Constellation Brands Inc (STZ) 2003 Q3 法說會逐字稿

Okay.

I would like to turn the conference over to Mike Mondavi.

Go ahead, sir.

Thank you.

Good morning.

It's Michael Mondavi speaking.

I want to welcome you to today's conference call discussing the release of our third quarter fiscal 2003 earnings.

Joining me today are Greg Evans, President and Chief Executive Officer, Hank Salvo, Chief Financial Officer and Bob Philips, Vice President of Treasury and IR.

Before we get started let me remind you we'll make a number of forward-looking statements today and those statements should be taken as estimates only.

Actual results may differ from our expectations.

Please refer to the MDNA in our annual report for discussions in the risks in the wine business.

To help you follow this call, we have already posted a copy of our prepared remarks on our website, www.RobertMondavi.com.

Look under about the company investor relations followed by news and events and then conference calls.

Note that the financials we reference today are presented in accordance with SEC regulation G which requires the emphasis of GAAP results.

On occasion, we'll itemize some of these items included in GAAP such as the inventory step up charges, the writedowns of inventory or fixed assets, gains or losses on the sale of fixed assets and the severance costs that may be of interest to you.

There are several themes we'd like to touch on today during our prepared remarks.

First is that the market remains difficult and industry pricing remains competitive.

Pre-Easter industry figures per AC Nielsen food drug and scanning stores through the 13 weeks ending March 15, 2003 show a continued slow growth.

Domestic varietals grew 7/10ths of 1 percent in volume and declined 1.9% in price during the past 13 weeks compared to a 2.9% increase in volume on flat pricing during the last 52 weeks.

Imported wines drew 14.6% in volume on 2.4% lower prices during the last 13 weeks close to the 52 week trends.

For Mondavi the quarter's wholesale depletions declined 1%-- part of this was due to late Easter, April 20th this year versus March 31 last year.

This means that our peak pre-Easter shipments fall in April this year and helps account for the difference between the shipments in depletion rates in Q3 last year versus Q3 this year.

We've posted a loss of 10 cents per share at the low end of our guidance of 5 to 10 cent per share loss in the GAAP EPS.

The GAAP results include a 5 cent per share in inventory step-up charges and a 42 cent charge in restructuring. 3 cents more than we guided you to in the last call.

Second, we continued progressing against the plan that we announced last June to improve asset efficiency.

During the quarter we sold nonstrategic fixed assets with a book value of $11.1 million for 17.2 million resulting in a pre-tax gain of $6.1 million.

We are hoping to close at least one more transaction during the June quarter.

And third, the restructuring efforts that we announced March 27 remain on track.

Greg will provide you with an update later in the call.

Now, Greg will cover the details of the quarter.

Thanks, Michael.

Good morning.

We'll start with top line performance.

Total company wholesale depletions for the quarter ended March 31, 2003 declined 1% from last year.

Wholesale inventories were 50 days compared to 46 days last year and 51 days in December.

New products added about one day to this number.

Total company shipments declined 14% to 1,986,000 cases as we continue to work down wholesaler inventories.

Average price per case grew 2% to $46.41 as a result of higher average selling prices of our Robert Mondavi winery brand from positive mix and stronger sales of imported brands.

Total company net revenues were $92.2 million, 12% below last year's $104.3 million.

Scanning channels, AC Nielsen reported that our brands declined 2% in volume and 2% in average price.

Now we'll review the brands' performance.

During the quarter wholesale depletions of our flag ship Robert Mondavi winery brand declined 6%, although the brand reported 7% growth in March, it's first positive month since August 2001.

Robert Mondavi winery shipments declined 21% to 53,000 cases.

Net revenues declined 17% to $10.1 million.

Average price per case was $192, 6% above last year due to a shift in mix to the district tier wines which were promoted in the quarter and the strong acceptance of the 2000 vintage Robert Mondavi Cabernet Sauvignon Reserve by the trade and consumers alike.

In scanning stores Robert Mondavi winery volumes declined 14%, an average price decline 3.5%.

