Molson Coors Brewing Company F2Q08 (Qtr End 06/29/08) Follow Up Earnings Call Transcript

Aug. 6.08 | About: Molson Coors (TAP)

Molson Coors Brewing Company (NYSE:TAP)

F2Q08 Follow Up Earnings Call

August 5, 2008 3:00 pm ET

Executives

Dave Dunnewald – Vice President Investor Relations

Leah Ramsey – Manager of Global Investor Relations

Mark Ingebritson – Senior Director of Global Accounting and Financial Reporting

Scott King – Director of Strategic Finance

Greg Snider – Group Manager of Global Forecasting and Analysis

Mario Sisneros – Senior Analyst Global Forecasting

Phil [McFarland] – Director of Tax

[Kara Row] – Group Manger of Tax

Bill Waters – Vice President and Global Controller

Analysts

Christine Farkas – Merrill Lynch

Orin Baranowsky – BMO Capital Markets

Mark Swartzberg – Stifel Nicolaus & Company, Inc.

Scott Paulson - Cornerstone

Bryan Spillane - Banc of America Securities

Harry Garcia - Palisades Investments

Marian Montagne - Thrivent Asset Management

Judy Hong - Goldman Sachs

Analyst Inaudible

Lucas Klein – Riversource Investments, LLC

Operator

Welcome to the Molson Coors Brewing Company 2008 second quarter investor relations follow up session. (Operator Instructions) I would now like to introduce your host for today’s conference Dave Dunnewald, Vice President of Investor Relations at Molson Coors Brewing Company.

Dave Dunnewald

On behalf of Molson Coors Brewing Company thank you for joining us today for our second quarter 2008 follow up earnings conference call. Our goal on this call is to address as many additional earnings related questions as possible following our regular earnings conference call with Peter Swinburn and Stewart Glendinning earlier in the day. We will use a standard question and answer format and we anticipate that the call will last less than an hour, so let’s get started. With me on the call are Leah Ramsey, Manager of Global Investor Relations, Mark Ingebritson, Senior Director of Global Accounting and Financial Reporting, Scott King, Director of Strategic Finance, Greg Snider, Group Manager of Global Forecasting and Analysis, Mario Sisneros, Senior Analyst Global Forecasting, Phil [McFarland], Director of Tax, [Kara Row], Group Manger of Tax and Bill Waters, Vice President and Global Controller.

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 10K, 10Q 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-US 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 US GAAP results.

As Peter Swinburn mentioned on our regular earnings call earlier today, in the second quarter we created one of the most significant business combinations in the history of US beer. A new company that will make us stronger and more competitive in the US. Miller Coors offers tremendous potential in resources and value for Molson Coors and our shareholders. On a companywide basis, our top brands continue to outperform the industry and we achieved net pricing gains and substantial cost savings in each of our core markets. At the same time however, energy costs and commodity inflation have become bigger challenges for our company. This cost inflation combined with our higher tax rate drove lower underlying earnings for our total company in the second quarter. In the face of these challenging economic conditions, we continue to implement value added strategies that will allow us to build our brands, achieve positive pricing, reduce costs and grow profits and cash for our shareholders.

By way of follow up to our earnings call this morning, I’d like to offer some additional perspective regarding the quarter and our performance going forward. When we think about how our business is doing overall, we have a number of reasons to believe that we are headed in the right direction and have the right strategies to drive performance going forward. There are a couple of things that I wanted to highlight for you. First of all, looking at cost of goods trends in Canada and the United Kingdom, we expect these trends to improve in the second half of the year versus what we saw in the second quarter. For example, if you look at what we talked about on this morning’s call, Canada had a mark-to-market adjustment, a one-timer last year of $5.8 million in cost of goods. In the UK, we had $3.5 million approximately of additional pension expense in the second quarter so there is $9 or $10 million that is not going forward.

At the same time, as we move in to the third quarter in the United Kingdom you’ll see a $9.5 million cost for pension in the prior year period, third quarter of 07. If you add these factors together you get a swing factor if you will from second to third quarter of $19 to $20. Now, this is obviously just related to comparables and doesn’t take in to account other factors but we do actually have other factors to focus on, for example strategic improvements that we have coming. You all know about Miller Coors and how important that will be to our company going forward. You also know now about the United Kingdom where we have the Heineken deal, Magners supplier renegotiations, some of those types of things that we talked about on the call this morning.

We also have a challenging inflationary environment but we also have sustainable solid pricing levels in the US and Canada which also bode well for driving our business forward and dealing with some of the challenging inflation that we face. More broadly, we talked earlier in the year about the UK business and how that was the most challenging call it performance in the second quarter and earlier in the year, on the first quarter call we talked about how we expected our UK performance this year to be essentially a tale of two halves where the first half would be very challenging related to smoking bans, some additional costs, tougher comparisons, things like that. That’s in the half of the year where we generally make less than a third of our annual earnings. So, essentially we’ve seen that play out this year in 2008 and now with all of the strategic improvements and changes in comparables that we’re looking at in the UK we’re expecting the other half of that tale of two halves going forward.

Those are some of the reasons why we feel good about the strategies that we have as a company and where we are headed in the quarters and years ahead. With that, I’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Christine Farkas – Merrill Lynch.

Christine Farkas – Merrill Lynch

Just to get back to Canada and I appreciate your comment about what factors we should look for in the second half, I just want to understand that I’m looking at the right line item when you talk about virtually flat cost of goods per barrel year-over-year. You reported up 19% in the first quarter and up 10% in the second quarter, is this the right number I’m looking at? So, this whole year would suggest to be flat suggesting declines in the second half?

