities

Judy Hong - Goldman Sachs

Christine Farkas - Merrill Lynch

Kaumil Gajrawala - UBS

Operator

Good day, ladies and gentlemen, and welcome to the Molson Coors Brewing Company 2008 first quarter earnings conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Mr. Leo Kiely, President and Chief Executive Officer of Molson Coors Brewing Company. Sir, you may begin.

Leo Kiely III

Thanks, Matt. Hello and welcome everybody and thanks for joining us today. With me on the call are: Tim Wolf, Kevin Boyce, Peter Swinburn, Mark Hunter, the CEO of our Coors Brewers Limited business; Dave Perkins, President of Global Brand and Market Development; Sam Walker, our Chief Legal Officer; Mike Gannon, our global Treasurer; Marty Miller, our global Controller; and Dave Dunnewald, Vice President of Investor Relations.

This morning Tim and I will take you through some highlights of our first quarter 2008 results for the Molson Coors Brewing Company, along with some perspective on 2008, and then we will open it up for questions.

The first quarter of 2008 was a very strong quarter for our company, as we continued to achieve solid top-line and bottom-line performance. Let's start with some global highlights for the quarter: we grew Coors Light sales to retail more than 5% globally in the first quarter.

We achieved net sales growth of more than 10%, driven by brand strength, positive pricing, and the benefit of favorable foreign currency. We grew net pricing in all three of our major markets on the strength of our brands and the discipline of our sales teams.

We captured $29 million of cost reductions as part of our Resources for Growth program in the quarter. These cost reduction programs allowed us to offset more than 90% of our cost inflation in the quarter. We continued to invest with discipline and at a high level in our brands and our sales capabilities in each of our businesses.

We used cash on hand to pay down more than $180 million worth of high-rate senior notes during the quarter. And excluding special and other one-time items, we more than doubled our consolidated income from continuing operations in the first quarter of 2008 to $59.1 million after tax. This substantial increase in underlying earnings was driven by strong sales growth by our brands, positive pricing, and cost savings that exceeded our goals, along with a lower tax rate.

With our first quarter bottom-line results, we also achieved the profit target for our primary long-term incentive program. This performance-share program was designed to reward employees if the company met a stretch target for trailing four-quarter profit within a two-to-five-year period.

Due to the very strong performance of the company in the past year, we achieved this target in the first quarter of this year, which is the third year of the program. As a result, we recorded $25 million of accelerated expense for the program that was originally planned to flow over the balance of 2008. In fact, our earnings per share would have been $0.10 higher without the accelerated expense related to this program in the quarter.

It is a substantial accomplishment for this organization to grow underlying earnings 136% in a seasonably small profit quarter, even though nearly half of the total expense for this multi-year incentive program fell in the first quarter of this year. This speaks to the strength and the quality of our company's earnings performance in the quarter.

On the whole, we are pleased with our strong start to 2008. We are building a winning culture based on strong talent and a clear vision of becoming one of the best-performing beer companies in the world. We have more work to do but we are clearly moving in the right direction and we have made good progress to date.

At this point, I'll turn it over to Tim to review first quarter financial highlights and trends and then we'll provide some perspective on the balance of 2008, so Timothy.

Timothy V. Wolf

Thanks, Leo, and hello to everybody out there. I'll start with first quarter financial highlights.

In the quarter, we grew total-company volume 2.8% and net sales 10.4%. Gross profit increased $63.2 million, driving more than a full percentage point improvement in gross margin. Our operating margin of 6.3% excluding special items also increased more than a full percentage point from a year ago. On the bottom line, we achieved underlying after-tax earnings of $59.1 million, or $0.32 per diluted share, in the first quarter, which is up 136% from a year ago.

We will discuss our earnings performance today primarily in terms of underlying earnings, which is a common performance measure that excludes special and other one-time items from our U.S. GAAP results. Also, unless otherwise indicated, all of the financial results we share with you today will be in U.S. Dollars.

Our first quarter underlying earnings exclude restructuring costs in the U.K., brewery closure costs in Canada, and expenses related to our proposed U.S. joint venture, partially offset by a gain on the sale of our company-owned distributorship in Boise, Idaho. We also exclude one-time debt extinguishment costs of $12.4 million, which we used to repurchase $180 million of our 6-3/8% senior notes that were due 2012. This debt tender made good sense because we had cash on hand from year end and saw good value in paying down high-cost debt, especially with short-term rates so low.

These adjustments to our U.S. GAAP results are described in more detail in the earnings news release we distributed this morning.

Net foreign exchange improvements increased our total-company pretax profit by approximately $4 million in the first quarter on an underlying basis, driven by the appreciation of the Canadian Dollar versus the U.S. Dollar.

Before I go through our business segment results, I want to share some changes in the way we are reporting our results this year.

With the appointment of Dave Perkins to President of Global Brand and Market Development, results for our businesses in Asia, Latin America and Continental Europe are now included with our Corporate results in a new non-reportable segment called Global Markets and Corporate. Prior year results have been reclassified the same way for comparability.

As a result, our U.S. segment now includes only U.S. and Puerto Rico results, and the Europe segment has been renamed and now includes only the U.K. and Republic of Ireland.

