Constellation Brands Inc (STZ) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Robert Mondavi third-quarter earnings' conference call. At this time all parties have been placed on a listening-only mode and the floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host for today's conference call, Chairman Michael Mondavi.

Sir, you may begin.

Thank you.

Good morning. It's Michael Mondavi speaking, and I want to welcome you to today's conference call discussing our third quarter fiscal 2002 earnings release. Joining me today are Greg Evans, our CEO, Hank Salvo, our CFO and Bob Philipps, our VP of Investor Relations.

During the call we're going to make a number of forward-looking statements. While these statements are being made in good faith, please keep in mind that they should be taken as estimates only. Actual results may vary from our expectations, so please refer to the MD&A in our Annual Report for a discussion of the risks in the wine business.

All the numbers and comparisons reviewed today will be on an adjusted basis, excluding the inventory step-up charges associated with our Ornellaia investment and the Arrowood acquisition in any one-time gains or losses. During the current quarter, the step-up charges were $713,000 for Ornellaia which show up in equity income and $1.1 million for Arrowood which show up in the cost of goods sold.

We plan to cover four topics during our 30-minutes of prepared remarks:

First, review of our performance during the quarter; second, a review of our outlook for 2002; talk about our total fiscal 2003; and then clarify some recent changes in our international business.

I'll start with a review of the industry trends during the quarter.

In general, the marketplace continues to be difficult. The on-premise channel remains weak, but is now showing signs of sequential improvement. For example, many of the major hotel chains took immediate steps in September to reduce their investment in wine inventories. This impacted everyone -- particular the top-selling brands -- since wine buyers were instructed to stop all wine procurement until overall wine inventories were reduced and in balance with the new, lower level of demand. In some of the high tech areas such as Boston and Northern California, this adjustment is still going on and will likely continue through May. In other areas such as New York and in Southern California, the right-sizing was finished in February or March and hotel chains are now reordering -- in the restaurants and convention business, with it increasing -- from wholesalers again.

In the off-premise channels, growth has accelerated as consumers have continued to buy wine for at-home consumption. However, we see more and more competitive activity as each week passes and more and more producers are shifting their product mix and their marketing efforts to the off-premise channels. This is evident in the U.S. food, drug and liquor store scanner data complied by AC Neilsen. For the latest reporting period ending March 16, 2002, please note that the Neilsen cutoff was two weeks before Easter. The volume growth of domestic and imported wines priced over $6 per bottle (retail) accelerated 8 percent during the last 13-weeks, compared to 6 percent growth during the last 52 weeks. The average price improved 2 percent during the last 13-weeks and that's the same rate as during the last 52-weeks.

Looking at the domestic wine prices over $6, they grew 7 percent in volume, significantly ahead of the 52-week pace of 4 percent, with average pricing continuing to improve at about 2 percent, which is the same as during the last 52-week period. Imports to the U.S. priced over $6 grew 13 percent in volume for the 13-week period, slightly ahead of the 10 percent growth posted during the last 52 weeks. Average price improved 1 percent during the 13 weeks, unchanged from the 52-week number. Imports from Australia and Italy continued to perform very well, both growing volumes in excess of 20 percent.

On the pricing front, an analysis of the top 54 brands in all categories -- domestic varietials, generics and imports -- reveals that 20 brands had an increase in the average price when compared to last year's quarter; 23 had a decrease in the average price, and the rest had no change in price. While we think it's encourage that producers are attempting to protect their brand equities, we are seeing signs that more aggressive pricing is beginning to occur.

Greg will now cover our topline results.

Thanks, Michael. Good morning.

Let me start by saying that I would characterize the quarter as a strong retail quarter in domestic channels, with our other channels performing more weakly.

Robert Mondavi's total shipments for the quarter ended March 31, 2002 with 2,299,000 cases, up 1 percent versus last year's level of 2,275,000.

