Constellation Brands Inc (STZ) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Robert Mondavi first quarter fiscal 2004 conference call.

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

Following today's presentation instructions will be give given for the question and answer sea objection.

If you neat operator assistance press star 0.

As reminder the conference is being recorded today, Thursday, October 23 of 2003.

I would like to turn the conference over to Mr. Michael Mondavi, please go ahead, sir.

This is Michael Mondavi speaking and I want to welcome you to today's conference call discussing Robert Mondavi first quarter 2004 2004 results.

Before we get started let me remind you we are going to make a number of forward-looking statements today and these statements should be taken as estimates only.

Actual results may differ from the expectations to please refer to the MD and A in the annual report on form 10-K for a discussion of the risks in the wine business.

Zo help you follow a call we posted a copy of the prepared remarks on the website www.robert Mondavi.com.

Look at company Investor Relations news and events and then conference call iss.

The financial is we presented are in accordance with SEC regulation G which requires the emphasis on GAAP result is and on occasion itemize some of the things included in GAAP such as inventory stepup, write down severance and gains or losses on the sale vs fixed assets.

A complete list of these items can be found on the website so you can see where they impact the income statement.

Also on the website is a restatement of historical financial statements in accordance with FIN46 which requires the consolidation of all variable interest entities.

While the FAS B has delayed the result we decided to move ahead and implement the changes in synw y with the we beginning of the new year.

Summarize some of the key industry trends and our own performance during the quarter by showed a continuation of some of the positive momentum that began last quarter.

Second, we will provide more visibility into some of the production cost cutting initiatives we implemented now at that time grape harvest is nearly complete and their, an update on (inaudible).

Finally we will we view the outlook for Q2 and the full year fiscal 2004.

After that we will move your questions and hopefully limit the call to no more than one hour.

Start with the market trends as captured with the A.C.

Nielsen U.S. food, drug, and liquor store data for the 13 weeks end the September 27, 2003.

Over all the sales of wine continued to grow in a healthy peace during the quarter.

Co-mess particularly grew at 4.4%, double the growth rate over the last 52 weeks and the same rate as the fourth quarter of fiscal 2003.

Imports grew at 13.7% in volume, close to the 52-week trend.

The blended volume growth rate was a strong 6.8% versus 5% during the last 52 weeks.

The pricing environment in food, drug and liquor stores continued to decline with (inaudible) prices falling 2-points compared to about 2 % in the last 52 weeks.

Domestic during the last.

Impocketed wine prices declined 1.2% compared with a 1.9% decrease during the last 52 weeks.

Remember, please, A.C.

Nielsen does not cover performance across all channels and therefore may not be indicative of the over all market trends.

Let's move from the industry now to Robert Mondavi.

During the last conference call on July 31st works, we said that we expected a slight improve mbt in volumes for the September quarter, prices down on key brands reflecting a more competitive environment but positive impact of new products would keep the over all price per case level with the year before.

This would result in Ann EPS of between 46 and 50 cents.

The actual results came in better than the guidance contribution shipments grew only 2% average price improved 3% and GAAP earnings were 60 cents compared to GAAP earnings of 49 cents last year.

Even backing out the 6 cents gain from the sale of nonstrategic fixed assets and adding back the 2 2 science in Arrowood inventory step up charges pro forma were 56 cents compared to a consensus estimate of 511?

March we announced a plan with three key elements.

Increasing topline growth by investing in the core brands and placing greater emphasis on developing new products.

Steam lining the operations by improving asset of legalization.

Increasing efficiency and deleveraging the balance sheet and reshaping the originalal structure to develop a clear line of sight to the consumer and sharpen the execution in the market.

I think that Greg and his management team have shown excellent progress in executing this plan.

Efforts to spur topline growth showed up in encouraging whole sale depletion growth of 6% net revenue growth of 5% and a positive pricing mix.

Efforts to improve efficiency showed up in improved operating margins despite the negative impact from continuing bulk line sales that hank will discuss later.

Tight controls around capital spending and further progress in divesting nonstrategic assets continue to help the balance sheet wheel our own efforts to reduced intake of grapes from the 2003 vintage and with a little help from Mother Nature left inventories in better balance.

As we look ahead, we are cautiously optimistic that the worst may be behind us.

While we face whatle probably be the most competitive marketplace ever in the upcoming holidays the domestic grape supply has come into closer balance except for a few major varieties such as Cabernet sative sative andpy know noir.

