Constellation Brands Inc (STZ) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

And thank you for standing by.

Welcome to the Robert Mondavi Q3 fiscal year 2004 Conference Call. [OPERATOR INSTRUCTIONS] As a reminder, today's teleconference is being recorded, Thursday April 22nd of 2004.

At this time, I'd like to turn today's presentation over to Mr. Bob Phillips.

Please go ahead, sir.

Good morning.

This is Bob Philipps, Treasurer and Vice President of Investor Relations, and I want to welcome you to today's conference call to discuss Robert Mondavi's third quarter fiscal 2004 results.

Joining me today are Greg Evans, our President and CEO, Dennis Joyce, Executive VP of Sales & Marketing and Hank Salvo, our Executive VP of Finance and CFO.

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

Actual results may differ from our expectations, so please refer to the MD&A in our Annual Report on Form 10-K for a discussion of the risks of the wine business.

To help you follow this call, we have posted a copy of our prepared remarks on our Web site www.robertmondavi.com earlier this morning in our investor relations section.

Here we heard some, I think refills based on some calls I had this morning and if anybody has had difficulty, accessing the information should be there now because I've checked everything.

Please note that the financials, we reference today are presented in accordance with SEC Regulation-G which requires the emphasis of GAAP results.

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

A complete list of these items can be found on our Web site in the financial information section.

The next hour or so will cover three main areas.

First, we'll summarize the quarter for the industry and our company.

Second, we'll discuss our performance in more detail; and finally, we'll review our outlook for the rest of the fiscal year before taking your questions.

One other potential agenda item, our outlook for fiscal 2005, will have to wait until the completion of our strategic plan.

We will schedule a special conference call in late June to discuss fiscal 2005.

Hopefully, we can limit the call to an hour.

Now Greg will get us started.

And I'll turn the floor over to Greg Evans.

Thank you, Bob and good morning everyone.

I'll start with the industry performance per AC Nielsen US food, drug and liquor store data for the 13-weeks ended April 10, 2004.

Sales of wine in scanning channels picked up when compared to the growth rate during the December quarter.

Domestically produced varietal wine volumes grew 3% in the March quarter, compared to flat in the December quarter and 2% during the last 52-weeks.

Imports grew 12% in the March quarter, consistent with the 11% growth in the December quarter and 13% during the last 52-weeks.

And the blended volume growth rate was a healthy 6% in the March quarter, compared to 3% in the December quarter and 5% in the last 52-weeks.

Note that the sequential acceleration in national growth trends occurred despite the fact that Southern California food store growth rates, subsequent to the resolution of the grocery strike, remained negative.

Finally, pricing in food, drug and liquor stores weakened slightly.

Domestic varietal wine prices were flat while import prices grew 1%.

Interestingly, Australian imports posted a 4% decline in price despite the strength of Australian dollar.

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

Similar to last quarter, our topline reflected the progress we're making in investing in core brands and developing new products.

Robert Mondavi Winery, Robert Mondavi Private Selection and imports all posted strong revenue growth and a clear line of sight to the consumer and sharp marketplace execution helped our new product offerings, such as Woodbridge Select Vineyard Series, Woodbridge 187 milliliters and Papio, gain distribution and they, too, contributed significantly to volume growth in the quarter.

Wholesale depletions grew 5%.

Net revenues grew 6%m, against a negative 12% comp from last year, with 9% volume growth and a decline in average price per case of 3%.

Also, we continued to make progress in improving asset utilization.

Total assets shrank 2% from last year, including the buildup of $15 million in cash that's a direct result of more disciplined capital spending and the progress we're making in divesting non-strategic fixed assets.

This also showed up on the P&L in the form of reduced interest expenses.

The net result was that earnings came in at 12 cents per share, ahead of our guidance of 1 cent and 5 cents, and well-above last year's loss of 11 cents per share.

From a non-GAAP standpoint, we earned 16 cents per share this year versus 12 cents per share last year.