The average retail bottle price in these channels remains well over $20.

Sales of wine and merchandise sold at the winery grew 3%, although the visitor count was off 1%.

Robert Mondavi private selection wholesale depletions grew 6% from a geographical standpoint sales in Europe were strong while U.S. depletions grew 3%.

In U.S. scanning stores volumes grew 2% on slightly positive pricing during a time when the brand's competitive set lowered prices 2 to 3%.

Shipments declined 16% during the quarter to 291,000 cases.

Net revenues declined 19% to $17.1 million as the average price per case declined 4% due to heavier promotion spending and a shift away from higher priced markets.

Please note that the directional difference in the change of scanning store prices and versus our reported price per case is because AC Nielsen prices does not -- do not reflect the effect of club card price discounts which are, in effect, coupons.

But this spending is picked up in our net revenues and net revenue per case.

Woodbridge wholesale depletions declined 4% during the quarter.

Domestic scanning channels declined 3% in volume and 3% in price.

The club store channels in Europe posted good growth.

Shipments declined 14% to 1.5 million cases.

Net revenues declined 17% to $49.8 million as average price per case declined 3% due to heavier promotion spending.

Wholesale depletions of our other California brands grew 38% over last year due to positive performance across the board led by Hangtime and Arrowood's Grand Archer.

Shipments grew 22% to 32,000 cases.

Net revenues grew 13% to $5 million as the mix shifted towards the lower priced Hangtime and Arrowood Grand Archer.

This brought the average price per case down 7% to $158.

Let me talk about our import portfolio excluding Vichon Mediterranean which was divested last year.

Wholesale depletions of our imported brands grew 27% with good growth due to two exciting developments.

The first is the release of new wines from our Australia joint venture with South Corp called Kirralaa.

These wines are priced between 12 and $15 per bottle retail.

The second is the fact that we had our first full quarter as the exclusive U.S. importer of a strong portfolio of Italian wines produced by Marchesi de'Frescobaldi.

With these entries, we are now participating in two of the hottest segments in the import business.

Import shipments grew 15% to 135,000 cases.

Net revenues grew 38% to $8.2 million.

Average price per case grew 20% to $61 per case as the mix shifted from lower priced Chilean wines towards higher priced Italian wines.

In scanning stores our imports declined 5% in volume on 1% lower prices mostly as a result of continued weakness in the Chilean category.

Now Hank will cover the rest of the financials.

Thanks, Greg.

Overall financial results were consistent with our guidance on March 27.

Consolidated net revenues declined 12% to $92.2 million compared to $104.3 million a year ago.

Consolidated average price per case grew 2% to $46.41 versus $45.36 last year despite higher levels of promotions support behind Robert Mondavi Private Selection and Woodbridge.

This was due to strong sales of Robert Mondavi winery district tier and Cabernet Sauvignon Reserve wines.

Cost of goods per case grew 25% to $31.41 during the quarter from last year's level of $25.22.

This year's numbers include $738,000 pre-tax or 37 cents per case in Arrowood's inventory step-up charges.

While last year's number included $1.1 million pre-tax of 48 cents per case in Arrowood inventory step up charges.

This year's number includes $7.6 million pre-tax or $3.81 per case for inventory and bulk wine writedown.

Gross profit per case declined 26% to $15 from $20.14 last year and gross margin was 32.3% compared to 44.4% last year.

Inventory writedowns booked in the quarter to cost of goods sold accounted for 820 basis points of the decline.

Operating expenses grew 8% to $31.7 million or 34.4% of net revenue an increase of 620 basis points over last year's 28.2%.

This year's number included $1.2 million in severance costs and $2.2 million in vineyard writedowns.

Excluding these costs operating expenses declined 4% to $28.3 million -- or 30.8% of net revenues.

We posted a $2.0 million loss -- operating loss during the quarter compared to $16.9 million in operating income last year.

Equity income was a negative $489,000 which included $479,000 in Ornellaia inventory step-up charges.

