Molson Coors Beverage Company (TAP) — Q2 2015 Earnings Call Transcript

Thank you, Carmen, and welcome everyone to the Molson Coors earnings call. I appreciate your participation today. Joining me this morning are Gavin Hattersley, CFO of Molson Coors and Interim CEO of Miller Coors, as well as Stewart Glendinning, our Canada CEO; Simon Cox, our CEO for European business; Kandy Anand, our International CEO; Sam Walker, our Chief Legal and People Officer; Brian Tabolt, our Controller; and Dave Dunnewald, our VP of Investor Relations. In the second quarter, our underlying pretax earnings on a constant currency basis increased by 5.9%, supported by positive net pricing and cost-saving initiatives. However, our underlying after-tax income decreased by 9.9% due to a higher tax rate and unfavorable foreign currency impact. We saw an increase in gross margins across the U.S., Canada, and Europe, with net sales revenue per hectoliter growing in the U.S. and Canada when measured in local currency. In Europe, while NSR per hectoliter decreased in local currency, excluding the terminated Modelo and Heineken contracts, NSR per hectoliter rose in most major European markets, except Serbia. We also expanded our global underlying operating margins, particularly in our U.S. and Canadian operations. This quarter, we continued our strategy focused on brand-led profit growth, significant cash generation, and disciplined allocation of cash and capital. We consistently invested in our core brands, seeing Coors Light in the U.S. increasing its market share. We’re progressing in reshaping our portfolio towards above-premium, craft, and cider, and we’ve enhanced the depth and reach of our international brands in fast-growing markets. This year, we brought Staropramen lager back to our U.K. portfolio, acquired Mount Shivalik Breweries in India, and purchased distribution rights for Rekorderlig cider in the U.K. and Ireland. These acquisitions allow us to establish high-potential platforms for growth in key markets. We have also decided to significantly restructure our operations in China to boost our overall international performance, leading to the closure of our Alton brewery in the U.K. as part of our U.K. supply chain restructuring. We're committed to using PACC as our business-decision framework, focusing our cash on rewarding investors, maintaining a healthy balance sheet, cutting costs to enhance front-end capabilities, and making strategic investments for brand-led growth. Our team is highly engaged and motivated, aspiring to be the first choice for our consumers and customers. This quarter's progress occurred amid ongoing volume challenges in our largest markets, significant foreign currency impact, a higher tax rate, and the earlier mentioned contract terminations in the U.K. and Canada. In the second quarter, our net sales per hectoliter dropped 2.2% in constant currency, influenced by changes in our sales mix within Europe and International, particularly due to the termination of the Modelo and Heineken agreements in the U.K. While positive global pricing and revenue management partially offset these changes, constant currency net sales fell 3.3% due to lower volumes in Europe and Canada and a negative mix, again partially mitigated by positive net pricing. When factoring in the effects of foreign currency, reported net sales decreased by 15.4%. Globally, Coors Light volume fell by 2.3%, driven by declines in the U.S. and Canada, although offset by high single-digit growth outside North America. Our craft portfolio achieved high single-digit volume growth this quarter, with cider sales growing over 30%. Worldwide volume decreased by 1.9%, affected by the termination of agreements for our Miller brands in Canada and Modelo brands in the U.K. Our underlying pretax income totaled $327.9 million, down 0.9% but up 5.9% on a constant currency basis. Underlying after-tax income dropped by 9.9%, influenced by a higher tax rate, which followed a large discrete tax benefit from the previous year, and unfavorable foreign currency conditions. However, positive net pricing and cost-saving initiatives partially offset these impacts. Underlying EBITDA for the quarter was $455.3 million, reflecting a 4.4% decline from last year, again due to currency fluctuations. We initiated our $1 billion stock buy-back program, repurchasing over 672,000 Class B common shares in the second quarter, with another $50 million allocated to Class B share repurchases early in the third quarter. Regionally, in the U.S., underlying earnings rose by 8% as a result of reduced brewing, packaging materials, and fuel costs, coupled with higher net pricing and supply chain improvements. Volume in the U.S. faced challenges due to a weak beer market in the second quarter. Overall, Miller Coors achieved solid financial results while continuing to transform our U.S. portfolio towards the above-premium market. Both Coors Light and Miller Lite increased their market share in their segments, and Coors Banquet experienced growth in volume and market share. Our Above Premium portfolio, which includes Blue Moon Belgian White, Leinenkugel’s, and the Redd’s family, also showed growth this quarter. In Canada, underlying pretax income rose by 4.3% in constant currency, benefiting from positive pricing and mix, as well as significant cost savings, even with the negative effects caused by the conclusion of the Miller brands agreement in March. In Canadian retail, sales declined by 8.1%, primarily due to that contract termination. Coors Light and Molson Canadian volumes both decreased, affected partially by industry weaknesses in their primary regions. However, Coors Banquet exhibited strong volume and share growth in the second quarter, alongside solid performance from Mad Jack Apple Lager, Molson Canadian Cider, and Strongbow Cider, along with strong double-digit growth for our Granville Island craft brands. In Europe, if we exclude currency fluctuations and the terminated Modelo and Heineken contracts, our underlying pretax income would have increased in the second quarter, attributed to higher sales volume, positive pricing, and reduced costs. The underlying income from our European business fell by 21.5% due to unfavorable currency impacts and the terminated contracts. We saw some recovery and higher beer volumes in Croatia, Bosnia, and Serbia, regions that were significantly affected by flooding a year ago. Core brands like Carling improved in trends, and both Ozujsko and Bergenbier saw volume and segment share increases in their markets. Furthermore, our craft and above-premium offerings performed well, with Coors Light, Doom Bar, and Staropramen outside of Czech achieving strong growth in this quarter. Our International business noted double-digit volume growth in the second quarter, with triple-digit growth in India driven by our strong local business and the earlier acquisition of Mount Shivalik Breweries, along with double-digit growth from Coors Light in Latin America. This quarter, in striving for international profitability, we announced a significant restructuring of our existing China operations, which led to a $3.6 million increase in price promotion expenses. This additional expense and unfavorable currency fluctuations primarily contributed to the $2.1 million rise in the underlying pretax loss for International compared to last year, although these impacts were partially offset by increased volume and reduced marketing expenses. Now, I will hand it over to Gavin for further financial highlights from the second quarter and a look at the remainder of the year.