Encouraging reports of improvements in business travel and hotel occupancies during the upcoming months.

Greg and Hank will review the performance in more detail.

Thank you, Michael,.

This is Gregory Evans.

Good morning.

Review the topline.

Total company wholesale deprexs ended September 30, 2003 grew 6% over last year, depletions strong in on premise and off premise channels.

Total company shipments grew 2% to 2,000,130 how to cases which left whole sale inventory at 49 days compared to 45 days last year and 51 days at end of June.

We estimate that there was about one extra day of inventory due to estimates of new products that were shipped into the trade at a greater rate than they were depleted.

Average price per case grew 3% to $48.80 result of strong sales of Robert Robert Mondavi Winery, Robert Mondavi Private Selection and wines from import portfolio.

Total company net revenue grew 5% to $103.9 million with new products adding 400 basis points to revenue growth, in in the food drug and liquor scanning channels as reported by A.C.

Nielsen our volumes declined 1.1% and revenues 3.7%.

We think the disparity between the Nielsen and distributor deplex may be a buildup in retailer inventories as they prepare for the who will did kas and part holidays and partly due to the performance of the brapds in noncanning channels, turning to the Robert Mondavi Winery we were pleased with the second quarter if a row of strong depletion growth.

Enthus as tick trade and quality price repositioning of several Napa Valley varietals and strengening in the premise channel helped drive sales.

Depletions grew 5% and shipments much mast faster than depletions up 16% to of 6,000 cases in and tais -- 66,000 cases.

Average price per case was $171,000. 7% below last year due to the mix shift from our reserve in district wines to the Napa Valley tier, net revenues grew 8% to $11.2 million.

Sales of wine and merchandise sold at wineries retail and tasting rooms 18% above last year at $2.3 million on 2% higher Vitter traffic.

Robert Mondavi private selection had another excellent quarter.

Whole sale depletions grew 9% to a very competitive segment.

Growth was sped out eenl over the core varietals and the new products like and Pinot Noir.

Net revenues grew 6% to $20.3 million on 2% lower average price per case which reflected the competitive nature of the category, privacy (inaudible).

U.S. scanning store volumes flat and there was considerable strength in the channels not reported in A.C.

Nielsens, sales in clubs, packaged stores and hotels were all strong.

Now, let's move to Woodbridge.

Woodbridge depletions grew 4% which was slightly ahead of our target primarily result of very strong September and 200 basis points of growth from new products such as select vineyard series and the new single serve 18 milliliter bottle.

Shipments declined 2% to 1.6 million cases against a 24% growth comp last year.

Net revenues grew 1% to $56.4 million on 3% higher average price per case.

About half of the price growth came from positive mix contributed by select vineyard series which has a suggested retail price of about 8-$10 $10 per 750-milliliter volume, U.S. scanning store volumes declined 4.1% and price per case key declined although wood Woodbridge pe formed well in other channels.

Wholesale deprexs other grands grew (inaudible)% over last year.

Which we will talk about more in just a minute.

Shipments grew 7% to 74,000 cases and net revenues grew 22% to $5.2 million as we introduced a new lower price brand.

Average price per case declined 11% to about $70.

Finally import depletions grew 21% over last year led by very strong sales from the Chilean and Italian and estimates grew 21% from last year while revenues grew 24% to $6.8 million.

In U.S. scanning stores our imports excluding new products grew 15% in volume on 3% higher price.

Let me add a few comments about new products.

During the June quarter we launched wood ridge see it electric vineyard series a now line of 750 mill liter sprue premium price varietals from the cool low dike growing region of California and we are very pleesd with the launch and the wines have been (ed and shipped throughout the U.S.

During the September quarter we launched two additional new products the 187-milliliter single serving size Woodbridge wines and a now brand called pap yo.

The Woodbridge single serving are targeted as reaching con summers into new usage occasions and have again rated tremendous enenthusiasm from the trade.

Pap yo is a line of fresh, fruit forward, easy to drink wines designed to appeal it to a new segment of wine drinkers.

Trade reception as Han strong.

In total the new products as well as the hang time brand launched last spring and the freeze co-Bali we import to the U.S. added 400 basis points to the quarter's volume and revenue growth.

Now Hank will cover the financials.

Thanks, Greg and good morning.

Again, as Michael said earlier, I'll talk to GAAP numbers and to restated historical fption financial statement nulss.