Other nonoperating income was $5.3 million which included a $6.1 million gain from the sale of winery in vineyards fixed assets.

EBIT or earnings before interest and taxes is not a GAAP measure.

Let me first define how we calculate it.

We take pretax net income and add back net interest expense which means EBIT includes our joint venture income, aswell as the other income and expense line in our P&L.

EBIT declined 84% to $2.9 million versus $18 million last year.

EBIT margin was 3.1% of net revenue compared to 17.3% last year.

Net interest expenses were $5.5 million, 6% below last year, primarily as a result of lower borrowings.

Partially offset by lower levels of capitalized interest.

Capitalized interest expenses for the quarter were $179,000 compared to $558,000 last year.

The effective tax rate for the quarter remains at 37%.

We had a $1.6 million net loss for the quarter compared to a $7.6 million profit last year.

EPS was a negative 10 cents this year compared to a positive 46 cents last year.

Those of you excluding inventory step up and restructuring charges earnings were 13 cents per share versus 53 cents per share last year.

March 31, 2003 balance sheet was $868 million, 1% below last year.

PP&E declined $20 million while inventories grew $9 million or 2%.

Capital spending for the quarter was $4.9 million with most of the money being spent on vineyard development.

As Michael said we sold the LaFamiglia winery facility and a vineyard in Santa Barbara county.

Combined book values of these properties were $11 million and we received proceeds of $17 million for a $6 million gain.

Free cash flow was $16.3 million.

Since this is also a nonGAAP measure we've included a table in the written prepared remarks for you to see how we calculate this number.

Let's look at the full year outlook.

We are not making any changes to the financial projections we provided on March 27.

At that time we forecasted a depletion growth rate of 3% for March through June.

Including 2% lift from new wines which would result in full year depletion growth of 2.5%.

Net revenues of approximately $450 million, 3% over last year -- GAAP EPS of 91 to 96 cents per share.

As Michael said earlier we expect the late Easter to help us in Q4.

Also please note that the March 27 conference call prepared remarks posted on the web show the full year EPS numbers in brackets indicating negative amounts.

These EPS numbers should not have been bracketed, but the press release was correct.

We have since corrected the written version on the web.

Now Greg will update you on the restructuring efforts.

Thanks, Hank.

On March 27 as we talked about our outlook, we said that there are three factors that are contributing to the fierce competition we are seeing today in the premium wine industry.

First, a weak U.S. economy which is depressed the travel and entertainment sector and dampened demand, especially for high end wines.

Second an oversupply of grapes which is leading to intense price competition and a proliferation of value priced domestic and imported brands and third increased retailer buyer power at the trade level.

Since we believe these three factors will be present for some time, we announced a series of changes in our business model designed to improve our competitive position by increasing top line growth, reducing product costs, and reducing operating costs.

Today we'll provide you with a bit more detail behind each of these initiatives.

The third quarter reflected only about half of the operating expense redeductions we announced on March 27.

Since then, we have moved forward and as of today, we are 90% of the way complete.

Most of this is coming from staffing reductions from which we expect to get $6 million in savings in fiscal 2004.

Product cost reductions are in process from which we expect $30 million in annualized savings or about 10% of our production costs.

However, because our inventory turns slowly the full impact of the cost reductions will not flow through the P&L until fiscal 2007.

The cost reductions will occur as a result of reducing our internal and external grape costs, as well as wine making costs through improved asset utilization and increased throughput.

However, a key objective of the restructuring touring was to get the company more consumer focused and put us back in a growth mode.

During the last call we announced the release of a new line of wines the Select Vineyard Series or SVS from Woodbridge.

These wines are currently being sold in six markets in the U.S.

Photos of the bottles can be found on our website, www.RobertMondavi.com under about the company, investor relations, about us, and then what's new.

We also have some new brands that will be released in the first quarter of fiscal 2004.

Finally, we are working on some strong promotions for our base business which we expect to be in place for the next Christmas holiday selling season.

Now, Bob has some housekeeping items.

Thanks, Greg.

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

Beginning at about 9:30 A.M.