And let me take you through this in little detail.

We compute the 16 cents by adding back the 4 cents per share in one-time expenses incurred in the quarter.

For last year, if we exclude the 24 cents gains we received from the sale of non-strategic fixed assets, 42 cents per share in restructuring, employee separation and vineyard write-down charges, you'd get 7 cents in EPS.

Finally, if you then add back 5 cents in inventory step-up charges, you'd get a non-GAAP number of 12 cents for last year's quarter.

With that, I'll turn it over to Dennis.

Thanks Greg and good morning.

I'd like to begin by reviewing the performance of our brands.

Total company wholesale depletions for the quarter ended March 31st, 2004 grew 5% over last year, similar to our volume growth in AC Nielsen scanning channels.

Total company shipments grew 9% to 2,171,000 cases, which left wholesale inventories at 50 days, compared to 50 days last year and 49 days at the end of December.

We estimate there was about 3 extra days of inventory due to new products that were shipped into the trade at a greater rate than they were depleted.

Average price declined 3% to $45.21 per case primarily as a result of a mix shift to lower priced products.

As a result, total company net revenue grew 6% to $98.1 million.

Turning to the Robert Mondavi Winery brand, we were very pleased with the fourth consecutive quarter showing strong depletion growth.

Robert Mondavi Winery wholesale depletions grew 15%.

Shipments grew 31% to 69,000 cases.

Average price per case was $160, 17% below last year; about half of this resulted from steps we took to re-position Napa-tier of wines to more competitive price points in last year's June quarter, and the other half resulted from a mix shift away from Reserve and District wines.

Net revenues for Robert Mondavi Winery grew 9% to $11.0 million.

Robert Mondavi Private Selection also had another great quarter.

Wholesale depletions grew 13% above last year.

On-premise channels performed well, and the AC Nielsen scanning stores grew 15%.

Shipments grew 20% to 349,000 cases, led by the introduction and news behind the Pinot Grigio in March.

Importantly, this new product launch created a synergistic opportunity for us to taste retailers and restaurateurs on other key varietals, in our Robert Mondavi Private Selection lineup such as Pinot Noir and Syrah, which, in turn, really helped shipments and depletions.

Net revenues grew 22% to $20.9 million on 2% higher average price per case, which was really outstanding given the competitive nature of this segment of the category.

Woodbridge experienced a challenging quarter as the popular premium market segment continued to feel the impact of new entrants, imports and private label.

Depletions declined 2%, with the core Woodbridge varietals challenged by ever-increasing competition from new 1.5 liter entrants.

We continue to lay the foundation for Woodbridge's success through strategic investment in pricing, where necessary, new products and brand equity investment.

Woodbridge shipments declined 1% to 1.5 million cases.

Net revenues declined 3% to $48.5 million.

US scanning store volumes declined 1% and price per case 2%.

Bright spots for Woodbridge that give us cause for optimism include Select Vineyard Series, which is part of Woodbridge's strategy to deliver high quality, high value to consumers.

It was launched in July and continues to gain distribution.

And I would add that importantly, our research suggests that cannibalization is not a problem -- in fact, 77% of the Woodbridge Select Vineyard Series purchases are incremental to the brand.

And, we're also very pleased with the introduction of the new single-serve Woodbridge 187 milliliter bottles.

Like Select Vineyard Series, the 187's are helping Woodbridge broaden its consumer franchise by reaching incremental merchandising locations and incremental usage occasions.

Turning to our Other California brands.

Wholesale depletions grew 132% over last year led by strong demand really across the portfolio.

As you know, this group contains a wide array of brands from Arrowood and Byron in the luxury segment to popular premium wines like Papio.

Since many of our domestically sourced new product initiatives are reported under "Other California", volume growth is strong, but the average price per case reflects a fairly significant mix shift towards the high growth, popular premium wines.

Shipments more-than-tripled to 173,000 cases, and net revenues grew 44% to $8.2 million.