That reflect the impact of con sel doiting the sin thete tick leases this quarter we added $109.5 million of the leases to the balance sheet.

And last year's first quarter was restated to include $108.5 million of the leases.

Last year's first quarter GAAP earnings per reTated 4 # cents per share versus 50 cents previously due to interest expense recorded on the consolidated debt.

Specifics lifted on the website which we resteated each of the fourth quarters in fiscal 2003.

As Greg said, Q1 net revenues were $103.9 million, 5% above last year.

Cot of goods per case improved 5% to $29.07 during the quarter from last year level of $27.74, this year pas number includes $619,000 pretax in arrowwood inventory stepup charges and last years if included $710,000 in air Arrowood step upcharges, in years cost of goods cold also included $2.5 million in bulk wine sales written down in prior quarters and sold at break even this quarter.

The bull rk wine sales lowered groabt operating and EBIT margins by 100 basis points.

Gross profit per case grew 1% to $19.72 from $19.46 last year.

Gross margin declined 80 basis points to 40.4% from last year's 41.2%.

Operate operating expenses $28.7 million or 27.6% of net revenue.

A decrease of 270 basis points from last year.

It result however included a $1.5 million gain from the sale of nonstraik fixed assets excluding the gain operating expenses $30.3 million or 29.2% of net revenue, still below last year.

Operating income grew 24% to $13.3 million compared to $10.7 million last year.

Operating margin was 12.8%, 190 basis points above last year's 10.9%.

Excluding the gain from the asset sales operating income each grew 9% and operating and EBIT margins grew 40 basis points.

Equity income from joint ventures was $8 million compared to $7.3 million last Jere.

Note that last years if equity income included $1.4 million in inventory stepup charges.

EBIT or earnings before interest and taxes grew 16% to $21 million and EBIT margin was 20.3% of net revenue.

While EBIT is not a GAAP measure we think it is Ann important end Kater of our performance since it includes the full impact of the joint ventures which are not fully reflected in reported gross and operating margins, excluding gain from asset gales EBIT grew 8% and margin grew 40 basis points.

Net interest expense $5.5 million up 5% from last year as a result of lower capitalized interest this year, the expenses were $172,000 compared to $608,000 last year.

The effective tax rate for the quarter was 36.5%.

Net income grew to (inaudible) million dollars compared to $8.1 million last year and EPS grew 22% to 60 cents compared to 49 sense last year jurks however, adjust Ford the inventory stepup in both years and gain from asset sales this year net income delined 1% to $9.3 million and EPS 2% to 56 cents.

The September 30, 2003 balance sheet was $989.4 million, $29.2 million smaller than last year due pry primarily to a smaller infake of graips and the sale of? (inaudible) fixed assets.

Accounts receivable was up but in line with the in (inaudible) September sales.

Free cash flow for the quarter was $19.9 million compared to $11.8 million last year.

In quarter cash flow numbers include a $5.3 million decrease in noncash work capital, $7 million in dpap dap depreciation and amortization and $6.8 million in capital spending.

A table in the prepared remarks posted on the web defines how we calculate it.

Now I will talk about the cost savings program.

In march we announced Ann initiative to row deuce product cool costs by 10%.

Which apply on a pro forma basis to the fiscal 2004 P&L would result in $30 million in annual savings.

We see that the cost savings would likely flow P&L as $4 million in 2005, $12 million in twice and the full $30 million in fiscal 802.11 due to -- 20007 due to the small cycle times.

Drivers are increase in high quality but less expensive internally sourced fruit, lower prices for contracted spot fruit and bulk wine.

Higher asset utilization and more efficient grape improving and wine making processes.

While we have to be careful here in in the disclosing sensitive information I want to give you some idea of where the main pint points of emphasis are and at this point in time reexpect production cost savings in four major areas. 15-$20 million should come from lower grape prices. $4 million to $5 million of the cost savings should come from packaging. 1-$2 million should come from bolting and the remainder should come from proceeds and order fulfillment.

Thanks, Mother Nature has been friendly to the California wine industry this year.

While the statewide harvest won't be complete until early November we are about 90% complete for the California brands and we are optimistic about the quality of the vintage since the ripening was orderly the vines are in good shape and it as small crop which also results in more flavorful wine.

Industry experts estimate the crop between 10 and 15% below last year compared to a preharvest estimate of minus (inaudible) Merlot which we would characteristic ais as being long prior to the harvest appears to be closer in balance or even short as the Merlot crop dmaim at about 25% below last year's crop.

