Molson Coors Beverage Company (TAP) Q2 2007 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Molson Coors Brewing Company 2007 Second Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions]. As a reminder, this conference call is being recorded. 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.

Thanks, Matt. And hello and welcome everybody and thanks for joining us today. With me on the call are Tim Wolf, our Global CFO;, Kevin Boyce, CEO of Molson Canada; Frits van Paasschen, CEO of Coors Brewing Company; Peter Swinburn, CEO of Coors Brewers Limited; 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 the second quarter for Molson Coors Brewing Company, along with perspective on the back half of 2007. Then we will open it up for questions. In the second quarter of 2007, we achieved double-digit earnings growth by delivering strong top line growth, substantial cost reductions, reduced interest expense and a lower effective tax rate. Let's look at some of the highlights. We grew total company volume led by market share gains in the U.S. and Canada. This represents our first Canada share gain in nearly four years and the achievement of one of our most important goals leading into the merger. Although overall global sales to retail declined 0.7%, due to a softness in the U.K. beer market, our sales to retail in North America grew 1.5% in the second quarter. In fact, the U.K. market on and off-premise channels each declined approximately 7% in the second quarter, driven by some of the wettest weather on record and cycling the 2006 World Cup tournament. We continue our company-wide focus on brand building, and increased revenue per barrel and local currency in all three of our businesses. We captured additional merger synergies and next generation cost savings in the second quarter to bring our year-to-date savings from all cost programs to $78 million. Results from these initiatives allowed us to offset more than 80% of the cost of goods inflation impacting our company in the first half of this year. Both the synergies and next-generation cost reduction programs are on target for our 2007 goals. We successfully brought our new Shenandoah brewery on line in the second quarter, with annualized cash savings of more than $30 million and P&L savings of approximately $14 per year. We increased total company income from continuing operations nearly 45% in the quarter, led by 39% pretax income growth for our U.S. business. Both of these results exclude special and other one-time items. And we reduced our go-forward interest costs and effective tax rate by refinancing $625 million of our debt and refining as company structure. Overall, we are pleased with our company's performance in the second quarter as our teams continue to progress on brand building and taking costs out of the business. So at this point, I will turn it over to Tim to review second quarter financial highlights and trends and then we'll provide some perspective on the balance of 2007 for the company. Timothy?

