Constellation Brands Inc (STZ) 2003 Q4 法說會逐字稿

Good morning and welcome to the Robert Mondavi fourth quarter earnings conference call.

At this time all participants are in a listen-only mode.

Following today's presentation instructions will be given for the question-and-answer session. (CALLER INSTRUCTIONS) As a reminder this conference is being recorded today, Thursday, July 31, 2003.

I would now like to turn the teleconference over to Mr. Michel Mondavi, Chairman.

Good morning.

This is Michael Mondavi speaking and I want to welcome you to today's conference call discussing Robert Mondavi's fourth quarter and full year fiscal 2003 results.

Joining me today are Greg Evans, our President and CEO;

Hank Salvo, our CFO; and Rob Phillips, RVP Treasury and Investor Relations.

Let the remind you that we will make a number of forward-looking statements today and these statements should be taken as estimates only.

Actual results may differ from our expectations, please refer to the NBA in our annual report for a discussion of the risks of the wine business.

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

Look under, about the Company Investor Relations followed by news and events and then conference calls.

Note that the financial refer to today are presented in the accordance with section SEC regulations G, which requires the emphasis of GAAP results.

On occasion, we will itemize some of the items included in GAAP, such as inventory step-up charges, write-downs of inventory or fixed assets, severance costs, and gains or losses on the sale of fixed assets.

A complete list of these items can be found in our website so you can see where each one impacts the income statement.

We plan to cover three main topics during our 30 minutes of prepared remarks.

First, we will review our fourth quarter performance, which we think is beginning to show some early positive trends.

Followed by a review of our full year performance.

For example, last quarter we said we would begin increasing promotions for some of the Robert Mondavi Winery Napa Valley tier wins to boost volumes and profitability.

As we will discuss later, the brand showed good growth during the quarter as a result of more competitive pricing, strong promotion execution, and a very enthusiastic reception from the trade and consumers of our 2000 vintage red wins.

Second, we will provide an update on the restructuring announced in March.

While there has been much emphasis on the cost-cutting aspects of the restructuring, let me point out one of our goals is to increase topline growth.

We're seeing some early signs that increased promotions in execution are gaining traction, not just the Robert Mondavi Winery, but for other brands as well.

And finally, we'll review our outlook for Q1 and full fiscal year 2004, which are essentially unchanged from before.

After that we will move to your questions.

Hopefully we can limit the call to no more than one hour.

I will start with an overview of sales both in industry level & company level, followed by Greg and Hank, who will cover the quarter's topline results, financial details, and summarize our view of fiscal 2004.

Let's start with the market trends as captured by A. C. Nielsen, U.S.

Food, Drug and Liquor Store data for the 13 weeks ended July 5, 2003.

In general, sales of wine in the U.S. accelerated in scanning channels during the quarter.

Domestically-produced varietal wine volumes grew at 4.6 percent, more than double the growth rate over the last 52 weeks.

Revenues grew 1.5 percent, a fivefold increase compared to the growth rate in the last 52 weeks.

Imports led by wines from Australia and Italy grew 14.1 percent in volume and 12.5 percent in revenue.

Both of which were slightly ahead of their 52-week growth rates.

The blended growth rate was a robust 6.9 percent in volume and 4.5 percent in revenues.

The pricing environment in Food, Drug and Liquor Stores continued to slowly weaken.

Average prices declined 2.3 percent, somewhat softer than the 52-week run rate of -1.5 percent.

Domestic varietal wine prices were weakest, posting a 3 percent decrease for the last 13 weeks, compared with a 1.6 percent decrease during the last 52 weeks.

And imported wine prices posted a 1.3 percent decrease for the last 13 weeks, compared to a 1.8 percent decrease during the last 52.

Both the volume and pricing performance in the U.S. were negatively impacted by the continuing weakness in the California market.

Looking at sales in scanning and food and drug scores, domestic varietal wine volumes declined 1 percent in California but grew 6 percent outside of California.

Imported wine suffered a similar fate.

Volumes declined 9 percent in California, but grew 18 percent outside of California.

Sales in California's scanning channels undoubtedly reflect the impact of super value wines being offered in both scanning and none scanning channels.

Now let's move from the industry to Robert Mondavi.

During our last conference call in April 24, we said we expected the full year wholesale depletions to grow at about 2.5 percent and net revenues to be around $450 million.

EPS would then range from 91 cents to 96 cents per share.

Excluding inventory step-up charges, restructuring charges, and onetime gain on losses, EPS would be in the range of $1.76 to $1.81 range.

Actual results were somewhat mixed.

Wholesale depletions grew only 1.6 percent for the year, but the net revenue came in slightly above guidance at $453 million.

Full-year EPS was $1.06, about 10 cents above the high-end of our guidance.

Five cents came from lower inventory step-up charges, which will shift to fiscal 2004.

Four cents came from lower than anticipated restructuring charges, and three cents came from improved operations.