Chardonnay has been a short stop and looks like it will be in balance sooner than previously expected.

Sthr are two other major varietals which are still flong supply throughout the state, Cabernet Sauvignon will be in surplus we believe for two years and Pinot Noirly looks to be in balance now will likely be long beginning next year as new (inaudible) planted backs bearing in California.

Greg will cover the outlook for the remainder of the year.

Full year GAAP EPS guide Idaho is higher due to the asset sale during the quarter.

Let me review the highlights.

Still expect about 2 to 300 basis points of growth in base business and a similar amount from new products.

While we are very very encouraged by the better than plan the results from this quarter we need to get through the OND holiday period before we have assess possibly upsides for the year.

Gross margins are still expected to increase about 400 basis points to around 4% as cot of goods sold per case comes down by about 5%.

EBIT mags are expected to improve about 450 to 500 basis points.

And our EPS guidance is now $1.86 to $2.01 which $2.01 which is 6 cents higher than before due to the asset sales this quarter.

Note that this guidance includes inventory stepup charges of about 12 cents.

In the December quarter we expect EPS to range from 75 cents to 80 cents on mid-single digit increases in revenue, stable pricing, and flat EBIT margins.

However, we are very concerned about two grocery strikes in the U.S. that began last week.

One in Ohio, West Virginia and Kentucky anes another in southern California and Arizona.

Either strike could have a significant effect on the results if it lasts long.

The one in California is particularly unfortunate given the fact that our California business had posted a nice rebound during the September quarter.

Now, Bob has some house keeping items.

Thanks, Greg.

Good morning.

I wish to take a few moments to remind everyone again about our founder Robert G. Montana has condition mods has made a number of significant contributes to charity and has been selling shares daily under a 10V15 program and has saved the current commitments and will suspend selling shares for awhile although he still has major commitments that will come due oi over the next several years.

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

Beginning at 930 today to 550 Pacific time listen to a reply dialing 1-800, 405-2336.

International callers dial 1-303-590-3(inaudible).

In both cases the access code for the preplay is 555578-pound.

Today's prepared rear marks as we said earlier can be vied downloaded or listened to on the website www.robert Mondavi.com.

Look under about the company, Investor Relations, followed by newscast and events and then conference calls.

The shareholders may wish to attend the annual meeting it is scheduled for Friday, December 12 in the Napa Valley.

For more information call 1-888-766-6327, extension 4092.

Finally the next conference call covering the second quarter fiscal 2004 results is scheduled for January 29th, 2004 at 70:00 a.m.

Pacific time.

I want to thank you for your par participation in today's call and we will now open the line for your questions.

Thank you sir, if you have a question press star one on your push button phone.

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One moment please for the first question.

Our first question is from in Jeff Cantor from the Prudential equity group.

Please go ahead, sir.

Good morning, gentlemen.

Good morning.

Good morning, Jeff.

Quick question for you.

The guidance for the year, revenue growth is still 5% I don't think anybody was!

Pecsing five and a halftime percent in the first quarter and the comparisons get easy easier as you go through the year.

You know, are you just Kenned about how the second quarter is going to shape up because of the strikes or being con versative and give us a sense on why it is still 5 5%?

We want to be cautious about the second quarter I think particularly because of these two grocery strikes, Jeff, which we have understood have you know potentially a long-lasting effect.

It is a serious issue and that is a significant part of the business particularly in Arizona and California.

So I think as we get through OND and have visibility into whether or not that is a significant factor we will be able to give you a better sense as to whether the upside around the 5% after that quarter.

What are you doing now, what are you doing now to deal with it?

How are you preparing?

Well, we have got, you know, we got Goody'stry by objection in channels outside grocery as you know in California grocery is a significant distribution point.

Right.

But so are clubs and independent stores and packaged goods stores and we have obviously got lofts programs aimed at the markets and if you look at the depletion trend on the days parity on the Nielsens this quarter versus our total number, what is being reflected is the fact that some of the independent channels and package good channel as well as onpremise channels are he performing very swole I think we are Velda verse fieed but fill a stying significant part of the business.

In southern California and Arizona the grocery chains that are being struck right now are a huge part of that market.

I was down there at the end of last week trying to get a first-hand view of what was happening and the strike is having some impact.

