Constellation Brands Inc (STZ.B) 2007 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Constellation Brands fourth quarter and fiscal 2007 earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Bob Czudak, Director of Investor Relations. Sir, you may begin your conference.

Thank you, Jackie. Good morning, everyone, and welcome to Constellation's fourth quarter and fiscal year 2007 conference call. Richard Sands our Chairman and Chief Executive Officer; Rob Sands, President and Chief Operating Officer; and Tom Summer, Executive Vice President and Chief Financial Officer are here with me this morning. By now you should have had an opportunity to read our news release which has also been furnished to the SEC. This conference call is intended to complement the release.

During the call we will discuss financial information on a GAAP, comparable, organic, and constant currency basis, reconciliations between the most directly comparable GAAP measure, and these and other non-GAAP financial measures are included in the news release or otherwise available on the Company's website under the investor section. These reconciliations include explanations as to why management uses the non-GAAP financial measures and why management believes they're useful to investors. Discussions will generally focus on comparable financial results excluding the acquisition related costs, restructuring, and related charges and unusual items. We will also discuss organic net sales information which is defined in the news release and constant currency net sales information which excludes the impact of year-over-year currency exchange rate fluctuations. Please be aware that we may make forward-looking statements during this call. While those statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations. For a detailed list of risk factors that may impact the Company's estimates, please refer to the news release and Constellation's SEC filings. Thank you. Now I would like to turn the call over to Richard Sands.

Good morning, everyone. Thank you for joining us today. While fiscal 2007 reflects solid organic net sales and record comparable basis earnings, our results were impacted by the competitive challenges in the U.K. Nonetheless, I believe we had a great year as we made many strides over the last twelve months which have strengthened our business and positioned us to take advantage of the significant opportunities in the beverage alcohol business for true growth.

These activities include the acquisition and integration of Vincor in June 2006 which gave us a fifth core market, Canada, a growing and highly profitable wine market which further enhanced the premium mix of our portfolio. The formation of the Crown Imports joint venture in January 2007 which provides the Grupo Modelo portfolio, a single national importation and marketing platform for the first time. The SVEDKA brand acquisition in March. SVEDKA is the fastest growing major imported premium vodka brand in the U.S. and significantly advances our premium spirits strategy. And the organizational and operational footprint refinements in our worldwide wine business. I am confident these and other actions we have taken strengthen Constellation's position for the future as we focus on creating value by executing our strategy and capitalizing on the growth opportunities from our existing portfolio o new products, strategic partners, and acquisitions.

Rob Sands, our President and Chief Operating Officer is here with us today. We believe it is important that you receive Rob's insight related to business operations. At this time I am going to turn the call over to him for further details and updates on our business activities and markets.

Thanks, Richard, and good morning, everybody. I am very pleased to have the opportunity to discuss our business and markets with you today. I am going to start by briefly reviewing our fiscal 2007 sales on a constant currency basis. For the year our organic branded business increased a solid 7%. Imported beers performed very strongly, delivering 15% organic growth. Spirits increased 1% in total but continued investments behind our premium spirits brands helped drive a 4% increase for our branded spirits business. Branded wine, organic net sales increased 4% as strong growth for North America was somewhat offset by the decrease in the U.K. marketplace.

Not much has changed in the U.K. marketplace or for the status of the Australian wine order supply from our recent discussions. The strength of the multiple grocers combined with a significant Australian wine over supply continues to result in pricing pressures and makes it difficult to recover increasing costs. As expected, in late March the U.K. government implemented another duty increase. This came in slightly above last year's duty increase and our expectations. As a reminder, the Australian over supply has made low cost, bulk wine available which in turn has allowed certain U.K. multiple grocers to quickly build private label wines in the Australian category.

In 2007 Australian grape harvest is almost complete. The interview based on certain industry estimates, the harvest could be approximately 25 to 30% lower than the 2006 grape crush. The effects of the ongoing drought conditions are also expected to reduce the 2008 harvest size. While there are signs that the Australian bulk wine market is firming, and we are not waiting for the competitive situation in the U.K. to change, instead, we are focusing on increasing operating efficiencies and improving product mix -- we are increasing marketing support behind our brands that provide margin enhancement opportunities including Robert Mondavi Woodbridge, our Echo Falls brands and certain brands in the Hardys range as well as the launch of a new brand Melbourne Lounge.

Last August we announced plans to invest in the U.K. distribution and bottling facilities. This initiative which will allow us to reduce costs and maximize asset utilization is now moving from the planning stage to the execution stage. The new distribution center and bottling facility will be located in close proximity to our existing distribution center in the Bristol area. This will eliminate the need for satellite warehouses and allow us to move both wine instead of bottled goods resulting in significant ocean freight savings. These facilities are expected to be operational in calendar 2009 and will transform our U.K. operating footprint and provide greater operating flexibility and efficiencies. This will enable us to enhance our service to customers. Tom Summer will provide an update on the financial details for this program in a few minutes.