On the other hand, we did not complete an asset sale which we had planned on, costing us about two cents in forecasted gains.

Excluding inventory step-up charges, restructuring charges and onetime gain and losses, EPS was $1.83 or about two cents above our guidance.

Now, Greg and Hank will review our performance in more detail.

Thanks, Michael and good morning.

Let's review the topline performance of our brands.

Total company wholesale depletions for the quarter ended June 30, 2003 grew two percent over last year.

Total Company shipments were flat at 2,593,000 cases, which left wholesale inventories of 51 days compared to 46 days last year, and 50 days at the end of March.

However, we estimate that there were two extra days of inventory shipment of new products like Woodbridge Select Vintage series that are being rolled out as we speak.

Average price per case declined four percent to about $46.59 as a result of higher promotional spending, partially offset by a mix shift away from Woodbridge.

Total Company net revenue was $120.8 million, 3 percent below last year's $125.1 million.

And in the Food, Drug and Liquor scanning channel as reported by A. C. Nielsen, our volumes grew a strong 8.7 percent and revenues grew up 4.5 percent.

Turning to the Robert Mondavi Winery brands, we saw a turnaround in volume trends in the quarter as a result of the positive trade in consumer reaction to the 2000 vintage reds, and some well executed promotions.

We also took advantage of a unique opportunity to leverage Robert's 90th birthday with increased national publicity and in-store activity.

Wholesale depletions grew 7 percent for the quarter.

Shipments grew in line with depletion of 8 percent to 81,000 cases.

Average price per case was about $168, 16 percent below last year due to a mix shift from reserve and district wines in the Napa Valley tier.

The net revenues declined 10 percent to $13.5 million.

In scanning channels Robert Mondavi Winery volumes grew 3 percent, while revenues declined 1 percent with the average bottle price declining 4 percent to $22.

Sales of wine and merchandise sold the winery's retail and tasting rooms were 4 percent below last year at $1.6 million, and 5 percent higher visitor traffic.

Robert Mondavi Private Selection had an excellent quarter.

Wholesale depletions grew 6 percent in a very price conscious segment.

Secondary varietals such as J.R.

Syrah (ph) and Pinot Noir, our accounted for 70 percent of the domestic depletion growth as we focus on filling distribution voids.

Shipments grew in line with depletions up 6 percent to 380,000 cases.

Net revenues grew 4 percent to $22.2 million, on 2 percent lower average price per case was reflected the competitive nature of the category.

Private Selection's U.S. scanning store volumes grew 18 percent and revenues grew 13 percent.

Now let's move to Woodbridge.

Woodbridge depletions declined 1 percent, which was below our target.

The weakness is a result of consumer trade downs to low-priced wines, particularly in California.

As a result, we are taking steps to address the problem, including the recent launch of the super premium Woodbridge Select Vineyard series and going forward a single serve 187 ml size package.

The new advertising campaign and improved packaging.

Woodbridge shipments declined 3 percent to 1.9 million cases.

Net revenues declined 2 percent to $67.8 million on 1 percent higher average price per case.

What looks like a very successful launch of Woodbridge Select new series added about one point of positive mix.

U.S. scanning store volumes grew 6 percent and revenues grew one percent during the period.

Wholesale depletions for our other California brands grew 38 percent over last year led by strong demand for Arrowood, Arrowood Grand Archer and La Famiglia.

Shipments grew 29 percent to 39,000 cases, but net revenues declined 16 percent to $5 million as the mix shift away from Byron towards the lower-priced hang time to Grand Archer, and La Famiglia brands.

And the mix of La Famiglia reflected our strategy to feature and focus on Pinot grigio more than on the Reds.

Average price per case declined 35 percent to $129.

Finally, import depletions grew 36 percent over last year on strong demand for our wines from Chile and Italy.

If you back out the new wines in our import portfolio, for example Kirralaa from Australia and the Marchesi de'Frescobaldi wine, which we began importing from Italy last quarter, imports still grew 20 percent.

Shipments grew 17 percent over last year, while revenues posted a 4 percent gain to $9.7 million.

In U.S. scanning stores our imports grew 19 percent in volume on 2 percent higher prices.

Now Hank will cover the rest of the financials.

Thanks, Greg.

As Greg said, Q4 net revenues were $120.8 million, 3 percent below last year. (indiscernible) per case grew 9 percent to $29.90 during the quarter from last year's level of $27.37.

This year's number includes $749,000 pretax or 29 cents per case in Arrowood inventory step-up charges, while last year's number included $1.1 million pretax or 44 cents per case in Arrowood inventory step-up charges.

This year's number also includes five point to million dollars pretax or $2.00 per case for inventory write-downs and contract buy-outs.

Excluding these items, (indiscernible) sold per case grew 3 percent over last year.

Gross profit per case declined 21 percent to $16.70 (technical difficulty) 3 cents last year and gross margins declined to 35.8 percent from last year's 43.4 percent.