We focused right now with working with the different clubs and the in depen independents the drugstores and they are really tooling up to take advantage not just of the strike but to really give proper service to the customers and we are working very closely with the wholesalers and with the key independents to make sure that we don't have out of stock and that is going to be the biggest problem is supplying the retail chain because you have a lot few are customers there.

Our next question is from Dara Mohsenian from J.P. Morgan.

You posted pretty strong results across the entire prfl portfolio from a stop lien topline and wonder if there is over riding theme or explanation or on p on-premise rebound or strong mods execution and maybe put magnitude behind the reason.

Let me say first as I mentioned in the formal comments I was complimenting Greg and management team forex lent execution and I think that the entire company has really rallied towards what we are trying to accomplish everything from the quality of the wine the quality of the image and particularly the execution of how we get it to market efficiently.

I think that in that sense the quarter reflected more symmetry than usual around the depletion patterns.

I think virtually every brand was showing depletion growth.

We were obviously pleased about Woodbridge at 4%.

The core brand base business group grew 4.5% and then we had a good performance from the maul -- small brands as well so I think we have to also suggest this may be indicative of the market to some extent and we see the market picking up a little bit.

And as a channel our on-premise business was very strong.

I think it was in the 9-10% arena which we also believe is reflective of the economy beginning to pick up.

Our next question comes from Bryan Spillane of Bank of Merk securities.

Please go ahead.

Good morningion guys.

Good morning.

A couple of questions.

First, was there any buy?

In I guess towards the end of this quarter ahead of the supermarket strike in southern California and if you give us any idea of how you know shipment and depletion trends are going in October that would be great.

We can't really give any insight into October at this point, Brieian.

I think in some cases in southern California we sow some buy-in by supermarkets who are running programs for us in October.

And if you look at the southern California depletion number it is -- it is a pretty healthy number.

Having said that, you know, in the scheme of things that is not going to add a significant lift to the over all results.

But he think there was some foresight into the effect of the strike by the chains.

And I think that gives us, you know, good protection and good business on the floor in October.

But again, the fact that virtually every brand in the prl portfolio including the small brands and import brands showed significant growth really reflects the broad trend as opposed to a specific event like a buy-in from a supermarket because they clearly don't carry that kind of portfolio.

The next question is from Ann Dorkin of Davenport, please go ahead.

If you could review a little bit more pricing in the marketplace for your brands?

Pleased where prices are or do you need to make some further adjustment's?

Well, I think we are pleased with the balance this quarter of -- of price, volume and relative positioning.

Obviously the market continues to be competitive.

I think the average price on Nielsen was down 3.7.

But part of our strategy that we have given in our guidance this year so to improve our average price through mix improvements.

Things like the select series and imported portfolio.

So I think the best way to answer that is that -- that we are prepared for some competitive periods during the holiday.

I think people have suggested that this will continue to be Ann intensely competitive environment but from where we sit we have a good balance right now of where we want to market our wines and we would love to see the same trend -- continue.

Your next question is from Jonathan Finey of Wachovia.

Please go ahead.

Hi, guys, congratulations on a solid quarter.

Thank you, John.

Thank you.

Wanted to just to clarification on your clearly your whole sale depletions outpacing your shipments companywide but then talked about potential retail inventory buildup and how do you think whole sale inventory stands right now in light of the impressive numbers?

Whole sale inventory is the number that we are giving that the wholesalers, the 49 days.

49 days.

Would reflect the level of inventory at distributers and is your question what is the retailer inventory situation, other than.

I'm sorry, I misspoke, I meant to say (inaudible)

Other than the comments about southern California, retailers are not likely to carry significant amounts of product these days and we no reason to believe that the retailer stocks are loaded up at this point to any significant degree.

Our next question is from Skip Carpenter of Thomas Weisel Partners, please go ahead.

Good morning, guys.

Good morning, Skip.

Give given the percent of depletion and give WAN you talked about with July and August that would seem to argue that September was quite strong.

If you could give us a little bit of flaiiver in terms of specifically the month of September.

And second, I believe with your guidance for the December quarter you had suggested flat pricing.

Why would we see after what was a clearly a nice mix benefit in the first quarter why would that effectively go away in the December quarter in?

Let me speak to the September quarter and Greg can speak to the pricing.

In September -- July and August were a little soft.

