Constellation Brands Inc (STZ) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to Robert Mondavi's fourth quarter fiscal year 2002 call.

At this time, all participants have been placed on a listen-only mode.

And the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to one of your hosts, Mr. 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 Robert Mondavi's fourth quarter and full year fiscal 2002 results.

Joining me today are Greg Evans, our President and CEO, Hank Salvo, our CFO and Bob Philipps, our VP of Investor Relations.

Before we get started, let me remind you that we'll make a number of forward-looking statements today.

And these statements should be taken as estimates only.

The actual results may differ from our expectations.

So please refer to the M&D annual report for a discussion of the risks in the wine business.

All of 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 and any one-time gains or losses such as the charges in fiscal 2002 for the Disney restructuring.

In the current quarter, the step-up charges for Ornellaia were $218,000, which show up in equity income.

And for Arrowood, we're $1.1 million, which show up in cost of goods sold.

We plan to cover two topics in our 20 minutes of prepared remarks, review our performance during the quarter and full year and to review the outlook for fiscal, 2003.

After that, we'll move to your questions.

And hopefully, we can limit the call to no more than one hour.

Let's start with an overview of the sales, both at an industry level and at the company level, followed by Hank and Greg, who will cover the quarter's top line results, financial details and then, summarize our view of fiscal 2003, which we covered in detail on a conference call and press release on June 27th.

Let's start with the market trends as captured with AC Nielsen food, drug and liquor store data for the 13 weeks ended July 6, 2002.

Domestic varietal wines priced over $6 a bottle grew 5.1 percent in volume and 5.3 percent in revenue.

Imports priced over $6 a bottle, led by wines from Italy and Australia, grew about twice as fast, up 11.6 percent in volume and 11.1 percent in revenue.

The blended growth rate was 6.7 in volume and 6.9 percent in revenue.

The pricing environment in the food, drug and liquor channels showed some signs of softening a bit in this reporting period when compared to the 52-week trends.

Premium domestic varietal wines posted a .2-percent increase in average price for the last 13 weeks compared with a one-and-a-half-percent increase during the last 52 weeks.

And premium imported wines posted a .5-percent decrease in average pricing for the last 13 weeks compared with a .8-percent increase during the last 52 weeks.

Actually, the consolidated results would have been even stronger except for Northern California, where domestic wine volumes were below last year and imports were flat.

Overall, our quarterly and full year results came very close to forecast, despite the very difficult environment.

As we outlined last October, we lowered our full year wholesale depletion growth guidance to between zero and five percent, reflecting a week on-premise market and a more competitive off-premise market.

I'm happy to say that excluding Vichon Mediterranean, which we divested in the first quarter of fiscal 2002, our depletions grew at four percent.

We also targeted a five to 10-day improvement in wholesale inventories by the end of the first quarter of fiscal 2003, that is, by next September.

However, we hit that number back in March, about two quarters ahead of schedule.

So our wholesale inventories are in excellent shape starting our fiscal 2003.

And while we targeted cutting SG&A spending to be level with fiscal 2001, we beat the target significantly since SG&A spending came in at $6.7 million below fiscal 2001.

With respect to the balance sheet, we made excellent progress in controlling capital expenditure spending and limiting the growth of wine inventories.

In fact, the year-ending balance sheet was smaller than last year.

That's not to say that everything on our business is running on all cylinders.

A few markets, such as California and metro New York, posted significant declines versus the prior year.

But only Northern California had a big impact on the fourth quarter as chain stores there remain weak.

Now, Greg will walk you through the top line performance of each of our brands.

Thanks, Michael.

Now, let's review the performance of our brands.

Total company wholesale depletions for the quarter ended June 30th, 2002, declined one percent from last year.

Vichon Mediterranean, depletions grew one percent.

Total company shipments declined five percent, to 2,584,000 cases, which left wholesale inventories at 46 days compared to 56 days last year and 46 days at the end of March.

Average price per case declined three percent, to about $47 as a result of higher promotional spending on many of our wines and mix shift towards Woodbridge.

Total company net revenue was $125.1 million, seven percent below last year's $133.8 million.

In the food, drug and liquor scanning channels, as reported by AC Nielsen, our volumes grew 1.2 percent and revenues grew 0.2 percent.

Turning to the Robert Mondavi Winery brand, wholesale depletions fell 14 percent due to the softness in the Northern California and New York metro markets, particularly in the on-premise channels.

Shipments fell 23 percent, to 75,000 cases.

The average price per case was $200, 14 percent below last year, due to mix shift from reserve and district wines to the Napa Valley tier.