Including the step-up charges, inventory write-downs and grape contract buyouts, gross profit per case declined 12 percent and gross margin declined 370 basis points.

Operating expenses grew 12 percent to $36.8 million, 30.4 percent of net revenue.

An increase of 420 basis points over last year.

This year's number includes $2.9 million in employee separation costs, partially offset by a $1.2 million gain on the sale of a vineyard.

Excluding these items, operating expenses grew 7 percent, reflecting our strategy to spend more money in the marketplace and operating expense margin was 29 percent of net revenues.

Operating income declined $6.5 million, to $6.5 million compared to $21.6 million last year.

Operating margin was 5.4 percent, below last year's level of 17.3 percent.

Other income expense netted $454,000 of income, which included $1.5 million in equity income from our joint ventures.

EBIT or earnings before interest in taxes (indiscernible) at $7 million versus $21.9 million last year.

EBIT margin was 5.8 percent of net revenue versus 17.5 percent last year.

Net interest expenses were $5.4 million dollars, down 4 percent last year, primarily a result of a smaller balance sheet and lower variable interest rates.

Effective tax rates for the quarter was 37 percent.

Net income decreased to $978,000.

EPS declined on one percent lower share count to 6 cents, compared to 62 cents last year.

Backing out all the inventories step-up and restructuring charges and asset sales, net income decreased 49 percent to $5.7 million, and the EPS to 48 percent to 35 cents per share.

The June 30, 2003 balance sheet was $849 million, $2.7 million smaller than last year.

Inventories rose 1.5 percent and fixed assets declined $21.6 million as capital spending was tightly controlled to about the level of depreciation expense.

And about $20 million of non-strategic assets were divested.

Capital spending for the quarter was $9.6 million.

Capitalized interest expenses for the quarter were $136,000 compared to $553,000 last year.

Free capital up for the quarter was $26.6 million compared to $39 million last year.

This quarter's cash flow number includes a $13 million decrease in cash working capital from last quarter, mostly due to a reduction in inventory.

Also note that it is the fifth quarter in a row of positive free cash flow.

Since this is another non-GAAP measure, a table in the prepared remarks posted on the web defines how we calculate it.

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

Wholesale depletions grew 1.5 percent. (indiscernible) grew 3 percent to 9.7 million cases while wholesale inventory ended at 51 (ph) days, of which two days were due to the shipment of new products.

Net revenues grew 3 percent to $452.7 million.

Average price per case declined one percent (indiscernible) to $46.67.

Cost of goods sold per case grew 8 percent to $28.59, which included $16.1 million or $1.66 per case in inventory step-up and restructuring charges.

Gross margin declined to 38.5 percent of net revenue.

Excluding inventory step-up and restructuring charges, gross margins declined to 42.1 percent.

Operating expenses declined 4 percent to $132.1 million or 29.2 percent of net revenue, but there were $9.4 million in restructuring charges in this year's number, as well as $7.3 million in gains on the sale of fixed assets.

Operating income declined 22 percent to $42.4 million and operating margin declined 290 basis points to 9.4 percent of net revenue.

EBIT declined 22 percent to $48.9 million and EBIT margin declined 340 basis points, 10.8 of net revenue.

Net income declined 32 percent to $17.3 million and EPS declined 32 percent to $1.06.

Excluding the inventory step up in restructuring charges and asset sales, EPS was a $1.83 above consensus.

Full year CAPEX was $25.9 million.

Full year free cash flow was $57.6 million which included $20.9 million in net proceeds from sales of non-strategic assets.

Since this is a non-GAAP measure again we have included a table in the prepared remarks that show how we calculate this number.

Return of average investment capital was 4.3 percent excluding the inventory step-up charges, restructuring charges, and onetime asset sales gains, ROIC was 6 percent.

Now Greg will talk about the restructuring.

Thanks, Hank.

Let me start with the summary of the goals that we announced in our March 26 restructuring plan.

First, we want to increase topline growth to at least the market rate of growth, which we believe is 45 percent in volume but somewhat less in revenue.

Second, we realigned management responsibilities to streamline decision-making, improve accountability, and reduce costs.

This has been done.

Third, we want to significantly reduce product and operating costs.

And four, we want to improve balance sheet efficiencies.

So let me give a brief update on each of these initiatives.

With respect to topline growth, as we said earlier we saw some reason for optimism from Q4.

Certainly the rollout of Woodbridge Select Vineyard Series is a key part of our strategy to regain momentum and excitement behind the brand.

In addition, we have just released a 187 ml Woodbridge size, which we think will help attract new consumers who are looking for single usage occasions.

Turning to the management changes and cost-cutting, Pete Mattei, Hank, and Dennis Joyce hit the ground running.

Pete is making significant progress in reducing product costs while improving quality.