Pacific time today until about 5 p.m. today you can listen to a tape of this call in the US by dialing 1-800-405-2236.

International callers can listen to the tape by dialing 1-303-590-3000.

In both cases the access code to the replay is 534555 pound.

Today's prepared remarks can also be viewed, downloaded or listened to on our website, www.RobertMondavi.com look under about the company, investor relations, news and events, and then conference call.

Finally our next conference call covering the 4th quarter and full year fiscal 2003 results is scheduled for July 31, 2003 at 7:30 am Pacific time.

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

Operator, we'll now open up the line for q-and-a.

Thank you.

Ladies and gentlemen at this time we will begin the question and answer session.

If you have a question please press the star followed by the one on your push button phone.

If you would like to decline press the star followed by the 2 you will hear a three-tone prompt.

Your questions will be polled in the order they are received.

If you are using speaker equipment lift the handset before pressing the numbers.

One moment, please, for the first question.

First question comes from Mr. Mark Swartzberg with Legg Mason.

Please go ahead.

Good morning, everyone.

Good morning.

Michael, two questions for you.

It's kind of an old topic that's coming up again.

These rumors, at least on take out of the company.

Two simple questions.

Can you remind us what the family's voting control of the company is?

And secondly, just share with us your philosophy on receiving expressions of interest, your philosophy and the thoughts on how those mechanics work as relate to all of us in the public world, if you will.

Okay.

As you, and I think everyone knows when we went public in 1993, we let everyone know that this was a family-controlled company that was going public where the family had super voting stock of 10 votes per share.

Compared to one vote per share for the general public.

Presently, the family owns 42% of the company and has 88% of the vote.

Don't know if that responds.

We have aboard of directors of 11.

On that board of directors we have five insider members and six independent members on our board.

The whole objective of the family and of the entire board is to do what is best for the company, both today and for the long-term.

Great.

Thank you for that.

And can you just share with us just how you handle mechanics here?

Again in the instance where you're receiving interest.

I know it's kind of standard procedure.

In the mechanics where we receive interest.

First of all, we aren't receiving interest.

And I think everyone knows that our objective is to remain independent, et cetera.

If we receive anything, we have to evaluate it seriously.

We have to take any viable things to the board of directors and review it, and then act on it.

Great.

Thank you, Michael.

Thank you.

Our next question comes from Mr. Bud Leedom with Wells Fargo Securities.

Please go ahead, sir.

Good morning.

Just a couple of questions here.

You know, from what we're hearing out in the market, the spot situation appears to be sort of rectifying itself in terms of all the demand for that wine.

And what I'm hearing is that there is now, I guess some issues at the higher end.

With that said, I was wondering if you might be able to get into a little bit more detail as to what you saw at RMW in terms of some of the decline.

Was that some seasonality issues, or you know some timing of shipment?

Maybe you can kind of describe what happened there.

By RMW you mean the Robert Mondavi winery brands?

Yes.

Well, essentially, as you know when we go into a softer economy, people will start trading down, very simplistically say from a Reserve wine to a Napa wine or from a Napa wine to a Private Selection or Woodbridge.

That's step one.

Step two is then there are price reductions that take place or more promotions that take place.

And Robert Mondavi winery has maintained pretty firm pricing, and we have been using promotions as a vehicle to get proper pricing in the market place and in the last month or so, we've done a lot more of that.

And I think you'll find that the price of Robert Mondavi Winery wines are going to be in their proper, relative position according to the market basket, whether it be reserves, the district wines or the Napa wines as we move forward.

Bud, this is Hank.

Are you implying that the surplus at the high end is lessening, is that your question?

No.

Actually I heard that was sort of the issue at this point, more so than what we've seen at the spot market.

Yes.

Okay.

That's correct.

The lower end is starting to dissipate because of some of the lower priced wines.

The high end there's still plenty of wine.

Right.

Right.

Okay.

Hank, on that note, or related issue, we talked last time on the conference call you said that there would be some type of update on this conference call regarding the synthetic lease issue and how that may impact guidance for '04.