But it was really across the country whether in New York with the retailers and restaurant yous or in places in the south or west coast, they kept pinching themselves throughout the month of September saying ghee, it is picking up, it is picking up so there was a real trend change in the summer doldrums you might say of July and August to much more brisk business in September.

Ever everyone is kind of holding their breath and saying is this going to continue through October and through the holiday period.

Needless to say we don't know yet but business was very healthy at across the board in September.

One of the just to add to Mike's comment one of the features we are seeing in today's marketplace is more month to month volatility in depletion trends and Nielsen trends.

So there is a little bit of a roler coaster effect during the quarter which is one reason that we don't like to talk to monthly depletion results because there is a lot of movement that is reflective of promotions basically.

So, I think the way the pattern went, July was a very good month, I think it was about nine and August was a poor mot month and think it was minus three or minus four and September came back strong because we had programs in September so we really have to sit back and look at this on a quarterly basis.

In terms of price wag is constituting the flat pricing number is the recognition we have to be more competitive on promotion against the prices during the holiday season.

So that directly affects the revenue.

That is offset by some positive mix effects that we have in the portfolio such as you saw in this quarter.

But, we are saying net-net that we see something very similar to the price per case as a result of those two factors.

At this time we have a followup question from Mr. Jeff Cantor from Prudential equity group.

Thank you.

Hank, can you just ex-chain what we -- what should we be expecting for gross profit margin and is that cost of good solds included bulk wine sales is that something that you can give us a sense where we are going on the gross profit margin and also concept Wally if vie rye vau rightals end up being short about R. you going to be able to pass that through in higher retail selling prices opt exist on the existing brands or roll out new brands at a higher price point to absorb that extra cost?

Thank you.

The gross margin projection for the year is 4% and we -- 42% and we think we will get back to the range this quarter.

It was impacted by gross wine and we sold at break even and it erepressed the margin by 100 basis points.

We think we will get to 42.

From a grape price standpoint we don't anticipate Ann increase in grape prices this year and we are in pretty good shape from that stant point.

I would tell you from a pricing standpoint, though, I don't think any one in the industry is looking at price increases over the next year for any reason so the fact that we think we will have our grape prices in check and also have more internally sourced grapes than in the past and that will take any pressure off any price something we're not looking for any price increases in grapes.

I think the effect could be a little more probably a little more two-step which is if the harvest is coming in light for Chardonnay and Merlot as Michael points out that puts people short on to the bulk wine market and the bulk wine market will probably begin to reflect the fact that the grapes are coming back into balance and therefore prices of bulk wine for those varieties could rice.

I think the effect of that would probably be two-fold and one would be perhaps less intense promotion and the second would be perhaps a reduction in the volume of the extreme varietal categories that people have been talking about and in fact I saw last month in good morning berg that the shipment growth on extreme varietal wines had started to slow down so I think it could be a little more round about as it affects the business but I think we would not be surprised to see some of those factors come into play which is why I think Michael's comments about the harvest would indicate some cautious optimism about its effect.

We also don't really play in the bulk wine market to any great extent, Jeff, I mean we have in the past but other than balancing a couple minor needs we don't anticipate being in the bulk wine market this year so if the price is strengthsened there it won't affect us.

A followup question from Bryan Spillane of Bank of America securities.

Please go ahead.

Hi, actually for Hank.

Do you have for the end of year a target for wholesaler inventory days?

And if you could just kind of walk through how we could -- how we should sort of model out the estimates versus depletion growth rates over the next couple of quarters and I was curious to see in the fourth quarter I'm thinking that maybe shipments might actually be ahead of depletions.

Is that right?

The -- from an -- inventory shipment dates one day is not a big deal and I know everybody makes a deal about this and frankly wish they would make a bigger deal with our competitors than they are with us.

I'm comfortable with 49 days.

There is a day in there of new products so we really imimproved by last quarter.

Would I like to be at 45, I would.

With the new products I think we'll be higher with that so I think the 48-49 days oh I. I'm sew Kay with.

In terms of shipment and deplex guidance or for rt rest of the year the goal is to match shipments to depletion so at this point we still have comps that don't allow us to show that necessarily.

But that would be my guest guidance that the point is we would be moving into that arena where if depletion growth continues to be at 5 or 6% that is where the shipment growth could be and that is what we are projecting.

Guys want to add anything to that?

I think we talked that we think deplex are the way we have to manage the business because it reflects the true demand and that we ought to create some being markes as an industry measure progress and guidelines against depletions and distributor.