Since these changes will directly affect our 2003 Vintage, we will provide an update during our Q1 fiscal 2004 conference call when we have a better sense of the size and quality of the harvest.

From an operating expense standpoint, we have completed our initial cost reduction and have reallocated these funds to ANP spending as we planned.

And we do think that topline growth is picking up as a result.

Finally, the balance sheet and cash flow both reflect our desire to operate the business with fewer assets.

We will continue to sell $48 million in non-strategic assets we have remaining in the balance sheet, and to manage our inventories to lower levels.

Now I will move to fiscal 2004.

Since we first issued guidance regarding 2004 last March 26, we have seen a lot of movement in various parts of our business, but our overall guidance is unchanged.

Let me review the highlights.

Topline growth of around 4 to 5 percent, half of which comes from base business and half of which comes from new products.

Gross margin increase of about 300 basis points to between 41 and 42 percent as cost per case comes down by about 5 percent.

The 400 basis point improvement and operating margins to between 13 and 14 percent of net revenue as we realized the immediate benefit of lower headcount related costs.

A 450 to 500 basis point improvement in EBIT margins.

Our EPS guidance remains at $1.80 to $1.95.

This guidance however, now absorbs an additional five cents per share in inventory step up charges that have shifted from fiscal 2003 to 2004.

That reflects about 2 cents in savings when using a 36.5 percent tax provision going forward.

With respect to the balance sheet, there's several moving parts that make it difficult to predict at this time.

First, there are about $112 million in vineyard synthetic leases which will go on our balance sheet at the end of Q1 fiscal 2004 in accordance with FIN-46.

At that time, prior years will be restated.

Second, current predictions for Vintage 2003 are for a smaller than last year wine grape harvest in California and we are attempting, like last year, to restrict our own grape intake.

We do have a good handle on fiscal 2004 CAPEX, which is expected to be in the range of 25 to $30 million.

About one-third of the spending would be in vineyard development.

Finally, we will continue to pursue the sale of non-strategic assets but the timing of future disposals is unknown and not reflected in our guidance at this point.

In the September quarter, we expect EPS to range from 46 cents to 50 cents on a slight improvement in volume and stable pricing.

EBIT margins are forecasted to decline between 40 and 60 basis points.

Now Bob has some housekeeping items.

Thanks, Greg.

I just want to take a few moments to remind everyone again that our founder, Robert Mondavi, has made significant commitment to a number of charities.

By or before December 31, 2003, he needs to monetized about $6.6 million in gifts.

This would be accomplished by selling share Class B shares which will then automatically convert to class A shares.

Total shares outstanding will not change, but the public flow will increase.

Finally, today's call it is copyrighted material of Robert David and can not be rebroadcast without our express written consent.

Beginning a little bit later today, you can listen to a tape this call in the U.S. 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 543572 #.

Today's prepared remarks, as Michael said earlier, can be viewed, downloaded or listened to two on our website, www.RobertDavid.com.

Click under about the company, Investor Relations, followed by news and events and then conference calls.

In terms of upcoming events, I'm pleased to announce that we will be attending the Prudential Securities back-to-school conference in Boston in early September, September 3, and also for those shareholders who may wish to attend our annual meeting, it is scheduled for Friday, December 12 in the Napa Valley.

For more information on any of these events, again contact or look at our website.

Finally, our next conference call covering first-quarter fiscal 2004 results is scheduled for October 23, 2003 at 7:30 AM Pacific time.

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

Operator, we will now open up the lines for questions.

Thank you, sir. (CALLER INSTRUCTIONS) Marc Cohen of Goldman Sachs.

I wonder -- this is probably a question for Greg and Michael, but Greg, I remember you speaking in May and talking about trends beginning to strengthen in the March and April period, and obviously you expected that to continue with the forecast you had for depletion growth in the Q4.

I guess what isn't clear to me is what went off plan here in May/June and in particular, I wonder if you can address Woodbridge sales trends being down one percent, which surprised me in light of the new product roll out, can you give more protective to what is happening there and then take us forward to how you relate that to holding a 4 or 5 percent unit growth number for next year?

I will try to keep all that in mind, Mark, but if I don't catch it all, remind me if I am missing a part of it.

First of all, I guess I want to go back to March because for both Robert Mondavi and the industry, March was somewhat disappointing month from a depletion standpoint, having to do with the timing of Easter.

So when we got our April results in, we combined the March/April period and the combination of March and April this year over last year was a 5 percent increase year-to-year, so we felt that that trend was beginning to reflect some positive momentum.

What happened between April and the end of the year, is that we had a soft May and I think the number in May was about minus 6 percent, followed by a rebound in June to something like a positive 5 percent, so that total trend of 5 percent we saw in March/April, didn't really flow back to the quarter.