Dave Dunnewald

Almost. When you saw 19% that was an all in number including FX. If you strip out FX, which we did for the flat number, that was in local currency, if you strip that out I think you get to – let me verify that, if you strip out FX I get –

Christine Farkas – Merrill Lynch

You have about eight points it looks like from currency.

Dave Dunnewald

Actually 1.4% actually.

Christine Farkas – Merrill Lynch

So the other factors as you discussed about quarter-to-quarter comparisons would improve that number in the second half?

Dave Dunnewald

Yes, the factors we talked about on the earlier call, sure.

Christine Farkas – Merrill Lynch

The second question, with respect to your MG&A, your guidance was still about the same $115 million plus or minus but the first half was substantially, implied, larger than the second half. Why would this moderate so much in the second half, your corporate MG&A?

Dave Dunnewald

Yes, that’s right. If you recall Greg reminded me that we had that long term incentive plan that paid out in the first quarter, that was a three to five year plan that paid out so obviously a lot of extra additional expense in the first quarter including in the corporate segment. That is not an ongoing situation and you did not see that in the second quarter. Although, you did see a little bit of additional call it incentive payments in the US business for a very strong first half performance and that level of performance, well we’ll see whether – the business would have to very much outperform for that to be an ongoing level of expenses and you saw that primarily in the MG&A line.

Christine Farkas – Merrill Lynch

Then you have guidance about the 2009 tax rate being below the 22% to 26%. Is that just due to timing of when you’re going to close some of those issues this year?

Dave Dunnewald

That’s right. Essentially, you remember our guidance on the last quarter’s call, we showed the 08 effective rate at a lower level than our long term rate. About 10% or 15% I think was the last guidance we gave. The rate for 08 that we just gave on this call this quarter is somewhat higher because of the timing of closing out those tax years. It essentially was just a shift from 08 in to 09 so it’s a timing difference and not a change in either our long term rate, or I guess you do see a shift in rate between 08 and 09 but that’s the only change.

Christine Farkas – Merrill Lynch

Last question, then with respect to Miller Coors coming in, how you report this going forward will the US business then be pulled out of your top line and we’ll get an equity income line coming in about the pre-tax line or above the operating income line?

Dave Dunnewald

Yes, you’re honing in on it there. Right, we will no longer show US call it Coors Brewing Company or Coors US throughout our P&L. Instead we will have an equity income line in our consolidated P&L and that will flow in right above the operating income line. So, it will be pre-tax income taxed at the parent level. Then in addition, we plan to provide a full P&L for the Miller Coors joint venture in US GAAP with obviously explanations around that. Then, we will provide a reconciliation to get you from call it the bottom line on that full Miller Coors P&L over to the equity income line on our consolidated P&L, does that make sense?

Christine Farkas – Merrill Lynch

Any chance we will get pro formas on the prior quarter either prior to that date or on that date?

Dave Dunnewald

Our plan is to give you pro formas as we go, yes.

Christine Farkas – Merrill Lynch

So we’ll get the prior third quarter but no more?

Dave Dunnewald

That’s the plan now. Obviously, we try to exceed our goals and we’ll do our best.

Operator

Our next question comes from Orin Baranowsky – BMO Capital Markets.

Orin Baranowsky – BMO Capital Markets

Just a follow up on the corporate MG&A line. Would we expect it to be kind of in the $80 million range next year? Because, I would imagine that we would have some of the corporate costs taking out from the US operations so if we look at where we were at the beginning of the year versus kind of the second half run rate, would we be kind of in the $80 to $90 million range?

Dave Dunnewald

No. The impact on the corporate area, call it corporate expenses from the formation of Millers Coors is really relatively modest, in other words, there’s some give or take. There are some things that will move in to our P&L and there are some things that will move in to theirs. None of them are huge anyway so I probably wouldn’t model it the way you’re suggesting. I think I’d take a look at recent quarters and use that more as your basis. Not the first quarter, as I talked to earlier with Christine because the first quarter had that long term incentive expense in it.

Orin Baranowsky – BMO Capital Markets

We had about a little more than $70 million in the first half and then you’re guiding to $110 to $115 the second half so which is closer to what the run rate is $40 to $45 million or $70 to $75 million?

Dave Dunnewald

One thing you want to keep in mind is that we do have global markets now in the corporate segment as well which will tend to bump it up a little bit and that I guess will partially offset the long term incentives going away. But, we do anticipate about $110 million of corporate general administrative expense plus a little bit of global market expense. We will give you the break out of the corporate piece separate from the global markets piece going forward but let’s focus on corporate here a minute because the global markets is quite small. Corporate is around $110, I don’t see a reason why – for example, global markets would be only in the range of 10% to 15% of the corporate amount. But in any case, looking at the $110, I don’t see a reason why you should model that dramatically differently next year. If we have some cost savings that we’re planning or something like that then we’ll update our guidance at the appropriate time later in the second half of this year.

Orin Baranowsky – BMO Capital Markets

Would we see a more seasonal smoothing of that $110 compared to what we’re seeing in 2008 then?

Dave Dunnewald

Yes, I think that’s a fair assumption.

Orin Baranowsky – BMO Capital Markets

Then 10% to 15% on top of that for the global markets?

Dave Dunnewald

Right.