Thanks, Mark, and hello, everyone. In our financial highlights, the underlying free cash flow for the first half of 2015 was $241.1 million, a decrease of $90.6 million compared to the first half of 2014. This decline was mainly due to lower underlying after-tax income, negative foreign currency impacts, and reduced benefits from working capital changes, notably increased cash payments for taxes. The free cash flow for the first half included $198.1 million in operating cash flow and $248 million in net adjustments related to our discretionary U.K. pension contribution made in January, as well as Miller Coors investments and the cash effects of special items. Investing cash outflows amounted to $139.8 million for capital expenditures. Our underlying free cash flow reflected $692.9 million in cash distributions from Miller Coors and $758.1 million in cash invested back into Miller Coors. A thorough reconciliation of our underlying free cash flow can be found in our earnings release shared this morning. By the end of the second quarter, total debt stood at $3.138 billion, with cash and cash equivalents reaching $413.8 million, leading to net debt of $2.724 billion, which is $430.4 million less than last year. For a detailed review of our business unit financial results for the quarter, please refer to the earnings release we issued earlier today. Looking ahead to the remainder of 2015, our full-year guidance remains unchanged from last quarter. We target an annual underlying free cash flow of $550 million, with a margin of plus or minus 10%, based on foreign currency rates as of July 31. We expect cash contributions to our defined benefit pension plans to fall within the range of $300 million to $320 million for 2015, which includes our 42% share of Miller Coors contributions. For 2015, we project pension expenses to be around $27 million, including our share from Miller Coors. Our anticipated capital spending is about $300 million, and we estimate our MG&A expenses in Corporate for 2015 will be approximately $110 million. Our consolidated net interest expense is expected to be about $120 million, depending on foreign exchange rates and hedging positions at the end of the second quarter. We foresee our underlying effective tax rate for 2015 to be between 18% and 22%. After this year, we expect our effective tax rate to be closer to the lower end of our long-term range of 20% to 24% over the next few years, barring any further changes in tax regulations, settlement of tax audits, or adjustments to our uncertain tax positions. Regarding our cost outlook for 2015, we still anticipate Canadian cost of goods sold per hectoliter to rise at a mid-single digit rate in local currency, while International COGS are expected to decrease in a low double-digit range per hectoliter. However, Miller Coors now expects its cost of goods sold per hectoliter for 2015 to be roughly comparable to the previous year, shifting from earlier guidance predicting a low single-digit increase, primarily due to lower fuel and commodity costs. In Europe, we're revising our expectation for a low-single digit decrease in cost of goods sold per hectoliter this year in local currency, down from a previously anticipated mid-single digit decrease, largely owing to increased sales of higher-cost above-premium brands. Finally, concerning the impact of foreign currency on profit and cash this year: applying the foreign exchange rates as of the end of July to our results from the second half of 2014 would lead to a reduction of over $43 million in underlying pretax earnings for that period, which would have an even greater effect on cash. When considering the foreign exchange impact on pretax results for the first half of this year, we arrive at a total foreign currency effect of more than $70 million compared to our 2014 consolidated pretax results. We have implemented measures in recent years to mitigate some of our foreign currency risks through debt structures and hedging strategies. At this point, I'll hand it back to Mark for the outlook, wrap up, and the Q&A.