With the announcement of Jon Moramarco as the CEO of Constellation International in February of 2007 a new position for the organization, we have realigned our international reporting responsibilities. Reporting to John are Hardy and Constellations Wine's International based in Australia, Nobilo in New Zealand, and Constellations Europe headquartered in the United Kingdom. This refinement of our organizational structure preserves our decentralized operating model while ensuring that we maximize coordination of import and export activities for our products operating capabilities and resource utilization for our international operations.

Shifting to the United States, the wine market remains very healthy and continues to reflect a significant amount of trade-up activity by consumers. We continue to improve our mix by focusing our resources in the faster-growing premium categories. Our premium wine brands continue to perform very well in the marketplace as shown by growth in dollar sales at retailers in the IRI food and drug channel and the many industry awards earned by our brands. 15 of our wine brands received Adam's Growth Brand awards. This is the most for any company. Six made IRI's, Best Performing Wine Brands list, and four made Impacts Hot Brands list. In the fast track, rising star and new power brand categories Black Box, Four Emus, Hayman & Hill, Monkey Bay, Nobilo, Red Guitar, Three Blind Moose, Twin Fin, and Trove, all won awards.

We entered in the established growth, power, and hot brands category, included--Alice White, Blackstone, Estancia, Rex Goliath, Robert Mondavi Private Selection, Ruffino, Simi, and LaTerre. I would also like to report that efforts to reduce distributor inventory levels are underway and progressing as planned and we continue to expect to complete most of this initiative in the first half of fiscal 2008. As expected, this has been received by the distributor, and that went very well, and we have received indications that many of our distributors intend to reinvest savings from this initiative behind our brands in the marketplace.

Turning to Vincor, we continue to be pleased with the results and integration of the business. In the U.S. the brands have been fully integrated into the Constellations Wines U.S. organization, Hogue, RH Phillips, Toasted Head and Kim Crawford are growing faster than category trends according to market data.

In Canada we are seeing trading-up trends driving a positive mix across our portfolio. This has been led by Jackson Triggs, and Sawmill Creek and our [Inaudible], and Ice Wine brands which according to market data are outperforming their respective categories. Additionally we're working to leverage our leadership position and strong portfolio of new world wines to capitalize on the fast-growing California, Australian, New Zealand, and South African categories.

Shifting to spirits, our branded spirits business had a strong year as we continued to execute on our strategy of building premium offerings with brands like Effen, Cocktails by Jenn, 1792 Ridgemont Reserve bourbon and [Vical] cognac, the acquisition of the SVEDKA vodka brand significantly increases our premium spirits mix. With over a million cases sold and 60% growth in 2006, it provides a powerful selling and marketing platform to build our premium portfolio. SVEDKA has great marketplace momentum and we intend to build upon the success of this brand by leveraging Constellation's strong distribution infrastructure to capture additional brand opportunities.

Our imported beer business both in the form of Barton beers through December 2006 and now Crown Imports delivered strong growth for the year as consumers trade up in the category. The entire Grupo Modelo portfolio of brands, Corona, Corona Light, Modelo Especial, Negra Modelo, and Pacifico were 2006 Impact Hot Brand award winners.

The operational transition for Crown Imports with wholesalers in the Eastern U.S. continues to progress in a seamless manner. Senior level staffing has been in place since Crown commenced operations and the building of support teams is substantially complete. These teams are partnering with wholesalers and retailers to affirm strategy and responsibilities to ensure the portfolio receives appropriate support and growth opportunities are maximized. Efforts include increasing penetration of Modelo Especial, Negra Modelo, and Pacifico, launching the 24 ounce Modelo Especial can, and reintroducing Corona 24 loose pack in the Eastern U.S.

In closing, I believe we are making the right decisions to address challenges. Our selling, marketing and operating teams are executing the right actions to strengthen our business across categories and geographies. We remain focused on capturing growth opportunities in beverage alcohol, and creating value. Now I would like to turn the call over to Tom Summer for a financial review for fiscal 2007. Tom.

Thanks, Rob. Good morning, everyone. I would like to start with a review of our P&L for the full fiscal year where my comments will focus on comparable basis financial results and commentary for net sales comparisons will be on a constant currency basis. Our fiscal 2007 net sales grew 12% reflecting a 6% increase in organic net sales and a 9% from the Vincor acquisition partially offset for the move of imported beers to Crown Imports resulting in ten months of imported beers net sales in fiscal 2007 versus 12 months in fiscal 2006.