Orin Baranowsky – BMO Capital Markets

Secondly, you said cap ex about $240 million for this year, correct?

Dave Dunnewald

Yes, $245 was our outlook for this year and that would exclude second half capital spending by the US business which is obviously now part of Miller Coors.

Orin Baranowsky – BMO Capital Markets

Then what would we expect for next year? Kind of in the $180 range?

Dave Dunnewald

Basically our cap ex plan for this year didn’t change in a significant way so you could take our prior year guidance which was $300 and something on the last call and look at the guidance we gave today of $245. The difference is back half US and then back out just another half US and then you can get at least an estimate.

Orin Baranowsky – BMO Capital Markets

In terms of the Molson Coors income statements, because you’ll be responsible for the funding of the capital for Miller Coors or is that just going to be funded from internal cash flows?

Dave Dunnewald

It will be funded by Miller Coors. Now, this entity is a direct pass through on a cash basis with the two parent companies so to the extent they need operating cash they’ll get it from their parents and to the extent they generate it they’ll pass it through to their parents in relatively frequent manner.

Operator

Our next question comes from Mark Swartzberg – Stifel Nicolaus & Company, Inc.

Mark Swartzberg – Stifel Nicolaus & Company, Inc.

A couple of questions here, with your free cash flow view for the year unchanged $550 million, I’m with you on why a GAAP change in taxes as no bearing on free cash flow but you’re saying the cost environment is getting more challenging which is of course real costs. So, in your mind, what are the incremental positives whether they are top line or cost related that are causing your free cash flow view to be unchanged?

Dave Dunnewald

There are obviously a lot of things that go in to our cash view. Well, we did say by the way, our resources for growth program is on plan, right so that’s helpful, that’s real cash as well and that’s even with the formation of Millers Coors. That would be for 08, right. In addition, I did mention a little bit earlier about the solid sustainable level of pricing that we’re seeing in – well, the US doesn’t give us benefit in the back half directly in the free cash plan but Canada does so I would say just overall business performance, we have some monetization of non-strategic assets we’re thinking about. We did for example a monetization of a distributorship in the first quarter. We also did a small one in the second quarter. And we also have a focus on working capital trying to maximize that or improve that. We also have some other assets for example in Edmonton Brewery we closed that we no longer need and some other assets that I won’t go into today. But a little here, a little there, it all adds up.

Mark Swartzberg – Stifel Nicolaus & Company, Inc.

Do you know off hand where you were on monetization of non-strategic assets and where you are today, how much delta is there?

Dave Dunnewald

I would say we’re doing fine on that at this point. Those types of events are sometimes hard to predict the exact timing of but so far so good.

Mark Swartzberg – Stifel Nicolaus & Company, Inc.

As relates to the UK, there are several things that were mentioned earlier and by you at the beginning of this call. Can you give us an idea of how significant these benefits are in terms of dollar impact or rank order them or a little more detail on them? I mean, a phrase like “supplier renegotiation” is a pretty attractive phrase but we really don’t know how significant it is.

Dave Dunnewald

Yes, I think that’s a good strategy and it’s great that we’re doing it, supplier renegotiations. The UK team always as long as I can remember has put a great deal of energy around improving their business and that’s one example. Nonetheless I would put it at the bottom of the list of the things that we talked about. More important than that would be the Heineken contract pack deal. We said that would get 2 million or 3 million hectoliters by the time it’s ramped up in 2010 and that means we essentially have to do that ramping between mid-year this year and through 09. So call it a slow ramp up of a contract brewing arrangement. But that’s a lot of volume and so we do anticipate getting at least some benefit from that in the back half. And if you work your graph paper from a standing start mid-year 08 and get to that level by the end of 2009 actually, then you might be able to get an assumption on how much we could benefit from that. Looking at it in global benchmarks, it’s a relatively attractive production contract for us and we think it’s attractive for Heineken as well. And then the Magners deal, cider is an attractive business; it’s the fastest growing segment in the UK market; Magners is the largest selling cider in the UK; however, it’s always been packaged up till this time. So again it’s a ramping up from essentially zero in the second quarter of this year, actually I think late in the second quarter is probably the best way to put it and the rollout is going well. But we are starting from zero so it’ll take us a while to see the full benefits, but I think it is useful to know that Magners and ciders generally are growing fast at a double-digit rate and they have relatively nice margins.

Mark Swartzberg – Stifel Nicolaus & Company, Inc.

And when we first heard about the contract brewing Scotch and New Castle that there wasn’t a change in control as we’ve since seen. Did that whole process with Heineken, did that have any bearing on what you originally referred and we just heard you refer to today as favorable economics?

Dave Dunnewald

No. There was no impact that I’m aware of from the S&N call it purchase. No impact on our situation with the contract brewing arrangement in the UK.

Mark Swartzberg – Stifel Nicolaus & Company, Inc.

As far as tax rates for 09, I might have missed it, but when you’re saying the tax rate comes back down, did you give us some range? In the past you’ve talked about a rate in the teens but can you give us an idea of where your head is?

Dave Dunnewald

Essentially our guidance went from 10% to 15% for 08 and then talking about long-term guidance from there to, we raised that guidance to 20% to 24% instead. And that difference essentially shifts into 09. That’s all we’re saying is that these audits happen on a rolling basis and we anticipate closing some of these in 09 instead of 08. So it’s purely a timing difference. And based on the difference in our guidance for 08 on this call versus the last call, you can just shift that into 09 if you want.