Net revenues declined 34 percent, to 15 million.

In scanning channels, Robert Mondavi Winery volumes declined 14 percent.

And revenues declined 16 percent, with the average bottle price declining two percent, to $22.88.

Sales of wine and merchandise sold at the winery's retail and tasting rooms improved sequentially but still finished the quarter three percent below last year, at 1.7 million,

17 percent fewer tour participants and 16 percent higher spending per capital.

Robert Mondavi Private Selection had a challenging quarter.

Wholesale depletions declined 11 percent, excluding the California market.

actually grew eight percent with Northern California itself off by 39 percent.

While our strategy of positioning Private Selection at the top end of the super premium segment remains intact, our pricing in Northern California got too high relative to the competitive set during the quarter.

In our fiscal 2003 plan, we have provided Private Selection with promotional support to address problems and opportunities like this on a market-by-market basis without compromising our positioning.

Because many of the markets continue to perform strongly, we see no reason to change the eight to 10-percent growth target we outlined on June 27th.

Shipments declined 15 percent, to 357,000 cases, with most of the shortfalls in Northern California and Europe, where we made a 35,000-case sale in Q4 of last year that was one time in nature.

Net revenues declined 16 percent to 21.4 million.

The average price per case declined two percent compared to last year as a result of heavier promotional spending.

Finally, Private Selections U.S. scanning store volumes grew 4.2 percent on 1.1 percent higher prices.

Now, let's move to Woodbridge.

Woodbridge depletions grew three percent, accelerating from Q3's eight-percent growth rate but coming in on forecast at the five-percent rate for the second half, which Dennis Joyce mentioned in the June 27th conference call.

Merlot and

contributed most of the growth.

And the 750 milliliter and club store businesses posted eight-percent growth each.

Northern California declined 18 percent, lowering the total company growth rate for Woodbridge by 200 basis points.

Woodbridge shipments declined two percent, to two million cases during the quarter.

Net revenues declined one percent, to $69.2 million.

The average price per case was flat, at $34.77 due to positive mix offset by heavier promotional spending.

U.S. food store volumes grew 1.3 percent and revenues grew 0.2 percent during the period.

Wholesale depletions of our other California brands grew 25 percent over last year.

Shipments declined eight percent from last year, to 30,000 cases.

And net revenues grew three percent, to $5.9 million due primarily to strong growth of the Byron and Grand Archer brands, which also helped mix.

The average price per case grew 11 percent, to $198.

Import depletions declined 22 percent below last year.

But excluding Vichon Med, they grew six percent.

Shipments declined 20 percent from last year, while revenues posted a 17-percent gain because the mix was richer this year without Vichon Mediterranean.

In U.S. scanning stores, our imports declined 9.7 percent in volume on 3.7 percent higher prices as we shifted the mix from scanning channels to independent markets.

In summary, our top line results came in a little below where we've expected, primarily due to weakness in the Northern California and metro New York markets.

Both of these markets continue to be plagued by weak on-premise sales.

But there were some execution issues in the off premise that we are addressing for fiscal 2003.

Now, Hank will cover the rest of the financials.

Thanks, Greg.

$125.1 million in net revenues during the quarter included $3.6 million in bulk line sales as we took steps to reduce inventories in anticipation of the upcoming grape harvest.

This had a big impact on cost of goods per case since there were no case volumes reported with the bulk line sales.

Cost of goods per case grew six percent to $26.93 compared to last year's level of $25.50 but would have declined one percent without the bulk line sales.

Gross profit per case declined eight percent to $21.47 from $23.43 last year.

And gross margin was 44.4 percent, a decrease of 350 basis points from last year.

Without the bulk line sales, gross margin would have been 46.3 percent, 160 basis points below last year due to lower sales of high-margin volumes typically sold in on-premise channel.

Operating expenses declined 20 percent, to $32.7 million or 26.2 percent of net revenue, a decrease of 450 basis points from last year as a result of aggressive cost cutting efforts.

Operating income declined one percent, to $22.8 million compared to $22.9 million last year.

Operating margin was 18.2 percent, 110 basis points above last year's level of 17.1 percent.

Other income expense netting $475,000 of income, which included $150,000 in equity income.

EBIT declined seven percent, to $23.2 million versus $24.9 million last year.

And EBIT margin was 18.6 percent of net revenue, level with last year.

Net interest expenses were $5.6 million, down six percent from last year, primarily a result of a smaller balance sheet.

Effective tax rate for the quarter was 37-and-a-half percent.

Net income decreased five percent, to $11 million.