Organic net sales for our branded businesses, wine, imported beers, and spirits increased 7%. Imported beers generated 15% organic growth. Spirits increased 1% with branded spirits growing 4%, and branded wine organic net sales increasing 4%. Our base business branded wine net sales for North America increased 8% while Australia, New Zealand was up 1%. Competitive conditions in the U.K. drove a 6% decrease for Europe.

Moving to margins, for the year our gross margin was 30%, up 30 basis points. This primarily reflects a sales mix benefit from Vincor partially offset by a number of factors in the U.K. including the annual duty increase and the impact of lower sales on fixed cost absorption as well as higher transportation costs for imported beers and increased material costs for spirits.

Operating margin for the year was 16.2%, a decrease of 30 basis points. Operating income included $17 million of stock compensation expense primarily related to the March 2006 adoption of FAS 123R. This included about 2 million of expense related to the accelerated vesting of options for certain employees who were moved to Crown Imports. This action eliminated the potential expense volatility associated with these options if vesting had not been accelerated.

In addition we recognized $4 million for transaction related costs in our share of the start-up and transition expenses for Crown Imports. Together stock compensation expense in Crown related costs negatively impacted our operating margin by 40 basis points. Wine operating margin for the year was 16.4% which was level with the prior year. This primarily reflects synergies and mix benefit from the Vincor acquisition offset by the impact of U.K. related margin pressures discussed a moment ago as well as the impact of stock compensation expense.

As noted in our press release, you will see that we have changed our segment reporting to separate beers and spirits, and we've added a segment for reporting Crown Imports. We have included, restated historical segment information for the separation of beers and spirits on our website under the investor section. In beers operating margin declined 110 basis points primarily due to higher transportation costs and stock option expense. Increased material costs and stock compensation expense drove the 270 basis point decline in spirits margin. For the year corporate and other expenses totaled $61 million compared with $63 million for the prior year. As a reminder, fiscal 2006 included $4 million of expenses associated with the Vincor tender offer.

We're targeting corporate expenses for fiscal 2008 to be in the range of 75 to $80 million. The increase includes the impact of additional stock compensation expense, costs associated with investments to upgrade business financial management systems, and other costs to support the growth of the Company. The increase in corporate expenses from our estimate back in March primarily reflects refinement of planned expense estimates and allocations between our segments.

Our SG&A for the year was 13.8% of net sales compared with 13.2% a year ago. This reflects the impact of stock compensation expense and costs for Crown Imports I just discussed, somewhat offset by Vincor's synergies. Overall, our operating income increased 11% to $843 million for the year due to the addition of Vincor as well as base business growth. The $17 million of stock compensation expense effectively reduced our operating income growth by 2 percentage points.

Equity investment earnings totaled $53 million versus $11 million last year. That increase was driven by Crown Imports which contributed $39 million of equity earnings for the month of January and February 2007. Looking at Crown's operating results for its two months of operations, Crown generated just under $370 million of net sales and operating income of $78 million. Constellations' EBIT margin for the year was 17.2%. This represents a 50-basis point increase versus last year and was driven by the increase in equity earnings from Crown Imports. Interest expense for the year was $269 million, up 42% over the prior year reflecting the impact of financing the Vincor acquisition and higher average interest rates on our floating rate debt. Our average interest rates for the year on all of our debt was 7% compared with 6.2% for the prior year. At the end of February we had approximately $2.6 billion of bank debt and $1.6 billion of fixed term and other debt.

The SVEDKA acquisition closed in March and was funded through our senior credit facility. Taking interest rate swaps into account, approximately 60% of our debt is effectively fixed rate after the SVEDKA acquisition. Our effective tax rate on a comparable basis was 35.6% for the year versus 34.6% last year. This came in lower than our previous guidance as certain tax positions will clarify during our year end closing process at more favorable levels than expected. As a result of the factors I've just mentioned, net income increased 6% for the year. Our weighted average diluted shares outstanding were 240 million compared to 239 million last year. Diluted EPS grew 6% to $1.68 for the year and was down 3% for the fourth quarter to $0.35.

Shifting to free cash flow, for fiscal 2007 we generated $143 million of free cash flow. This came in below our expectations, primarily due to some capital spending that was pulled forward in late February. Capital expenditures for the year totaled $192 million. As a result of this timing shift, we are revising our CapEx guidance for fiscal 2008 to $155 million versus our previous estimate of $175 million. In addition, we're revising our 2008 free cash flow guidance up to 170 to $190 million from our previous guidance of 140 to $160 million. This $30 million increase reflects the lower CapEx amount I just discussed as well as plans we put in place to improve working capital levels versus our earlier target.