We expect to be in the target range and the variable that we are talking about is if there is a load one of new products in the quarter we will point out one or two extra days because we just introduced a new item that might create a little noise around that but I think that is our goal and so far we are executing around that range.

I'm not -- you know, is it possible that new products could -- new product shipments could bus of the shipment load exceed depletions, I guess that is possible but we're not seeing a major empact from that at this point.

The new products are shipping well.

But SBS we started shipping in the fourth quarter and continue to ship to the market this quarter but actually depleting well, too so the turn yarned seemed pretty quick so there might be some impact from new products but other than a day or two of inventory load it won't be that much.

I would love to see it takeoff and be huge but we're anticipating a normal growth.

At this time we have a followup when from Dara Mohsenian from J.P. Morgan.

Please go ahead.

Comment on importing U.S. brands to international markets specifically new a U.S. dollar is helping you now as opposed to the last few years and if that is going to be a focus.

The export market is Ann excellent growth opportunity for us and for the California wine industry particularly now that the dollar has gotten a little better bald.

The quality of our wines, the consistency of the quality versus many of the producing area around the world, we have a distinctive advantage.

The biggest problem historically on California wines and our own forex port is that the market here in north America is so big that we focus more of our attention here and our competitors all focus attention here because their home markets are not strong so they have done a better job historically in addressing their "export markets quags because of necessity.

We now have the last few years have been looking at that and we expect to have disproportioniate growth in!

Port.

A followup from Jonathan finey from Wachovia, please go ahead.

Thanks, guys, just one followup.

Looking at your K now, company owned grapes down to about 10% it it says of your total volume with 90% bought from es elsewhere and can you kind of comment.

That was last year.

For the last fiscal year I'm sorry.

What per September right now are being bought under some longer term contract and I guess I'm trying to get a sense for how what party of your grapes are being bought at above spot market prices and how much less vulnerable you are getting to the two buck chuck fa nom mon none.

The grape contract situation right now our stage had been to contract most of our production needs at Woodbridge in particular with long-term contracts.

And most of our needs in Napa through our own vineyards so if you look at the blended in tenally sourced number this year for the '03 harvest I think you are in the range of 20%.

The balance of those grapes which would represent about 80% this year would mainly be under long-term contract.

And I say mainly because in you know in some cases there are certain varieties like piepy know Gris yo that we are still weeing on the open market and those contract the tend to come up each year and a certain percentage of those will expire as we go forward is that our position and the flexibility that we have next year and and the following year clearly improves as -- as we are able to go out and either renew contracts in a more favorable basis or go into the spot market.

Jonathan, it is very important to understand the differential by brand as Greg poined out.

At high end we probably source 85% of the grapes and some great growers up there.

But we are almost entirely internally sourced and at Woodbridge 3-5% is high and actually get probably a little lower than.

And then the Private Selection benefitting brand is benefitting from vineyard development we have done in the late 90s and it is currently sitting at about 25% source and will likely go to almost 40% at some point so it really depends on the brand so over all saying it is 10% really reflects the Woodbridge impact on the total.

We have a followup question from Skip Carpenter of come mass Weisel partners.

Please go ahead.

Greg or Michael if you could given the importance that the December quarter is going to have give us Ann update with regards to your marketing and media plans specifically for Woodbridge, will it be run no contest any kind of television whether in terms of network or cable this year as well as your media and marketing plans also for the private selection, please.

The Woodbridge marketing plan that year does not include any sort of national TV programming.

There is obviously some advertising and a good deal of marketing support for Woodbridge.

We probably would be using print and radio as the main vehicles for the Woodbridge program.

There is also some advertising support for the Robert Mondavi brands that will be a print campaign used during the OND quarter as well.

But again, television is not a big factor in the mix this year after we beVal waited the advertising we did in the previous advertising we didn't feel that the cost ben flit that case of TV was worth reinvesting in this year.

Our next scwe from Ed Warhatch of Media Vision Capital.

Hi, good morning.

Good morning.

The question for Michael.

In one of the recent issues of wine spectateor there was a good and thorough profile on the company and in it I believe you might (inaudible). been quoted as saying that you have a terrific brand but you know somebody else might really be better managers so my question is what if you could expand on that and what your thoughts would be in terms of you know being a division of a larger company where there maybe the greater economies of scales in terms of marketing and driestry by objection and separately the thoughts on using into the u significant free cash flow repurchasing shares?