EPS declined six percent on a lower share count, to 67 cents compared to 71 cents last year.

The June 30, 2002 balance sheet was $854 million dollars, $8.8 million below last year.

And an increase in inventory was offset by lower receivables and a reduction in fixed and long-term assets.

Capital spending for the quarter was $4.9 million, with most of the money being spent on staff expansion and maintenance at Woodbridge.

Capitalized interest expenses for the quarter were $553,000 compared to $1.1 million last year.

Free cash flow for the quarter was a positive $40.3 million compared to a negative $3.2 million last year.

This quarter's cash flow number includes about 24 million of working capital investments mostly related to carrying higher inventories.

Now, let me run briefly through some of the full year results.

As Michael said, wholesale depletions grew four percent, excluding Vichon Med.

Shipments declined six percent, to 9.4 million cases, while we reduced wholesale inventory base to 46.

Net revenues declined eight percent to $441.4 million.

Average price per case declined three percent to $47.08.

Cost of goods sold per case declined two percent, to $25.74.

Gross margin declined 70 basis points, to 45.3 percent of net revenue.

Operating expenses declined five percent, $225.8 million, but 28.5 percent of net revenue.

Operating income declined 16 percent to $74.3 million.

And operating margin declined 160 basis points, to 16.8 percent of net revenue.

EBIT declined 14 percent, to $85.3 million.

And EBIT margin declined 140 basis pints, to 19.3 percent of net revenue.

Net income declined 18 percent, to $39.5 million.

And EPS declined 18 percent, to $2.41.

EBIT declined 11 percent,

million.

Capital expenditures were $31 million.

A build up in inventory, partially offset by lower cap ex spending, caused free cash flow from operations to be a negative $4.4 million.

But total free cash flow was a positive $7.9 million, including $12.3 million in proceeds from the sale and leaseback of vineyards in the first quarter of this last fiscal year.

Return on average invested capital declined 160 basis points from last year, to seven percent.

Now, Greg will talk about fiscal 2003.

Thanks, Hank.

Since we conducted a call on June 27th to provide detailed guidance for fiscal 2003, I'll just hit the high points.

Note, however, that there are no changes to what we said on June 27th.

Total revenues are targeted to be around 500 million on strong shipment growth, supported by six to eight-percent depletion growth and balanced wholesale inventories.

Average price per case is expected to increase between two percent to three percent as shipments of Robert Mondavi Winery, Private Selection, other California and imports grow at a faster rate than Woodbridge.

cost of goods sold per case is expected to rise seven percent as the mix shifts into more expensive wines and we balance inventories throughout our portfolio.

This will translate into a gross margin of between 43 and 44 percent, a 130 to 230 basis point decline from fiscal 2002.

We're expecting a 150 to 200 basis point improvement in our operating expense ratio as a result of ongoing G&A cost cutting, partly offset by the startup costs associated with the go-to-market improvements and an increase in advertising costs.

The G&A cost cutting involves position eliminations, travel and entertainment synergies and more efficient procurement of outside services.

Equity income should be around 9.5 million due to lower profits from our high-priced imports and lower yields to improve their quality.

Interest expense is targeted for about $22 million, relatively flat with fiscal 2002 due to slowing balance sheet growth and favorable lending rates.

Earnings per share is targeted to be between 255 and 260.

As a result of strong steps we've taken, we expect the balance sheet to be around $900 million and free cash flow to be between $5 million and $10 million.

These assumptions are based on vigorous controls on capital spending, which we will keep in the 25 to $35 million range, slowing working capital growth due to the excellent progress we've made in reducing the expected intake from the 2002 grape harvest.

And we're not including in those estimates any affects of asset divestitures that we are attempting to make this year.

In the September quarter, we expect earnings per share to range from 48 cents to 52 cents on strong top line growth but lower equity income from our joint ventures that reflect a seasonalization patter more in line with historical norms.

Let me turn it over to Bob to make some announcements.

Thanks, Greg.

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

Beginning at 9:30 a.m.

Pacific time to about 5:00 p.m. today, 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 access code to the replay is 3381824.

Today's prepared remarks can also be viewed, downloaded or listened to on our Web site, www.robertmondavi.com in about one hour.

Look under About the Company, Investor Relations, News and Events and then, finally, Conference Calls.

Let me just review a couple of upcoming events.

I'm pleased to announce that we'll be attending two National Association of Investors Corporation events during the next quarter, the national convention in Portland, Oregon, in September, followed by the Phoenix chapter event also in October - no, sorry - in October.