Thanks, Gavin. In addition to the foreign currency headwind that Gavin just discussed, our results in the balance of this year will continue to be challenged by the termination of three major business contracts, which we anticipate will have a full-year 2015 profit impact of $40 million pretax, as well as a higher effective tax rate. Additionally, and importantly, we plan to significantly step up our portfolio investments across all of our businesses. These investments will have a particularly negative impact on third quarter and overall second half bottom-line results, but we expect them to provide benefits long-term, as we focus on delighting our consumers and our customers to ensure we are the first choice in the geographies and segments where we choose to play. Regionally, in the U.S., we are driving a handful of priorities. Job number one is to transform our portfolio and rediscover volume growth. And to do this, we have three focus areas. Firstly, taking share and growing our American light lagers, Coors Light and Miller Lite. As part of Coors Light's overhaul, we are rolling out a contemporary visual identity across all packaging, and we have introduced new national television advertising that emphasizes Coors Light’s Rocky Mountain heritage. Secondly, we'll continue to premiumize the portfolio and further develop Above Premium offerings that have the potential to build scale quickly and sustainably. Examples include the successful launches of Blue Moon White IPA and Leinenkugel’s Grapefruit Shandy, along with the expansion of Blue Moon Cinnamon Horchata 6-packs, as well as the introduction of Leinenkugel’s new seasonal release, Harvest Patch Shandy. And then thirdly, we will simplify and clarify our below-premium portfolio offering. Job Number Two in the U.S. is to improve our commercial capability, including winning in an on-premise and increasing the relevance of our brands in this critical channel, where brands critically are built, and finally Job Number Three is to ensure that our cost base is competitive and fit for the future. Consistent with our priorities, in the 2nd half of this year, we intend to invest significantly in our brands and information technology, and as a result we expect our U.S. underlying operating margins for full-year 2015 to be relatively flat versus prior year. In Canada, we continue to invest in our core brands and Above Premium, including Craft, imports, cider, and flavored malt beverages. For our core brands, a new ad campaign and increased focus on commercial execution on Coors Light will provide the foundation to help improve trends for our largest brand in Canada. Also, solid creative execution and integrated supporting programs for Molson Canadian, particularly related to our Anything for Hockey and Beer Fridge advertising, are starting to create a renewed bond between drinkers and our second-largest brand. In the 2nd half of this year, we plan to invest aggressively in these programs. In Above Premium, the termination of the Miller brands contract will present a headwind for our business through to the 1st quarter of next year. Despite this, the strong performance of the Coors Banquet, Mad Jack Apple Lager, Rickard’s Radler, and Molson Canadian Cider brands are influencing the transformation of our portfolio toward the above-premium segment, and our expanded partnership for the Heineken, Dos Equis, Sol, and Strongbow brands is delivering volume and share. We also recently announced that Blue Moon Belgian White, the number-one selling craft beer in the United States, is coming to Canada this month as Belgian Moon. In Europe, we will cycle the terminated Modelo and Heineken contracts in the U.K. for the balance of this year. The Modelo brands volume represented about 1 share point in the U.K. for us last year. The repatriation of the Staropramen brand rights for the U.K. business and securing the U.K. distribution rights for Rekorderlig cider are part of the plans we said we would execute to transform our portfolio and mitigate the impact of these contract losses. Starting in 2016, we expect these two brands to add more than 350,000 hectoliters of above Premium volume annually to our Europe business and provide attractive growth potential for the future. In combination with the integration of the Franciscan Well craft brands in Ireland and the acquisition of the brewing and kegging operation of Thomas Hardy’s Burtonwood Brewery in England, we now have a broad range of consumer and customer offerings in the above-premium, craft, and cider segments across the U.K. and Ireland. Also, we continue to invest in our core brand portfolio across Europe to ensure that these critical brands remain relevant and contemporary for our consumers. The positive momentum we are currently seeing in the Carling, Ozujsko, Bergenbier, and Borsodi brands illustrates that this investment strategy is working. Additionally, we intend to explore further opportunities to improve the efficiency and effectiveness of our European operations over the coming months to unlock more resources to invest in driving top-line and bottom-line growth. Our International business is focused on attaining profitability in 2016 on a constant-currency basis and accelerating our overall growth and expansion into new and existing markets. We will continue to drive rapid growth for Coors Light and develop Coors 1873 in Latin America. We will also continue to build on Staropramen’s momentum in greater Europe, recognizing that volume for this brand in the U.K. and Ireland will transfer at the end of this year from our International business to our Europe operation. Additionally, we will augment rapid growth in our existing India business with growth from our newly acquired Mount Shivalik Breweries operation. Finally, here are the most recent volume trends for each of our businesses early in the 3rd quarter. In the U.S. through July 25th, STRs decreased at a low-single-digit rate. In Canada through July 31st, STRs were down high-single digits; however, excluding the Miller brands last year, our Canada STRs for this period decreased at a low single-digit rate. In Europe in July, sales volume was up high single-digits, driven by growth in 10 out of 11 countries in the region. Our International sales volume, including royalty volume, increased at a double-digit rate in July. As always, please keep in mind that these numbers represent only a portion of the current quarter, and trends could change in the weeks ahead. So to summarize our discussion today, our 2nd quarter financial results reflect continued volume pressure in our largest markets, significant impact from foreign currency movements, a higher tax rate, and terminations of business contracts in the U.K. and Canada. We expect these headwinds to continue in the balance of this year, along with a significant step-up in our brand investments across all of our businesses, which we expect to negatively impact our short-term profit but provide longer-term benefits to our financial performance. Going forward, we will continue to implement our strategy of driving brand-led profit growth, meaningful cash generation, and disciplined cash and capital allocation. Over time, we expect this strategy to help us unlock opportunities for growth in Molson Coors Brewing Company's top-line, bottom-line, and long-term shareholder value. Now, before we start the Q&A portion of the call, just a quick comment. As usual, our prepared remarks will be on our website for your reference within a couple of hours this afternoon. Also, 1 p.m. Eastern Time today, Dave Dunnewald will host a follow-up conference call, which is an opportunity for you to ask additional questions regarding our quarterly results. This call will also be available for you to hear via web cast on our website. Additionally, we hope to see many of you at the Barclays Global Consumer Staples Conference in Boston on Thursday, September 10. So, at this point, Carmen, we would like to open it up for questions, please. Thank you.