Thanks Leo and hello everybody. Starting with the second quarter financial highlights for the total company, we reported consolidated sales volume of 11.5 million barrels, up seven-tenth of 1% from a year ago, while total company sales to retail declined seven-tenth of a percent in the second quarter. Volume growth was driven by brand strength in the U.S. and Canada, offset by weak market conditions in Europe. Net sales were $1.68 billion, up 5.9% from the second quarter of last year, while cost of good sold increased 5.1%. Marketing, G&A expense grew 1.9% in the quarter. We achieved income from continuing operations of $176.1 million or $1.94 per diluted share, excluding special and other one-time items in the second quarter, which is up nearly 45% from $121.6 million or $1.40 per share a year ago. These results exclude a gain on the sale of our interest in House of Blues Canada this year and one-time tax benefits and net special charges in both years, which are described in the earnings release we distributed this morning. Foreign exchange movements increased our total company pretax profit by approximately $7 million in the second quarter, driven primarily by a 9% appreciation of the British Pound and a 3% appreciation of the Canadian Dollar versus the U.S. dollar. By the way, all the financial results we share with you today will be in U.S. dollars, unless we indicate otherwise. Please note that all our company earnings discussions today will be for continuing operations, that is, excluding the Kaiser Brazil business that we sold last year in January. In segment performance highlights, starting with Canada, we grew market share more than one-third of a share point versus the prior year. On the strength of this volume growth, along with cost savings initiatives and favorable foreign exchange rates, pretax income excluding special charges and one-time items increased 1.9% to $146.2 million in our second quarter. Favorable currency benefited Canadian pretax results about $5 million versus a year ago. Positive factors in the quarter were partially offset by inflation, increased brand investments, and $5.8 million non-cash expense in the quarter related to mark-to-market adjustments on foreign currency hedge positions. These Canadian results exclude $24.1 million non-cash special charge related to the termination of our Foster's U.S. license agreement and $16.7 million one-time benefit from the sale of our ownership interest in House of Blues Concerts Canada, which is reflected in other income. Our Canada sales to retail, or STRs, for the second calendar quarter ended June 30th increased 1.1% from the calendar quarter a year ago. Molson strategic brands continued their mid single-digit growth trend in the quarter fueled by Coors Light, Creemore, Carling and our partner import brands, which all grew at double-digit rates. Coors Light, our primary growth engine in Canada, has achieved double-digit STR growth in every quarter since the merger. In addition, Rickard's continued its high single-digit growth this quarter, while Molson Canadian experienced a mid single-digit volume decline. Total Canadian beer industry sales to retail grew an estimated one-tenth of 1% in the calendar second quarter, so Molson achieved more than one-third share point gain. Molson Canada sales volume totaled 2.3 million barrels for the fiscal second quarter that ended July 1st, which is an increase of 4.0% from a year ago. Approximately 3 percentage points of this growth is due to the inclusion of the higher volume week leading into Canada, the Canada Day weekend in the second fiscal quarter this year, versus its inclusion in the third quarter last year. We expect this volume timing benefit resulting from the year-over-year alignment of weeks to reverse in our next third quarter. Net sales per barrel increased approximately 1% in local currency, driven by positive sales mix toward higher revenue per barrel products, including Rickard's and our partner import brands. Approximately 3 percentage points of revenue per barrel from selective frontline price increases was almost entirely offset by higher price discounting focused in Ontario and Quebec. Cost of goods sold per barrel increased approximately 6% in local currency, driven by the following factors: First, 2 percentage points of increase due to input cost inflation, which was more than offset by 3 percentage points of synergies and other cost savings within the quarter; a 3 percentage point increase from sales mix shift to higher cost, but also higher-revenue super-premium partner import brands; 2 percentage points of increase from a requirement to mark-to-market in the second quarter certain foreign currency hedge positions primarily related to future quarters; and finally, a 2 percentage point increase from other one-time impacts, including incremental costs to supply the market as a result of the Edmonton brewery strike. Marketing, G&A expenses decreased 1% in local currency, driven by reductions in G&A expenses, which more than offset an increase in overall brand investment. For our U.S. business, second quarter pretax income was $98.1 million, up 39.1% excluding special items a year ago. This increase was driven by sales volume growth, higher net pricing and continued savings from our operations initiatives. Looking at U.S. highlights: Our 50-states sales to retail increased 2.0% and we grew market share again in the second quarter. This sales increase