As you will recall, in the first quarter of fiscal 2007 we refined our definition of free cash flow because under FAS 123R excess tax benefits from share-based awards previously reported as a component of cash flow from operating activities were required to be reported in the financing activity section of the cash flow statement. Last year, in order to show free cash flow on an apples-to-apples basis versus fiscal 2006, we added excess tax benefits from share-based awards back above the line. Now that we have completed a fiscal year with this classification change, we're reverting to defining free cash flow as net cash provided by operating activities less CapEx. This will keep us in synch with operating cash flow as reported on our GAAP cash flow statement.

Now to leverage. At the end of fiscal 2007 our debt to trailing twelve months comparable basis EBITDA was four times compared to 3.1 times at the end of fiscal 2006. This primarily reflects the increase in our debt balance related to the financing of the Vincor acquisition and not having a full year of benefit from Vincor's results.

Now moving to our expectations for fiscal 2008, we're reiterating our comparable basis diluted EPS outlook of $1.30 to $1.40. This guidance excludes acquisition related integration costs, restructuring, and related charges, and unusual items which are detailed in the press release. These results are primarily being impacted by the ongoing challenges in the U.K. marketplace and our decision to reduce distributor wine inventory levels in the United States. As a reminder, we estimate the year-over-year impact to diluted EPS for the challenging U.K. environment to be about $0.10. Part of this amount is being driven by the duty increase that was announced near the end of March and the rest reflecting margin pressure from retailers, additional advertising and brand support planned for higher margin offerings.

Regarding our plan to lower distributor wine inventories, we estimate the reduction in net sales will be in the range of 160 to $190 million and the related impact to diluted EPS to be in the range of $0.15 to $0.20. We still expect to complete most of this effort in the first half of the fiscal year with about two-thirds occurring in the first quarter and the balance in Q2. In addition, new product development activity and increased marketing support for key brands is expected to impact the EPS by $0.05. We still expect the SVEDKA acquisition to be dilutive by $0.05 to $0.06 in our fiscal 2008.

Our 2008 EPS guidance also assumes the following--for net sales low single digit growth in organic sales and single digit incremental benefit from the acquisitions of Vincor and SVEDKA As a result of these increases and the impact of reporting Crown Imports under the equity method, reported net sales are expected to decrease 13 to 15%. Breaking this down by category, we see branded wine-based business growth of low single digits, that includes the impact of our plan to reduce distributor inventories.

Spirits based business growth of low to mid-single digits, wholesale and other low to mid-single digits. Interest expense in the range of 310 to $320 million. The increase versus 2007 primarily reflects the full-year impact of Vincor and the incremental interest from funding SVEDKA, stock compensation expense of approximately $30 million. That includes about $15 million of incremental FAS 123R expense primarily from the option grants in fiscal 2008 plus the second year of expense recognition from the 2007 grants. We're anticipating a tax rate of about 38%, the rate increase is primarily being driven by a higher percentage of profit coming from North America, and we're assuming weighted average diluted shares to approximate 241 million. To date we have not purchased any common stock under our previously announced $500 million share repurchase program. We will report repurchase activity when appropriate and the effect of share repurchase is excluded from this fiscal 2008 outlook.

As Rob mentioned we're investing in new distribution and bottling facilities in the U.K. We announced this program last August and had been working on the planned details the last several months, and are now moving to the construction phase. To outline the spending related to this project, restructuring and one-time costs are expected to total $0.02 per diluted share in fiscal 2008 and $0.03 in fiscal 2009. This is basically in line with what we outlined in August, but some of the costs originally estimated to occur in fiscal 2008 have shifted to fiscal 2009 as construction is starting a little later than first planned. We're still targeting CapEx totaling about $25 million over 2008 and 2009 for this initiative. This investment is expected to be offset by about $17 million in proceeds from the sale of our current facility and in addition we'll avoid maintenance capital that would have been necessary for that facility.

Now, let me briefly summarize some key points from fiscal 2007. We delivered record comparable basis results in the face of a challenging U.K. market. In addition to the U.K. our current results reflect a year-over-year impact of items like stock compensation expense and higher interest rates. When you look at our branded business outside of the U.K. realm, we continue to experience solid growth. I am therefore confident in the Company's ability to generate high single digit to low teen diluted earnings per share growth over the mid-to long-term using fiscal 2007 as the base. And our strong capital base and free cash flow generation ability provide plenty of flexibility to fund growth in the future.

As many of you know this is my last earnings conference call as I will be retiring from my position next month. My ten years here have been very gratifying, and I am fortunate to have been part of the dynamic growth of this company during the past decade. We've built a great business with an outstanding portfolio of brands and a leadership position in the most important markets in our industry. It has been an honor to be a part of this organization and a pleasure working with all of you on this call. I wish you all well. I know I will see many of you in my travels, if not, I hope our paths cross soon. With that, Richard, and Rob, and I will be happy to take your questions.