Within the "Other California" category are some brands under the management of an internal division called Prospect Peak Cellars, whose mission it is to develop innovative new wine brands that attract new consumers to wine.

Remember, only 11% of adults regularly consume wines, so there's a substantial market opportunity.

Prospect Peak Cellars is an (inaudible) innovative group set up with separate grape sourcing, a dedicated winemaking staff, and its own marketing resources. "Papio," this new division's first release, is a perfect example of what we expect to accomplish with the group.

Papio's presentation is somewhat irreverent, its flavor profile is fruit-forward, not oaked, and its ready to drink at a very attractive price.

This unique combination has generated enthusiasm in the global marketplace and our market research shows it has appeal with new wine consumers.

Finally, import depletions grew 10% over last year as a result of the continuing strength of our Italian portfolio.

Shipments declined 1% below last year to 120,000 cases, while revenues grew 8% to $8.2 million led by strong sales from the Italian brands.

In US scanning stores, our imports grew 7% in volume and 12% in revenue.

So, in closing, like last quarter, the quarter showed how our broad and deep portfolio can deliver good overall topline results even when individual brands may not.

And we'll continue to pursue strategies to increase topline growth through exciting new product offerings and continued investment in core brands.

And with that I'd like to now turn to Hank who will cover the financials.

Thanks, Dennis and good morning.

Again, as Bob said earlier, I'll talk to GAAP numbers and to restated historical financial statement numbers in compliance with FIN 46r that reflect the impacts consolidating our synthetic leases.

This quarter's balance sheet included $111.5 million of these leases, while last year's third quarter was restated to include $111.9 million.

After the adoption of FIN 46, last year's third quarter EPS was restated to an 11-cent loss versus 10 cents previously reported due to interest expense recorded on the consolidated debt.

Details are available on our Web site, where we've restated each of the four quarters in fiscal 2003.

Q3 net revenues were $98.1 million, 6% above last year.

Cost of goods per case declined 10% to $28.33 during the quarter from last year's level of $31.56.

Since last year's number included $738,000 of pre-tax in Arrowood inventory step-up charges and $7.6 million in inventory write-downs, the apples-to-apples comparison shows cost of goods per case growing 4%.

Gross profit per case grew 14% to $16.88 from $14.85 last year, and gross margin grew 530 basis points to 37.3% from last year's 32%.

However, excluding the last year's inventory step-up and inventory write-down, gross profit per case declined 11%.

Operating expenses grew 20% to $30.7 million, or 31.3% of net revenue, an increase of 350 basis points from last year.

This year's number included $1 million in one-time expenses.

Last year's number included $2.2 million in vineyard write-downs and $1.2 million in employee severance charges offset by a $6.1 million gain on the sale of fixed assets.

Excluding this one year -- year's one-time expenses and last year's charges and the gain from the asset sale, operating expenses grew 6% and operating expenses as a percent of net revenues declined 30 basis points.

Operating income grew 53% to $5.9 million, compared to $3.9 million last year, and operating margin was 6.1%, 190 basis points above last year's 4.2%.

Excluding the aforementioned items in the last year's quarter and this year's quarter and last, operating income declined $2.8 million or 30%.

Equity income from joint ventures was $1.6 million, compared to a $489,000 loss last year.

Last year's equity income included $479,000 in Ornellaia inventory step-up charges.

EBIT, or Earnings Before Interest and Taxes, was $8.1 million versus $2.9 million last year.

EBIT margin was 8.3% of net revenue versus 3.1% last year.

While EBIT is not a GAAP measure, we think it's an important indicator of our performance since it includes the full impact of our joint ventures, which are not fully reflected in reported gross and operating margins.

Excluding this year's charges and last year's charges as noted previously, EBIT grew 1% and EBIT margin declined 50 basis points from 9.7% of net revenue to 9.2%.