The total company wholesale depletions grew 2 percent over last year. Depletions grew 6 percent, however, excluding Vichon Mediterranean, which was divested in the September quarter.

Wholesale inventories improved to 46 days, two days above what we reported at the end of December, but a week below last year's levels. We expect distributor inventories to remain at around this level for the foreseeable future.

In the food, drug and liquor channels AC Neilsen reported that our brands grew a strong 10 percent in volume, 9 percent in revenue, on pace with the category.

Shipments of our flagship Robert Mondavi Winery brand declined 12 percent during the quarter to 67,000 cases.

Wholesale depletions fell 19 percent, as RMW continued to see an impact from the soft economy and the post-September 11 sales declined in restaurants and hotels. The market for wines prices over $50 per bottle retail remains difficult, as Michael alluded to.

Average price per case was $181, 21 percent below last year due to a much lower mix of high-end Reserve and District wines this year than last.

Net revenues declined 30 percent to $12.1 million.

Revenues from visitor programs to wineries, excluding tour revenues, showed improvement, but were still 10 percent below last year, as spending per visitor rose 11 percent on 19 percent fewer visitors.

In scanning stores Robert Mondavi Winery volumes declined 2.5 percent and revenues declined 7 percent. The average retail bottle price in these channels declined 4 percent to $24, due to a shift in mix towards less expensive wines and more promotional support on high-end wines.

Robert Mondavi Private Selection had another good quarter. Shipments grew 19 percent to 347,000 cases, on top of an 11 percent growth comp a year-ago.

Wholesale depletions grew 5 percent, but this was held down by a weak export market. U.S. depletions grew 11 percent, while European depletions declined significantly as we overlapped a very tough growth comp from the prior year.

Net revenues grew 11 percent to $21.1 million against a 14 percent year-ago growth comp, as increased promotional spending and mix pushed average prices 6 percent lower.

Sales results were driven by larger displays, increased distribution of several varieties, including merlot, and improved turns off the shelf due to the new package. We expect the benefit from the new package to continue for another quarter, since it isn't yet in full U.S. distribution -- for example, about half the markets still have the old package chardonnay.

Private Selection's U.S. scanner store volumes grew 33 percent and revenues grew 29 percent. For the last 26 weeks, Private Selection was the fastest growing of the major super premium brands in the country in scanning stores.

Let's look at Woodbridge. Woodbridge shipments were flat at 1.7 million cases during the quarter.

Woodbridge depletions, however, grew 7 percent, which represents a nice sequential improvement from the 1 percent decrease posted in the September quarter and the 3 percent increase posted in the December quarter. Net revenues declined 3 percent to $59.6 million, reflecting a higher level of depletion-based promotional support.

Line extensions of pinot grigio and syrah added over 50,000 cases of new business, and Johannisberg Riesling is now being rolled out. Pinot grigio growth had previously been constrained by availability, but that is now beginning to free up and the sales force is aggressively to increase distribution. The new package is now close to national distribution, which has helped the brand's on-shelf presence.

Finally, in scanning stores, Woodbridge volumes grew 6 percent and revenues grew five percent.

Shipments of our Other California Brands grew 18 percent over last year to 26,000 cases, as sales were strong at LaFamiglia and Grand Archer, the new brand launched last fall by Arrowood. Wholesale depletions grew 13 percent above last year.

Net revenues declined 2 percent to $4.4 million, however, as average price per case declined 17 percent to $170 per case due to a mix shift from Arrowood and Byron to the lower priced LaFamiglia and Grand Archer.

Please note that because the sales of these brands are heavily skewed towards the on-premise channel and non-scanning independent retailers, their performance in AC Neilson is not meaningful.

Shipments of our imported wines declined 19 percent during the quarter and revenues dropped 28 percent. However, if we exclude Vichon Mediterranean (which was divested last July), shipments grew 434 percent, but heavier promotion support behind Caliterra and Danzante, and a mix shift towards those two brands held revenues to 1 percent growth.