Do you have any update on that?

We're still planning on putting them on the balance sheet as of the first quarter next year.

The maximum amount to be about $150 million.

We anticipate something less than that.

We are looking at the asset base to determine what assets we really want to own and what assets we can do straight operating leases on.

So we'll end up with about 130-ish.

Coming on the balance sheet, bud will be probably in the range of 100 to $130 million.

Okay.

And do you have any -- what I was trying to do is figure out the impact that that may have on interest expense, and I'm not sure what the interest rates are associated with that.

Do you have sort of a go-forward number on interest rates?

Yes we do.

Overall interest expense next year will probably be not -- well, it will be between $23 and $24 million.

So not a huge increase versus this year's run rate.

The rates on those synthetics, bud -- It varies. -- are about 100 basis points over LIBOR.

It's going to depend if I need to refinance them or not.

At this point we rather not.

And if we don't have to that's not bad borrowing of rates.

It shouldn't effect the rates significantly.

Okay but that should give you a positive impact on gross margins a slight impact positive impact at gross margins.

Do you have any outlook on gross margins for that year?

Over time, bud, again the lease expense that would be flowing in product cost will reflect itself later on in '05 or '06.

Remember the wines that would have born those lease expenses will take a couple years to roll through inventory.

You will see the interest expense bump a little bit before the release on gross margins.

Okay, great.

Finally, do you have any update on the vineyards that you had held for sale?

Is there any flow on those at this point?

We expect to close another one this quarter.

Okay, great.

Thanks very much.

Thank you.

Our next question comes from Mr. William Booth of the Wellington Management Company, please go ahead.

Hi it's Nick booth.

Two questions.

One on Woodbridge.

Could you give us a little bit more feel for the impact of the on trade business during the quarter and what it's looking like if you can tell in the first couple weeks -- last two or three weeks.

And then, also on south corporation JV is there a change of control provision in that JV?

Yeah, let me address the JV while we get a little data on off trends.

Generally the JV we have with South Corp has been fairly flexible provisions from both sides which would be equal between the partners.

So there would be a change of control provision if, you know, if either partner had a change in its current control.

Mmmm-hmmm.

Okay.

In terms of on off -- let me pull something together here on on-off for you.

We are seeing on a year-to-date basis, if you wanted the Woodbridge number, I can get you there, but let's start on a year-to-date basis we're seeing on premise channels flat to up about 1% which, I believe, is generally consistent with what we had forecast.

And off premise channels are going to be growing slightly faster than that.

For Woodbridge in particular, I can give you the months of February and March --

That's fine.

And what we saw in February and March was basically a decrease in our onpremise business on the order of 5%, and I can't really tell you which accounts that would involve.

Mmmm-hmmm.

That's fine.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Mr. Bryan Spillane from Banc of America Securities.

Please go ahead.

Hey, good morning.

Good morning Bryan.

Question on excise taxes.

And I guess more specifically in California there's a pretty -- I as I understand it the proposal that's out there is against all alcohol and it would be a pretty significant increase.

And I was just curious if you could kind of fill us in on where you guys stand on that, and get a feel for the lobbying effort that you guys have against that issue.

Very simply, whether it's beer, wine or spirits, all of us are united in the fact that we are trying to prevent any excise tax increase whether it be the State of California, other states or federal.

From a realistic standpoint, I think we are all realistic enough to realize that some of these states are in such desperate position they are going to do whether the lobbying effort is successful or not.

So the question then becomes the scale.

And hopefully it will not be too onerous.

But we, speaking just for Robert Mondavi as well as other wineries are very proactive in the lobbying efforts both here and other states.

And as you know on something like that, until it's all done, there's nothing certain.

There can always be surprises in these issues.

Okay.

Thank you.

Thank you.

Our next question comes from Carolyn Levy with UBS Warburg.

Please go ahead with your question.

Good morning everybody.

Two questions one is just if you could address the growing need for scale in the business.