was driven by low single-digit growth for Coors Light, which achieved its ninth consecutive quarter of growth, along with strong double-digit growth of Blue Moon and mid single-digit growth of Keystone Light. Also, we're encouraged by the performance of Coors Banquet, which grew slightly in the quarter by refocusing the brand's positioning on its heritage, reinforcing the redesigned packaging and increased advertising investment. Including our Caribbean business, total U.S. sales to retail increased 1.6% in our second quarter. Meanwhile, U.S. volume to wholesalers grew 3.1%, due to strong sales to retail growth and the timing of the 4th of July holiday in our fiscal calendar. U.S. net sales per barrel increased 2.2% in the second quarter, almost entirely due to higher frontline pricing. Cost of goods per barrel decreased five-tenths of 1% in the quarter, driven by over $22 million of cost saving initiatives, and lower depreciation expense, which were offset by higher commodity, transportation and packaging material costs. Our operations cost savings offset about two-thirds of the U.S. cost of goods inflation in the second quarter. U.S. marketing, G&A expense decreased nine-tenth of 1% in the second quarter, as higher brand-building and sales investments were more than offset by a decrease in G&A costs. Our Europe business, second quarter pretax income of $38.9 million, excluding special items increased 5.1% from a year ago, driven by higher revenue per barrel, lower operations and administrative costs and higher pension income, along with favorable foreign exchange rates, which added approximately $4 million in pretax results in the quarter. Pension income of $4.7 million in the second quarter, up $1.8 million from a year ago, reflects the improved funded status of our U.K. pension plans. These positive earnings factors were partially offset by cycling a $5.5 million gain on the sale of surplus land, which was reflected in Other Income for the second quarter of 2006. In more detail: Our Europe owned brand volumes decreased 7.5%, due to cycling a benefit from increased sales during the World Cup soccer tournament last year, along with an extended period of very poor weather conditions this year. Recall that our volumes increased 5.1% in the second quarter last year, largely due to strong sales during the World Cup which is played every four years. Our U.K. market share this quarter was impacted only minimally as other brewers also faced difficult comparisons related to the World Cup last year and poor weather this year. U.K. owned brand volume net revenue per barrel in local currency increased just over 4% in the second quarter, due largely to higher owned brand net pricing, with a portion of this benefit related to weak pricing a year ago during the World Cup. This represents our fourth consecutive quarter of improving trends in owned brand pricing, which is an encouraging turnaround from the previous two years. Cost of goods sold for our U.K. owned brands decreased about 1% per barrel in local currency, driven by cost savings from our supply chain restructuring program and higher pension income as our U.K. plans benefited from improved funded status and lower staffing levels this year. Marketing, G&A expenses in the U.K. decreased approximately 1% in local currency. Marketing and sales spending increased at a low single-digit rate as we continued to roll out our new ad campaigns for Carling and C2. G&A costs declined faster than front-end spending due to continued savings from cost initiatives and higher pension income. Moving beyond operating business unit performance, corporate G&A expense in the second quarter was $30.3 million, $2 million higher than a year ago from one-time fees related to restructuring some of our debt during the quarter. Corporate net interest expense, excluding U.K. trade loan interest income, was $27.8 million in the second quarter, which is $12 million lower than a year ago, driven by our repayment of debt during the past year and the benefit of cycling $4.6 million of expense last year related to adjusting Ontario Beer Store swaps to market value. Our second quarter effective tax rate was 13% on a reported basis and 20% excluding special and one-time items. One-time tax items include: This year, the non-recurring benefit of a one-half percentage point reduction in the Canada corporate income tax as well as a one-time adjustment to our liabilities for unrecognized tax benefits under the new FASB Interpretation No. 48 tax rules. These changes had the non-recurring effect of reducing our tax liabilities on the balance sheet and our quarterly tax provision by $11.5 million in the second quarter. Second, last year's second quarter reported results benefited from a 2 percentage point reduction in the Canada corporate income tax rate, as well as minor changes in two provincial income tax rates as well. These tax rate changes had the one-time effect of reducing our deferred tax liability on the balance sheet and our quarterly tax provision by $52.3 million a year ago. Free cash flow in the quarter totaled approximately $93 million, driven by operating cash flow of $221 million and asset sales of $33 million, minus $161 million of capital spending. Well over half of this CapEx was due to the repurchase of our U.K. keg float early in the quarter. Net debt at the end of the second quarter was $2.0 billion, and that excludes approximately $100 million of non-owned joint