Let me start with your reference to the good and thorough report in the wine spectator which I don't think was either thorough, number one or good.

For example, there was one and a half Sen tens where they quoted me in the article and they never even bothered to interview Greg Evans the CEO so it was not a good and it was not a thorough article unfortunately.

Okay.

As far as any references to improving our management, I think I have stated already twice this this call that I think Greg and our management team are really hitting stride and doing a great job.

Your question about would we be better served to "be acquired or American in with a large company" if you look at results of the larger spirits companies in their wine division and any of the large companies in their wine divisions versus the independent wine companies, the independent wine companies are doing a far better job including Robert Mondavi than those spirits companies with their existing brands.

So from that standpoint we think that it would be counter productive for the brands.

And also with the restructuring plan that we have had I think that the financial market has appreciated the work that we have done and the attention that we have done to really manage this in a very proactive cost conscious and value conscious way and our stock has appreciated significantly in the last few months.

We have looked at the stock buyback as an option and at this point because of, you know, a very competitive what we consider a very competitive second quarter holiday period we are going to keep the powder dry and at this point we don't anticipate doing that.

The next scwe from Marc Cohen of Goldman Sachs.

Please go ahead.

Good morning.

Good morning, Marc.

I was wondering if you could go back to the depletions, Greg.

Yeah.

And I don't know if you really covered this and maybe I just missed it you you have very strong depletion growth on R and W and very strong numbers on wood bridge.

I guess I'm a little curious about the self-bsh what you know about the sell through on this because there are some particularly on Woodbridge you introduced two new products this quarter and guess one last quarter and it just isn't clear to me who of much of the upsfied depletion growth that we are seeing here is actually retail pipeline filling.

Can you give us some sense of what you really think is happening in terms of consumer take away on the brands?

Maybe looking more broadly than what this Nielsen data is indicating.

Let me try to get at that two ways because it always takes a little bit of art to try to sort through the depletion numbers and relate them to A.C.

Nielsen which covers about 34% of the on-- the off trade market in the U.S. and so on and so forth so in you took the over all 6% and let me break that down into sort of a channel set of numbers for your first.

The on-trade business restaurant and so on representing about 20% of the volume.

We're probably up 9 tore 10%.

The Nielsen portion which is grocery, food and liquor, I'm sorry food, drug and liquor representing about 35%.

Was down about 1.9%.

Therefore, the anomaly, the export portion was probably flat and that is about (inaudible)% which leaves the -- 8%.

Which leaves the other channels, packaged good stors and club stores independents being about 37% of the business and up about so% -- so 10%.

Very strong performance in independent packaged good store is which, you know, we think is a very important part of our distribution strategy and was a bit of a focus during the quarter so that is how the channel thing plays out.

In terms of are the new products you know, filling the channels at either the distributor or retailer and we tried to give you the distributor impact and it is about a day.

This quarter I think we shipped about 83,000 cases in new products and depleted about 53,000 cases so, t, you know we left about thousand cases at distributor level and on the retail side there is undoubtedly some distribution being gained without consumers taking that product away and that is just the nature of the beast.

In terms of launching new product.

If you can successfully get it on the shelf which we have been very successful at.

We don't see that as -- as being, you know, a major distortion in trend because the -- you know the base business the core business, 90% of the volume of the company was up4.5% in very strong number and the ongoing items like Arrowood, Brie Ron, the import portfolio and La Famiglia were all showing a strong double digit growth so we just think that it is a quarter where most of the brands are clicking on all sill cylinders and the new product stream we think is -- is going to be successful at consumer level as well as the distributor level.

Marc, in addition, on the new products for example the Woodbridge SVS and is 187, that is not a supermarket type item, more of a convenience store and delis and things like that so those numbers would essentially probably never show up very much on Nielsens.

As far as the SVS and other new items it takes quite awhile to get those eseptionly cut in on new ski matics at supermarkets so for any new products most of the initially growth in the first few months or even years is in the in depen independents and restaurants and things like that and then follow after that cutin on the ski mat ski matics for the supermarkets and that is where you would show up on the Nielsen.

Ladies and gentlemen if there are any further questions press star one on your telephone.

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Gentlemen, it appears there are no further questions.

Please continue.

Thank you very much.

That will end our conference call.

Appreciate the support.

Thank you.

Ladies and gentlemen, this concludes the Robert Mondavi first quarter fiscal 2004 conference call.

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