Including Vichon Mediterranean, whole depletions declined 31 percent, excluding Vichon Mediterranean they grew 11 percent.

In scanning stores, our imports grew 41 percent in volume, mostly as a result of increases of Danzante, which was up 133 percent, and Caliterra, up 25 percent, significantly ahead of the category growth rate.

Now Hank will cover the rest of the financials.

Thanks, Greg.

Consolidated net revenues declined 7 percent to $104 million, compared to $112 million a year ago.

Average price per case declined 8 percent to $45.36 due to negative mix in the Robert Mondavi Winery brands and high promotional support on the major consumer brands such as Woodbridge, Robert Mondavi Private Section, Danzante and Caliterra.

Cost of goods per case declined 6 percent to $24.74 due to a shift in mix towards brands with lower costs plus the continuing benefit of lower grape costs overall.

Gross profit per case declined 10 percent to $20.62, and gross margin was 45.5 percent, a 120 basis point decrease from last year's 46.7 percent due to negative mix at the Robert Mondavi Winery brand and a higher mix of Robert Mondavi Private Section (which has a lower gross margin than Woodbridge).

Operating expenses of $29.4 million were 6 percent below last year in dollars, but 40 basis points higher as a percent of revenue than last year, reflecting the benefit of the cost cutting we announced earlier in the year, but offset by the loss of volume leverage.

Operating income declined 15 percent to $18 million, compared to $21 million last year. Operating margin was 17.2 percent, 170 basis points below last year's level of 18.9 percent.

Other income and expense netted $1.8 million of income compared to $1.3 million of income last year primarily due to increased volumes and higher margins from our Chilean joint venture.

EBIT declined 12 percent to $19.8 million and EBI margin was 19 percent of net revenue, compared to 20 percent last year.

Net interest expenses were $5.9 million, 5 percent below last year, primarily as a result of lower borrowings and lower rates as we swapped from term debt for floating debt. The effective tax rate for the quarter was 37.5 percent.

Net income declined 13 percent to $8.7 million. EPS declined 13 percent on a level share count to $0.53 per share, compared to $0.61 last year.

The March 31, 2002 balance sheet was $878 million, 1 percent above last year and 2 percent below the level on December 21. Inventories grew 8 percent over last year as a result of slower year-to-date sales this year than last, but accounts receivables were down due to lower sales. PP&E was down due to the write-off of the Disney investment which occurred in the first quarter of this fiscal year.

Capital spending for the quarter was $8.5 million and most of this money was spent on vineyard development, production equipment and tanks.

Capitalized interest expenses for the quarter were $558,000, compared to $1 million last year as several vineyard development projects were completed.

Free cash flow for the quarter was a negative $69 million, compared to a negative $49 million last year. This quarter's cash flow number included a $70 million buildup in working capital that is driven by a $30 million increase in inventory and a $49 million reduction in short-term debt as the short-term line of credit was renegotiated to a 3-year term loan at very favorable rates.

In summary, our depletions are tracking slightly ahead of the top end of the full-year fiscal 2002 0 to 5 percent growth rate we outlined in October, but it's costing us more due to heavy competition. So that leaves us on track to hit a full-year EPS in the range of $2.40-$2.45.

Looking ahead at fiscal 2003 we expect the category to grow 4 to 5 percent, and deletions of our wines to outpace the category by 1 to 2 points.

Since we expect to ship and deplete the same number of cases, shipment growth should outpace deletion growth due to fewer shipments in fiscal 2002 than we depleted.

We're taking a cautious approach to pricing. In fact, there are no price increases planned for either Robert Mondavi Private Selection or Woodbridge.

We're not yet in a position to issue detailed P&L guidance for fiscal 2003 since we're in the middle of our planning process, so we're going to schedule a separate conference call something before the end of the 4th quarter to just focus on guidance for the next year.

Let me just mention here two things: One is that we're just going through the feedback from our advertising campaign this fall in a detailed way, which is giving us some fairly positive insights into the Woodbridge campaign, but we've not yet developed immediate plans for next year.