venture debt. This figure is net of $680 million in cash at the end of the quarter, which is primarily the proceeds of the $575 million convertible debt offering that we completed in June. Early in the third quarter, these proceeds were then used to fund most of a tender offer for some of our higher-coupon notes issued about 7 years ago. Special and other one-time items in the second quarter this year include two special charges; a gain on the sale of an equity interest in a company, and the discrete tax benefit that I mentioned a moment ago. Following are details on all, but the last of these items: Special charges, net totaled expense of $25.4 million pretax, are primarily due to the following: In Europe, we recognized $1.2 million of special restructuring expenses in the supply chain and other areas. In Canada, as we mentioned before, we impaired the value of our Foster's U.S. license agreement via a special charge of $24.1 million, which represents virtually all of our carrying value of this contract. Due to a recent adverse court ruling, this contract will expire in the fourth quarter of this year. Also, Canada results benefited from $16.7 million gain on the sale of our 50% equity interest in the House of Blues Canada business during the quarter. This non-recurring gain is reflected in other -- is reported in other income net, but it is excluded from our underlying non-GAAP earnings for the second quarter. Finally, in discontinued operations during the second quarter, we reported net income of $600,000, due to favorable FX rate movements, which more than offset a small increase in the indemnity estimates related to the Brazil Kaiser business. Now, I'll preface the outlook session 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 don't 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 anticipate 2007 corporate net interest expense of approximately $115 million, plus or minus $2 million, and that excludes $24.5 million of one-time expenses related to tendering our $625 million of our 6-3/8% notes, a very successful transaction that we completed in July. In the past few months, we have completed significant corporate projects to improve our company tax structure and refinance a portion of our higher-coupon debt. We expect these projects to reduce interest costs substantially next year, and I will provide more details during the Lehman Back-to-School Conference in Boston in about 4 weeks. We anticipate full year 2007 corporate G&A expense of approximately $100 million, plus or minus $3 million, which is a reduction of approximately $20 million versus 2006. Turning to our effective tax rate, we anticipate that our full year 2007 rate will be in the range of 20% to 25%, assuming no further changes in tax laws. Note, the U.K. government early in the third quarter approved changes in depreciation treatments and a corporate tax rate reduction from 30% to 28%, both effective April 1st, 2008. We have not yet finalized our examination of the impact of this legislation. Also, the settlement of additional open tax years or passage of other tax legislation in the U.K. and Canada could alter our tax rate outlook. We now anticipate that our long-term effective tax rate on GAAP earnings will be in the range of 23% to 28%. Our capital spending outlook for 2007 is approximately $425 million to $450 million, and that includes approximately $105 million for the acquisition of kegs in the U.K. this year and about $40 million of capital spending by our consolidated joint ventures. Our current free cash flow outlook for 2007 is $170 million, and that's defined as cash from operations, minus capital expenditures and that include the one-time impact, as I said before, of buying back our U.K. kegs, plus non-strategic asset sales. This free cash outlook also includes $24.5 million of one-time costs related to tendering debt last month and an incremental $50 million voluntary cash contribution to our U.S. pension fund in the second quarter, and this increases our expected total pension contributions to approximately $220 million to $240 million for 2007. These contributions have allowed us to fully fund our pension obligations, given today's assumptions for plan asset returns and interest rates. Our free cash flow plan excludes dividend payments and cash proceeds from stock option exercises, with option proceeds exceeding $165 million in the first half of this year. To be sure, our cash generation shows dramatic fluctuations from one day to the next, but we are optimistic that the business can achieve our free cash flow goal this year. Looking forward, we see much greater cash generating potential in this business than we are showing this year, and we will cover this in more detail in Boston next month. Now, an update on our cost reduction initiatives, which provide resources to invest for brand growth and to drop to the bottom line. In the first half of this year, we captured an incremental $32 million of merger-related pretax cost synergies. We also achieved $46 million of next-generation cost savings during the first half of 2007 as part of the program to generate $250 million of additional savings by the end of 2009, which is our program that we've referred to in the past as Resources For Growth. Combining both programs, we are on track to achieve our goal of total cost savings of $121 million in 2007. At this point, I'll turn it back over to Leo for a look ahead to the balance of 2007. Leo?