[OPERATOR INSTRUCTIONS] Your first question is from Lauren Torres of HSBC.

Good morning. I was hoping you could talk a little bit more about the initiatives that you have in place to help offset weakness in the U.K.? I know you talked about certain things in your prepared remarks, but I was hoping you could expand upon initiatives as far as improving these underdeveloped routes to markets that you mention and had also these operating efficiencies.

Yes, Lauren, this is Rob. I did talk a little bit about that in my prepared remarks, and we really have a significant multi-prong strategy to address our weaknesses in the U.K. It really covers the whole waterfront. Number one, with our U.K. footprint project we're looking at -- we're going to be improving our operating efficiencies which will obviously have a positive effect on our costs. We're looking at our product portfolio and focusing on higher margin products. We've got a very healthy NPD new product development process in place, and we're working on new products that can deliver positive results for us in the market. We're looking at other markets in Europe and mainland Europe that we think are very healthy and working on developing channels such as the on-premise, such as the convenience sectors, such as the specialty wine sector where margins continue to remain healthy, so really we think that by focusing on all of these areas we'll be able to ultimately offset the weakness that we're experiencing in our core business there.

It sounds like there are more longer-term in nature, they're not near term benefits?

Yes. I mean, I would say that it is mid-term, there is no silver bullet in the very short-term to the issues that we're facing in the U.K. I think that we've been fairly clear about that.

Okay. Thank you.

Sure.

Thank you. Your next question is from Tim Ramey of D.A. Davidson.

Good morning. Was hoping that there -- and congratulations, Tom on your retirement. It has been a pleasure working with you too. The distributor inventory question really didn't come up on the call, and there wasn't any metrics provided. Can you tell us anything about -- I know that your program to reduce those inventories doesn't really kick off until the 1Q, but can you give us any starting metrics on what's going on there or year-over-year metrics?

Tim, thank you. I think the extent of the metric we've already given which is the top line range which is the reduction in sales and the impact on EPS, the range of impact on EPS, which is $0.15 to $0.20 in the year, and then meting it out two-thirds in the first quarter and one third in the second quarter, and I think that that's as specific as we can be right now other than I would want to reiterate what Rob said during his prepared remarks which is that really the plans are for the most part in place. They have been well received, and I think that those guidelines still are good guidelines. That is how we believe things will work out.

But anything available as snapshot in time in terms of distributor day sales, inventory, and/or depletion for the 4Q?

We really haven't been getting too specific with that, Tim. I think as the general matter you can figure out with the range of sales guidance, what the impact is on the level of our sales, and that's pretty much flowing through to the distributors, but as you look backwards, just to remind everyone that our ships and our depletions have been pretty much in synch over the last three, four years, and so this really is -- it's already taking place. It is going to take place during, mostly during the first quarter, and then again during the second quarter, and then we should resume to more normal patterns.

And the U.K. bottling plant, I was surprised that you mentioned it wouldn't be operational until calendar '09. A, what takes it so long, and, B, is it your plan to use that plant to do private label offerings of your own for the trade or is this really for your branded wine programs?

Yes, this is Rob. Number one, obviously to build a fairly large distribution center and bottling plant does take a significant amount of time, especially in the U.K. where getting planning approvals and that kind of thing can be a very extensive process as has been reported in the press on numerous occasions. We'll be bottling everything there to the extent that we do do private label which certainly is not the main focus of our business, but we've always done some private label or buyers brand or buyers own brand or control label business for our retail customers, but, yes, we'll be bottling all of our requirements at the new facility.

And just on the share repurchase, were you in a blackout period for the entire time since the 500 million announcement or was that a conscious choice not to be buying?

We don't disclose our blackout periods, Tim, but obviously we concluded our fiscal year at the end of February and just reported our results, so we haven't repurchased any shares.

Terrific. Thanks again.

Thank you. Your next question is from Christine Farkas of Merrill Lynch.

Thank you very much. Good morning. A couple of questions if I might. Could you comment on the shipments versus depletions of U.S. beer and wine in the quarter? I know, Tom, you said generally they run in line, but was there any differences this is quarter?

Christine, there was some difference with our beer business that related to the start-up of Crown and making sure that all the channels of distribution were -- had plenty of beer, and so you would see a little bit heavier shipment activity than depletion activity for the beer business across the United States in the quarter.

Okay. Great.

Other than that, no.

And in wine, then, generally they were in line?

Correct.

Okay. Moving to the U.K., looking at some California data, it suggested that Constellation had seen or experienced a large growth in exports from California overseas as well as a pick-up in shipments of foreign material. I am wondering if there is something you can help us with? Were there some major shipments of California wine to the U.K. or elsewhere or was the focus in the U.K. still very much Australia?