On the trend itself in the last quarter, I think what we were looking at a and talking about earlier as part of our guidance was something like half of the trend being made up of base business and half of the trend coming from new products, and while we saw (indiscernible) select vineyard series get into the market very successfully on a shipment bases and as Michael said great reception from the trade, in fact the depletions of select vineyard series just didn't start to happen in that period, so we didn't get much depletion lift, but we did get some shipment lift from Select Vineyard Series.

And again, we don't see that at all as a negative.

It is just a question of the difference between launching a product and seeing it flow through the system.

Okay, so moving to '04, unless there is anything else on '03 --

So your point in terms of the miss on depletions this quarter was basically a miscalculation of the timing of how that new product would move through the pipeline and out into the retail shelves?

No, that would be part of our change in what actually happened versus the guidance, which we said about half of a depletion rate would come from new products being depleted.

That didn't really happen in the case of Select Vineyard Series and the second part would relate to Woodbridge, because Woodbridge was down one percent for the quarter and we clearly had a thought that we would see at least a positive movement in Woodbridge, and we pretty much have related that problem back to three markets -- the main market there being California, where Woodbridge was down in double digits.

So the Woodbridge business, as I mentioned in my comments, is still one that we need to turn around to get that growth rate backup.

So shifting to '04 in terms of our guidance, which I think we're looking at four to 5 percent topline guidance, again we had said half of that is coming from base business and half of that we think you'll come from new products.

I would remind you that from a contribution standpoint next year what is going to be important is the base business rate as opposed to new product rate because the new products are not going to have initially as much contribution given launch expenses and so on and so forth.

We think our current trend on base business is running at about 2 percent, plus or minus, but that's what the core rate is, so what we really have to do to make that 4 percent in see a 2 percent lift from new products, which is going to be -- a key indicator is going be how Select Vineyard Series performs and then, as we said earlier, we have two more products keyed up for putting into the marketplace in the fall and then the late winter.

I think you are asking for why should I have confidence in the numbers? (multiple speakers) the other point I think, let me go back and talk to the A&P spending that we're putting in the marketplace partly as a result of our cost reductions should allow us to structurally increase our promotions while maintaining our marketing, probably incrementally by something in the range of 12 to $15 million for the year, so we have a more aggressive A&P schedule planned for fiscal '04.

Art Schwartzberg of Legg Mason.

Two industry questions for you, Michael and Greg.

The first is on the wine category, and issue of some negative mix transfers everybody and price competition.

It sounds like you're saying that is stabilizing or is pretty near an inflection point.

I guess is that what you're saying and if it is, how would you comment on the possibility that this could be a bit of head sake in the sense that California harvest everyone seems to believe it will be flat to down.

Australia's harvest is down markedly, but it doesn't necessarily mean we're going to see that kind of relationship continue.

By that I mean it seems very reasonable that we will see the harvest start growing again.

There are some unusual factors driving these particular harvests on the downside.

Do you think that there might be a head fake there from a three-year category profitability perspective?

And unrelating to that, on the distribution side of things, can you give us some sense of where you think the industry is in terms of dealing with the ripple effects and turbulence or disruption that was anticipated and to an extent has shown up from Diaggio having consolidated its wholesalers over the last year or so?

Mark, let me from a harvest standpoint and that is that you are correct and people are estimating that California harvest will be a normal harvest to slightly down, but you can never predict what the actual harvest is going to be until it is actually there or pretty close to complete.

We have bunch counts etc., that we believe are fairly accurate for the year, but what will the harvest be one and two years from now?

No one can tell.

So I think more important than the harvest, because we know how many grapes are in the ground whether it is here or Australia or Chile or wherever is, what is the consumer going to do in what is the consumption going to do?

Is going to continue to grow at 2 percent, at 4 percent, at 6 percent or as it did in the '90s at a higher rate?

Or conversely, is going to be flat?

One of the things about those super value wins, we're hopeful that they would bring in new customers.

They don't really do that, so I wouldn't say that those new super value wines and going to bring a lot of new customers.

They are just trading people down a bit, so it is going to be very competitive out there and we are looking forward in very cautious optimistic standpoint.

And Michael, while we are on that topic to put a finer point in my question, it seems like a lot of folks think the price competition in wine, even though it continues due largely to this mix issue and particularly low-priced wine, it sounds like a lot of folks think the price competition, we have seen the worst of it, or we're about to have seen the worst of it, and I guess what I'm wondering is we know what the acreage is that is under vine and so we can make some reasonable assumptions about how weather will play out over the course of a couple or three years, and I'm wondering if we'd if this is just sort of a pause, if you will on the price competition and whether we might see it kick up again in another 6 to 12 months as people start seeing another big harvest come through?

If there is a huge harvest in France, Australia, Chile, and California a year from now, who knows what can happen, but on the present horizon and dealing with what we know, we know for example that Yellowtail is going to have a fairly good price increase coming on right now, as one example.

The other is that many of the -- you look at California where those super value wines have been more successful, the trade, whether it's the independent trade or the supermarket, know how to count money also.