And I'm just thinking about Constellation buying BRL, even in the spirits business you are just seeing some concerns about a need for scale in dealing with distributors.

Michael and Greg, just wondering if you could comment on whether there might be some opportunities for alliances, or if you think you're in pretty good shape in that regard?

And secondly, I would just appreciate an update on the supply situation.

You talked about how, perhaps the low end had stabilized.

If you could give us timingwise when you think pricing might firm on grapes in, you know, low, mid, high end.

Okay.

On the scale aspect, Carolyn, I would suggest that you research what the spirit company's wine divisions have done over the last three years or five years.

And what you'll find is that they are losing fairly dramatic market share, particularly if you look just at kind of same store sales or the same brands, and we believe that the scale issue is much overblown.

What it has to do is the scale of the brand and the attention that those individual brands can get with the ownership, the management and the sales and marketing people of the distributor and of the buyers.

But if you go back and track the spirits company's wine sales versus the wine company's wine sales, I think you'll be pleasantly surprised from the wine standpoint.

On the supply side, Carolyn, I guess the trends that we're seeing is that the bottom end of the market is firmed up as a result of the value priced brands that are emerging, and to give you an example, those brands might have been buying wine at $1 per gallon and that price is now lifted probably to $1.50 per gallon.

So that there is a firming up on both the bulk wine market and, therefore, the grape market that people are looking forward towards in the '03 harvest.

On the higher end wines, in particular on the coast and with Napa and Sonoma, there doesn't appear to be the same solution on the demand side because the demand for those wines has not picked up dramatically as it has for the value-priced wines.

So that we still see an overhang on supply, and I would reiterate the guidance that we've had before, and I think others have given, which is we see the red supply as being in surplus for the next two to three years, that would be two to three vintages, and the white supply to be in surplus for the next year or two.

So the whites are a little bit better balanced than the reds.

On the pricing side, the grape prices may not behave exactly as the supply imbalance suggests because the grape prices in Napa and Sonoma are often fixed under long-term contracts so we may not see as much price release as the overhang would suggest.

Our own grape prices this year are expected to decline from last year both within the north coast and within the -- and central valley areas where we purchase our Woodbridge fruit.

Thanks.

Okay.

I appreciate that.

Thank you.

Thank you.

Our next question comes from Mr. Skip Carpenter with the Thomas Weisel partners.

Please go ahead.

Yes.

Good morning.

Good morning.

You guys mentioned with regards to inventory increased by one day was due to a new product was that the Select Vineyard series?

It would be a bit of that, but generally speaking we had the de'Frescobaldi wines which we have become the exclusive importer for, we've also assumed that those wines that were already in distributor channels now are in effect part of our wholesaler inventories.

Another category of Italian wines that we have obviously just started to introduce are the wines from Ornellaia as an importer and then our new Hangtime brand which has just been in the market this year and starting to build volume is one that we also ...

When you put a new wine in the market, the relationship between the inventory that you're going to put at the wholesaler and your previous depletion rates is going to be somewhat disproportionate because these new wines tend to grow at a much more dramatic clip.

So when we take into account those new brands, including our new Australia brand, there's about one day of additional volume that we're getting just because of these new products being shipped in that really have very low depletion basis.

Could we see inventory in terms of inventory days also build a little bit as the Select Vinyard Series is rolled out?

Yes.

I think in the fourth quarter, in a way, depending how successful we will be and we think we will be quite successful in placing the wine at the end of the fourth quarter, we could have a similar effect with Select Vineyard Series if our wholesalers are excited about it and thus far they are, we might have a similar effect of having more inventory of that product relative to its historic depletion rate which will be very close to zero.

And how would you -- Greg, how would you characterize in terms of positioning the Select versus the core Woodbridge in the sense -- you look at Woodbridge it accounts for about 75% of your volume.

How are you guys positioning this with the retail trade?

As you mentioned, I think on the last call new product activity is a critical component of growth.

Are they viewing this as a real differentiated product versus Woodbridge, or is this in their eyes simply a line extension of Woodbridge?