On the institutional side, we'll be - we will be represented at the Wells Fargo Securities Conference in San Francisco on September 4th and the UBS Warburg Global Consumer Conference in New York on October 29th.

Also, for those shareholders who may wish to attend our annual meeting, it is scheduled for Friday, November 8th, in the Napa Valley.

For more information on any of these events, visit our Web site.

Finally, our next conference call, covering the first quarter of fiscal 2003 is scheduled for October 4th, 2002, at 7:30 a.m.

Pacific time.

I want to thank you for your participation in today's call.

We'll now open up the line for your questions.

Thank you, sir.

The floor is now open for questions.

If you do have a question or a comment, please press 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 queue by pressing the pound key.

Once again, ladies and gentlemen, that is one, followed by four on your touch-tone phone.

Our first question is coming from Caroline Levy, of UBS Warburg.

Hi.

Actually, it's

, for Caroline Levy.

Two questions.

You mentioned Northern California as a - as an area of particular trouble and decline in certain key brands.

And you also mentioned some executional issues related to that.

Would you mind just elaborating on that and what, sort of, executional issues and industry issues there might have been in that number?

And a second question is with regard to wholesaler margins on some of your key brands, are you seeing that those margins are decreasing in recent times?

And if so, are you getting a little - are you getting any push back or - from them about possible pricing in light of the fact that their margins may be decreasing on key brands such as Woodbridge?

Thank you.

Let me take the first question about the Northern California execution.

The key thing we've seen, particularly with the economy and after the tragedies of 9/11 is that the restaurant part of the business has really gone from the higher-priced restaurants that business travelers, et cetera, go to, to more of the neighborhood restaurants and particularly in Northern California, in the outlying areas from San Francisco.

We found that the execution, in other words, the wines by the glass and the wines on the wine list in those non-major San Francisco areas were not as strong as they should be.

We've identified this.

And there is a major push by our wholesaler and our own team to improve that situation.

We think that will have some definite help in Northern California.

Let me also say, though, Northern California is the most competitive wine market in the world today in the fact that not only are a lot of the imported lines focusing in California because it's such a large market but Northern California per capita consumption has been greater than most areas for years.

And just think about the wineries in Northern California.

When we started in 1966, there were 18 wineries.

There are about 275 wineries in Napa today.

There's more than that in Sonoma.

And there are a lot of people right now in the small, boutique wine business who are what I call the station wagon wine business.

And they take their station wagon or their van and they go to the different stores and the different restaurants and they start trying to sell.

And if they can't sell it at the regular price, then they give you one on five and pretty soon, two on five and pretty soon, five on five.

So that is disrupting the Northern California market and that's fine.

We've seen the cycle in the past, back in the mid-'70s.

And it'll flush through and everything will work out in the next year or two.

, let me - let me just give you a specific comment on what we saw in Northern California relative to Private Selection as an example of the marketplace and why we felt we're out of the competitive set, that our pricing in Northern California for the week - for the month of June that ended our quarter at the end of the fiscal year, for Robert Mondavi Private Selection, it was $10.01 on average per bottle retail.

Pricing at some of our key competitors during that same period, Beringers Founders Estate was $9.62, which represented about a 4.8-percent decrease from the same period last year.

Meridian 750 was $9, down 3.6 percent.

Kendall-Jackson's price was 9.44, down 11.6 percent.

Our pricing at $10.01 was actually up 15.3 percent.

So we really got too far out of that relative competitive set during that period.

As we said, we want to be at the top end of that super premium segment.

But on a relative basis, the gap widened a little bit too much during that fourth quarter.

And we intend to correct that gap as we move forward into fiscal 2003.

And on wholesaler margins, has there been a decrease over the last year or so, given what's going on in retail?

And are you getting any push back on your pricing on your

brands, in particular, Woodbridge?

Well, as I mentioned, California is the most competitive.

And it's California for the wholesaler, as well as for the producer.

And both ourselves and our wholesaler are spending more and investing more in the market in Northern California.

As far as push back, no.

We don't have push back.

We have a great relationship with Southern Wine & Spirits and are working very closely with them to do the best possible execution in the entire state of California.

As you know, California is a very chain-dominated state.

And the thing that's really affecting a lot of the wine sales in the state, from a margin standpoint, are the wine clubs or the instant coupons on the scans at the supermarkets in California.

And that's an area that we're all studying.

And we're trying to figure out how to do a better job.

OK.

Thank you very much.

Thank you.

Our next question is coming from Skip Carpenter of Thomas Weisel Partners.

Yeah.

Good morning.

Good morning, Skip.