And they realize that their net margins have gone way, way down.

In fact, a number of the buyers in the retail trade did not meet their margin targets this year, and for the first time in many years have not gotten their personal bonuses, and these buyers are upset by that.

Those buyers will have impact as to what wines are promoted, what wines are displayed at end aisles and what wines are not.

So yes, the super value wines are still going to be around, but they're not going to be as dominant this next year as they were in the past.

Okay, that is helpful.

Diaggio, Diaggio has had an impact with the wholesalers.

The good news is that what I would call the realignment or the turmoil in setting up new divisions in the personnel at the distributor levels, in getting different brands in different paths aligned for their sales teams, that has all been essentially completed, at least in the major markets.

And so each of the teams, whether it is a Diaggio team or a non-Diaggio team or an Allied Domecq team, et cetera, are established.

One of the nice things we're seeing is that the wholesalers realize that for them to be strong, they can't just be strong with either an Allied Domecq or a Diaggio.

They need also to be strong with other brands and other suppliers.

And with the Robert Mondavi brand and Woodbridge brands in our family of wines, we have a very, very good, profitable portfolio of strong brands to bring the wholesaler, and so we're very important to them.

In fact, some of them indicate that we're more important today than we were before, because it makes them balanced when they negotiate with the big boys.

Is it fair, Michael, are you also saying you think some of the ripple effects in terms of how competitors with Diaggio, you know, in terms of making changes with their wholesalers, you have obviously made some changes.

The kind of ripple effects including those wholesalers who financially just may not have what it takes to survive.

Do you think the near-term significant ripples are behind us?

You're always going to have events, but the noteworthy direct effects are behind us?

Yes, you look at the tremendous changes that took place in the market this last year in many of the states.

You're not going to see that happen in the future.

And the other interesting thing is if you look at the execution -- everybody is worried about Diaggio, and they have done an excellent job in many ways, but if you look at their wine portfolio and evaluate the growth or lack of, the wine portfolio versus wine companies versus spirits companies, we wine companies are doing a far better job than the spirits companies who also happen to have wine.

Go break them out and look at them separate, and you'll be very happy that you're involved in the wine business.

Thanks, guys.

Bryan Spillane with Banc of America.

Good morning, guys.

Two questions.

One, I just want to make sure I understand the volume guidance for next year.

Inventory days -- I guess you ended the year with wholesaler inventories at 51 days, and you are assuming 4 to 5 percent volume growth.

Is that depletion growth or shipment growth?

Shipment growth.

So does that assume that your depletions are going to be 7 or 8 percent?

Are you going to ship behind consumption or ahead of consumption next year?

I think the depletion assumption would be slightly ahead of the shipment assumption.

So if the industry is going roughly 4 to 5 percent, you're actually assuming that you'll grow ahead of the industry next year; is that right?

Slightly ahead.

The second thing, just circling back or hitting on Mark Schwartzberg's question, just thinking about pricing over the next 12 months, as you go through this harvest, assuming that we have a harvest that is roughly in line with the last couple years, maybe a little bit below, it seems like one other factor to think about will be just inventory levels in general, not just your own but just for the industry.

And I know know if, Greg or Michael, if you have a feel for some of your competitors, how much inventory they may be sitting on, whether it is juice in the tanks or finished inventory, as well as what is sitting at the wholesaler level.

Because it seems to me that what happened last year was there was just too much in the supply chain and it all had to get flushed out, sort of by the holidays.

Let's start with our own distributor inventory levels, which I think is the figure you quoted of 51 days, which we think includes about two days of select vineyards series which has not really moved out into the marketplace.

We have tried to keep a fair amount of discipline around the wholesaler inventory level, so that what you see is basically what you get.

When we ship, we deplete, give or take a few days because I think it is important that we don't lose sight of what is really moving in the marketplace.

And our assumption next year is that the wholesaler inventory levels would be similar to what we're seeing this year.

For the balance of the industry, I think there has been some trade build, and I don't know at this point if the other public companies reporting are as specific as to what the distributor inventory levels are.

We think that is an important metric for the industry, because I think it really puts the burden on seeing what the consumers are purchasing from the shelf.

In terms of the industry overhang, shifting a little bit to what the wine industry itself is doing, we still think that there is something like a 20 percent overhang of inventory in excess of what demand is in various forms, whether it is bulk wine, case good wine, a product at the wholesaler or at the producer level.

And I think that is the primary reason why the price depression in the marketplace is so severe and why, coming to your question and Mark's question earlier, our assumption is that price competition will continue to be intense during fiscal '04, and while we would, I think, favor an environment where prices were stable, we are planning on an environment where prices will continue to deflate, particularly in some of these channels.

Greg, the 20 percent overhang, how is that relative to last year?

Do you think that there is more inventory out there this year versus last year?

If the same amount or do you think it might be a little bit less?

I think for the magnitude of calculation which is fairly speculative, I think it is about the same.