And number two, we are beginning to see some positive trends, particularly at the retail level, as I mentioned. We need a little more time to see if these are really structure trends to build that forward. So in this environment of a little more change than we've seen in the past few years, we're going to take a few more months to lay this plan out. And then, as Hank said, schedule a separate call.

What we'd like to do is to bring in a couple of the business people as well, who are really managing these businesses and brands, and have them speak specifically to what their plans and programs are for next year.

Finally, we can say that with respect to the balance sheet, we see it growing at about the same rate as wholesale depletions. Cap ex spending should approach a maintenance level of about $25 to $30 million. Note that this projection does not include the possible sale of non-strategic vineyard or winery assets, since the timing of such assets is difficult to anticipate.

Now Bob has some housekeeping items before we wrap up.

Thanks, Hank.

I want to clarify three things in the import area that we've discussed somewhat casually over the last few months and how they impact the P&L and balance sheet, and then I have one additional topic to cover.

In terms of imports, we announced on March 18 that we began a process to increase our ownership stake in Ornellaia from 49 percent to 50 percent. This is a two-step transaction, where the first step involved purchasing the remaining 51 percent of Ornellaia that we didn't own, and then the second step is where we would sell a half interest to our existing JV partners in Italy, the Frescobaldi's. Ornellaia produces such notable wines as Masseto, Le Serre Nuove, Le Volte and Ornellaia -- named the Wine Spectator Wine of the Year in 2001. Most of the transaction will take place during the June quarter.

Second, we are now the exclusive importer of Ornellaia wines to the U.S. market. This was unrelated to the change in ownership structure. As an importer, the shipments and revenues for these wines will now flow through our topline, beginning in Qr. This won't have a material impact, however, on the topline. For example, in fiscal 2003, we expect imports of Ornellaia's wines to contribute about 10,000 cases to our shipments and about $5 million to our revenues. Also, because of very limited availability, we do not anticipate much growth in these numbers over the next few years.

Third, next January, we will take over as the exclusive importer of Fresobaldi wines such as the highly regarded Castelli di Pomino, Nipozzano, Castel Giocondo and Castiglioni, and the more moderately priced Remole to the U.S. market. This will add about 25,000 cases and $2.3 million in revenues to the topline in fiscal 2003, and we think there are excellent opportunities to grow those numbers over the next few years since they have been highly allocated in the U.S. From a strategic standpoint, we think this move nicely complements the wines offered by our joint ventures and offers us some synergies in the trade.

I would also like to remind you that over the next several months you may see some stock sales by Robert Mondavi insiders. Let me explain why some of this will be happening.

First, as we have previously disclosed, Robert Mondavi, our founder, has made significant commitments to a number of charities. By or before December 31, 2002, he must satisfy about $8.9 million of his pledge to Copia: The American Center for Wine, Food and the Arts in Napa. He will do that by a gift of Class B shares which will then automatically convert to Class A shares in the hands of the charity. Total shares outstanding will not change, but the public float will increase. He will make the gifts over time under a pre-set 10b5-1 selling program to minimize the market impact. Timing of the sale of the gifted A shares is totally within the control of the charity, but typically they quickly monetize stock gifts. Other significant gifts to UC David, Stanford and others totaling about $42 million will be funded over the next several years by Roberts.

Second, other family members will probably sell some stock to meet cash needs and for normal investment diversification purposes. Michael, for example, is building a home. The vast majority of his net worth is, and will remain, however, tied up in Robert Mondavi stock.

Finally, we granted a round of options to company executives on February 25, 1993. Since the maximum term of stock operations under the tax laws is 10 years, those options will expire if they are not exercised before February 26, 2003. There are about 160,000 such options that will likely be exercised in that period. The Class A shares outstanding will increase by that amount. Some executives will exercise and sell nonqualified options to raise cash to buy and hold ISO's. Last quarter, for example, Greg Evans sold 14,000 nonqualified options, so he could invest in 22,000 ISO's, with a current value of about $800,000. Note that he was a net buyer, not a net seller. Other executives many elect to convert the options to cash, particularly since this year we eliminated all company bonuses.