My first question is on Canada. So, it seems like you lost share but your pricing and profitability was relatively healthy. So, can you just talk a little bit about your market share performance and kind of your balancing share versus profit, it sounds like you may do the investments you'll step up in the back half, so would you expect the market share performance to improve and is that really more of a near-term priority in Canada?

Hi, Judy. Let me offer you just a couple of comments and then Stewart can pick up on the detail. I think the encouraging thing in Canada, as you mentioned, is our pricing performance was strong and having now secured de-pricing performance clearly gives us options as we move into the second half of the year, signaling very clearly that we do intend to step up the level of our commercial investments behind our portfolio. Stewart, do you want to talk about some of the priorities as we go through the second half of the year?

Sure, Mark. Look, Judy, we're not going to give any specific guidance on where we think share will end up. I think there is always a careful balance between share and price. We've got the flexibility in the back half for being able to choose that. One area of note, I'd just point out is our conscious decision with Coors Light in Quebec in the second quarter to take the price up to match the 5% beers; that's the one market in Canada where the 4% beers have historically been priced underneath the 5% beers. So we sought to address that; it was a really specific decision. In other parts of the country, we saw some fairly aggressive pricing and price spending, and my team is looking at those tactics for the back half.

Okay. So would you attribute some of the market share losses to the healthy pricing and the more aggressive competition, or is it sort of the ongoing challenges that you've been stating?

I wouldn't say that the answer to that is yes. There were places where higher prices have translated into lower shipments.

Okay. And then Gavin, just two questions for you. One is just on the U.S. and sorry, I missed the Miller Coors calls, but I think one of the priorities that we're hearing more from you is just simplifying and streamlining the below premium segment and recognize that you've got a long tail there. And I guess, historically, some of the challenges that you've had, just working with your distributors and making sure that you've got a plan in place. So, can you just elaborate on the plan there? And then on the financial side, the free cash flow guidance this year, just remind me what’s embedded in terms of the currency impact and any other kind of puts and takes that’s changed since your last guidance?