Christine, first of all, our California portfolio in the U.K. certainly volumetrically continues to perform very strongly. We have brands that we're selling over there both in the form of shipments of case goods from the U.S. as well as the shipment of bulk wine and the exact timing of those shipments can be -- there can be differences, let me put it in from period to period. but in general that portfolio is performing very well and is growing at a fairly fast rate. a double-digit growth rates, so hopefully that answers your questions.

That's helpful, Rob. What about the import of foreign material? Is that largely for California sales or is it going elsewhere?

Foreign material?

Or product -- I read the data to suggest thatyou're importing more bulk perhaps from Australia. Is that for blending? Firstly, is that true, secondly, is that blending for domestic wine?

Well, first of all, we do also -- we bring in wine in bulk from Australia and bottle it in the United States for some of our products like a brand like Alice White, for instance, as well as bringing in finished case goods and on the export side we do the same thing. Some of our product we ship in bulk and bottle outside the United States in our other markets and some of our products we ship in finished case good form, so there is nothing unusual going on there.

Okay. And final question, just on Vincor synergies, in fiscal '07 could you quantify that number or perhaps relative to what the ultimate run rate would be from Vincor synergies?

Yes. Christine, I think not -- yes and no, not any more than we have already indicated. I think our Vincor synergies are running in line with our expectations. As you know because we have multiple integrations of Vincor across multiple markets, and a lot of that involves combining SG&A from various organizations, we don't -- we think it is a good idea not to get too granular about exactly what we recognize where, but knowing that we've run well within our plans around the world it is easy for us to conclude that the integration has gone well and has at least met if not exceeded our expectations.

Great. Thanks a lot, Tom.

Thank you. Your next question is from Mark Swartzberg of Stifel Nicolaus.

Thanks. Good morning, everyone, and congratulations again, Tom, really been a pleasure. On the working capital for fiscal '08, I know you touched on this a little bit on March 1, and you're saying 10 million less in terms of working capital increase in fiscal '08 than you were saying then, but I am still struggling with the -- what still amounts to a pretty significant expected increase in working capital. I think if my numbers are right in the high 100s, which isn't quite a record, but is a big number when you consider the destocking happening on the wine side, and the benefits that's going to give you both in terms of receivables, collection ability, and I would think your purchasing needs on the wine side. Can you just help us understand -- I know obviously there are several pieces in there that aren't only wine, but can you just help us understand a little more what's going on with the expected working capital increase in fiscal '08?

Happy to do that, Mark. First of all, as a point of clarification, we increased our free cash flow guidance by 30 million of which 10 million was related to the CapEx decrease, and 20 million was related to working capital, so there is a 20 million working capital benefit in our plans at this point.

Just to be clear, I thought you said CapEx -- 20 million change?

No, CapEx was a 10 million change, working capital a 20 million change.

Okay.

I just wanted to be clear for everyone's benefit. Now, the second part of your question -- your basic question is why is your working capital still going up, and I think we talked about this a little bit in our initial guidance call, and the problem with -- you're correct about receivables with the destocking program. However, in the first year of the destocking program the impact on inventories works in the opposite direction, and the reason for that is that many of these SKUs are related to premium or fine wines that have -- we own the vineyards or we have commitments that we don't want to break or we can't break, and so we're -- there isn't as much of a benefit and therefore we're holding more finished product just at the end of this fiscal year than we would like. We get to take care of that longer term, but in fiscal year '08 it is a work -- it hurts our working capital performance relative to inventories, and to roughly half of the destocking, so it is not a benefit to working capital on the inventory line although it is a benefit on the receivables line.

Just to be really clear, is the corollary to that that you think that in fiscal '09 your inventory build requirement if you will becomes less than it would otherwise be or is it just simply not going to have any particular impact on fiscal '09.

I would say that logic does follow.

It does follow. Okay. Great. Thank you. Again, congratulations.

Thanks, Mark.

Thank you. Your next question is from Bryan Spillane of Banc of America Securities.

Good morning. Just a few questions. First, Tom, also congratulations. I guess you congratulate on retirement, but anyway congratulations. Just a clarification on the depletion. It was in line. Is that the base business North America growing 7%, the depletions that number were in line with the shipments?

Yes.

Okay. And then, Rob, if you can give some perspective I guess on assuming looking at depletions as being the end demand, can you give us some perspective on how mix is working there? Is your higher end portfolio growing faster than the lower end and also some perspective on what's happened on your value brands in terms of the price and volume mix there?

Sure. Actually I think that what you said is exactly right in the U.S. market. We certainly -- our premium brands quite purposefully are growing faster than our value brands. There is a trading up story in general in the U.S. market as well as other markets, some other markets. And we continue to benefit from that trend, particularly in the U.S. and Canada. So that's a very positive trend and the wine business is very healthy in those markets in that regard.