I don't think that the demand has picked up enough to move the surplus needle, and the crop side itself being down 3 percent is really not enough to change the factors either, so I would say the order of magnitude the surplus itself has not really changed the way it looks.

I think what might change and have an impact is that the cost of lower end fruit from the Central Valley of California, which is really the supply basis for the super value wines, that cost of lower Central Valley fruit is starting to move up, and I think that will have some effect on the competitiveness in the availability of super value wines, but we'll believe they're going to go away in the next year or two unless there is a significant change in the supply mixture.

That is great.

Thank you, that is very helpful.

Jeff Kanter a Prudential equity group.

I'm just trying to understand this.

Wholesaler inventory levels are (technical difficulty) 51 days and did I understand you correctly that you expect it to be around this same level of, the same number of days this time next year?

What I am trying to do is you said that depletions should move ahead of shipments, so can you just help me a bridge all of that again please?

Let me refer a little bit to the model, but I think that generally speaking our goal would be to have the depletion rate slightly higher than the shipment rate and at the end of the year, what we might see happened in fiscal '04 could be similar to what we saw this year is some additional days of inventory from new products getting into the channel as we put a launch in place in the spring, because we do have plans some additional new items.

You may not get a precise answer just using the shipment and depletions, because in fact these new products do not always deplete at the end of the fiscal year.

But in general, the guidance would be our distributor inventory levels would remain the same and our depletion rate would be slightly higher than our shipment rate.

And your pricing assumption for '04, the rate you are betting on that mix will offset whatever type of rate impact is out there.

Is a correct?

Yes, I am -- I'm going to look at the model.

It looks as though you are expecting flat price.

We've got a mix benefit coming into the overall product mix, so we do expect to see prices stable to down for most of the brands on a net basis because of increased promotion for the most part, but we're getting some overall average increase in prices, primarily due to a wine like Select Vineyards Series which has a higher average price than our average corporate price.

We have a higher mix of imported wins, de'Frescobaldi wines that add to the picture, so what you may see is a stable or slightly increased price would really reflect mix as opposed to the true price of each brand.

And what were your consumer marketing spends and promotional spends in 2003 and what are your expectations again for '04?

I think you said the promotional expenses is up 12 to $18 million?

We had used a figure 12 to $15 million as additional promotional spending.

That was our goal to put into the marketplace as part of our restructuring plan, and in F '04 we expect to be able to achieve that goal, really shifting more resources into promotion expense.

However, we have maintained a significant amount of what we look at as brand building marketing spend, primarily advertising, although we haven't finalized a campaign.

I think that number is going to be somewhere this year in the range of 8 million, whereas last year we were probably in the range of 10.5 to 11 million, so some shift from the advertising brand built into promotion, but we still think marketing, advertising, building brand equity is a long-term strategy that you need in this environment.

Kevin Barry from M. Shanken (ph) Communications.

What are the types of ads for the Woodbridge marketing campaign include?

Will the new campaign include TV commercials and how will it compare to the last campaign?

We're looking at both print and electronic ads for our advertising this next year.

We are studying the mix and exactly how we will execute that, but it will be a combination.

And will it be as ambitious in terms to spend and exposure as the last campaign?

As Greg just said, we are going to be the $8 billion range, rather than 10.5 to $11 million range of the previous year.

And do you have an idea of when it will begin?

We will start something in the fall, around the holiday season.

(CALLER INSTRUCTIONS) Kevin Barry.

How did the Mondavi wines perform over the last fiscal year and what is the outlook for the next year?

The on premise environment this year -- just looking at the numbers, remain difficult particularly for the white tablecloth area.

However, from a depletion standpoint, our on premise business was up 3 percent, which clearly was an improvement over '02, and we would remain cautiously optimistic that we would see that number increase slightly in the '04.

Marc Cohen of Goldman Sachs.

I would like to return to Woodbridge a little bit and understand how you see the brand beginning to accelerate and put into perspective for us where this new single server item fits into the product mix and/or channel mix and what you are expecting out of it?

The 187 ml package I think you're probably familiar with in the wine category.

It is often sold in a four-pack and it is often sold at on premise accounts where you can actually take out a single serving and it has a screw cap with the technology has gotten a lot better, so it is a category that we have not participated in with Woodbridge, but we think that there is a significant opportunity for it.

You see it in cold boxes, in the grocery stores, and we also have seen some demand and shipped some product to the export market, where it has been used in hotel environments as well as off premise.

So that item in our plans for Woodbridge next year does represent some incremental growth that we are really counting on as part of our new business.

And we think the opportunity is very significant because of Woodbridge's brand equity.

Also we have had very good response from the trade who deal in a lot of the 187 sizes and the response has been thank goodness we can now offer a premium wine, meaning Woodbridge, compared to what is out there, and there is a lot of enthusiasm for the Woodbridge 187, as it is now just beginning to roll out.