Okay. So, Judy, let me take the last one first. From a free cash flow point of view, I'll just remind you that our guidance is $550 million, plus or minus 10%. And we haven't been specific about the foreign exchange impact on that underlying free cash flow other than to say that the $70 million I referred to from a profit point of view, the impact from a cash point of view would be even higher than that. And if I can just remind you of some of the impacts beyond FX because obviously foreign exchange is a big part of that, but we did have our strong push on working capital in 2014, which over-delivered for us, and if you recall some of our larger customers paid early, and then we do have a higher capital investment plan, some of the cost savings programs, and we have higher cash tax payments, as our cash tax rates get closer to our underlying tax rates. So that's really the cash flow side. And let me just talk my Molson Coors cap off and put the Miller Coors cap on.

Below premium.

Below premium was the other question. Look, I mean we all continue to lose share of industry and shares of segments in our economy brands, and we are reviewing our long-term strategy for these brands. We know we have the ability to win in the economy segment. For example, in 2014 and the first half of this year, Steel Reserve has been up in mid-single digits, in large part due to the introduction of the Flavored Steel Reserve Alloy Series. So we're going to get sharper from our below premium economy segment point of view, we're going to simplify, and I'm not ready to share those details publicly. We do have our full distributor meeting with our distributors coming up, and we'll elaborate a little bit more then.

Got it.

Judy, the only thing I would add, I mean your specific question was around the relationship with our distributors and below premium brands; that job number one is for the team at Miller Coors to really clarify our below premium portfolio strategy and align that with our retailers, our distributors will then benefit from the impact of that clarity. That's a work in progress, and Gavin and the team will be taking that to market in the near term.

Got it, okay, thank you.

My first question has to do with your price mix realization in Europe. I recognize that there are a lot of moving pieces as some of your previous partnerships unwind, but given the change in your COGS outlook, driven by premium mix shift, can you offer a little bit more color on what your price mix or price per hectoliter realization would have looked like on an underlying basis in Europe in the quarter?

Vivien, I'll let Simon talk to the detail, just you know from a context point, one of the things I referred to in the script was actually in local currency we saw pricing growth on a per hectoliter basis. The context in Europe as we go from local currency to euros or from sterling to euros and then onto dollars, so it can get a little bit complex. Simon, you want to offer just a bit more detail as to how you are reading the mix across countries and across our portfolio?

Thank you, Vivien. As Mark mentioned, discussing 11 countries with varying dynamics and the effects of contract manufacturing, along with the loss of Modelo, is intricate. However, let me simplify this. First, it's important to note that pricing in Europe this quarter increased by 0.6%. The negative factor was primarily the mix, which is again related to the contract losses. If we exclude those impacts, our net sales revenue per hectoliter rose in 10 of our 11 markets, with Serbia being the only exception. Therefore, if you remove the Modelo brands from our volume growth figures, we are pleased to see that the pricing and volume mix reflects a pricing increase of 0.6% and a rise in net sales revenue per hectoliter in 10 out of 11 markets. Overall, we believe our pricing performance was strong, especially when paired with our volume results.

That's very helpful.

Vivien, I would like to point out that we have seen positive movement in our volumes across most markets through July. The team is effectively balancing price and volume in nearly all of our markets.

Absolutely, no, that's great. My second question has to do with Canada and the industry backdrop. You know one of your key competitors reported earnings, and actually he had characterized the Canadian market, how the industry is, having had good performance in the quarter which stands in contrast a little bit, I think, to the way that you guys characterize the market. So can you could offer any more context? Is that just a function of relative geographic mix or is there anything underlying kind of the discrepancy in that commentary?

Stewart, do you want to pick that up and just give a feedback of the industry backdrop?

I'm not sure Vivien where you saw the discrepancy. Certainly, we saw an industry that was healthy and in positive territory. I think from our standpoint, we had two things going on in our business. When you look at the underlying performance, our pricing was stronger, and we certainly weren’t affected by geographic mix. When you look across the country, the west was much stronger than the east. And if you looked at Ontario and Quebec and the Atlantic provinces, all of those declined. Those are the provinces in which we are strongest.

Thank you very much.