Value business, we're definitely more focused on our premium business. That's where we're putting our investments, our value business is nevertheless important, but as I said, we're purposefully driving that mix change towards more premium, higher margin products, so it is not going to be -- you shouldn't expect to see anything different than our -- than, in fact that mix shift that's going on and our premium business growing at a much faster rate than our value business.

Are your value brands -- is your value business declining at this point still?

Yes.

Okay. And--?

And that category. It is a declining category.

Are prices still running up -- retail prices still running at a a high single, low double-digit rate?

High single? You mean just in general?

No, just on the value side.

Oh, our prices.

Yes, yes.

Yes, I think that you will see some price -- that kind of high single digit it price increases, yes.

Okay. And then I guess, Richard, some perspective on the U.K. It just seems to me you've got a couple of factors there that are at odds. You've got some regulatory pressure to try to curb consumption of beverage alcohol in general, whether it is higher excise duties, smoking bans, tinkering with the hours that pubs and bars stay open, but on the other end, it seems that retailers are using beverage alcohol as a loss leader, so some perspective on that, and actually is that true? Is your sense that retailers, especially at the holidays have used wine and just beverage alcohol in general as a loss leader?

First of all, you're absolutely right there are some pressures, but the U.K. in general is still a growth market, and that just goes right to the consumer, the consumer is growing the business. I think that's what is the most important factor there. It isn't growing as fast as it was, and that may be a result of some of these pressures that you're talking about, but it is still a growth market.

Are retailers using wine as a loss leader on promotion at least?

Rob, what do you think?

I think that there is some instances of that. It is a very promotionally driven market, and typically the kind of nomenclature which is used to describe what you're describing is it generates foot fall, that's what the British say in the stores, so they are using heavy promotional activity in the beverage alcohol category in general to generate foot fall. Now, does that make it a loss leader? Well, I don't know that that's necessarily the case, but they definitely view it as a way to get people moving in the stores. Are they making a healthy margin on it themselves, yes, I think they probably are, so loss leader, I am not sure. Foot fall generator, yes.

Okay, great. Thanks.

Thank you. Your next question is from Marc Greenberg of Deutsche Bank Securities.

Thanks and good morning. First question for Rob. Rob, any sense in your mind as to when or how we get to a point where U.K. wine pricing stabilizes?

Well, U.K. wine market pricing is not unstable. It is in fact -- it is stable. It is too stable is the truth of the matter, it is somewhat -- it is fixed at a particular level to the consumer, call it that 399-pound number, and obviously what we're looking for ultimately is some upward movement and so in a way that's the opposite of stability. We're looking for some upward volatility. How is that? Now, when and how, when we'll see that, I think is a very unpredictable thing.

There is certainly things that can influence that like the Australian over supply and the lessening of the availability of Australian bulk wine, low cost Australian bulk wine and things to this effect, we're not sitting around waiting or hoping for things to change which are somewhat fundamentally outside of our control. As I mentioned very early on in my answer to other questions, we have a pretty robust multi-prong strategy to address all matters in the U.K. right from our costs to our product portfolio, new product development, new geographies, new channels. As I also said, no silver bullet, but in the mid-to longer range, we're optimistic about the results of our activities in this regard.

Thanks. Second question, just trying to get a little bit at the beer trends in the U.S. on the import side. I know it is hard for you guys to give us an apples-to-apples given that you've just taken Crown, but can you confirm at least that retail trends are trending in double-digits as far as Corona sales go and as far as retail take away goes, is there anything particular about your portfolio with Cinco de Mayo falling in your next fiscal which may cause a little more of an inventory build?

First of all, let me just say that our beer business, Crown's beer business is very, very healthy. We see no issue at all with the health of that business, and that business continues to benefit by all the positive trends that it's benefited from in the past, the trading-up activity, things to that effect. In the shorter-term it has been more like mid-single digits, but that's the shorter-term. I don't really -- I don't see that as necessarily indicative of anything. We are very -- we continue to feel that the business is extremely healthy. In terms of inventory build, I think you asked for Cinco de Mayo; is that right?

Yes.

Yes, there will be some inventory build with respect to positioning ourselves for Cinco de Mayo. There is always times throughout the year that we have to position inventory for the high-selling seasons and opportunities, so that's always the case that there is some build of that kind or that nature.

Thanks, and last question, Tom, with regards to your tax rate for '08 given that the fourth quarter came in a little lower than expected, any update in guidance in terms of prospective tax rate for 2008 fiscal?

I think I gave 38 in the call, and that's our best estimate right now. Obviously there are things that happen, and we certainly very careful to have the right provisions in place and our tax rate based on everything we know right now, 38 is the best number we can give you for '08.