In Canada, the new Modelo/Molson joint venture created at the beginning of this year and the loss of the Foster's U.S. production contract change our reported results in two ways: first, Modelo/Molson JV results are being reported under the equity method of accounting. When comparing current year results to prior year, this change will have the effect of reducing our reported sales volume, reported net sales per barrel, reported cost of goods per barrel and reported marketing expense.

Our 50% share of the joint venture earnings are included in Canada cost of goods sold. In addition, sales to retail and market share results will now include sales of Modelo products for all of Canada, where prior-year results did not include provinces west of Ontario.

Second, the loss of the Foster's U.S. production contract will drive lower reported sales volume and higher revenue and cost of goods per-barrel for the first three quarters of 2008. The loss of this contract has no effect on our STRs, since the Foster's U.S. production volume has never been included in our Canadian STRs.

These reporting adjustments reflect recent changes in the structure of our company. I'll provide more detail on the impact of these changes with the discussion of each business.

In segment performance highlights, starting with Canada, underlying pretax income of $64.1 million in the first quarter was nearly 42% higher than a year ago, driven by positive net pricing and a $9 million benefit from favorable foreign exchange.

Our Canadian sales to retail, or STRs, in the first calendar quarter ended March 31st increased 2.5% versus a year ago, driven by strong growth of our strategic brands and the addition of Modelo brands to our portfolio in Western Canada.

Coors Light continues to lead strategic brand growth with a double-digit increase in the quarter. Creemore, Carling and our partner import brands also maintained their double-digit growth rates, while Rickard's grew at a high-single-digit rate. Molson Canadian experienced only a slight volume decrease compared to the prior year.

On a comparable basis, excluding the addition of Modelo brands in Western Canada, our STRs grew 0.7% year over year.

Total Canadian beer industry sales to retail grew an estimated 1.3% in the calendar first quarter. Our Canada market share increased approximately one-half share point compared to prior year due to the addition of the Modelo brands in the West. Excluding the addition of the Modelo volume in the West, our first quarter Canada market share declined approximately one-quarter of one share point.

Our Canada sales volume totaled 1.5 million barrels for the fiscal first quarter ended March 30th, which was a decrease of 8.6% from a year ago. This decline was attributed entirely to two factors: first, the termination of the Foster's contract resulted in a 6% decline in current year volumes; second, the elimination of Canada sales volume for Modelo products, which drove a 3% decline compared to prior year, which also included sales volume for Eastern Canada. Excluding these two factors, comparable Canadian sales volume increased slightly over prior year.

Net sales per barrel increased 6.4% in local currency, with approximately 3% of the increase driven by positive pricing. The remaining increase is due to the positive effect of the Foster's contract termination on our sales mix.

Cost of goods sold per barrel increased 2% in local currency in the first quarter due to 5 percentage points of commodity inflation, partially offset by a 3 percentage point decrease from cost savings under our Resources for Growth initiatives, and we’ll talk more about that in a moment.

Marketing general & administrative expense in the quarter decreased approximately 5% in local currency due to lower overheads from cost savings initiatives and amortization expense, along with the elimination of all Modelo brand costs, which are now managed by the joint venture. These savings were partially offset by the Canada portion of accelerated expense for long-term incentives.

In the U.S., we continued to drive very strong growth on both the top-line and bottom line. As a result, underlying pretax income grew 36% in the first quarter to $61.9 million. Our performance represents a significant improvement versus a year ago in our ability to convert sales momentum into earnings growth as pretax margin improved by nearly two full percentage points.

This substantial profit increase in the U.S. was the result of solid brand building and sales execution, positive pricing, volume leverage, cost reductions, and lower commodity inflation than we saw last year. The U.S. business delivered these strong results despite the accelerated expense for long-term incentives. Excluding incremental incentive costs, U.S. underlying pretax income would have increased more than 60%.

Looking at U.S. highlights, U.S. sales to retail, which includes Puerto Rico, increased 6.6% and we grew market share significantly in the first quarter. For the 50 states excluding Puerto Rico, for the 50 states sales to retail increased 7.1%. This increase was driven by mid-single-digit growth of Coors Light, and double-digit growth by Blue Moon, Keystone Light and Coors Banquet.

Each of our four largest brands achieved accelerated sales and market-share growth trends in the quarter. Equally important, the strength of our U.S. portfolio spanned the country, with sales-to-retail growth in 47 out of 50 states and in all major channels. In 15 states, our portfolio grew at double-digit rates. We also continued to expand distribution, with about 30,000 new placements of Coors, Coors Light and Keystone Light in the quarter.

U.S. volume, including Puerto Rico again, to wholesalers grew 7.4%. Net sales per barrel increased 3.4% in the first quarter, driven by 2.9 percentage points of positive net pricing, along with increased distributor fuel surcharges and new commercial sales from our U.S. can joint venture.

Cost of goods per barrel increased 1.6% in the quarter, driven by higher transportation and packaging material costs and tornado damage at our Memphis redistribution center. In addition, our Memphis redistribution center was damaged, as I say, by a tornado and that damage caused a one-time 0.7% increase to cost of goods sold per barrel. These increases were partially offset by cost savings.

U.S. marketing and G&A expense increased 9.6% in the first quarter, driven by accelerated expense from our long-term incentive plan. Our U.S. team continued to exceed its cost-reduction targets, as overall cost savings offset essentially all of the U.S. inflation in the first quarter.