Now changing gears, on another note, we will be participating in the Goldman Sachs Global Consumer Products Conferences in New York in early May and the Thomas Weisel Growth Forum in Santa Barbara, California mid-June. We also have plans to visit Boston and Texas over the next several months.

Today's call is copyrighted material of Robert Mondavi, and cannot be rebroadcast without our expressed written consent.

Beginning at about 9:30 today until about 5:00 p.m. today, Pacific Time, you can listen to a tape of this call in the U.S. by dialing 1-877-519-4471. International callers can listen to the tape by dialing 1-973-341-3080. In both cases, the PIN to access the replay is 3205786. Today's prepared remarks can be viewed, downloaded or listened to on our Website 222.robertmondavi.com in about one hour. Look under "Investor "Relations followed by "News & Events" and then "Conference Calls."

Finally, our next conference call covering the 4th quarter -- excuse me, our next conference call will now be in June where we'll talk about the fiscal 2003 plan. And then following that in July, we will cover the 4th quarter results of 2002. And that conference call will take place on Thursday, July 25, 2002 at about 7:30 p.m., Pacific Time. Operator, let's go ahead and -- 7:30 a.m., excuse me, Pacific Time.

Operator, let's go ahead now and open up the line for questions.

Ladies and gentlemen, the floor is now opened for questions. If you have a question or a comment, you may indicate so now by pressing the numbers one followed by four on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received and we do ask that while you pose your question that you please utilize your handset to provide optimal sound quality.

The first question is coming from

. Please state your affiliation and proceed with your question.

Goldman Sachs. Hi, everyone.

Can you quantify for us how much of the net revenue per case the decline was related to mix and how was related to the promotions? And secondly, can you just give us some more color on the competitive environment in the marketplace? It sounds like it's pretty difficult, and I'm just wondering where competition is most intense in terms of the price segment. What have your competitors done in terms of raising promotional spending and what you expect to do on your brands going forward?

Well,

, your question on the revenue per case change related to the Robert Mondavi Private Section brand -- it would be difficult to speak to "a weighted average" sort of company notion. But I think the big change in the quarter was the Robert Mondavi Private Selection net revenue per case, which came down 6 percent overall, and we think that 1 percent of that basically relates to varietal mix in terms of selling, you know, varieties that have a bit lower revenue; about 1 percent relates to geography mix, selling those products in states or regions where the FOBs, let's say, would be below the "weighted average" FOB overall; and three or four percent relates specifically to additional promotion costs. And that correlates, if you see -- let's say if you looked at the AC Neilsen data for the 13-weeks the Private Selection, you'd see that it's weighted average price is down about 3 percent.

Woodbridge, at the same time, had a weighted average shelf price decrease during that period at about 1 percent, so I don't think there was a significant...

Four percent.

I'm sorry. So the 3rd quarter it is 4 percent, however, it's 1 percent for the year. And I guess I'll lead into the second question and let Michael finish that up.

We are seeing a fair amount of competition at the shelf level and part of what you're seeing reflects the fact that as we have shifted our channel strategy more towards retail grocery supermarkets away from on-sale and hotel business, those channels tend to be more promotionally driven and, frankly, more expensive to do business with, at least from a spending standpoint. From a manpower standpoint that's not the case. So that part of what you're seeing is the fact that competitors are promoting and discounting fairly significantly and we're selling more of our mix in channels where promotional spending is really the way to do business.

Mike, do you want to have some comments there?

Yeah, there's no question that the market is more competitive, and as the better, higher-priced wines are seeing that the softness is continuing in the restaurant sector, they're moving more to the independent package store and to the supermarkets. What we're doing is making sure that we are competitive, and the key there, Judy, as you know, is you've got to get the wine on the floor, and we are doing that.