Mark Swartzberg – Stifel Nicolaus & Company, Inc.

So think about it as a 10% to 15% number for 09?

Dave Dunnewald

Just take the percentage change in our guidance which, let’s see, we went from it was if I recall correctly 10% to 15%, that’s now 20% to 24% so that’s about 10 percentage points. And then look at our long-term rate and you can back that off and that’ll give you a sense I think. We haven’t provided any guidance for 09 but that seems like the best methodology based on the publicly-available information.

Operator

Our next question comes from Scott Paulson - Cornerstone.

Scott Paulson - Cornerstone

I understand that fuel and oil prices went up a lot during the quarter, but you kind of had a pretty good inflection from being in front of it in the first quarter to behind it in the second quarter. Could you kind of walk through at least what the drivers there were and your ability to price or not price at a higher rate? And secondly, if I heard you right, you said that the pension impact to the UK in the second quarter was $3.5 million and in Q3 of 07 it was a $9.4 million impact.

Dave Dunnewald

Good questions. I’ll take the last one first. The pension call it higher expense in the second quarter of 08 versus 07 was about $3.5 million and we also even more important we had an extra expense because of a change in some benefits and that sort of thing plus some catch-up expense in the third quarter of 07 and that was I thought it was $9.5 million in that timeframe. We talked about it on our call in the third quarter of 07. $9.5 million incremental pension expense in that quarter. So that gives you an idea of the flow of pension expense in the UK being very important when you’re looking at second quarter results this year and then what do we look for looking ahead to the third quarter, what do the comparisons look like. So I think that covers pension in the UK.

If you look at fuel costs, just looking at the world price of oil and the relative inability to hedge based on the types of call it transportation services that we buy, it’s difficult to do much hedging in that area. So I would say that if you look at the world oil price you can see some of the challenges that really all of our businesses have faced from fuel and other energy costs increasing in this year. Relative to the beginning of the year, it’s noticeably more. Now that’s a smaller base than packaging materials but packaging materials are a commodity that does allow some hedging. We don’t say how much; neither do our competitors; but let’s just say that on a percentage basis we’ve seen a much bigger swing in fuel than we have in call it packaging materials on a year-to-date basis. Now the fuel and energy is really across all of our businesses.

If you move to commodities, that is more of an issue in the second quarter in Canada and the UK. If you look at what’s happened to agricultural commodities on a global basis, they’ve increased in the range of 50% or more year-to-date. And in the US as you may know it’s pretty common knowledge that we contract grow directly with farmers in the western states. That tends to give us a large amount of smoothing effect. We are not able to do that in Canada and the UK, so agricultural commodities are closer to market prices at least in their changes so I think you saw a significant dose of that in the second quarter.

As far as pricing, what can we do? Well I think we’ve shown again relatively healthy pricing in Canada. 3% pricing in the first and second quarters looking at an overall inflation rate, that looks relatively sustainable. If you look at the pricing the Canada business was able to achieve going back a year or two, which it was noticeably less than that, actually 3% looks pretty attractive. And we have been able to price there. The UK we’re a little bit more limited because of some of the industry dynamics going on there and some of the opportunities frankly that we’ve seen in the off-trade to get our brands to consumers in a little bit more proactive way than perhaps we would have a year or two ago. Does that help?

Scott Paulson - Cornerstone

Yes. You had cost reductions of $18 million in the quarter. Where did that all flow?

Dave Dunnewald

The cost reductions actually were across all three of our businesses. For example, if you look at the various businesses, we have tended to get the most cost savings historically out of that program in the US. And in fact the US did get call it more than a third but not as much as we’ve seen in some prior years as the resources for growth program has moved through the years, matured, whatever, moved through the process, the US business is no longer more than half the savings. In fact Canada had nearly as much in savings as the US did and then the UK was a bit lower than that. So in a nutshell we really got savings from all three businesses and not skewing toward the US as much as they have historically.

Operator

Our next question comes from Bryan Spillane - Banc of America Securities.

Bryan Spillane - Banc of America Securities

First I just want to make sure I’m clear on the free cash flow expectation and tell me if this isn’t the right way to think about it. But you set an expectation for $550 million when the year started and that assumed that the JV didn’t occur. So that number is fueled or is supported in part by the assumption that you’d own Coors Brewing Company for all of 2008. And then what’s changed is whatever impact you’ve had on your earning stream, you mentioned the net impact of monetization and now you’ve got the JV has actually happened. I guess the question is if there are up front cash uses by the JV like severance costs, you’ve indicated some up front cap ex, it’s possible that $550 million you could be something less than $550 million if some of that incremental or initial cash investment is pulled into the back half of 08. Is that the right way to think about it?

Dave Dunnewald

I think it is Bryan. I’d call it the background or the thought process around that is with the Miller Coors business five weeks old or whatever and they are making great headway in finalizing plans and selecting the top team, they’ve selected all the top folks and they’re doing layer by layer getting throughout the business. But as part of that or you could say because we’re relatively early in the process there, we don’t have perfect visibility at this point to the timing of the cash needs. I think we know full well what the overall cash needs will be and we’ve talked about it to capture those synergies. What we don’t have visibility to is the exact timing of those cash needs in the near term. Until those plans are finalized and call it more the staffing selections made, we don’t know precisely how many dollars the Miller Coors business will need in the back half of 08. Now we do expect to have much better visibility on our next earnings call around that.