Our U.K. business reported a $2.0 million pretax loss on an underlying basis. An increase in off-premise volume and supply chain savings, partially offset by higher pension costs and lower on-premise volume, drove a $700,000 improvement versus a year ago.

Our U.K. owned-brand volume increased 1% in the quarter, driven by a 17% increase in the off-premise channel. This strong volume growth was due to selective but more-visible promotional features, the Easter holiday falling in the first quarter, and customers buying in advance of a 9% increase in the beer excise tax.

On-premise volume declined approximately 8% as a result of the smoking bans enacted last year and challenging market conditions. The U.K. volume performance in the first quarter resulted in an increase in overall market share and in both the on- and off-premise channels.

Net sales per barrel increased 4% in local currency, with about half due to higher pricing and half due to our acquisition of the Camerons on-premise distribution business in the middle of last year. In a challenging market, we achieved our fifth consecutive quarter of year-on-year growth in owned-brand pricing.

Cost of goods sold per barrel in local currency increased 4.6% in the first quarter, with approximately three percentage points of this change related to factored brand sales, including the Camerons acquisition. The balance of the increase was driven by higher pension costs and cost inflation, offset in part by cost savings initiatives.

Marketing, G&A expense in the U.K. increased 3.5% in local currency as a result of higher pension expense and overhead costs related to the Camerons business, again partially offset again by continued cost savings. Marketing costs were largely unchanged.

In Global Markets and Corporate, MG&A totaled $37.3 million in the first quarter, including Corporate G&A expense of $28.9 million. Corporate G&A increased about $8.3 million in the quarter, driven by higher long-term incentive plan expense this year.

Corporate net interest expense improved $2.5 million from a year ago, meaning lower, because of the debt restructurings we completed last year along with lower net debt balances this year. We achieved this reduction in net interest despite $5 million of additional interest expense due to unfavorable foreign exchange rates, primarily caused by a stronger Canadian Dollar.

The underlying loss for Global Markets and Corporate was $58.3 million pretax, which is a 13.0% increase as a result of the additional incentive plan expense in the first quarter this year, we’ve mentioned repeatedly.

Moving beyond operating performance and unit performance, our first quarter effective tax rate was negative 12% on a reported basis and positive 2% on an underlying basis. These rates are below our expected annual rate for 2008 because of the release of unrecognized tax benefits in the quarter as we closed or effectively settled some tax years.

The first quarter is generally a cash-use quarter because of the seasonality of the beer business. Free cash flow for the first quarter reflected a net cash use of $167 million, which was made up of $126 million of operating cash use, plus $28 million of proceeds from asset sales, less capital spending of $69 million. This free cash flow was $111 million improved versus the first quarter of 2007 due to higher net income and asset sales and lower capital spending this year versus last.

Total owned debt at the end of the first quarter was $1.96 billion, excluding approximately $110 million of non-owned joint venture debt. Cash and cash equivalents totaled $119 million at the end of the quarter, resulting in owned net debt of $1.84 billion.

Now I'll preface the outlook section as usual by paraphrasing our Safe Harbor language. Some of what we talk about now and in the Q&A 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 the call, please visit our website, www.molsoncoors.com, for a reconciliation of these measures to the nearest U.S. GAAP results.

Looking forward, we continue to anticipate 2008 corporate net interest expense of approximately $95 to $100 million on a foreign-exchange-neutral basis. This approximate $13 million reduction from last year is attributable to the debt repayments and restructurings we have undertaken in the past year to lower costs and strengthen our financial foundation.

We still expect full-year 2008 corporate G&A expense of approximately $110 million, plus or minus 5%, which is in line with last year.

Turning to our effective tax rate, we currently anticipate that our full-year 2008 underlying tax rate will be in the range of 14% to 18%, and that excludes special and other one-time items, and that assumes no further changes in tax laws. With a rate of 2% in the first quarter, this implies an underlying tax rate in the range of 15% to 19% for the balance of this year. We expect our 2008 rate to be lower than our long-term range of 22% to 26% because of the release of unrecognized tax benefits in 2008.

Our capital spending outlook for 2008 remains approximately $280 million, and that excludes self-funded capital spending by our consolidated joint ventures.

We are on track to achieve our 2008 free cash flow goal of $550 million. Note also the completion of the Miller/Coors JV in the U.S. would likely change our outlook in some or all of these areas.

Now, highlights of our cost-reduction initiatives, in our first quarter we captured an incremental $29 million of cost savings as part of our three-year, $250 million Resources for Growth cost reduction initiative. We are on target to achieve our 2008 goal of at least $77 million of additional cost savings and we have already delivered more than one-third of this annual goal in our first quarter. Equally important, we are confident that we will be able to achieve our goals for this 3-year program.

At this point, let me turn it back to you, Leo, for a look ahead at 2008 on our other businesses

Leo Kiely III

Thanks, Tim. In 2008, we remain focused on building strong brands and reducing costs in each of our businesses. To keep our brand momentum going this year -- in Canada, we are building momentum in our strategic brands by rolling out innovative new packages, promotions and advertising creative in the year. Coors Light is receiving strong investment behind new ad creative and our Cold Certified campaign.

We expect the solid growth trends to continue on our super-premium owned brands -- that’s Rickard's and Creemore -- including the continuation of our highly successful national rollout of Rickard's White. We will also focus on improving the performance of our Molson trademark brands throughout 2008 by introducing new advertising and innovation for Molson Canadian, Export and Dry.