In addition, though, you want to communicate with the consumer and you want to make sure the consumer is there for the pull-through. For example, June through August for Woodbridge, we're going a shared program with the diary industry and they're coming out with big ads on the power of cheese and Woodbridge is the main wine and the sponsor for co in-store promotions well as Woodbridge will be referred to directly in their television advertising.

We're doing some Memorial Day programs with the National Pork Board and that's an advertising tie-in also with Gourmet magazine -- really focusing on the 25 to 35-year-olds and there's a group called the Wine Brats, who are a young, national group who have very active chapters across the United States and Woodbridge is the main sponsor and developing a great relationship with them in about 20 cities through the United States. They're doing specific promotions and events. That is all in addition to the new National Television campaign that Greg referred to earlier that we're working on.

In the Private Selection there is the price competition, but the growth in most markets is doing very, very well and what we're seeing is as the new package is replaced -- I'm sorry, as the old package is replaced by the new one, the velocity of the wine sales on the shelf and in the displays increases fairly significantly. And so we're very optimistic as to what's happening with Private Selection over the next few months as we get into 100 percent distribution with the new package.

OK. But as the on-premise outlets are showing some signs of stabilization, has that affected the off-premise channel in a more favorable way? In other words, you know, with more producers moving their products from the off-premise now back to the on-premise?

I think it's too early, Judy. As I mentioned, you know, in the non-tech or non-com type markets, the hotels, restaurants and all are in pretty good balance and the business is picking up. I've recently been in Denver, Las Vegas, Los Angeles, et cetera and those markets are picking up very nicely. The restaurants are busy, but they're not busy enough to take the additional wines. I think there was a false euphoria in the wine industry over the last six to seven years in the ultra-premium end that was led by the opulent spending, you might say, of the dot-com people. They're gone. So we're back to a more normal premium wine sales growth and I think it's going to take another year for the industry to fully understand it and there will be some oscillation back and forth between on and off sale during that time.

Thanks.

Thank you.

Our next question is coming from

. Please say your affiliation and proceed with your question.

Davenport. Hello?

Hello.

It was my understanding that inventories were down to the 40-day level at the end of January. And now, I think, if I heard you correctly, it's back up to 46. Can you just give me an update as to where you think it'll end up for the year?

Yes. The inventory for distributors was down to 44 days at the end of December when you look at quarterly. And we anticipate at the end of our fiscal year that it will be at 45 days, which is really the sort of long-term bogie that we have identified as a target. Now, it will vary around that number because this is not a precise science. And this year it's up a day or so above 45 because Easter was on March 31 and people didn't want to run out of product. But...

Sure.

...I think of 90 days as really being where we anticipate seeing that distributor inventory each quarter.

Great. And we were looking for cap ex in the range of 20 -- excuse me, 30 to 35 million? Have you all lowered that range a little bit to 25, 30? Are there any...

We have lowered it for next year to 25, 30. This year, we're still on the $30 million to 35 million.

OK. And lastly,

were talking about adding sales people or category brand managers? How's that going?

Yes, we're in the process of implementing some structural changes in the sales force which as one of the features will include a category management or category validation group. In the broader scheme of things, we're really aiming towards more of a channeling customer approach particularly with the large chains and substores. And that group will support those channels.

And you feel...

That should begin to be in place

July, although the actual hiring and training the individual will probably take place over the next six months.

Great. Thanks very much.

Thank you.

Our next question comes from

. Please state your affiliation and proceed with your question.

Yes, I am with

Capital. I have two questions. Fundamentally, how do you measure price change in a competitive environment, i.e. one competitor increases a price but discounts extensively every other week. Another has introduced a new label at, let's say, $7.99 that was comparable in years past to a $15 bottle of wine.

Second question, what do you think medium to long term would cause the competition in off-retail to abate somewhat? Thank you.