Very good questions.

If you could just give us a rough kind of percentage of your volume that would be in Northern California and metro New York, just kind of, just roughly what percentage of the business is that?

Skip, metro New York is six percent of our - or five percent of our volume and about six percent of our revenue.

It's going to - it's going to be between the two, probably 12 to 14 percent.

OK.

And as the quarter progressed, did the competitive dynamics of those two markets intensify during the June quarter?

Would that be a fair characterization.

That is a very fair characterization.

OK.

Greg, could you give us just a little bit of an update on the go-to-market strategy with regards to the sales force.

Will the, I guess, some of the changes that the organization is adopting, will that be finalized by the end of the September quarter or will that go in, as well, into potentially, the December quarter?

We're making very good progress on that implementation.

Our sales executives had meetings with our entire team over the last two weeks and have rolled out the changes internally.

There are some new positions that we're bringing in from the outside that we have not yet filled, specifically in the - in the category management/category validation arena.

And I can't promise when we deliver that those people will be in line.

But in terms of the creation of the signature estate specialty sales group, that has now been put in place and we're in the process of moving people around to the new regions.

So I think we've really hit the ground running on the go-to-market strategy.

Skip, in expanding on that, I just returned last night from St. Louis, where Mitch Clark, our Senior VP, Sales, Gayle Dargan, Senior VP of Robert Mondavi and Dennis Joyce, Senior VP of Woodbridge presented in St. Louis yesterday to most of our Midwest and Central U.S. wholesalers that entire new go-to-market strategy.

Two days earlier, we did the same thing in Portland for the West Coast.

So essentially, everything but the Eastern Seaboard has already been communicated and reviewed with our wholesalers.

And the acceptance by the wholesale community and our wholesale partners has been very enthusiastic.

They like the way we've done it.

They think there's going to be better focus.

And it will allow both of us, the wholesaler and the winery team, to work much more synergistically and much more efficiently together.

Michael, are there other wineries that have a similar sales force structure or is this somewhat unique in terms of what you guys have developed here?

This is a little unique because what we've done is we've, with our signature estate brand, we said there are wines that are, kind of, established brands and then, there are the newer brands.

And the newer brands require, just like a child, more care and feeding.

The time and effort spend on the new brands will be disproportionate to the dollar volume of sales.

So you want people who are more like a teacher, an educator, involved in those.

And on the core brands, Robert Mondavi Winery, Robert Mondavi Private Selection and Woodbridge, a couple of the other larger brands, you want people who really understand not only the brand building but the execution and the implementation of that.

And so, we think we have the experts aligned now.

Where people have been different in the past is they've really divided it so they're totally different sales forces.

And we have worked with the wholesalers in creating this model.

And they like it very much because it works with them as one company.

Rather than making six calls on a buyer, we make one call on a buyer.

OK.

Well, great.

Thank you very much.

philipps?

Operator, before you take the next question, I want to just correct, I guess, two things.

In the conference call text and in the press release, the timing or the date of our next earnings release should have read in the press release and I should have said in the conference call, is October 24th, 2002.

So the press release is incorrect as it went out.

Next question.

Once again, ladies and gentlemen, if you do have a question or a comment, please press the numbers one, then four on your touch-tone phone.

Our next question is coming from Bud Leedom of Wells Fargo Securities.

Hi, gentlemen.

Good morning.

Just - I have a couple of macro questions.

I missed the very first part of the call.

So I apologize if you've already answered this.

Do you have any status on the progress of the properties that are held for sale at this point?

Bud, we had marketing programs in place for all of the assets that we're currently offering for sale, both the winery facilities and the vineyards.

We do not have any firm offers in place for those assets.

The interest level has picked up somewhat from what it was a few months ago.

But nothing really to report at this point.

OK.

And within those particular areas where you have the properties for sale, are the - are the values holding pretty firm overall or from what you know of that market?

Or...

It's hard to say.

You know, the property - there's one vineyard in Napa that we have up for sale, an undeveloped piece of ground and the contiguous property to it just sold at a price that's in the range of what we have offered.

So, you know, particularly on the North Coast, we think the values - that's one of the anomalies right now in the wine market is that prices on land in Napa Valley has continued to escalate, even though the market's gotten tougher.

So up here, I think the values still look pretty strong.

We don't really have a good read on the values for the properties down in the Santa Maria area.

And we have quite a bit of our vineyard assets for sale listed in that area.

OK.

And being that it looks like it appears that grapes are going to be in a state of oversupply probably through 2004 so, at least, by the data that I have, you know, how can you best take advantage of some of these really low spot prices, you know, over the next couple of years?