I think it's looked at as really a different product.

It has the Woodbridge brand equity so to the degree that we have invested in advertising and promoting Woodbridge it's going to play off that equity.

And we think consumers will see Woodbridge base business as a trade-up to this.

But it really competes in the low end of that super premium segment.

And if you think about that segment as let's say 7 to $10, where our Robert Mondavi Private Selection is priced towards the high end of that segment, this wine would be priced towards the middle to lower end of that segment which puts you in a slightly different category than Woodbridge.

Remember Woodbridge is still really 75% of the business is a one five business.

Mmmm-hmmm.

So this is going to be perceived, really as a different product, but we think we'll capture some of those Woodbridge consumers who will relate to that brand equity.

Is this one five as well as 750.

No this is a 750 mill product.

With regards to the quarter I think you mentioned Woodbridge completion was down 4% were you running media in the quarter?

If so, will we see a pick up in media behind Woodbridge in the June quarter?

We had some media in the quarter.

But as you recall after December, we had trimmed back on the Woodbridge media a bit.

I think there will be some spillover into the fourth quarter because we had media running in the month of April as well for Woodbridge.

We did not have a significant media campaign during the third quarter as we originally envisioned.

Clearly this fiscal year, in terms of your media campaign for Woodbridge was very different from your strategy a year ago.

Have you guys had a chance to kind of look or reflect in terms of the tactical, you know placement in terms of the more kind of national, I guess networks versus kind of cable spots, any sense of how that all played out and were you pleased with that strategy versus last year's strategy?

I think our general view is that last year the network strategy gave us a more successful result in terms of recognition and awareness.

It may not have reached as many people because we clearly had more impressions, but it just -- the general sense, because we haven't completed all the data analysis, is that the network strategy was more successful.

However, the year we ran the network strategy network was also cheaper than it would have been to run this year because that was partly during the period where Dot-Coms were really reducing their advertising expenditures and was a little easier to get on network.

I see.

Okay.

Thank you very much.

Thank you.

Our next question comes from Mr. Mark Swartzberg.

Please go ahead with your follow-up question.

Thanks, operator.

Hey, again.

Michael, fairly broad question.

I'd be curious what your thoughts are.

Obviously there's a lot of negativity about the wine outlook broadly speaking.

Whether it's the glut or onpremise or what have you.

I would be curious if you think there's a story regarding the industry broadly that is not being told here?

And if you do, what your view on that is.

I think the key is that the industry, over the decade of the '90s what I call the halcyon opulent days of the wine industry and of many other industries we were growing, as you know mid double digit and we had tremendous price increases during that time as well.

And I think that the wine industry and those who follow it got swallowed up in very high expectations.

Even today at these slower growth rates compared to the beverage industry, except for water, wine is still the best growth beverage in the world for the future.

So we just have to get our organizations as a better marketing products company, and do the job that we know we can do.

To me the most exciting part of it is the long-term demographics.

The number of people who are going to be going into that 30 to 50 year range over the next few years who are the optimum volume wine consumers is growing dramatically.

The interest in the young people about wines is growing more now than I've seen it in the past 15 or 20 years.

When I used to go to wine tastings 10 and 15 years ago I was very concerned there were a lot of old people at the tastings and not very many young people.

Today I see a lot of young people.

Maybe it's just that I'm old.

Anyway, I think the outlook is still very bright when you compare us to a broad beverage industry.

And I would add, Mark just from a specific company perspective and you may have more view of this on a macro basis, but we have, even in this very tough environment that as a company, we have been able to generate free cash flow for each of the last three quarters.

I think it was the fourth quarter as well of the prior year.

So that one of the questions has always been, and in the past when we were enjoying double digit growth, and chewing up cash, one of the questions had always been hey, if you guys slow the growth down, do you think you could get to the point where you would be generating cash flow.

And I think the answer is if we focus on managing the business more effectively, which we have been doing on an asset utilization basis, that this industry and this company can deliver positive cash flow.

However, I wish we were doing it with slightly higher growth rate.