Net interest expense was $4.9 million, 16% below last year, as a result of having a positive short-term cash position rather than a balance on our revolving line of credit facility, as well as the benefits from an interest rate swap from fixed to floating on one of our private placements.

Capitalized interest expenses were $55,000, down from last year's $197,000.

Note that our capital spending has decreased to a level where year-to-year changes in capitalized interest should not have a material impact on interest expense.

The effective tax rate for the quarter remained 36.5%.

Net income was $2 million, compared to $1.8 million loss last year, and EPS was 12 cents, compared to 11 cents loss last year.

On a non-GAAP basis, as we've previously defined, net income grew 34% to $2.6 million and EPS grew 33% to 16 cents.

The March 31, 2004 balance sheet was $962.4 million, $16.5 million or 2% smaller than last year due primarily to continued progress in reducing inventories and divesting non-strategic fixed assets.

Working capital grew 7% as a result of reducing short-term borrowings and generating free cash flow.

We continue to generate free cash flow.

This quarter, operating cash flow of $13 million less capital spending of $2 million resulted in $11 million in free cash flow.

Now, Greg will cover our outlook for the remainder of the year.

Thank you, Hank.

Through the first three quarters of our fiscal year, total depletions grew 4%, and shipments grew 4.7% while average price per case grew 0.6%.

This is at the low end of the targets we outlined going into the year, and what has changed is that the growth has been more skewed towards new products and away from Woodbridge.

This hurts us in two ways: one, the new products typically have lower margins early-on as we invest to gain trade support and consumer trial; and two, Woodbridge is a high margin brand, so when it's sales decline, we see a lot of margin pressure.

This is why gross margin percentage, excluding all of the charges discussed, has declined.

While we've been able to pick up nearly all of the margin loss in favorable operating expenses and equity income, we believe the oversupply of grapes will continue to exert margin pressure for the next 18 to 24 months, particularly for red wines.

Therefore, we expect heavy price discounting and private labels to remain significant competitive factors.

As we look at the June quarter, we're expecting the topline growth trends to continue, the gross margins to be weak due to more new products in the mix and the decision, which we discussed last quarter to move the release of our flagship wine, Robert Mondavi Winery Cabernet Sauvignon Reserve, to the fall.

On the other hand, continued productivity in operating expenses and interest expense savings should result in profit margins in Q4 that are similar to last year's quarter.

Barring further asset divestitures, we continue to expect earnings to be in the range of $1.63 to $1.78 per share, which is consistent with our prior guidance after deducting the 23 cents Caliterra charge announced in January.

Note that we now forecast Arrowood's inventory step-up charges to be about 6 cents per share for the year versus the 11 to 12 cents previously forecast, which show up in cost of goods sold.

As Bob said, after the completion of our strategic plan, we'll schedule a call in late June to provide more insight into our expectations for fiscal 2005.

Now, Bob has some housekeeping items.

Thanks, Greg.

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

Beginning at 9:30 a.m. today, until about 5:00 p.m. today, Pacific Time you can listen to a replay of this call in the US by dialing 1-800-405-2236.

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

In both cases, the PIN to access the replay is 566105#.

Today's prepared remarks, as we mentioned earlier are on our web and can be viewed, downloaded or listened to in the "Investor Relations" section under "News & Events" and "Conference Calls."

Finally, our next earnings conference call, covering the fourth quarter and full-year fiscal 2004 results is scheduled for July 29, 2004 at 7:30 a.m.

Pacific Time.

I want to thank you for your participation in today's call; we'll now open up the line for your questions.

Andrew.

Thank you sir.

Ladies and gentlemen at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS] One moment please for the first question.

Your first question comes from Dara Mohsenian with JP Morgan.

Please go ahead with your question.

Good morning guys.

Good morning.

Hi.

Hi.

I wanted to discuss Woodbridge, which week again for the second straight quarter despite some of the success you are having with new products like select vineyard series and 187 milliliter product, and strong results really in the rest of your portfolio.