Our super-premium partner-import brands continued their double-digit organic growth in the first quarter. Our new long-term joint venture to import, distribute and market the Modelo beer portfolio across Canada further strengthens that portfolio and provides enhanced share growth opportunities for us in Western Canada.

From a trade promotion standpoint, Quebec has started the year with considerable competitive activity. We remain committed to growing our strategic brands while ensuring that our portfolio remains competitive on a market-by-market basis.

In the U.S., our strong volume and share growth continues, as does our delivery of substantial cost reductions. Coors Light, Keystone Light and Blue Moon will remain our national focus brands, and we intend to continue to leverage the momentum behind Coors Banquet to further expand distribution. We are also implementing programs to improve sales trends for Killian's and Molson Canadian. Our brands are strong and primarily play in healthy segments of the U.S. beer industry.

We will continue to drive sales and profit by bringing our Rocky Mountain Cold Refreshment to more consumers and by extending our successful General Manager sales structure to the entire country by the end of this year.

Fully half of our U.S. growth last year on our largest brands was through successful increased distribution and we have plenty of headroom versus our competition to do the same again this year. We will also grow our Key Account business through increased category management for retailers, better alignment with our distributor network, and even more disciplined execution at retail.

Finally, we will continue to take a disciplined approach to pricing while building our core brand equities.

In the U.K., we see 2008 as a year of two halves, with sales challenges related to the smoking bans and incremental pension expenses impacting the first half this year. In the second half, we anticipate that the smoking ban impacts will lessen as we cycle their implementation and several strategic wins will begin to improve our performance trends in the U.K. These strategic wins include the S&N contract brewing agreement, the Magners cider agreement, greater participation by our brands with major off-trade retailers, and positive pricing for our brands despite difficult industry conditions.

In addition, we continue to roll out our new cold-dispense technology for Carling with 12,000 installations in the first quarter, as well as "Cold As You Can See" thermo-chromatic packaging and our Compact Draught system.

Coors Light volume is also showing encouraging growth, driven by solid retail partnerships and an increasing consumer demand for lighter, more-refreshing beers.

And finally, looking at the quarterly flow of pretax earnings, these factors yield a U.K. financial plan weighted to the back half of the year with a particularly difficult comparison expected in the second quarter.

Across the enterprise, there are a few additional considerations regarding volume for the balance of 2008. In the U.S., our sales to retail continue to be strong in the first four weeks of the second quarter, growing at a high-single-digit rate from a year ago. In 2008, our reported sales volume in Canada will be significantly affected by the termination of our Foster's U.S. production contract and the new Modelo/Molson joint venture that Tim mentioned earlier.

The termination of the Foster's contract will result in approximately four to six percentage points of lower reported sales volume in each quarter for the first three quarters of 2008. The effect in the fourth quarter of 2008 will be much smaller as we cycle the end of the contract in early October.

In addition, not reporting future sales volume of our new joint venture with Modelo will drive about three to five percentage points of lower sales volume in each quarter of 2008 versus the prior year.

In Canada, our sales to retail in April, including Modelo brands for Canada, increased at a high-single-digit rate, driven by unseasonably warm weather. As always, it is difficult to call the full quarter based on only one month of results.

In the U.K., we continue to face challenges from a weak economy, the impact of the credit crunch on consumer confidence, and smoking bans in England and Wales. The second quarter will also be adversely impacted by the timing of Easter and customers buying in advance of the beer excise duty increase, both of which benefited the first quarter.

And In the first four weeks of the second quarter, our U.K. sales to retail have decreased at a double-digit rate from a year ago, due to difficult weather comparisons from last year and the year-over-year timing of Easter.

Regarding cost reductions, we are on track to meet or exceed our goals in 2008. Looking at the cost outlook by business, in Canada we now anticipate that our reported cost of goods per barrel will decrease at a low-single-digit rate in local currency for the full year 2008. Excluding the effect of the new Modelo/Molson joint venture, the loss of the Foster's contract, and the $8 million benefit of recycling prior-year foreign currency adjustments, we expect the cost of goods sold per barrel to increase at a low-single-digit rate.

In the U.S., we continue to expect our 2008 cost of goods per barrel to increase at a low-single-digit rate. We are confident that we will meet or exceed our cost-reduction goals this year via Resources for Growth program even if the Miller/Coors joint venture is completed as expected around mid-year 2008.

We anticipate cost challenges in two main areas: first, based on the current outlook for commodities, we expect transportation and fuel costs to increase substantially in 2008, along with moderate increases in packaging material and agricultural commodity costs.

Second, we will have higher contract-packaging fees and a full year of Shenandoah brewery depreciation expense in 2008. This outlook excludes the proposed Miller/Coors joint venture.

Our U.K. team will continue to attack costs and maximize the return on our production assets. We are targeting a substantial savings as part of the Resources for Growth program, driven by headcount reductions, supplier negotiations and improvements in supply chain efficiencies.

To summarize our results and our discussion today, our first quarter performance really highlights the profit and value-generation potential of this company, in effect delivering the promise of the Molson/Coors merger a little over three years ago.

We have been building competencies across the company to innovate, build brands, reduce costs to reinvest for growth, sharpen profit and cash generation disciplines, and strengthen our financial foundation.