I'm sure you have plans in place.

But maybe you could articulate that.

Well, I think we have the same read on the cycle that you're looking at but which is we said we think there'll be three vintages, you know, under the current assumptions out there before the market gets back in balance.

And during the period of time, we've got some very strong plans to work through some of our surplus and shed some of the contract arrangements that we have, particularly where the grapes are not meeting the best quality standards.

To the degree that we have additional availability to bring new grapes in, we will be able to take advantage of that spot market pricing.

But given our contract position this year and probably next year, that's not going to have a significant impact on our overall grape price.

And in areas like Napa Valley, I think it's almost irrelevant to our grape procurement because most of that fruit is grown internally on our own vineyards.

Right.

Right.

OK.

And then, just finally, you know, being that the French 2000 release will probably come some time in your fiscal '03, I was just wondering within your projections if you foresee any competitive demand pressure from that vintage, being that it'll probably be in such high demand?

Well, I think that both the French and both the Napa Valley or California wines enjoyed a stellar vintage.

And if you think back just about a year ago, when we released the 1998 vintage that was less than stellar according to the media, we've had great media impact.

So we think that there will be energy - positive energy for the 2000 vintage, whether it's Bordeaux or Napa.

OK.

OK.

Great.

Thanks very much.

Thank you.

Thank you.

Our next question is coming from

, of

Company.

Good morning.

Good morning.

I'd like to ask just two general questions.

Relative to last quarter, would you say that price competition is intensifying or has it leveled off?

And what's your expectations at this time for on-premise demand?

In terms of price competition, at least as reported through AC Nielsen, I think Mike will start off with the statistic that pricing on average across the country was basically flat for this last 13-week period.

It was up about half a percent on domestics and down about six-tenths on imports.

That would represent a softening of pricing over the prior 52-week period.

So we do see an intensification of, call it, pricing or more likely promotion during that period.

As the growth for the on-premise, we believe that the industry is going to grow at about four percent in on-premise.

And as I said, it will be skewed probably more to the neighborhood type restaurants than the very expensive ones.

We believe that our on-premise growth will be at a faster rate than the industry.

Thank you.

Thank you.

Our next question is coming from

of Merrill Lynch.

Hi.

Good morning.

Good morning.

Good morning,

.

Calling on behalf of

, who's, you know, now a full time mom, for a while anyway.

I think in the past you've discussed and it makes a lot of sense that, you know, our go-to-market strategy - and this follows off a question a couple - a couple of questions ago - excuse me, that it's really the wholesalers that, you know, probably exert more of an influence in this sector of the industry than a lot of them.

And while

seem to be onboard, at least from your comments earlier, am I understanding it correctly that unless these guys really start to buy into a program, it's going to be hard to get it into the marketplace in an effective way?

And if that's true, could you flesh out a little bit more in how you're dealing with these guys?

And I've got to presume there's going to be a consolidation going on in that part of the business, just like there has been in every other part of the food distribution business.

Could you give me some color on that?

The key thing with the wholesalers - and you've really hit the nail on the head - is share of mind.

And then, once you have that share of mind and agreement with the owners and the management of the wholesaler, then it's working together to truly get the job executed and implemented properly.

There will be continuing consolidation as

works its plan.

And then

and Brown-Foreman, Bacardi, all of these people make the necessary adjustments, as well.

We're doing the same thing.

What we've been doing now for about 18 months is having very detailed and very good discussions with the owners and senior management of these wholesale companies.

And we think that, first of all, we have great personal relationships with them.

We have commitments from them.

And they want to work with us, mainly because they know that we are a little different, hopefully quite different than these larger companies.

And the fact that we are personally involved, that if they excel and do a good job with our brands, they will continue to grow with our brands, whereas historically, in the past, there have been many brand changes, particularly in the spirits industry.

And with the stroke of a pen, a wholesaler, regardless of the quality of job that they've done, could lose the brand.

And we have let our wholesalers know that those who execute properly have essentially an ever green, that we want to work with them long term.

Those who don't execute properly, unfortunately, we will have to sever our relationship and move with a strategic partner who will work with us closely.

So I think that there is going to be a continued transition in the wholesale industry and consolidation.

And I think that's also healthy because there are few of us who are very stable and can give them additional value.

And as a result, we get an additional share of mind and share of execution.

, is it possible to take - I think the question was an excellent one about, you know, a concentrated market share, whether it's out here in New York or in California or

, somebody that uses a lot of the product.