Thanks, Tim. Looking ahead, we will remain focused on building strong brands to grow the top line and reducing costs in each of our businesses to provide additional resources for growth. We'll also experience some cost of goods and other prior year comparison impacts that I want to highlight for those of you who model our business. In Canada, we continue to focus on brand building and cost reductions. Our first priority remains investment for growth. We are focused on building the company's strategic brands and driving innovation behind those brands. In particular, we will leverage our innovation on Coors Light, driven by our Sub Zero cold draught dispense systems, new SKUs, and the introduction of the cold certified can. Further, we have extended innovation across our portfolio with the introduction of Creemore Traditional Pilsner and new programming on our partner import brand portfolio. Our marketing team remains focused on continuing Rickard's momentum and stabilizing Molson Canadian. Strategies will include leveraging the introduction of Rickard's White, which is adding incremental volume to the trademark, as well as new programming and SKUs for the Molson Canadian brand. For the month of July, our Canada sales to retail increased at a low single-digit rate, although it is important to note that July's results are not necessarily indicative of third quarter performance. Due to year-over-year differences in our fiscal calendar, we expect third quarter sales volume to be lower than sales to retail. On costs in Canada, we continue our focus on productivity across the business, including merger synergies and other cost saving initiatives in operations and G&A, to reinvest in our brands and offset inflation. Based on current commodity rates, we now expect underlying full year cost of goods per barrel to increase at a low to mid single-digit rate in local currency. That's excluding the mix impact of continued strong growth by our partner import brands, any incremental cost of the Edmonton strike, and the $11.3 million year-over-year impact of our requirement to mark-to-market certain foreign currency hedge positions. Without these exclusions, we anticipate that our reported cost of goods per barrel in Canada will increase at a high single-digit rate in local currency for full year 2007. Last week, we announced the closure of our Edmonton, Alberta brewery to make our Canada business more cost competitive in an ever changing market. This action was based primarily on the loss of the Foster's U.S. production contract and the ongoing shift in the marketplace demand from bottles to cans, as the Edmonton brewery only has a bottle line packaging capacity. Other key elements in the closure decision were the competitive need to reduce further operating costs and the labor impasse at the Edmonton brewery. This closure will result in the third quarter asset impairment of about $37 million and other, primarily non-cash charges of $10 million to $12 million over the balance of this year related to pension expense and other closure-related costs. We also plan to offer affected employees fair termination benefits, which will add some cash costs to the closure, but the impact of these benefits has not yet been determined. As part of the project, our Canada team is working to ensure a smooth transition of the Edmonton production to other breweries in our Canada network. Turning to our U.S. business; our focus for the balance of 2007 is maintaining our current volume and share momentum and aggressively managing costs despite significant inflation. Our fundamentals remain strong, and the year-to-date pricing environment is positive. But, recall we face tougher volume comparables in the back half of the year, and in the third quarter we will begin to cycle more than $6 million of quarterly benefits related to the closing of the Memphis brewery a year ago. Our priorities for the balance of the year are these four areas: First, we will continue to increase our investments this year behind Coors Light, Keystone Light and Blue Moon at a low single-digit rate versus last year and continue our initiatives to develop our regional brands, such as the refreshed Coors Banquet packaging and ad creative. For Coors Light, our priority is to constantly deliver refreshment as cold as the Rockies. Our Cold Activated Bottle and Frost Brew Lined Can deliver Rocky Mountain Cold Refreshment in an innovative way. Second, we will continue to go to market with discipline, strengthening our key retail accounts business and leveraging our NFL sponsorship as the football season begins. Third, we will strengthen our export markets. While we maintain the leading share of the Puerto Rico beer market, the economic environment remains challenging in that market. Fourth, we are focused on improving 3-tier profitability and service. To that end, our Shenandoah brewery is now fully operational, allowing us to diversify our brewing capability and reduce transportation time and costs to serve our East Coast customer base. We continue to expect U.S. cost of goods per barrel to increase approximately 2% for the full year of 2007, with the first half virtually flat and the second half growing at a mid single-digit rate. With the current outlook for higher commodity inflation and cycling the Memphis plant closure, we expect our U.S. cost initiatives to offset only about one-third of the anticipated inflation in the second half of this year. In the first 4 weeks of the third quarter, our 50-state U.S. sales to retail were up about 4% from a year ago, partially driven by an unusually warm weather this year. And finally, due to year-over-year differences in our fiscal 52-week versus 53-week calendar, we expect sales volume to be lower than sales to retail in the third quarter. In our Europe business, we face challenges on four fronts. First, consumer spending in the U.K. economy continues to be soft across all categories, largely due to higher consumer interest rates and taxes. Second, the competitive environment in the U.K. beer industry continues to be challenging, both on-premise and in the take-home channel. As we have noted in previous quarters, the smoking bans in England and Wales have taken effect in the past few months, and they are expected to adversely affect our volume and profit trends for the next year or two. And then finally, poor weather experienced across the U.K. during the second quarter continued into July, and we expect that this will have a negative impact on results in the third quarter. Nonetheless, our U.K. team has done a great job staying focused on building brands for the long haul and cutting costs wherever possible. On building strong brands, we will continue to manage our price promotions to optimize profitability. We plan to adjust the positioning of Coors Light in the U.K. to bring this brand closer to its global profile. This will include a name change from Coors Fine Light to simply Coors Light, along with new brand positioning and a new marketing program. We will increase the investment behind Coors Light and continue to actively support C2, our mid-strength lager entry from Carling. And we continue to roll out our new cold-dispense technology and distinctive above-bar fonts, which support our portfolio. We completed 20,000 installations during the first half of 2007 and currently expect a further 28,000 over the balance of the year. We continue to see sales uplift from these installations. On managing costs; we will continue to attack costs to provide fuel for brand growth and to offset cost inflation. While the flow-through of cost initiatives implemented in the first half of 2006 will have less impact in the second half this year, additional cost reduction initiatives are underway. It is important to recognize that these cost reductions are being achieved while we are investing more to build our brands. In the first five weeks of the third quarter, our Europe sales to retail have decreased at a mid single-digit rate from a year ago, largely due to continued poor weather across the U.K. In summary, our second quarter results show the ability of our company to deliver on the promise of our merger. While the global challenges we face have not lessened, the teams across our company have built success one quarter at a time by staying focused on the key drivers of shareholder value in this business. We have consistently worked to build strong brands and attack costs to provide further resources for growth in both sales and earnings. Our most recent results show that we are investing to build our brands and grow share consistently, and we are exceeding our cost reduction goals, and we are growing profitability for our shareholders at a double-digit rate. Looking ahead, we are confident that our teams can build on that momentum and win the all important summer selling season, while we make more progress building great brands, attacking costs, and becoming a top performing global brewer. Now, before we start the Q&A portion of the call, a quick comment. Our prepared remarks will be on our website for your reference within a couple of hours this afternoon. Also, at 3 PM Eastern Time today, our Investor Relations team led by Dave Dunnewald will host a follow-up conference call, which is essentially a working session for analysts and investors who have additional questions regarding our quarterly results. This 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