These improvements have generated solid results in recent quarters and they show that our company is much stronger now than three years ago. Equally important, our results show that this is a business with great potential to build brands and flow profit and cash for our shareholders.

And we are not done yet -- our next step is to gain regulatory approval for our U.S. joint venture with SABMiller and then successfully integrate our respective U.S. operations. We continue to target mid-year 2008 for completion of the U.S. JV, and we will keep you informed as we make progress.

Following completion of the JV, Tim and I and the rest of the new Miller/Coors leadership team will focus on the U.S., and Molson Coors will forge ahead with a strong vision and a deep pool of talent to take the company to the next level.

We are more excited than ever about the future for the Molson Coors Brewing Company, as we strive to become a top-performing global brewer.

Now, before we start our Q&A portion of the call, a quick comment -- our prepared remarks will be on the website for your reference within a couple of hours this afternoon. Also, at 3:00 p.m. Eastern Time today, our Investor Relations team, led by Dave Dunnewald, will host a follow-up conference call, essentially a working session for analysts and investors who have additional questions regarding our quarterly results. That call will also be available for you to hear via webcast and recorded replay on our website.

So, Matt, at this point let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mark Swartzberg from Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

Thanks. Good morning, guys. Leo or Peter, I didn’t catch if Peter was there but obviously U.S. momentum is very good here, and you mentioned the opportunity for added distribution gains. Could you be a little -- give us a little more detail on the opportunity for added distribution? And as you think of some of the markets that are doing well but not as strong as that double-digit of the 15, are there some markets that you think that are of size that have some near-term opportunity to get to that even stronger rate of growth we are seeing for those 15?

Peter Swinburn

First of all on distribution, I think we quoted a figure of about 30,000 year-to-date, which is where we are, and I think at the analyst review back in March, we said that about 50% of last year’s growth came from distribution. I’m not going to give you a [inaudible] in terms of quoting a number but suffice to say that we know AB within the competitive set of Keystone Light and Coors Light have something like 600,000 to 800,000 more placements than we do, so we see continued opportunity in the distribution both this year and going forward for our key brands.

In terms of the markets that are not in double-digit growth, you’ve really got to balance that out between percentage increase and volume momentum. And what we are really interested in is seeing good momentum in all of our markets and looking to gain share in all of our markets. And presently, we are doing really well on that front. So it really is a -- it’s a market by market share gain that we are looking for and as I said, we are doing very well on all of those fronts and across all of the channels as well. So hopefully that gives you the answer you required.

Mark Swartzberg - Stifel Nicolaus

Yeah, very helpful. Thank you, Peter.

Operator

Thank you. Our next question comes from Anthony [Bucalla] from Credit Suisse.

Anthony Bucalla - Credit Suisse

The question is for Peter, along a similar line as Mark’s question -- you said you had 15 states where you had double-digit growth in the brand portfolio, correct?

Peter Swinburn

Correct.

Anthony Bucalla - Credit Suisse

Are those states where you are traditionally strong or are they states where you are generally under-indexed relative to your national share?

Peter Swinburn

It’s a complete mix.

Anthony Bucalla - Credit Suisse

Any more detail than that?

Peter Swinburn

Well, really no, I mean, without giving you market by market exactly what we are doing. We are performing very well in some markets in the east coast, where you know we are traditionally strong. We are performing exceptionally well in some places in the central part of the Midwest and also in the west, so it is -- in the west, we’re strong as well. In the Midwest, historically we’ve not been as strong. So it is a complete mix. I’m not trying to avoid the question.

Timothy V. Wolf

Just to follow on, I mean, think about the math of what Peter is talking about. For 47 out of 50 states, on average to pull through 7.1% growth -- now again, this is just the 50 states excluding Puerto Rico, you’ve got to have a very, very healthy and right skewed distribution, right? I mean so -- we can talk about angels on a pinhead in terms of which states do what but the overall distribution of those 47 states is very, very healthy around that 7%. Some were a little bit lower, but not a lot lower, and you have a full one-third of those 47 states operating above 10%.

So just a really, really strong portfolio, if you will, of states.

Anthony Bucalla - Credit Suisse

So there is no one particular state that you would highlight as a strong market -- it’s sort of a portfolio?

Timothy V. Wolf

I think that’s what Peter is saying, yeah.

Anthony Bucalla - Credit Suisse

Okay, and just a quick question for Tim -- it looks like there may be some rules changes as it pertains to convertible debt, some accounting changes. What do you expect to see in your P&L next year if you are in a position to do some gymnastics on that?

Timothy V. Wolf

Our friends at FASB are always at work on our behalf. If indeed that happens, and it looks like it will, that amortization of the as if interest expense would impact the expense line. Understand that it is non-cash; understand it doesn’t affect the fundamental economics and the wisdom retrospectively and prospectively of us having done that financing, and so yeah, from an accounting basis, it would be a hit to the P&L but nothing of any significance.

Anthony Bucalla - Credit Suisse

Okay, so you are not expecting to give any sort of guidance on how to account for this in the P&L next year?

Timothy V. Wolf

No, I mean we’ll -- as we finish up this year and we look at our plans for 2009, we’ll be happy to do that and the reason why it makes no sense to do that now is I think we’d want to see where our cash balances are, toward the end of this year we want to see what investment rates on invested cash look like. I think it would be premature to give you a number but again, I think the most important point, with great respect to the accounting, this won’t affect the fundamental economics of that really good financing.