O.K. Let's start on the price change question. I think the way first of all the change last year that we reflected in our accounting which I believe I read in consolation call, they're just going to begin reflecting next year. Really,

what the industry has booked as promotion expense at the revenue line. So what you see now as net revenue is really the price of product less the direct promotion expenses that are generally discounts, that show up in price to the consumer. I say generally because other things can happen, so you're getting a much, I think, a much truer read. And we really prefer that accounting change, because it really shows directly at the revenue line what's happening with price.

So I think that's a good thing. In terms of our pricing strategy, we talk about our price with Neilsen and as we said with Robert Mondavi private selection for the quarter, our average price per case was down 3 percent on the shelf. But I have to say we look at pricing much more on a regional customer and channel basis, and it's not something that we believe that that strategy is to generalize from Napa what our price is but to really have our marketing sales people in each of the markets look at what the positioning of the wine is, what the competitive activity is, and within some boundaries, be able to respond with our products in those particular channels or regions. So it's a very dynamic environment, and what we're reporting on here is really sort of the average outcome of pricing.

On the longer term, not only are we going to be doing more advertising, but we are very hopeful and believe from what we're learning that the industry, a lot of our competitors, are going to increase the advertising. We think that's a very, very positive thing. If you study the industry in the last couple of decades, when the industry, not just one or two or three brands, but when the industry had a tremendous amount of television advertising, the per capita consumption across the U.S. grew fairly substantially each year that that advertising stayed at a higher rate.

We believe that if the industry does the advertising we're hopeful of, the per capita consumption will increase and when you add that to the demographic benefit that we have across the U.S. at the present time, that shows this wonderful growth. And I think proper growth is the best thing to alleviate the price competition.

: Thank you very much.

Thank you. Our next question comes from

. Please state your affiliation and proceed with your question.

Yes, Wells Fargo Securities. Good morning gentlemen.

Good morning.

Just had a couple of I guess more macro type issue questions. First off, just in regard to direct shipping, there's been some recent activity, I guess, at least legislatively. And I was wondering if maybe you could comment on what your outlook is for that, if we're actually going to see maybe some increased ability to direct ship to other states, just as you see the legislation, I guess in an overall sense, playing out.

Hank, would you want to take that?

Yes, the direct shipping is I think more of an emotional issue than a real volumetric issue at least for the next three to five years. Over the long, long term, it may have more volumetric impact, but if you look at the numbers, the cost of shipping wine in small lots even if totally legal and supported by FedEx, et cetera, is in the $8 to $15 per case versus essentially under a dollar per case in other cases.

So it would help some of the specialty allocated wines that wouldn't be available in certain markets, but you're not going to find wines in the six to twelve dollar bracket, which is the vast majority of the volume -- you're not going to find those wines affected a lot by direct shipping.

OK. And then as it relates to the '99 vintage that's coming up, obviously it looks like we're going to see increasing quality through 2001. I was wondering from your assessment at this point what type of impact the '99 vintage will have on

, and then sort of maybe if you can get into what the distributor feedback is on that, if the retailers are clamoring for more wine ahead of this. Because it seems like '98 was sort of stagnant following the '97 vintage, at least on the reds.

And I was wondering if you were getting any signs of increasing demand for this one here.

Yes, we are. In fact, your analysis is very accurate. The '97 was well-received in the marketplace. The media came out and downgraded, if you will, the entire '98 vintage in California, I personally think, erroneously in many, many cases. However, the '99 vintage -- the media, the wine makers, the trade, all know was an excellent vintage. There was a tremendous energy in the market for the '99 vintage. We are about halfway through what we call a luxury tour with our luxury wines, everything from the Robert Mondavi reserves districts, Napa's through our joint venture wines, Arrowood, Byron, et cetera.

And the response -- and we're tasting the '99 vintage reds on this tour. The response has been terrific. And just as '98 slowed down because of a quote "softer quality," I think '99 will accelerate because of a better quality and somewhat of a pent-up demand for California and super-premium and ultra-premium wines.