Is it a large segment of the market?

It is not a large segment of the market, but if it is another 2 or 3 percent, that is a large segment.

Okay.

And Greg, can you help understand the trends on Woodbridge here going back to this minus 1.

You're basically saying that as we moved from the fourth quarter of the year into the coming year, where to expect an acceleration in the base brands and for the whole company to move, Woodbridge has to move.

But what is it that you are pinning that optimism on?

You say you saw some signs here in the fourth quarter.

To relate to Woodbridge in particular, what is it that you're pinning your optimism on that this base level of business can accelerate enough to get you into that 5 to 6 percent depletion range that seem to be talking about, which seems high if you take the number by itself.

Let me make sure I correct an impression of that -- we're not looking for five or six percent depletion growth from Woodbridge next year.

But you said base would be half of it, so are you looking for the base business to grow 3 percent and it was down one in the quarter.

Woodbridge was down on in the quarter, anyway.

Yes, so getting back to the Woodbridge, the Woodbridge trend has been negatively affected by California to a great degree, and I think for the quarter, Woodbridge's trend outside of California was 3 percent, so the Woodbridge business is -- we think continues to be healthy and strong outside a few markets, California being the most difficult market.

To help offset that trend, and I think our view is that we're not going to solve the problems in California per se and get California back to a positive number at least in the short-term because California is a very difficult market environment with the entry barriers being extremely low for producers to go direct to the chain stores with product where they are not able to do that in markets outside of California.

So I'd don't want to leave the impression that we're trying to hit this number by getting California back up to five percent.

But we think again the select Vineyard Series Woodbridge 187 mil will both an incrementally to Woodbridge's volume, helping us to get to that growth rate, and the additional promotion that we're putting against Woodbridge in combination with better advertising that we referred to earlier, we think it's going to have a strong effect on sales for Woodbridge in most of the markets where the brand remains healthy and strong.

Can I just clarify two things there?

Was the additional promotion an advertising weight in place in the marketplace in the fourth quarter, or not?

We saw some of it.

We did not see all of it.

Again, going back the third-quarter where our call was -- I think third-quarter depletions were minus 1 percent at the company overall, we said in the third-quarter we're going to shift some more dollars into promotional spending to try to increase the top line.

We started to do that in the fourth quarter, but in this environment you can't really affect all of the programs, particularly with chain stores, in 90 days, so what we saw in the fourth quarter and I think one reason why Michael and I are saying we think the trend is starting to show some lift is the fact that the needle is beginning to move based on some of the additional programs that we have got in the marketplace.

They were not all here in the fourth quarter, but they will be in place during fiscal '04.

And the second thing to clarify, I'm a little confused about this one but wouldn't the launch of Select Vineyard Series actually introduce some cannibalization to the base or risk of it to the base?

Woodbridge brand?

That may be good from a gross margin standpoint, but it doesn't help me understand why depletions would be exhilarating in the base rate?

Yes.

We think you're going to be some cannibalization of the Woodbridge 750.

We don't think there is going to the crossover with the Woodbridge 15 which is roughly 75 percent of the business, but we have assumed a cannibalization rate for our Woodbridge 750 ml business.

Right, so that would be working the other way so isn't that making it an even harder hurdle?

Not really, because there will be some cannibalization but there will be some additional growth.

What we are finding in the original markets where this has been introduced, the wholesalers are finding that by stacking the Woodbridge Select Vineyards series alongside of the Woodbridge 750s, it helps to stimulate the growth of both of them.

So you are getting more display space for base Woodbridge because of it?

Yes, if you do a base Woodbridge display with five cases on each side of it for the SVS, it does compliment it.

Okay, thanks.

That makes --

The other thing, Marc, that I would add is that with the 750 ml consumer, they tend to be a little less brand loyal in general, particularly in the $8 to $10 price range, so while having a new offering in that segment may possibly cannibalize a little bit of Woodbridge 750 business, it will also, we think, steal some share from other 750 competitors.

Right, but you have characterized to buckets here, a base business growing at three and incremental volume coming from new products, and I think what you are describing, Bob, would be in the second bucket.

We're also not saying the base bucket will grow at three.

We're saying the total bucket is going to grow, but part of growth is SVS and part of it is 187, so those are both really new entries.

The other interesting dynamic that is happening here with the introduction of SVS, is that the distributor, management, and the wholesale sales representatives have a new reason to think about Woodbridge and they are having more focus and attention on Woodbridge because of the introduction of Woodbridge Select Vineyard Series, and remember one of the big jobs we always have is share of mind of your wholesale sales representatives.

If they don't remember to ask for the order, you are not going to sell that extra case of wine.

There are no further questions at this time.

Please go ahead with any closing comments.

Thank you very much and I will end the conference call.

Good bye.

Thank you.

Ladies and gentlemen, this concludes the Robert Mondavi Corporation fourth quarter earnings conference call.

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