Bryan Spillane - Banc of America Securities

But half of the $400 million of cash that’s going to be needed is related to headcount reductions, is that correct? Or severance I should say.

Dave Dunnewald

Yes, about $230 million of it. We’ve got $450 million we talked about, call them one-time cash needs, and about $230 million is one-time costs, things like restructuring, severance, that sort of thing, and the other $220 million or so is incremental cap ex to reconfigure our supply chain in the Miller Coors business.

Bryan Spillane - Banc of America Securities

If it were to be that especially with that portion of it, the severance portion of it, assuming that those are some of the early things that will get done, then there’s a chance that that could be sort of a use of cash in the near term that could potentially impact the initial starting point of $550 million of free cash flow.

Dave Dunnewald

Yes, that’s right. The only caveat I’d put around that is you’d want to weigh that against whatever appropriate assumptions you have around cash generation for the total Miller Coors business.

Bryan Spillane - Banc of America Securities

Second question, on the tax rate and maybe defer to your panel, in understanding the timing is what’s moving the accruals around but the decision I guess earlier this year to begin accruing towards much lower tax rates and making a switch in that accrual now, what’s the process towards some of the factors that went into making the accrual in the first place and I guess what I’m driving at is trying to get a handle on if we’re going to go ahead and model a 16% tax rate or somewhere in that neighborhood for next year, what type of reasonability should we put behind that number or probability should we put behind it? Because it seems like it’s a number that’s certainly bounced around a bit and how much of it is just that the accrual was made a little aggressively?

Dave Dunnewald

That’s a fair question. Maybe a little background will help you. When we look at our tax rate, it’s driven by a lot of different things. One of the more significant things recently is FIN 48, which I’m not going to go into what that is because that’s technical stuff that we don’t need for this call I don’t think, but essentially the new rules for accounting have resulted in greater volatility in our tax rate. And you’ve seen that ever since it was enacted in early 07. And by the way, to answer your last question up front, I don’t think our assumptions for tax rate are ever aggressive and this year I would say fits the mold there as well. Essentially what you’re trying to do under FIN 48 and basically our tax positions generally is trying to figure out when will tax years close. And you have all these different taxing authorities around the world and you have to make some estimates about when those taxing authorities will say, “Okay, I guess we’re done with this year.” And after they’ve worked through their analysis and discussed it and all that. And you have to make an estimate on that and we made an estimate that we thought we could get through certain tax years this year earlier on and that looked very promising right up until call it late in the second quarter. This was something that I think we had a very good basis for being confident about. And based on discussion with those taxing authorities, now we think 09 is more likely. We don’t expect a different outcome, but we expect different timing.

Bryan Spillane - Banc of America Securities

And the settlement of past tax bills?

Dave Dunnewald

Essentially companies like ours are audited by virtually every taxing authority in every geography every year and then over time either the statute of limitations or whatever rules they have in place essentially have them go through those taxes and decide whether or not they’re okay with them or if they’re not, obviously we discuss it and then you resolve whatever differences you have and you move on. And when it happens that means you’ve closed the tax year. And as I say, that happens in multiple geographies. Every year we have new tax years rolling into this process and tax years rolling out.

Bryan Spillane - Banc of America Securities

One last question Dave on the diluted share count. Diluted share count picked up a little bit. Is that the convertible? Is that the impact of the convertible or was there something else?

Dave Dunnewald

Actually I guess my favorite way to handle that question is to build it from the bottom up and that’s to start with the basic shares because when they increase that also increases the diluted shares on a share-per-share basis. What I mean by that is basic shares increased about 3.5 million shares year-over-year essentially because of stock options exercises mainly last year as our stock price went up and then there was a little bit, say 0.5 million shares in that basic count for that long-term incentive that vested in the first quarter. So that gets you to 3.5 million basic shares and then all of those of course would increase diluted shares and then if you want to get from that to the incremental I think it was 1. something million shares increase in addition to that in the diluted count, I think it was 1.2 million or 1.7 million or something like that, you would layer on a few additional shares for that long-term incentive plan but mainly just simply the way the diluted shares calculation is done, 0.5 million shares drove that. So we’ve got 1.3 million shares diluted on top of the basic shares and of that 1.3 million, nearly half was just a higher stock price. Only 200,000 shares was convertibles. That was your question. And then the rest would be a few additional shares the performance shares that vested in the first quarter. Those have a basic component and a diluted component, so you get a couple hundred thousand there.

Bryan Spillane - Banc of America Securities

So looking at the share count going forward, will it continue to creep up sequentially?

Dave Dunnewald

Subject to discussions with our Board that we talked about around stock buy-backs, we would expect, in other words [inaudible] get a stock buy-back program approved, then you’re likely to see some additional stock option exercises. Now at 3 million shares related to stock options on a year-over-year basis is a relatively high number for us so that might be less likely. And by the way we have not provided stock options to our employees for, none this year and as I recall, Scott did we give any last year? I know we had [inaudible] and other stuff, but I mean pure stock options? Yes, none this year and none last year. So the overhang has reduced in the last two years.

Operator

Our next question comes from Harry Garcia - Palisades Investments.

Harry Garcia - Palisades Investments

You said on the call that you were re-evaluating the planned price changes for the remainder of the year. Is it safe to assume that you mean lower price increases?

Dave Dunnewald

No. I’m glad you asked the question. When we think about re-evaluating our pricing plans for the year it’s really within the context of a challenging cost environment. What that means is we will be looking for additional opportunities to increase prices on a very selective market-by-market basis where it makes sense. So it’s the opposite of what you suggested.