But because of what Michael mentioned, on the demographic side, those consumers are out there, and when some of these circumstances turn around in terms of the economy, and the grape supply, I think we'll be able to put these back together in a very attractive framework for the investor community.

And Mark, as you know a lot of people for other industries have been kind of talking about the perfect storm with the weak economy, the war, consumer confidence, et cetera.

And if the wine industry is still growing slightly during this quote perfect storm as you know, the war wind down, hopefully, as the economy starts to stabilize and pick up and as consumer confidence comes back, there is a, I think a very good chance of better growth.

Is it going to be like the 90s?

Heck no.

But will it be very solid in mid to single digit?

I believe it will.

Thanks, guys.

Thank you.

Thank you.

Our next question comes from Jeff Cantor with Prudential Securities.

Please go ahead.

Good morning, gentlemen.

Good morning.

Greg, in your prepared remarks, talking about the pressure in the wine industry.

The first two, the economy and the oversupply of grapes are certainly cyclical.

You know, the third, as far as increased retail buying power, you can make the argument is secular.

What are you doing -- what are you doing in that regard to kind of push back a little bit?

And how do you compete, you know, with some of your competitors getting bigger and going to these retailers with more scale -- can you talk about that because that's a secular issue.

The two issues is not one that we identify really as changing from a structural standpoint.

I do -- I do think that if you look at the supply/demand situation, obviously there's a shift in power from the retailer back to the producer as grapes go in short supply and wines go in allocations.

That tends to change the balance a bit.

But generally speaking, we would agree with you.

I think there are two things -- there are two things that we are doing to really try to mitigate that power shift.

The first is on the sales and marketing side where we are, I think, in a lead role of forming key relationships with our key accounts and performing value-added services for them.

We've started a category validation group that has been very successful.

For competitive reasons I don't want to necessarily mention the accounts that we have been successful with, but really sitting down with some of these key customers with whom we have strong relationships and I think this is where the family consistency card is very key to play because Michael Mondavi has effectively been working with these same accounts for a long period of time and I think that is very helpful from a leverage standpoint and a relationship standpoint.

So I think that the first answer is get close to these key accounts, find out what they want, become one of their valued suppliers and because we can offer such a wide range of products now in all of the key segments, that helps us a tremendous amount compared to some of the other folks out there.

The second, I think, gets to the question of scale, but we also believe that having the strongest brands in the category ultimately is going to trump scale because you can be a very large company.

But if your portfolio of brands is not the kind of portfolio that attracts the consumer, the degree we think our portfolio does, then you're not necessarily going to have as much leverage.

So our strategy to continue to build and invest in brands that are attractive to that accounts consumer, I think also gives us an advantage in that segment.

So those two elements together, we think, are the best ways for us to succeed in this environment where retailers will continue to be powerful.

And I think that's how we have to learn to do business together with them going forward.

But is it fair to say that the cost of doing business in this trade is increasing?

Yes.

And -- and is it also fair to say, then as some of your competitors, you know, do get bigger and they have more dollars, more leverage to make their earnings or whatever, that they are throwing more promotional environment should increase or going forward as well in the retail channel?

Yeah.

And that really gets exactly to the need that we perceive to change structurally change our business model.

Because we obviously see the need to put more funds in the market place.

I don't think that we would necessarily agree that all of those funds ought to go to pricing and promotion.

We think that some need to go to long-term brand building.

But that is what drives us to change the business model to reduce our product cost, to reduce our infrastructure cost so we can reinvest those at the front end of the business and become competitive with some of the others who are able to do that.

Fair enough.

Thank you very much.

Thank you.

Ladies and gentlemen, if there are any additional questions press the star followed by the one at this time.

As a reminder if you are using speaker equipment you will need to lift the handset before pressing the numbers.

Mr. Mondavi there are no further questions at this time.

Thank you very much.

That will terminate the call.

Appreciate everyone being involved.

Thank you.

Ladies and gentlemen this concludes the Robert Mondavi quarter three earnings conference call.

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