Yes, good morning gentlemen. Two questions; firstly in Europe, certainly the volume numbers look pretty good. I just want to know whether you could give out market shares across the major markets. I know it’s a relatively easy comp to the flooding, but you do seem to have done pretty well, and perhaps you can give us an idea on shares. On Canada, I mean you gave us the figure of minus 8.1 and then say that half of that is due to the Miller brands. Is there nothing coming back from the extended Heineken contract yet? Is that something still to come or does that have a reasonable positive impact on this quarter?

Hi, Ian, I'll ask both Simon and Stewart just to talk to the specifics. I think it's fair to say within Europe that we don't typically divulge share by country. Also, Europe’s level we did lose a little bit, about 0.33%, but if you reverse out the impact of the loss of the Modelo, then actually it holds relatively flat year-on-year. Simon, anything you would add to that?

Not a lot, Mark, because as you say we don't intend to speak to that by country. If you do reverse the impact of Modelo volumes and then aggregate it back up, we did actually slightly grow share across the region, which is a setting combination with what we regarded to be pretty decent pricing performance and this is what we're seeing in the market in terms of discounting, then we were pretty happy with our volume performance. So, very slight share gain if you reverse out the impact of losing the Modelo contracts.

Yes, probably the only other thing I'd add, Ian, is that in a number of markets within the economy segment have grown pretty rapidly over the course of the last 12 months. And we are responding to that, but certainly not leaping to that and if we do have any share weakness anywhere, it would tend to be in the economy segment, which is obviously lower margin segment. So, we're playing, I think, a very balanced and responsive game across the markets in Europe. Stewart, do you want to talk about some of the emerging tailwinds in Canada's as you look at the broader portfolio?

Yes, absolutely. I mean, Ian, you asked a question about losing the Miller brands and picking up the intensive brands. Certainly we've had a good start with intensive brands, but they're much, much smaller than the loss of the Miller brand. So, I don’t know if you want more on that, but that's sort of intensive brands are a fraction of the Miller size.

So, just to be clear, these intensive brands can be quite slow. We don't want to see step up in that seeing Q3 free going forward. It will be over the next few years, will it?

We think we got some really good brands and of course we know that we can grow them, but we're growing off a very small base.

Understood. And just a quick follow-up, just getting premium back for the U.K., it's quite a big amount, I think, you're paying there, which is quite surprising to me, but when do you actually get that back? Does that come in from 2016?

Yes, and the majority of the deal is that we get the brand back from full on the 28th of December this year. So, effectively yes, for 2016 onwards.

Ian, the other thing I'd add is, as you would expect, the repatriation of the startup from a backend to the U.K. has been running through our PACC model and it makes absolute sense for our business on the basis of utilization of PACC based on existing arrangement and the new arrangement, and with that new arrangement will open up to us in terms of the growth profile of the brand.

I mean, I think you've mentioned the figure 350,000 hectoliters, which should start, is that split 50:50 at the moment?

I don't recall, if we mentioned this, Ian.

We know you have the opportunity.

Let’s just stick to the 150,000 hectoliters on a full-year basis in 2016 and obviously we've got an ambition to more that forward from there, but we open again the detail at this stage.

Very good. Thanks a lot.

Can you provide an approximate figure for the additional investment needed as we plan for the remainder of the year? Additionally, there seems to be a heightened urgency on your end regarding productivity, especially in Canada and due to changes at Miller Coors. Do you agree with this observation of increased urgency, and if so, what factors do you think are contributing to it? Investors appear to be noticing this as well.

John, let me take your second question first; then Gavin can talk on the specifics on incremental investment or rather than lack of specifics of increments of investment. On the second point, I've been very clear that when I commented the role that there is no fundamental change in our strategy but I'm very keen for our business to run harder and faster, and I've talked I think very consistently about the need for us to accelerate our brand-building capabilities and performance faster and importantly to improve our capability at the front end of the business. That is now our working trend; we've rolled our whole sales execution model across all of the sales force in the U.K. and Canada. So that’s hundreds of people are now changing their behaviors, their routines, and we're measuring people in a different way, around both effectiveness and efficiency. So, really starting to work harder to unlock further growth potential in our portfolio as we continue to build that portfolio out and then parallel to that, continuing to drive for a new fit for future cost base in the organization. So, I'm very pleased with how the teams have responded and I'm pleased that you're picking up that sense of urgency. It’s not nebulous; it’s important. Gavin, do you want to talk about the marketing investments?

Sure, John, thanks. We're not going to provide specifics on that, but I can say that we are planning to significantly increase our marketing spend in the U.S., Canada, and internationally. We also have some major business transformation costs in the second half of the year, as we've been trialing our new systems earlier this year and late last year. We expect substantial activities in the second half, which will naturally come with a certain level of associated costs. However, we will not be providing specific details on that.