Harry Garcia - Palisades Investments

Is there anything else that you could be doing but you’re not to combat high commodity prices?

Dave Dunnewald

I think given the aggressive cost savings programs we’ve done, given the latitude and pricing opportunities which are based on the strength of our brands and all the other levers that we can pull in our business or work, I would say the team has been very energetic about going after things. But it doesn’t mean we’re done either so I think there are a lot of additional cost savings opportunities that we will be able to look at. And certainly Miller Coors is a huge example of how we can cut costs going forward and make our business stronger and also obviously build shareholder value. That $500 million of synergies is huge and that’s one of the reasons along with some top line benefits that we anticipate capturing, that’s one of the reasons that this is arguably the biggest business combination in US beer ever.

Harry Garcia - Palisades Investments

You said that you weren’t done, but other than Miller Coors is there anything specific or that you’re thinking about that you could give as an example?

Dave Dunnewald

I was speaking specifically about cost reductions. As our teams, operations teams and other teams throughout the company work together we’re always looking for ways to cut costs. And we showed that when we did the Miller Coors merger, excuse me the Molson Coors merger three and a half years ago. In that one we came in with a synergies target of $170 million over three years. We delivered $180 million. And at the same time in the second year of that merger we also were able to do enough analyses, what I call deep-dive analyses, throughout the operations footprint and other areas of the company to come up with another $250 million worth of savings. That’s not something you can do when you’re looking at the business from a very high level, let’s put this merger together or whatever, and that goes by the way for Miller Coors, let’s do this US joint venture between two parent companies. You have to take a relatively high level view and you can’t do the kinds of analyses to capture all the savings or I guess identify all the savings. So that means we’re going to keep looking. Miller Coors will keep looking and so will the other businesses related to Molson Coors for additional cost savings for our business.

Operator

Our next question comes from Marian Montagne - Thrivent Asset Management.

Marian Montagne - Thrivent Asset Management

I’m just getting a little confused over the pricing. You’ve talked about taking more and yet it appears that there’s more discounting going on off of the list price in Canada and some of it’s by package, some promotions are package promotions. Can you give me a better handle on that?

Dave Dunnewald

Looking specifically at Canada pricing, if you look at the actual revenue per barrel benefit from pricing it was about 3% in the second quarter and about 3% in the first quarter. And there were a few timing differences that Kevin Boyce mentioned that gave us the first quarter numbers slightly higher than the second quarter number but not a major difference. The main point is 3% pricing we see relative to the overall inflation rate is relatively sustainable rate. It’s a good pricing rate and it seems as though it’s one that’s about right for our business. Now that doesn’t mean that there aren’t risks to that and we are seeing some additional discounting activity in various markets but I must say that on the whole potential discounting or even actual discounting flare-ups are relatively common in Canada as they are in the US. So we’re watching those very carefully. We’ll see how they pan out. But at least in the second quarter the discounting was not a major issue and so we’re watching the hot spots going into the third quarter.

Marian Montagne - Thrivent Asset Management

Can you talk about the sequential changes in the Molson volume in Canada?

Dave Dunnewald

We said the Molson Canadian in Canada down mid single digit rate. Is that what you mean?

Marian Montagne - Thrivent Asset Management

Yes.

Dave Dunnewald

And you’re wondering about July?

Marian Montagne - Thrivent Asset Management

Sure.

Dave Dunnewald

Actually I don’t have July specifically for those brands. We don’t normally provide that level of detail but based on the overall performance of the business being up at a low double digit rate, I think you could assume that it’s noticeably better.

Marian Montagne - Thrivent Asset Management

When you’re looking at your competitor up there, or the mix, let’s just address the mix. Do you find that in the industry that it’s leaning toward the lower-priced type of beers? How’s that mix looking for you?

Dave Dunnewald

That’s a good question. Let me finish the thought on the previous one. When I say the Molson Canadian brand should have been noticeably better in July, I meant relative to what we saw in the second quarter. It was down mid single digits in the second quarter, you’d expect it to be quite a bit better in the July timeframe just based on what was going on in the industry and in our overall business.

Shifting to the mix question, actually thankfully in great contrast to what we saw in 2005 when we did the Molson Coors merger, our mix in Canada, let me shift to the industry mix because the story’s essentially the same, the value brands are roughly flat and have been for a number of quarters now. And that’s good news. There’s much more segment stability in the Canadian market than we saw even a year and a half to two years ago and much more stability than we saw three, three and a half, four years ago.

Marian Montagne - Thrivent Asset Management

And then pricing in the US, well actually pricing in volume, can you give us an idea first of all on the volume in the US as we go into this quarter and then how the pricing mix looks for the industry here?

Dave Dunnewald

If you look at volume, really all I can give you is what we said on the earlier call which is we had a very strong 4th of July and our programming was very effective. We really liked what we saw. We also feel very good about the lead up to Labor Day. Because we just put this business together and we’re essentially working the financial reporting piece with two parent companies and so forth, we’re not going to provide specific volume numbers. But the industry numbers point toward a very strong 4th of July this year for the major players. And certainly the Coors brands went into the joint venture with momentum that would indicate that they would benefit from that at least as much as any other brewer.

Marian Montagne - Thrivent Asset Management

Some of the data we’ve seen showed something like 9% growth in convenience stores. Is that the kind of very strong we’re looking at?