Anthony Bucalla - Credit Suisse

Great. Thank you very much and congratulations on a good quarter.

Operator

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

Bryan D. Spillane - Banc of America Securities

Good morning, guys. Just a couple of questions -- first, in the U.K. you talked a bit about the impact of the smoking bans and I guess Leo, can you just talk a little bit about -- has the U.K. reacted -- has the lag or the time it’s taken for demand to normalize been a little bit longer for some reason in the U.K. than you’ve seen in some other markets?

Leo Kiely III

That’s really hard to compare. I think we are right in the middle of it in the U.K. and we’ve seen tremendous variability within state to state within the United States and we are seeing that in Canada. But Mark, I think you can give some perspective within the U.K. markets.

Mark Hunter

Really just to build on Leo’s point, there’s a number of things which are impacting the U.K. market performance. The smoking ban is one. As we come out of the first quarter of this year, the timing of Easter and obviously the magnitude of the excise duty increase that the government imposed, so all of those things are in the mix, so it is very difficult to call.

Our assessment is that particularly within on-premise, the underlying rate of decline of the market, which had been running at around about 4% or 5% has increased by two to three percentage points, so the market has been running at around about 8%. But it is really going to be August/September of this year before we start to see probably the new base for in particular the on-premise and the beer industry.

Bryan D. Spillane - Banc of America Securities

And Mark, on the excise tax increase, has most of that been passed through? Have retailers passed that through to consumers directly?

Mark Hunter

I can’t talk for what everybody has done but certainly at the Coors business in the U.K., that excise increase has been passed through to all of our customers. Those customers will then decide how they want to deal with that within their premises but we are certainly seeing -- we certainly saw pricing appear to harden within the off-premise channel. It looks like it’s got a little bit competitive again in the last couple of weeks.

Bryan D. Spillane - Banc of America Securities

Okay, and then Leo and Tim, just as you hopefully will begin spending most of your time focused on the U.S., you know, it’s been probably 30 years since you’ve seen an environment that has been this inflationary, especially harsh on wholesalers, given where fuel costs are. Can you talk a little bit about how the -- just the longevity, the length of this inflationary environment, what toll you think it’s taking on wholesalers right now, and do you suspect or do you think that it is going to drive maybe further consolidation of the wholesaler tier or cause some other changes to the way wholesalers approach the business, just given their costs have been rebased so much higher in the last two years.

Leo Kiely III

There’s no doubt this is a significant impact on our wholesalers but you know, the wholesalers are resilient characters as well, however. And I think this will inevitably bring pressure, continued pressure, I’m not sure increase but continued pressure, on consolidation at the wholesale level. You know, something we believed for a long time is that well-resourced and obviously well-managed wholesalers are real assets to all brewers and in our sense, that’s why we’ve been pro-consolidation for probably the past 10 or 12 years.

Some escalation of the pressure there but I don’t -- frankly, I don’t see anything way unusual about the wholesaler reaction in this environment right now. They are hunkering down and have an incentive to sell more beer.

Timothy V. Wolf

Bryan, I guess the other thing I might add is obviously our JV is not being formed because of inflation, but it could not happen at a better time because by bringing two great companies together and in effect reducing distance traveled from brewery to market, it will decline by about a third, a little less than a third for all Miller products, all Coors products. We are going to do everything we can to reduce the costs that either of the companies separate would have incurred. That’s call synergies, right? So we are going to be hard about that work and our objective will be to meet or exceed the committed $500 million of synergies and that couldn’t happen at a better time.

Bryan D. Spillane - Banc of America Securities

Great. Thanks, guys.

Operator

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

Judy Hong - Goldman Sachs

Hi, everyone. Leo, a couple of questions on the JV, I’m just wondering if you have any update on the timing of when you would expect a decision from the DOJ? I think there is a lot of chatter out there that we could get a decision by the end of this month. So I’m wondering if you have any clarity on the timing.

Leo Kiely III

No, we are smack in the middle of the process, Judy. Very few tea leaves to read. As we’ve reported before, we anticipate clearance in the middle of the year and I would say we are still there. Meanwhile, we are doing everything possible we can to get off to a fast start within the guidelines of what are appropriate and frankly staying very focused on selling beer.

Judy Hong - Goldman Sachs

Okay, and then with both you and Tim moving over to the JV, I’m just wondering if there is anything to read in terms of the future corporate structure in thinking about the Coors management really moving over to the new JV and you are left with Molson Coors management that has -- I’m just wondering if there is anything to read in terms of both you and Tim moving over to the JV.

Leo Kiely III

No, I don’t think so at all, Judy. Look, we’ve -- in many ways, this merger of Miller and Coors in the U.S. is delivering the strategy we set out three years ago for Molson Coors. And you know we said that our first priority was really to firm up the performance in our core markets so that we could take Molson Coors on to the destiny we believed at the time of the merger.

Frankly, I think we’ve got a terrific management team here and our depth of management is very good. We have a robust succession process with our board, so I think the baton pass here is going to be very clean and just very excited about the future of Molson Coors.