[Operator Instructions]. Our first question comes from Judy Hong, Goldman Sachs. Judy Hong - Goldman Sachs & Co.: Hi. First, juts a couple of questions on Canada. If you could just update us on the competitive landscape, particularly in places where you've seen discounting activity pick up a little bit and then just in terms of your effort to stabilize Molson Canadian; in the quarter it was down again the mid single-digit pace. If you can just talk about whether you are seeing any sort of tangible progress on that effort?

Yes, so first if you look at the discounting, as you asked, it varies from province to province, region to region if you like. Historically, we've spent most of our time talking about Ontario and that is the biggest market, so I'd say that the second quarter has been pretty aggressive from all companies not just the majors, but also the local players as well and historically in our market, the first half of the year is a little bit heavier in discounting than the second half of the year. So, it's been competitive. We did get some pricing through earlier in the year, but by and large, the pricing has been dealt back. In terms of Molson Canadian, we are seeing some stabilization in Ontario; we have a little bit of a weaker western part; we have some new areas that we are investigating to the back half; but clearly the segment that Molson Canadian participates in the premium segment is being attacked by outside and when you look at the growth, a really fantastic growth that we are getting on Coors Light, that to a degree is affecting our Molson Canadian brand in the most part of Canada. Judy Hong - Goldman Sachs & Co.: Okay. And then secondly, just in the U.S., can you just clarify where the distributor inventories level is at the end of the second quarter, because in the quarter I think the shipments were ahead of SCR and then you ended the first quarter with higher distributor inventory. So can you just help us understand where we are and then how we should think about that either being reverse for the balance of the year or any other factors to consider?