Dave Dunnewald

Well if the Coors business in the second quarter pre-Miller Coors was, if you take out the effect of July 4 timing, you really were around 7% growth. It’s not hard to imagine 9% growth or perhaps even more based on the kinds of trend changes we’ve seen leading up to July 4 just based on the call it industry sources, what some of our competitors have said about their volume around the 4th of July timeframe. So I guess the answer is yes. Does that help for that? And then I can talk about price.

Marian Montagne - Thrivent Asset Management

Yes.

Dave Dunnewald

On pricing, the pricing environment in the US industry for really the past two and a half to three years has been really consistently good in getting slightly better over time as commodity costs have increased, now not exactly in lock step. Let’s just say the pricing environment that we saw in the first and second quarters this year of 3% is solid pricing. Depending on which CPI measure you pick for the US, it’s still less than that so it feels sustainable. But it’s covering more than, that with cost savings are covering all the inflation that we saw in the US business and that’s quite an accomplishment.

Marian Montagne - Thrivent Asset Management

Are you seeing much of the 30 packs out there?

Dave Dunnewald

Yes, 30 packs are one of the largest packs that we have in the US. It’s a relatively stable package. We’re seeing some growth of course but the good news is, and that package by the way skews heavily towards grocery stores and mass merchandise channels, the good news is in our US business in the second quarter and actually in the second quarter and going back a few before that, we’re seeing solid growth across all the channels. So regardless of what 30 packs are doing, which is not very much, we’re seeing great growth across as I say all channels in 47 out of 50 states, really attractive broad-based growth. And the pricing environment has been sustainable and attractive for some time.

Operator

Our next question comes from Analyst Inaudible.

Analyst Inaudible

I apologize I got into the call a little bit late. But I wasn’t sure about you mentioned something about a mark-to-market in one of the reporting areas there. Could you help me out with that? What was that?

Dave Dunnewald

Yes, we have some currency hedges in our business, specifically on a Canadian dollar, and prior to the second quarter of last year is when we essentially achieved hedge accounting on those and no longer had to mark them to market. But up until that point, and actually I guess I mean including the second quarter of last year, after that we won’t have to mark these things to market. But prior to that when we saw a movement in the Canadian dollar, we’d have to adjust those hedges to market and that would result in an expense or an income on our income statement.

Analyst Inaudible

And that was an expense to you guys, is that right?

Dave Dunnewald

Yes, Paul. A year ago it was an expense to us and we even said the $5.8 million last year in the -

Mark Ingebritson

Derivatives are always market but they’re on the balance sheet of their value. It’s just a question of whether or not our way of hedge accounting and the realized gains are deferred. And that’s where we are. It’s just that in the second quarter last year there was a change in our hedging and there was a $5.8 million unfavorable foreign currency adjustment recognized that was somewhat unique.

Analyst Inaudible

And there’s no mark-to-market in the quarter just past Q2?

Dave Dunnewald

Nothing of that magnitude or of that type. We still have derivatives outstanding; we hedge those items; but we do have hedge accounting; we have hedge effectiveness; and so the gains and losses on derivatives simply flow through as the underlying items flow through the income statement and it flows through much more naturally.

Analyst Inaudible

So is that change between last year and this year, is that part of your underlying earnings that you talk about in the press release or how is that dealt with?

Dave Dunnewald

No Paul, in this particular case we didn’t think that this expense qualified as a one-time item for treatment to essentially put back in for our underlying earnings. So it’s not adjusted for that. It’s in the numbers so to speak.

Operator

Our next question comes from Judy Hong - Goldman Sachs.

Judy Hong - Goldman Sachs

Just some clarification on the timing of the synergies from Miller Coors JV. The $50 million the first year, and that’s starting as of now?

Dave Dunnewald

Good point. And actually the best way to answer that is in two parts. One, we have a commitment and two, we have the reality of where we are with Miller Coors. Number one, the commitment that we laid out last October is that we will capture $500 million obviously and then $50 million of that will be in the first financial year. That’s the commitment. However, at the time we rolled it out we didn’t know when Miller Coors might be completed. It could have been in December; it could have been in May; who knows. We got it done mid-year so now the reality is it’s done and the teams are not sitting around waiting for the first financial year to start. They’ve already started going after savings. So rather than adjusting either the commitment or the timing at this point, since we’re only five weeks in anyway, what I would do is look at it as an opportunity for the Miller Coors team to exceed their goals.

Judy Hong - Goldman Sachs

So when you first laid out the commitment, in your view the first financial year was really starting the first year of the calendar year financially?

Dave Dunnewald

Yes, for Molson Coors that’d be correct.

Judy Hong - Goldman Sachs

But now you’re saying the reality is that they’re already starting to implement some of the projects that could potentially lead to savings coming in faster than what you had laid out in the commitment?

Dave Dunnewald

That’s an opportunity for us, yes. I think the key is just not to assume that because the commitment is starting in 09 for $50 million that the Miller Coors team is sitting around waiting for that. They’re definitely not.

Judy Hong - Goldman Sachs

Just so I understand, under the commitment the $50 million is starting in 2009 and then the $225 million or the next round of savings accrue in calendar 10 under the commitment?

Dave Dunnewald

Yes, at this point that’s what the commitment is. Year one is 2009, year two is 2010 that’s $350 million additional, and then year three is 2011 with another $100 million of additional cost savings to get to the $500 million. That’s the commitment. I just want to make sure that people know that the Miller Coors team has an opportunity to exceed that commitment based on completing the deal in mid-year 08.