Is it possible to get into maybe one or two of the key retailers,

key wholesalers in that market and do

with them or is that counterproductive?

I lost the word as the phone rang.

Is it - would it be counterproductive to try and put in an exclusive with some of these dominant wholesalers in key markets such as Northern California or New York or others or is it better off trying to flood the - you know, take everybody in an area and give them an equal shot?

Well, if you look at the - and let's just pick Northern California as an example - you can't just work with - Safeway is the dominant chain.

If you work exclusively with Safeway, then you alienate the other chains and your independents.

Also, I think Safeway wants a brand that is strong and has good consumer pull.

Excuse me, Mike.

I meant more on the wholesaler rather than...

I'm sorry.

On our wholesale level, we are exclusive in each market.

We work with exclusively, for example, in California, we're with Southern Wine & Spirits.

Exclusively in metro New York, we're moving over to

, which is part of the

chain on an exclusive basis for the state of New York.

And we believe strongly that exclusive relationships in each of the markets is the best way to go.

There are a couple of exceptions where you have franchise laws, et cetera.

But working exclusively with a distributor partner, first of all, agreeing strategically with the vision for their objectives for their wine portfolio and our objectives as part of that wine portfolio, making sure your vision is aligned and then working with them as partners to execute is the best strategy in moving forward.

Thank you very much.

Thank you.

The next question is coming from

, from

.

Yes.

Hi.

A couple of questions.

First of all, can you tell me what percentage of your sales in the quarter came from on-premise and how that compares with a year ago?

And then, also, what are your revenue expectations for Q1?

You just said strong top line top line growth?

Can you be more specific?

Thanks.

Let us look the numbers up for a moment here,

.

, I show about 20 percent of our volume here in the quarter was on-premise.

I don't have a comparable number on the revenue side.

It's probably higher.

And how does that compare with a year ago?

Hold on a sec.

It's down about half a point, not a huge difference.

OK.

And then, revenue expectations for Q1?

I'm sorry.

What,

?

Revenue expectations for Q1?

Yeah.

Revenue expectations for Q1 are probably going to be in the high teens as we alluded to the strong top line growth.

We see driving more sales in this first quarter because the distributor inventory levels at the end of this fiscal year - that's 46 days - put us in a very healthy position early in the summer.

And also because of 9/11.

The comps...

Well, the comps - 9/11, sure.

That has to do with, kind of, the back half of September, as well,...

Right.

... which is pretty easy to improve against.

Thank you.

Thank you.

We do have a follow-up question coming from Caroline Levy of UBS Warburg.

Hi.

Again,

for Caroline.

Do you anticipate any dislocation drag, call it, to volume from switching wholesalers in New York City metro area?

And as the wholesaler realignment presumably progresses through the year, do you see any executional risks, any dislocation drag risk to your fiscal '03 volume from that?

Thank you.

First, any time you make a change of a wholesaler, there is disruption in the market for at least 60 to 90 days regardless of how good or bad the new or the old distributor was.

There is confusion

takes place.

We are planning and expecting some disruption over a short period of time.

We wanted this decision and this move made early enough so that we could be solid and clicking on all cylinders by the time the holidays hit.

Your next - on the long term, we are convinced that our association with

and with the

family is going to give us tremendous execution throughout the state of New York, as well as metro New York.

And, in fact, just this next week, their entire management team is coming out for a couple days of education so that they fully understand not just the numbers of what we're doing.

But they understand the vision, the values and we'll be educating their entire sales team in New York, both metro and the entire state within the next three weeks.

So we're expecting very, very good things.

But there will be, you know, 60 to 90 days when you're changing the suit, at times, you don't have it buttoned just right.

And that - and that's something that you foresee that situation replaying with further possible changeovers?

There may be one or two.

We don't see a lot of changeovers.

We have a very good relationship with the

and Southern Wine & Spirits.

As I mentioned, we have a wonderful relationship with the

at

.

And those are the two, as you know, major wholesalers.

There are a number of other wholesalers that we have very good relationships with.

And we don't see a lot of alignment changes.

We've had good relationships and we're going to maintain them.

Yeah.

, I would - I would point out that this year, as you're aware, the strategic move that

is making in the market will result in a number of changes at distributorships, certainly on the spirit side and in many cases, the wine tail will follow the spirits

.

There's likely to be a little more disruption this year for all wine producers as those events play out.

I think we're positioned, we think, for the most part, in the right places.

The only other major change that occurred that we have built into our plan for '03 was the change in the Chicago market and the Portland market, as well, where the Southern group purchased a couple of the distributors in Illinois.