So, I'm just wondering if you can kind of take me through what's going on the base Woodbridge business if it's just an issue of the comparative industry environment or if you think there's other things going on their.

And maybe talk a little bit about plans going forward to reinvigorate volumes there.

Yes Dara thanks, this is Dennis talking.

I think, if you prefer what I would advice is that you consider that over a long horizon and one, which has certainly been through cycles before like this and will come out strong as a result of this.

I would also add that it's inevitable really when you think about the market position at Woodbridge whole, a number one market position and its segment, it's inevitable that with the introduction of some of these new items coming from Australia and another places around the world and certainly domestically that, it would break us down to do some percentage of it's position in the market place.

That said, it's certainly not something that we are satisfied with and so as we think about the kinds of things that we need to be doing to position us for future success, I think that really grounded end, continuous improvement and to follow (inaudible) buying bottles, which is something that is always separated Woodbridge from the competition over time.

Continued innovation and expansion of the product line and we're seeing that now with select vineyard series and the 187 which still has a significant amount of distribution outside which will contribute to growth on the overall franchise overtime and then investment in all aspects of the marketing mix for the quarter.

So, selective pricing and promotional moves in given markets, looking at advertising and continuing on that front to develop the equity of the brand.

And I think that by polling out all the levers that are available to us we are really setting the foundation for future of success at a time when there is a lot of competitor activity.

OK.

Then some of pricing standpoint, what should we expect for the Woodbridge brand going forward?

Now this -- as Greg said, there's going to be continued pricing pressure on category we manager prices, you know, in this industry you manage your pricing in 50 countries the 50 states, at least on the domestic front.

And so, we will attach with tactical precision in each of those markets, but on balance while there's likely to be some pricing -- continued pricing pressure on Woodbridge, it's obviously are goal is to minimize that to put a floor on our pricing relative to the competitive set so that we can ultimately maintain the equity as a brand and price premiums overtime.

OK.

Great.

And if I could sneak in one more question, I just want to get update on your priority for cash as your cash flow situation improves.

I am just wondering if you guys plan to be more aggressive from an acquisition standpoint or if you've considered a dividend or a share repurchase program and where things stand there?

We have just got dividend about the dividend, the surplus program with the board level and at this point we have no plans to do anything of that nature.

We are in -- at a point in time where we need to reach, I have to take a look at our revolver as it expires in December so I'll be working on that.

But for the most part other than reducing debt and investing in the business we have no other plans, you know, the soon as I say that, I am sure some acquisition will cross the train.

But at this point there's nothing in the docket.

OK.

Thanks a lot.

Thank you, sir.

Our next comes from Jeff Kanter with Prudential Equity.

Please go ahead with your question.

Hi.

Good morning, gentlemen.

Good morning.

Just to understand Hank (ph), inventories have charges of 6 cents for the year.

I got 7 cents already booked in the first half.

Is that just rounding, I mean, we are really done, is that basically top line?

It's tied to specific areas -- volume which now -- it's actually a volume that we're moving slowly.

It's not a new inventory issue, it's an old inventory issue.

So we are about to answer it here, so it is rounding.

Have we done for good?

No, we still want to move those products.

So it may stress us about a little bit.

We are taking a look at how to handle it.

OK.

Fair enough.

Also, can you just explain -- you're wholesale inventories are about the same sequentially in year-over-year, but then you said that there was extra three days of inventory due to new products that were shipped.

I am just trying to figure out you really surprised to the upside relative to your earnings guidance, but I think I got a word with your (inaudible) from the fourth quarter?

No.

No, this is a new product situation really Jeff.

Yes.

This is actually acceleration of the new product.

Yes.

We really had a pretty good quarter.

Yes.

OK.

Fair enough.

And are you --is it Papio at all or is it too early but is Papio sourcing from Woodbridge at all or is it too early to tell?

You're trying to buy.

Yes.

No, no you mean canalization.

Yes.