And should we expect that to be more media related, sponsorships, sort of, all of the above? Any just sort of rough ideas in terms of what buckets it could all go into?

John, as I mentioned, we are currently working on the overall Coors Light initiative, which includes a new contemporary visual identity for all packaging. We have launched national television advertising focused on Coors Light's Rocky Mountain heritage. We will continue to invest in Miller Lite's heritage program, which we are very pleased with. The styled bottle from 1975 has recently entered the market, and we are excited about it. We will keep investing in the Above Premium and craft portfolios, including Blue Moon White IPA and the upcoming Leinenkugel seasonal release, Harvest Patch Shandy, as well as Redd’s. There are many initiatives underway, so what I mean is that the second half will see a greater focus on media.

Excellent, thank you very much.

My question, really two, one's a follow-on to John's and it's simply the incremental spend. Is it something that you had planned in your budget at the start of the year or is this based on things you're seeing here as the year progresses? And then I had an unrelated question.

Yes, I mean I would say largely in the business it was planned, and I would say in the U.S. we are probably shaping it up to even a little more than we'd originally planned given some of the activities that we want to do, Mark, but broadly I would say it was in line.

I think that's fair, Mark, and obviously as we've seen a little bit of benefit come through on the COGS line, and in the U.S. is giving us the opportunity to make some choices, and we're making the right choice, which is to further invest behind our brand portfolio, because we're very clear we want to get the business, really claim to win in the U.S. So we're in a position where we can make those choices, and I think that the right choices for the long-term health of our broad business.

Got it, okay, great. And then with the U.S. JV, I may have missed at the very beginning; I missed the opening comments, but is there any update on the transition to a permanent CEO there?

Let me share a couple of updates. Both Allen and I have been focused on recruitment and have made significant progress. We are pleased with how Gavin has integrated into the business on an interim basis and how the team has supported him, along with the changes he has already introduced. I am confident that we will soon be able to clarify our plans for a permanent solution. More details will follow, but as you can understand, I won't discuss individual career developments on this call. Overall, we are making good progress.

Great, Gavin, a first question. Given the pretty remarkable success of Constellation, with the Mexican brands, what impact has that had on the pricing environment in the U.S., particularly in the light of the fact that in a lot of states the gap now is very low between their brands and the premium brands? And there's two possibilities here. One is, it looks in certain states that Constellation is becoming a price leader, and they're taking some pretty ultra-aggressive price in California so that would be positive; the other way of looking at is, you know, there's been a lot of market share lost to them, and that could create more competitive pricing dynamics. So just wondering if, first off, you could kind of give us a sense of the pricing environment in the U.S. and how things may have changed because of the success they've had.

Thanks, Robert. I mean that's quite a question. So I think maybe just, there's no question that the Mexican imports are playing in somewhat of the same space, refreshing and insatiable space that the American light lagers are. The good news is that demonstrates that there's a continued relevance of refreshing and insatiable lager beers for the beer drinkers. And with Miller Lite and Coors Light, we think we've got two great brands that can grow volume and share and compete with them, particularly given some of the great sales and marketing programs that we've got coming. From a pricing point of view, I'm obviously not going to tell you about what our strategy is; what I can tell you is that we worked very hard over the last five weeks to develop a very clear point of view on pricing which has been led by Kevin Doyle and the team, and that's a pricing strategy that we're communicating with our distributors. So we had a clear point of view; I'm obviously not going to share it, but just remember we do follow that pricing strategy that is local in nature, it varies by brand and varies market by market. And more detail than that, Robert, I can't give you.

No, I'm not looking for your pricing strategy, I’m more in terms of your assessments of the pricing environment versus cost. And so do you think, I think we're seeing signs that Constellation is starting to become a price leader in certain markets, here at a 3% price increase in California? Do you think there is the chance of perhaps a greater umbrella effect from them than in prior years?

Yes, look Robert, I mean I don't think my answer’s going to be any different other than that we have a clear pricing strategy that we're not going to share publicly. That's all about all I’m prepared to say on that particular topic.

Okay. I got it. And maybe an easier question; you talked about a couple of years ago, your move in the economy segment to PET. Can you give us, I guess, a sense of where that stands now or are you a 100% national and your general assessment of whether that's been a success or not?

We are not a 100% national, no, but we are on track with the plan that we have in place for that rollout, and so far we're pleased with that, Robert.

Thank you very much.