Yes, sure this is Frits van Paasschen. The short answer to your question is our inventories are essentially flat compared to a year ago. The slightly more technical answer to the question is, if you look at our sales versus removal the first three quarters of the year, there is a lot of noise in that data. Now whether you not used that as comparison in order to determine or try to derive your own inventory levels. And I say that because we have the affect of the 53rd week, we have the fact that the 4th of July span two quarter, we have the Memphis build up and frankly, we had some pretty strong momentum in the marketplace. But as you look into the third quarter, you will see a shift where our sales will be below removals as opposed to what it had been in the first two quarters. Judy Hong - Goldman Sachs & Co.: Okay and then just finally, on the free cash for generation, looking at next year 10 I guess is it now appropriate to think about the pension being fully funded that you really don't get the incremental pension income... pension contribution next year so you really get a much bigger swing into next year than we were previously expecting?

Yes, July this is Tim. I am presuming you are talking about cash flow specifically and as you can see from this year and the last few years... last two years since the merger we have put a lot of money into the pension plans, no question about it. I will share a little bit more detail on this in Boston. But we are at a point now where we feel really good about the funded status of all 3 of pension plans obviously we're responsible for all 3. With that said, I think that the amount of cash contribution we place under the pensions can moderate. Obviously this year 2007 is... will has been a very, very heavy CapEx year, the purchase of the CAG, the completion of the Mountain brewery, the completion of Shenandoah, a very, very appropriately aggressive roll out of cold dispense units in the U.K. that Leo mentioned and so we are looking forward to a very strong delivering on the promise so to speak cash flow for 2008 and again all go into that, and don't forget also in 2007 we have the additional pension contribution, we settled it last year when we closed Memphis, this is the year we have to pay the pipe that actually make the cash contributions. So all in, when you think about all the cash that we have this year I think the critical point of underlying free cash performance of Molson Coors is better than ever and we are rolling into 2008 with really good momentum. Judy Hong - Goldman Sachs & Co.: Great, thank you.

Yes, you are welcome.

Thank you. O our next question comes from Robert Van Brugge from Sanford Bernstein.

Good afternoon.

Hello Robert.

Question about U.K. pricing, certainly it was lot better than what we had seen in previous quarters. Do you expect this trend to halt, in other words, are your competitors following on the price increases at this point?

Hi Robert, this is Peter Swinburn. We're actually showing sort of improving trends on pricing over last four quarters, so it is something of a continuum. Obviously, the comparisons with last year weren't as tough because of the pretty aggressive pricing around World Cup. As far as the competitor is concerned, really there's just lot of volatility in the marketplace. We've made it clear from the outset that it's... we will try as best as we can to play the part of the profit optimization roots as far as both volume and pricing is concerned and certainly this quarter we seem to record it more right than wrong but we'll continue to take the judgment calls and obviously move forward to the year, but so far so good I think.

Okay, great, thanks.

Thanks Robert.

Thank you. Our next question comes from Mark Swartzberg with Stifel Nicolaus.

Thanks operator, good morning everyone.

Hi Mark.

Hi Mark.

I guess Kevin, two questions on Canada on a local currency basis. Firstly, on Coors Light, was pricing net sales per barrel for the brand up in the quarter year-on-year?

Yes, it was.

Can you give us some idea of how much?

Net sales per barrel; I'd say very low single-digit.

Okay, great. And then same thing with Molson Canadian. It sounds like it was down, was it down low single-digit, down mid single-digit, what level of decline in terms of current local currency was it down?

In terms of the net sales per barrel or absolute?

Yes, net sales per barrel local currency.

It was probably up a touch.

Up at touch.

Yes.

Okay. And you feel like both those brands because of the first half being a little more competitive, you'll see a little bit of an improvement in the second half?

Well it's always hard to tell, but if you look historically at the industry, a lot of the push if you like has come in the earlier part of the year, but I guess it depends on the plans that everybody has and where they are relative to their targets.

Great. And those numbers were total region, right?

Total country, yes.

Great, thank Kevin.

Okay.

Thanks Mark.

Thank you. Our next question comes from Christine Farkas with Merrill Lynch.

Actually, all my questions has been answered, thank you.

Thanks Christine.

Thanks Christine.

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

Hey, good morning guys.

Hey Bryan.

Couple of question; first Tim, if you could just touch on working capital and I may have missed this in your prepared remarks, but just working capital in the quarters seemed awful high?

Yes, absolutely and it was high obviously building inventories, gabbled off a bunch of it, but we had timing difference in payables and receivables in the U.K. Obviously, there is a big, big swing there, given the size of some of our customers there. We have higher bonus payments this year than last year. Last year, they were meager, this year they were stronger. So there is a higher payments there. So we have lot of working capital movement the wrong way in the second quarter, but again I had focused you and others on the underlying performance, virtually all of the working capital use if you will, in my mind it's timing and if anything if you look at how Shenandoah is operating, how our plants were operating, how are Canadian supply chain will work pre and post Edmonton closure, if anything are objective will be to cycle tighter faster useless working capital and I think we've got the plans and direction in place to do just that.

Okay. And then a follow up on Judy's question on pension. On the P&L next year given the amount that you put into your pension now, will pension expense become a point of positive leverage next year?

Well if what you are asking is, we are seeking pension income? The answer is no.