OK. And with that said, when do you suspect that you'd see a lot of impact at least in terms of your business? I mean, or at least is the ordering coming in at this point, or are we still going to wait until Q4 or Q1 of 2003 before we really start to see that show up?

I think it's the later part, mainly because people are trying them now. They're excited now. They're still a little apprehensive, particularly the restaurants as to what's going to happen with the economy. Business seems to be picking up in restaurants in every week. However, I think they're going to be cautious, and unlike in the past where they would buy a year's allocation if you will of Opus One or

or

Rob Mondavi reserve, they're going to buy three months, two months.

They're going to see how that goes with their consumers, and if it moves, then they're going to do more. So I'd say the first or second quarter of next year is when we'll really have a good pulse of how that's working -- in other words through the holidays of 2002.

Great, and then finally I apologize if you have answered this. I was just wondering what the pricing outlook is for Woodbridge going forward.

Yes, the...

We're not planning any price increases at all.

OK. But competitive pressures, do you see any influence on that going forward?

Greg, do you want to cover that?

Yes, Bud. We -- I would go back, and really frame this from our last call when we said that with Woodbridge our goal was to at least equate but more likely update the category. And I think at that time we said we need to grow Woodbridge at least six percent, and so during this third quarter, you can see that we became more aggressively promotionally with Woodbridge to be able to achieve that rate of growth.

That's really critical to our strategy, and I would respond by saying that still is our bogie that we're going to target at least that level of growth, perhaps a bit higher with Woodbridge. We've got some promotional programs lined up to do that, so I would not be surprised if the continuation of aggressive promotion with Woodbridge and the competition carries over into fiscal '03. And we're preparing our plan to be able to do that, because the momentum of that brand is really critical to our success.

Great. Thanks very much.

The other point there, however, has somewhat of an offset -- in this environment, as you know, the supply side of the equation starts to give some relief in terms of lower product and lower grade costs to help absorb some of the margin decrease from additional promotion, so that should start to kick into effect with regard to Woodbridge next year as well.

And while I have the floor, I just want to add that relative to Michael's comment and your point about the '99, we did receive a 94 rating on our '99

which we think is going to be a big help both for our wine relative to CSR but also the general line of Robert Mondavi wines because that's a very clear recognition of improved quality in the vintage. And that tends to lead to additional sales.

Great. Thanks.

Thank you. Once again, ladies and gentlemen, as a final reminder, that's 1 followed by 4 on your touch tone phones at this time.

Our next question is coming from

. Please state your affiliation and proceed with your question.

JP Morgan. Good morning everyone.

John, good morning.

Wanted to ask you one sort of question on the -- supply side. Can you give us a view in terms of how much of your grape supply, sort of where you stand in terms of what you're supplying yourself, how much you're going outside for. And can you provide us with the road map over time in terms of how you see that changing?

John, last summer on a total company basis for the last vintage 2001, we were at 7 percent in total closing. Vintage 2002, that 7 percent will rise to about 14 percent, and then by vintage '05, I believe we're at about 26 percent. So you can see it's a relatively rapid rise, but we would not anticipate to go over that on a long-term basis.

And of course that number is influenced by very high internal

in the Napa valley area, where we're really striving for 90+ percent internal

but then offset by grape sourcing and

for Woodbridge which doesn't need to be very high at all.

John, we had some vineyards for sale as you know. And if that happens, that could drive that number up over those period of time. We're not factoring that in yet because...

Drive it down...

Drive the internal sourcing...

Down, and get rid of vineyards...

And the external sourcing up?

Exactly.

OK. Great. Thanks.

Gentlemen, there appear to be no further questions at this time.

OK.

Thank you very much. That'll end the conference call.

Thank you.

Thank you for your participation, ladies and gentlemen. This does conclude today's teleconference. You may connect your lines at this time, and have a great day.