Hello, everyone. I have two questions. First, could you remind us about the mechanics of the right of refusal if you're able to acquire the other half of Miller Coors, considering you currently own 58%? Secondly, Gavin, in simple terms, regarding the balance between top line growth and profit margin expansion, it seems there has been significant improvement in overall portfolio momentum compared to the industry, but margins have not seen much growth. Will your approach change given the adjustments you've made? I would like to know if there is any early impact on focusing on Modelo margins rather than prioritizing top line growth. Thank you.

I'd take issue with one thing you've said there, Pablo, because under Tom’s leadership, we actually expanded our operating margins almost double since the beginning of the joint ventures. I think we've been pretty successful from that perspective. From a portfolio transformation point of view, I would say we've made really nice progress under his leadership as well and we're going to continue to focus on transforming our portfolio. We need to take share of the American light lager segments; we need to continue to put premium onto the portfolio and develop the above premium offerings, and we're working very hard for that, and I think we've made good progress, and I'm going to continue to focus on that in a very deliberate, focused, and bold way.

At that point, could there be any changes to the medium-term profit margin guidance outlook for Miller Coors? And this time also provide that, but you said something that I would be hearing a new on some point?

There has been no update to the guidance that was previously given, Pablo.

I think we've been very clear about the three priority areas within the business. A lot of that continues the good work that Tom and the team did. And look to accelerate that over the course of the life of our long-range plan. So, with regard to your other question, obviously all of that information is in our filings from late 2007 and mid-2008. As to the opportunity and clearly it’s purely speculative, what's right for us to secure a bigger share of the joint venture within the U.S.? There is a right of first offer and last offer and some other associated rights, but the detail buying that's in all of the public filings, which I'd refer you to rather than get into them on this call. Thanks for your questions.

I have a follow-up question regarding your outlook on the impact of foreign exchange on pre-tax profits. Last quarter, we estimated it would be around $55 million for the year. Is that still accurate, or has your outlook on the effects of foreign exchange changed?

I think what I say, Bryan, was that if you have to plan foreign exchange rates at the end of July to our results for the second half of last year, and it would have reduced our underlying pretax earnings by more than $43 million, so if you add on to that, the actual foreign exchange impact in the first half of this year is about $27 million, and the impact would be more than $70 million year-over-year.

Okay. So the impact from foreign exchange rates was significant, reducing our underlying pretax earnings by over $43 million last year, and the actual foreign exchange impact for the first half of this year is about $27 million, leading to a year-over-year impact of more than $70 million.

That's probably what I've said last time.

Thank you for your insights. I have one more question as I try to understand how this year has progressed compared to your earlier expectations. It seems that in Europe, excluding the impact of lost contracts, volume may have improved a bit. Conversely, it appears that volume in Canada might have declined, while in the U.S., the cost of goods environment seems to have improved slightly. Is that correct? Am I overlooking any details regarding these areas that have performed better or worse than anticipated?

I'm not sure I would characterize it like that, Bryan. I think we're pleased with our overall performance in Europe, and as I mentioned, if you reverse out the loss of the Modelo brands, our shares increased slightly, and certainly the last couple of months through June and July you heard me mention our July STRs, we're seeing relatively strong volume growth, so that's encouraging and clearly we're right in the middle of peak selling season at the moment and we're up against the impact of the floods from last year, so there's still quite a volatility in the marketplace. So I don't think we're in a different place to what we assumed. And certainly within Canada, sure, it's been very clear that stripping out the loss of the Miller brands, there's a couple of areas that have, we will look at fixing as we go through the second half of this year or the volume impact as we’ve adjusted pricing in Quebec on Coors Light and just a couple of trading tactics as well. But strategically, I feel we're exactly where we anticipated being but you know this is always a game of strategy and tactics and a couple of our tactics will adjust as we go through the second half. But I think the critical thing is back to your first question on FX, we're looking at a $70 million FX headwind as we flagged, we've also flagged up $40 million on the contract losses, and we've been very clear that with the strength of our pricing that was seen in the first half, it’s given us some options to invest incrementally in the second half to further strengthen our brand portfolio. I mean that's what has happened and will be happening as we go through the second half of the year.

I'd just like to thank everybody for the time for joining us on the Molson Coors Q2 earnings call, and as I mentioned earlier, hopefully we'll see many of you at the Barclays Global Consumer Staples Conference in Boston, on September the 10. So thank you for your time and interest in our company, and I look forward to catching up with you in due course. Thanks, everybody.