Okay.

I mean this is... our objective is to have I mean, have our operating businesses generating more profit as a result of good investments growing our business. We are a beer company not a pension income company.

Right.

Right? So our job on the pension side is to mitigate risk, moderate and lower the amount of cash we have to put in because our pensions are well funded and returning adequately at a very, very acceptable level of risk. So to me, the way I look at the business I think our CFOs look at the business is pension income is nice, but that's not what we seek to do. We seek to sell more beer, so the going in proposition for 2008 is we will have less, I mean, I'll go into some of this detail next month, but to have less pension income per se and more risk mitigation and less need to put more cash into our pension funds.

Okay great. And then just one last if I could, on the Shenandoah brewery, did you operate... this quarter did you operate it full capacity this summer and then looking ahead, did your cost savings assumptions assume any ramp down in production or in your investment in Golden. I guess meaning, as Shenandoah wraps up, ramps up the full capacity, it leaves open the possibility to start reducing the cost and shrinking your footprint a bit in Golden, is that part of what's in your cost savings estimates going forward?

Yes Bryan, this is Frits. To be clear, Shenandoah is fully up to speed. In fact, it just had a few weeks operating and more than a 100% of what we anticipated its ability to perform, that's both in brewing and in packaging. So we are actually thrilled with the performance of that facility and invite everybody to come down and have a look when hey have a chance. So the first part of your question is, is Shenandoah up and running, absolutely in a great shape. The second part of your question relates to, are there further cost savings coming through Golden? I would answer that a little bit more broadly and that is first of all, as we grow the business, we will continue to have to put out quite a bit of volume through our Golden brewery operations. But having said that we continue to invest in fine ways to make the most of that facility to automate where we can and drive efficiencies and yes, those kinds of savings are absolutely built into our cost projections for the year.

Bryan, this is Tim. Just as a add on to Frits and Dennis Puffer's modesty, I mean, if you look at the way Shenandoah was operating, its about 50%, about 47% of last look, more productive than Golden on a per person per barrel basis. And what they are achieving is by having brewing and packaging capacities in an obviously close proximity. The packaging capacities which already were among the most efficient in the world, are operating at even a higher levels of efficiency. So the story is not completely told yet, in terms of how high is up but I think Frits' and Dennis' teams have done a spectacular job in beginning to squeeze even greater savings of over and apart from just the freight savings out of the Shenandoah decision.

And just to build again on what Tim saying, I want to call you back towards what Leo read in the prepared remarks, which is as we get to the second half of the year, we won't be in the position of anniversarying the Memphis closure from a year ago. So the savings that we have achieved in the first half of the year are certainly better than they will be in the second half.

Okay great, thanks guys.

Thank you. [Operator Instructions]. Our next question comes from Kaumil Gajrawala from UBS.

Hi. Can you talk a little bit about what's behind some of the growth in Keystone and what it... where it is as a percent our portfolio now that its being going double-digits I guess for about 6 months or so?

Yes. There are really 2 drivers to Keystone, right. Now one is we think we have a... we found a real chord with the lower premium drinkers around our positioning smooth even when you are not and based on the substance that we think Keystone is... the Keystone White is the smoothest of the below premium beers and that's a great place to be with the product. But in addition to that, because of the velocities we've enjoyed through that positioning, our distribution growth has been ahead of even what we hoped for and that is one of our stretch objectives for the year. And given the relative share of Keystone Light compared to the other major below premium brands and the consequent lower distribution that we have today with Keystone that distribution growth is an opportunity we see paying off for the next several years. So I don't think its by any means, an accident its a relationship between great positioning and frankly a terrific product and then some very focused efforts around gaining distribution, which we see is a long term opportunity.

It's useful. Could I just maybe drill a little bit deeper, if you could talk about channel a little bit as it relates to Keystone?

We are seeing growth really across channels both in sea store and key accounts in groceries and the growth has been terrific actually for us.

Okay great thank you.

Thank you. Mr. Kiely, I am showing no further questions.

Thanks Matt; thanks everybody for being with us. For those of you who will be Boston, we will see you soon and for those of you who won't, we will track to you at end of third quarter. Thanks for your continued interest in Molson Coors and have a great day.

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