As Mike said, those changes take a little bit of education and transition.

In the long run, they're going to be healthy.

But if you look at the industry this year, based on the

strategy, everybody is going to have a little bit more noise in their distributor relationships.

And that's one of the reasons why we think having a very strong internal sales force in the market gives us a competitive advantage when that happens.

You also can't put too much - or you can't put enough emphasis on the fact of how important the relationships are and the trust and respect that the key wholesalers and the key wineries have.

That makes a huge difference.

And one of the things that I think separates us is that we have an excellent respect and rapport and relationship with our distributor partners.

Thank you very much.

Thank you.

Our next question is coming from

of

Capital.

Regarding your change of distributor in New York, when did that occur officially?

It was actually filed today.

We notified them about two-and-a-half or three weeks ago.

And it is in the process of being implemented as we speak.

OK.

And from what distributor did you go from and what were your reasons for changing?

Well, we went from

to Charmer.

We felt that in the future, the execution, the efficiency and the systems that Charmer has is excellent.

We had a very good personal relationship with the

and the management at Peerless.

But we just felt that the way the market was going that we had a greater opportunity, better systems, better temperature-controlled warehouse, again, better execution by moving over to Charmer.

OK.

Second question, just bookkeeping.

On your first quarter revenue guidance, when you talk about mid-teens type of growth, are we assuming, sort of, an $80 million base for '01 for the, you know, September quarter?

Yes.

Yes.

For '01, it was...

Prior year...

, 80.9.

Right.

Yeah.

And,

, it was high teens, not mid teens.

High teens.

So you - the reason why I'm asking the consensus is

substantially below that right now.

OK.

OK.

Thank you.

Yeah.

It's more of a timing issue, I think, as we look at the quarter,

, in terms of the factors that we mentioned - lower distributor inventories starting out the quarter and September 11th, which certainly caused shipments to fall off at the end of September.

OK.

Thank you very much.

Thank you.

Our next question is coming from Skip Carpenter, of Thomas Weisel Partners.

Yeah.

I'm sorry for using the speakerphone.

But I'm just trying to get a little better feel, given some of the trends that we're seeing in the market.

I mean, we talked about a - the market from a pricing perspective getting a little bit more aggressive.

It seems like there's been some changes, not only internally with your sales force but also with regards to some of your wholesalers now.

I guess I'm just still struggling here why you guys feel that you can achieve a two to three-percent net revenue per case given that it probably

- that we haven't seen any up tick in terms of better performing trends in the broader industry and why you feel that your depletions can bounce back so quickly given that we really haven't seen any signs that the demand at the consumer level is improving.

Well, Skip, I think it's really a mix.

If you look at the Robert Mondavi Private Selection growth, it's growing at a much faster rate than Woodbridge.

We have Arrowood, Grand Archer growing.

The imported portfolio is growing disproportionately.

We're not building, needless to say, any price increases at Woodbridge or Private Selection.

It's really a mix shift by brand and by variety.

we see some price decreases in both Woodbridge and Private Selection in fiscal '03?

Net to consumer, yes.

Which is in the plan.

Yeah.

That's in the plan.

We planned that.

the way that our accounting works on the revenue side is that our net revenue number really shows our price to the wholesaler less specific direct discounts from promotional expenses, et cetera, et cetera.

And because we've increased our promotional spending for Robert Mondavi Private Selection and Woodbridge this year, there probably will be some net price decreases on those brands in fiscal '03, which has been factored into our planning.

But don't forget the new items we're bringing into the portfolio, particularly the import items, a series of, you know, very expensive high end wines that we're selling alongside other California luxury wines has an upward affect on our average price per case.

But do you think that the consumer in this kind of environment is experimenting, is trying new, higher wines or do you think that they're just going to continue to stay with the, kind of, tried and true and particularly if those tried and true brands are offering a more favorable price point than what they've seen in prior years?

Yeah.

But some of the wines that we're talking about here - we're starting the distribution of Ornellaia, you know, last year, which was named the number one wine in the world by the "Wine Spectator."

Many of the wines that we're talking about here have demand beyond the supply.

So it's really a question of our finding the right outlets for those to be distributed.

It's not to say that getting a new wine that doesn't have a brand equity built would be an easy exercise.

But for the most part, these are wines that, you know, have great image and high price points.

So we don't really see a lot of sales issues around things like the Ornellaia portfolio.

OK.

Thank you.

Thank you.

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We appear to have no further questions at this time.

Thank you very much.

We will end the conference call.

Thank you for your participation.

This does conclude today's teleconference.

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And have a wonderful day.