Yes.

No.

It is too early, but there's certainly no indication that that's the case.

OK.

Thank you, very much.

Thank you, sir.

Our next question comes from Tim Ramey with DA Davidson.

Please go ahead with your question.

Congratulations.

Thank you, Tim.

Thank you.

On the prospect peak sellers venture I am intrigued by that.

Is the -- have you envisioned that looking three years from now, is it going to have five or six different brands associated with it.

Is it going to look sort of like KJs, you know, whatever, I can't remember whether the selected group is called the -- or is this more targeted and it is targeted to any one particular end of the market like Papio being at 499 price point?

It is -- Tim, frankly I don't have a crystal ball but my hope is that it's going to be big.

I would say this that we are going to be very strategic in terms of appealing to folks at -- to consumers at various points along the price and quality spectrum, pricing value spectrum I should say.

And it will really be responsive to significant and in cycled consumer research.

Because, I think that the me-too game is one that will not bring significant volume to the party but rather it begin around, we begin it around innovation, new ideas, new creativity, the likes of which we haven't seen historically and the likes of which will bring, I believe new consumers into the category as we're beginning to think that actually.

Will these be virtual wineries or whether be some physical development of sites and facilities as well?

Yes, there'll be opportunities to provide the greatest return to the shareholders.

So, they will be evaluated in that regard.

I take it that means for virtual wineries.

OK.

And then just with regard to SDS, you know that's -- the strong performance there is somewhat counter intuitive to me but maybe I'm just not clicking well.

What do you attribute that too as if just the quality of the wine, is it people looking for sort of a more exclusive or focus label with a single, when you'll type your designation?

I think a combination of things, really I mean just as hitting and also, so I wonder, if you hit it on the head when you talk about the quality of the wine and you take a look at the accolades, that this wine has received.

It's really quite impressive.

But I also point to the packaging, which is really quite phenomenal, and the strength of the Woodbridge equity frankly.

That has a very positive impact and so these two, kind of work for each other, don't they?

The existing Woodbridge equity is benefiting Woodbridge select vineyard series and in turn select vineyard series is through the quality of its wine, and the new consumers its bringing in to the franchise is contributing back to the existing Woodbridge equity resulting in a stronger proposition overall.

OK.

And you hit it on the head, I mean to begin with the wines and these wines have gotten great recognition across the country.

Great.

And a quick one for Hank, I mean, just a follow up on Jeff's question.

Is this isn't borrowing from the fourth quarter in someway how come we're not raising guidance for the full year?

No, we're holding our guidance for full year and its -- but its still tough market Tim.

Where we still facing a challenging quarter and we don't see a reason to change our guidance at this point.

OK.

Thanks.

Thank you, sir.

Our next question comes from Marc Greenberg with Deutsche Banc.

Please go ahead with your question

Good morning gentlemen.

Couple of questions, first relating to the Wal-Mart wine business, can you give us any update on which if any of your brands are going to be sold in Wal-Mart's neighborhood store and outlooks for price and volume in that channel?

Yes.

I don't think it would be prudent for us to talk about specific retailers and specific pricing other than to say that we will be present in Wal-Mart and participate in their growth.

Can you speak specifically to the neighborhood store concept?

Yes -- no I can't.

I think Wal-Mart could.

And that's probably the best way to approach it.

OK.

Any sense that -- that some of the lead Australian imports in the 6 to 10 range now moving up on price.

Any sense you could give us in terms of how your competition and your sales are reacting to that.

I'm sure do you think it sets up to potential for better pricing as the economy improves.

What we saw during the quarter, that the Australian import category was actually down in price by 4%, which is somewhere inconsistent with the currency relationship but remember most of the Australian visionaries have fairly long forward positions, that allow them to do things that maybe different in what's happening in this fast currency market.

So we haven't seen a relief from pricing on the Australian side, as the currency would indicate.