Judy Hong - Goldman Sachs

Okay, and then Tim, I have a question on where you are on your decision of using the step-up in the free cash flow this year. I know at the analyst meeting you wanted to get a little bit more clarity in terms of the CapEx requirement for the JV. I’m wondering if you’ve finalized that number and at this point we’re closer to getting some kind of an announcement on the use of cash .

Timothy V. Wolf

Judy, thanks for the question. I am astounded I got the question. I’m just kidding. No, you were kind to raise it and I don’t have an update for you today. Needless to say we have traveled further in time so we’ve got more clarity than obviously we did at the beginning of March. We are still working it and we will continue to have the conversation with our management team and our board and certainly are very sensitive to and aware of the sort of issues that you and others have raised, and we’ll continue to work it here and if and when we have a decision, we will certainly communicate it in a timely fashion.

Judy Hong - Goldman Sachs

And then my last question for Kevin -- if you look at Canada, the FTR excluding Modelo was up 0.7%. You talked about losing a little bit of share in the first quarter, as well as a step-up in competitive activity in Quebec. Can you just talk about that and how that sort of translated into your share performance in the first quarter and how we should think about your share trends for the balance of the year?

Kevin T. Boyce

If you look at historically we’ve spent a lot of time talking about Ontario, so I’ll just start there, where we had less activity in terms of discounting and absolute number of activations, if you like, or weeks on sale this year versus last year. Quite a substantial reduction, actually, so we are very encouraged in Ontario by our share performance and nationally, when you look at it, considering the amount of pricing that we got to hold relative to the discounting in the marketplace, we actually think it’s a good tribute to the strength of our brands.

What you are seeing in Quebec is our major competitor has actually increased their discounting in the first quarter and that continues into the second quarter in the face of some share losses they’ve experienced. We’ll obviously continue to intelligently drive our strategic brand growth and react on a market-by-market basis.

Judy Hong - Goldman Sachs

Okay, and just clarification -- you said revenue per barrel was up 6.4% in Canada?

Kevin T. Boyce

Correct.

Judy Hong - Goldman Sachs

And how much of that was mix versus --

Kevin T. Boyce

About half of it is pricing and about half of it is really the change in the Fosters business, if you like, and the fact that we no longer have it, which was a negative impact on NSR.

Judy Hong - Goldman Sachs

Three points of pricing, that includes also the mix benefit from the growth of the import portfolio as well?

Kevin T. Boyce

Most of it is pricing, so the vast, vast majority of that 3% is pricing.

Judy Hong - Goldman Sachs

Thanks a lot, guys.

Operator

(Operator Instructions) Our next question comes from Christine Farkas from Merrill Lynch.

Christine Farkas - Merrill Lynch

Thank you very much. Good morning, everyone. Keeping with Canada just for a second, Kevin, given the economy and given the discounting that you are seeing in Canada, can you add a little bit of color on whether or not there are now category -- or are there any category mix shifts going on? It sounded like it improved in ’07. Are you seeing a reversal of that trend to value?

Kevin T. Boyce

No, actually the value segment -- and part of it is probably the way that we look at the value segment, it’s brands at their normal price, so if you discount say a Canadian into a lower price, we still consider it a premium business, if you like. But the value segment continues to decline on a national basis and we have seen some resurgence of the premium segment as they’ve been a little bit keener in pricing.

So I think what you’ve seen in the first quarter was pretty predictable. It’s a little bit of jockeying as the companies are trying to figure out what’s going to happen the rest of the year.

I would say compared to previous year across the country, price increases have come a little bit earlier.

Christine Farkas - Merrill Lynch

Okay, great, and then moving to the U.S., again with the economy, can you talk maybe a little bit, Peter, about the trends in the C stores or on-premise here -- has there been any acceleration in that traffic, or deceleration in that traffic?

Peter Swinburn

Sure, Christine. Two sort of answers -- first of all, as far at the overall industry is concerned, then yes, we have seen -- we’ve seen a downturn in the on-premise, which has been probably the most significant change. No other real significant movements. As far as we are concerned, we’ve not really experienced any change in our trends from last year. We continue to have quite a strong showing in all channels, specifically in drugstore and convenience and specifically in the restaurant channel in the on-tray, so our on-tray business continues to do well.

If you look at our individual brands, we are not seeing any significant changes within those brands either, so Keystone Light continues to grow at double-digit rates, which is very much in line with where it was last year. Coors light continues to be strong and certainly hasn’t come off last year’s momentum. And at the other end of the spectrum, Blue Moon again is still in high-double-digits, so we are not really seeing anything within our brands that would suggest either trading out or trading down.

Christine Farkas - Merrill Lynch

And then if you were to extrapolate or isolate the distribution gains in your brand, and you look at really just the core brands year-over-year or apples-to-apples basis, would you similarly that the growth is very much intact there across channel?

Peter Swinburn

Yeah, we are seeing velocity -- I mean a come-back to the on-premise and we are seeing significant distribution growth but in the quarter, we also saw velocity growth for all our brands, including Coors Light and for Coors Light, that was the first velocity growth that we’ve seen for the last eight quarters.

Christine Farkas - Merrill Lynch

Okay, great. And then a couple of questions for Tim -- the accelerated long-term incentive expenses, could you split that for us? Was it just in the U.S. and global or did that hit all segments?

Timothy V. Wolf

No, it hit all segments.