Thanks. Vaya con dios, Amigo.

Thanks, Mark.

Your next question is from Bill Leach of Neuberger Berman.

Tom, I know you're not a fan of quarterly guidance, but you have so many moving parts at the moment and your stock has had enough shock to last a lifetime recently, so can you help us out a little bit in terms of your quarterly expectations, particularly the first quarter, the consensus is currently $0.17 right now just for reference.

Well, I don't think it would be appropriate for me to do anything like we used to be able to do in the old days like express comfort or anything like that. I actually -- let me just talk a little bit about the Company's philosophy and how it has evolved over the last year because we have looked very carefully and taken a lot of input and it really is important to us that we're spending more of our time communicating about our long-term goals and strategies and our prospects and how the business is doing, not quarter by quarter, and I appreciate the fact that the math for Q1 and Q2 is a little bit more complicated than it would otherwise be, and I think we've tried to be as helpful as we can be to help people work that into their calculations. There are still a number of people who haven't completed their calculations. I am sure that as the year progresses that everyone's outlook will get more accurate, but I think we've given as much help as we can possibly give without giving quarterly guidance and we truly believe that that's the right thing to do for the long-term.

Well, that may be for the long-term, but if you have $0.17 consensus and you come in at $0.10, guess where your stock is going. It seems like given the uncertainty of the situation it would just be incumbent to provide some rough guidance. This is a very public format. You can do that.

I appreciate the input, Bill. Thank you.

Can you update us on the search for your successor, your time is running out obviously?

Well, this is Richard. Let me do that. We continue the search process. We have a very reputable top notch firm conducting that. We have a good candidate that we are in process with. We are hopeful that we will in fact fill the position in a timely fashion, and if there is a gap, we're hopeful it would be very short. So that's where we stand, and I would say things are going very well, and I am very happy actually about the qualifications of the candidates. I am not sure anybody can fill Tom's shoes, but we'll try hard.

It will be tough. Lastly, can I just ask you approximately how much of your profits came from the U.K. last year? Would it be in the order of something like 10%?

Something in that ballpark.

Okay. Good luck to you, Tom.

Thanks, Bill.

I think we have time for one more question.

Your final question is from John Feeney of Wachovia.

Good morning, Tom. Let me just add my congratulations here. One question on the -- can you explain how cash flow and balance sheet is going to work between Crown Imports and how it is working today between Crown and Constellation Brands, how that flows through?

Sure. The free cash flow generated by Crown will be distributed to its partners, and so net/net in the end we will see those distributions as operating cash flows for Constellation just as if half the beer business were a part of Constellation although it is coming on the P&L through equity earnings.

Thanks. Maybe to follow-up with Richard, will you be giving us on a quarterly basis sales and volume numbers for Crown? I know for official reporting purposes that will change, but going forward do you anticipate doing that?

Yes. We do.

Great. Just one final follow-up on something Robert mentioned. You mentioned mid-single digit it growth at Crown. Could you clarify what you were talking about there?

IRI, gross historic channel growth for recent.

13-week period.

13-week period on a dollar basis.

Okay. That's based on the IRI public data.

Right. The grocery store -- it is only for the grocery store channel which is only about I think 20% of the business, and in fact the on-premise sector and the non-grocery channels that are not represented by IRI are extremely healthy as well.

Okay. Thank you very much.

Let me just make some closing comments and actually playing off of what John just asked, if you look at our business fiscal '07 really demonstrated that we have a very strong portfolio with 7% organic branded growth. There aren't many companies that can claim that their business is growing at that level. If you look at our guidance, we actually are guiding to a number that has that type of growth underlying it. Why do I say that? We have said that we believe we will see low single digit organic growth. Well, that is after the distributor inventory reduction, so if you look at what's really taking place, what's really underlying movement to the retail over to the consumer, that distributor inventory reduction brings that to the mid-single digit level, and that doesn't have the beer growth in it because that has been taken out and moved to equity earnings, so to have a portfolio that has mid-single growth, mid-single digit growth without the beer portfolio is incredibly strong, so we believe that the strength of our business is very good, and that our portfolio is a dynamic portfolio with very good trade-up potential and that as we move forward again mid to long-term it is the strength of this portfolio that will bring us back in line with the economics, the model, that we presented in November of 8 to 12% EPS growth over the mid-to long-term again over the fiscal '07 results, so fundamentally our business is strong.

Yes, we have challenges in the U.K. They will straighten themselves out over time, and we will be on track, and we're very confident in our business and the strength of our portfolio. I would like to thank everybody for participating today. We look forward to our next call which will be after our first quarter, and we'll have more to report, I am sure then. Thank you very much, and enjoy the holiday weekend.

Thank you. This concludes today's Constellation Brands conference call. You may now disconnect.