Judy Hong - Goldman Sachs

Has Miller Coors started to change any of the brand strategies in terms of the positioning of the brands, etc. at this point?

Dave Dunnewald

I would say that there are no significant changes that I’m aware of. There may be some minor things with smaller brands that have been adjusted, but at this point there haven’t been. And I think it’s important to know that with Miller Coors putting these two companies together really was not an opportunity to rationalize brands and that sort of thing. It was actually to do more with the brands we have. And they have distinct positioning and they’re very competitive in the market place and we want to actually increase that competitiveness rather than focus on rationalizing brands.

Judy Hong - Goldman Sachs

The continued delay in the decision on the use of cash, whether increase your buy-back or increase in dividends, etc., is that purely tied to just really trying to get a better handle on the cash outlays as relates to Miller Coors JV? Because it seems like every quarter we get this response “A few months out we’ll have better clarity or better visibility,” and we keep waiting and waiting and we just don’t get a clear answer.

Dave Dunnewald

We apologize for testing your patience on that. No, you’re right. To answer your question, the short answer is yes it is specifically related to the relative lack of visibility that we have right now to the timing of the cash needs for Miller Coors. Because that’s a big nut as they say, $450 million over the next couple of years, and how that timing lays out will be very important.

Operator

Our next question comes from Lucas Klein – Riversource Investments, LLC.

Lucas Klein – Riversource Investments, LLC

A couple of quick questions on Canada, first is just the low double digit growth in July. Can you just clarify is that a selling day adjusted? Is that a real STR number or is that somehow not adjusted for a difference in shipping days or something like that?

Dave Dunnewald

That is not adjusted for shipping days. As Kevin Boyce mentioned on the earlier call, the Canada market is so different province-to-province. There are some differences we believe in shipping days year-over-year in certain provinces that would tend to reduce that number a bit but it would still be a really strong number anyway.

Lucas Klein – Riversource Investments, LLC

Any sense of what the industry is doing? Would you expect that you’re gaining share in that environment? Or, is it just strength in the industry overall?

Dave Dunnewald

I think based on the strength of the number we ought to be at least even or gaining share.

Lucas Klein – Riversource Investments, LLC

Then just on the commodities inflation that you’re expecting in Canada, it looks like there is a moderation embedded in the guidance for the back half of 08. Kevin talked a little bit about just the timing of when the agricultural run up started late last year. Is that primarily the reason or is there anything else going on?

Dave Dunnewald

Well, we also mentioned we had some additional costs to close down our Edmonton brewery and also to start up our [Monkton] brewery and those aren’t huge factors but if you roll it all together it’s meaningful. It does get you from essentially the trend we saw in the second quarter to the annual guidance of mid single digits on a comparable basis or flat on an all in basis in local currency.

Lucas Klein – Riversource Investments, LLC

So that basically tells you the all in number has to be down in the back half, right? My math isn’t wrong on that?

Dave Dunnewald

It needs to be lower than what we saw in the second quarter. I’m not sure you could model in a down number.

Lucas Klein – Riversource Investments, LLC

Well, if I’m up call it 1.5 to 2 in the first half and I’m suppose to be flat for the year, that doesn’t mean I’m down in the second half?

Dave Dunnewald

It might be. I’ll let you do the math. We gave you the numbers.

Lucas Klein – Riversource Investments, LLC

Then in the UK, you’re starting to lap the smoking bans in the second half and I know the economy is not in great shape but is the expectation for kind of no improvement in the industry environment just because the economy is weak or is there anything else? Or, is that just sort of conservatism on your part you think?

Dave Dunnewald

I would say there’s conservatism but, it’s warranted. What I mean by that is we know the smoking ban will get better. We do not and we still do not the effect of smoking bans to be zero. Once you lap it you still see some lingering softness in volume but less, right. Then, within a couple of years, normally a year and a half two years, normally you see relatively little effect. Because we now have an economic issue and the UK in my experience in the beer space, the UK is one market where we have seen some macroeconomic issues that actually effect volume and the industry more than I’ve seen any other mature beer market and as a result I think there are some question marks around how significant would that be.

Lucas Klein – Riversource Investments, LLC

Then the pricing environment for the back half of the year, I mean underlying price this quarter on owned brands is up about .5%. Is that kind of reasonable to think about going forward or again you consider maybe a little bit more given commodities pressure?

Dave Dunnewald

We didn’t provide any forward guidance on UK pricing so I guess I’ll leave it to you to model that. What I would say is that the competitive dynamics if we move from – you know, take out the strategic things that we’re doing related to cost, the Heineken co-packing arrangement, Magners and all that, set aside all that and just talk about the competitive set in the UK. Essentially when you role from the first half to the second half you’re going from smoking bans to some macroeconomic questions. How does that affect pricing? It’s hard to say at this point but you’re essentially giving up one and picking up another. But, beyond that, I’ll let you model it.

Operator

I’m showing no further questions.

Dave Dunnewald

I did want to mention just one additional piece. When I was talking earlier about Canada mark-to-markets, I did want to emphasize that that was a benefit this year in the second quarter and not a benefit to the prior year so that’s not something that will help us going forward from second to third quarter. Beyond that, I just wanted to thank everybody for your interest in Molson Coors and for joining us today. If you have additional questions that we didn’t cover during our time this afternoon, please call Leah or me on our direct lines or at the main number here at Molson Coors which is 303-277-3500. Thanks again and have a great day.

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