Christine Farkas - Merrill Lynch

And would you have a dollar amount just roughly of the $25 million how much of that was in the U.S.?

Timothy V. Wolf

The U.S. was about half of it.

Christine Farkas - Merrill Lynch

Half, and would you -- based on your comments, it sounds like there is more of this to come in the remaining quarters of ’08, did I hear you correctly?

Timothy V. Wolf

No, we are done with this multi-year program and my anticipation, and Leo can probably handle this better than I, but is the Molson Coors comp committee would probably be inclined to begin another cycle but I don’t think we’ve got detail on what that’s going to look like. But again, if you go back in time three years ago, we anticipated that this very tough target would take circa three, four plus years to achieve. And originally we thought this would be achieved maybe in mid late ’09 and as our businesses have gotten stronger and stronger, we’ve taken costs out, our momentum has accelerated, we realized that we would be hitting it in this quarter, which we did, and so that pushed basically three to four quarters worth of expense into this first quarter.

So for this program, no more this year.

Christine Farkas - Merrill Lynch

Okay, that’s done. And then finally in Canada, that JV equity income now, can you just remind us, the volumes come out of your top line but the JV equity income, that comes in through your operating income in Canada or other income -- where does that come in?

Kevin T. Boyce

It comes in operating income and the cost of goods.

Christine Farkas - Merrill Lynch

And the cost of goods?

Kevin T. Boyce

In the cost of goods, yeah.

Christine Farkas - Merrill Lynch

Okay.

Leo Kiely III

Essentially it’s in the margin.

Christine Farkas - Merrill Lynch

Okay, and then just a clarification, Tim, in terms of the buy-back plans or potential buy-back plans for Molson Coors; are you essentially waiting for the Miller Coors venture to be approved and looking at your overall statements before making a decision, or could this be a separate decision for your board?

Timothy V. Wolf

No update right now. I mean, we’ve gotten some of the markers that we said we wanted to collect in March in terms of CapEx spending and overall cash performance. I think we are on track with our analysis but we have some more bases to touch before we take a decision.

Christine Farkas - Merrill Lynch

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Kaumil Gajrawala from UBS.

Kaumil Gajrawala - UBS

Thanks. Good afternoon, everybody. The first question, I think I just missed it but Leo, did you give an update on April STRs for the U.S.?

Leo Kiely III

I did. Tim, what was that number?

Timothy V. Wolf

The U.S. number was a high-single-digit.

Kaumil Gajrawala - UBS

Okay, thanks. And then the next question on the distribution increases, was there a period of time last year, maybe a quarter, where distribution really started to accelerate? And mainly I’m asking to see if we are going to come into a period where you start to lap that and it’s difficult to get incremental distribution from that point forward.

Peter Swinburn

The distribution gains for last year were probably -- yeah, they were weighted, sorry, not probably -- they were weighted into the second and third quarters, so in terms of lapping those, yes we are but I would still come back to the main point I made earlier, and that is that there’s really significant headroom for us in terms of distribution compared to the competitive set certainly if you use Anheuser-Busch as the main driver of distribution in their brands. So we’ve got plenty of headroom so lapping really isn’t an issue for us. There’s lots for us to go for.

Kaumil Gajrawala - UBS

Okay, and then maybe if you could help us a little bit on what’s behind the distribution gains. Is it that the key account program is now three years -- you know, it’s been about three years and it’s got some momentum? Or is it that the brands are very strong in a few regions and then other regions are picking it up? Could you maybe help us with what’s behind --

Peter Swinburn

Sure I can and the latter point is probably the correct one. It’s not isolated to certain channels or certain geographies. This is happening right across the piece, so yes, our national account structure that we put in some years ago is really beginning to gain momentum now but equally, the brands -- and I think we quoted it in the release that we gave you -- over 90% of our portfolio is growing, so when you’ve got momentum like that, gaining distribution with retailers becomes much easier, confidence in the distributors to put these brands into distribution, new SKUs into distribution is really high because they are not concerned about having to pick it up at a later date.

So we really are increasing distribution across geographies and channels and brands.

Kaumil Gajrawala - UBS

Okay, great. And then last thing for the U.S. and for Canada, if you could give us your views on the consumer and how you feel about the price increases that have gone through and whether the consumer can handle it, given what we are hearing related to the economy.

Peter Swinburn

I’ll take it first, if you like. I can only tell you where we are. I mean, you’ve seen our net sales revenue figures and you’ve seen what portion of that is pricing that’s gone into the market and you’ve seen our volume sales. So I think really that answers the question.

Kevin T. Boyce

I think from our standpoint, we did take pricing, as I mentioned earlier, earlier in the year than perhaps previous years. There’s been a lot of reports in newspapers about some of the brewers, particularly the small brewers, facing increased pressure. I think right now, the pricing that has gone into the marketplace has been relatively well-received. The economy is slowing a touch but I still think the Canadian economy is in pretty good shape, so we are confident with the position we are in.

Kaumil Gajrawala - UBS

Okay. Thank you, everybody.

Operator

(Operator Instructions) Gentlemen, I’m showing no further questions.

Leo Kiely III

That’s great, Matt. Thanks for being with us, everybody, today and we’ll be back with further announcements when we’ve got them and if not before, we’ll talk to you at the end of the quarter. But have a nice week, everybody.

Operator

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

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