Well maybe just to be a little more specific then, you know, our sense is that Yellow Tail went up and that's kind of a close to straight up confidence with Woodbridge.

Does that specific to that brand and that competitor are you seeing higher pricing there and does that set up a better opportunity for Woodbridge pricing.

Yes but if you -- I would say that if you look at the ACNielsen's the last two months trend that Yellow Tail volume trend has changed from being an upward trend in more of a say the rising trend.

That was if due to prior to some other activity on that shore but if you look at the Nielsen data, it would suggest, you know, a slightly different trend for that brand over the last two months period.

OK.

Thank you.

Thank you sir.

Our next question comes from Skip Carpenter with Thomas Weisel Partners.

Please go ahead with your questions.

Yes, good morning guys.

Skip, good morning.

Hank, maybe you could help me with the clarification in terms of, first lets talk about step up, George, I think, you know, last conference call if I recall, discussion that I have with you guys, you guys were targeting the 11 cents might be in factoring kind of a 3 cents in the third quarter, now you saw that effect we did not occur what's lower in terms of Q3.

Yes it really with a very small numbers about 75, 65 and 75,000

its $74,000.

So it was so small I didn't -- experience nothing.

And so that's going top all now as you're seeing in that question being done it's just going to be likely deferred into next year.

Yes, yes.

OK.

It just so everybody understands that the step up charges are not at all related to the brand performance of Arrowood.

Arrowood is actually doing very well.

They are now related to very specific SKUs that were in inventory at the time of the acquisition.

And some of those SKUs are not moving success which we'd like in, very difficult to predict if you think about in our SKU forecasting.

So that's why we know how much step up there is to go.

Its very difficult for us to predict which quarter it will occur for this SKU related

Would you share with us, probably on which products then, are not moving?

No.

Yes they're going to be older red wines.

Older red wines, I mean if exactly but the brand is doing great.

OK.

I guess, you know, given the strength that you've seen on the topline and I guess going back to some of the other questions that were asked in the call I'm still a bit perpetual why there is such a significant stretch there in terms of kind of the earnings outlook for just the remaining quarter of this year?

Based on that, if you looking at -- kind of anywhere from a 34 cent to 49 cent quarter.

I guess what are they again I now they have a concern with regards to Woodbridge is that the key metric that you guys are kind of being more cautious with regard to why you're being such wide range in terms of earnings expectations for the fourth quarter.

Yes, let me just start with this quarter.

When we exceeded our guidance range this quarter, which was a penny to a nickel that, from our standpoint, a lot of the items that exceeded expectation were what we would characterize as below the line; as we mentioned, things like JV income, interest expense, so and so forth.

So, I don't think you should extrapolate that the base operating business was outperforming the guidance significantly.

So that would be one-time.

And due to the nature of those items, this quarter, it doesn't necessarily mean that they are going to recur next quarter and it's favorable and element.

So -- Yes, we are cautious about Q4 at this point.

We are leading the guidance range fairly broad, which we know is uncharacteristic but we want to make sure that what we're communicating is the higher degree of risk and uncertainty about the marketplace.

And again, I don't want to -- but is that risk and uncertainty in the marketplace -- is that resting -- you know, the -- I guess, in our couple of quarters of portions out of the Big Pigeons (ph) or Woodbridge.

Our Woodbridge is really critical to performance in the business for the reasons we mentioned.

It has a good margin and has significant volume.

Fortunately, we are able to offset much of that with the strong performance of Robert Mondavi Winery in private selection.

But, you know, we are -- we remain concerned about we integrating Woodbridge's growth.

Dennis referred to how we're going to do that, and because of that, we're being cautious and I think, prudent about the fourth quarter guidance.

When you look, I guess, not so much changes (ph) fourth quarter, I guess, going forward, Woodbridge, you guys just have different tactics in terms of advertising specifically, anything that you guys would be sharing with us right now in terms of how you plan to kind of look at the advertising vis-à-vis kind of the Woodbridge brand, I guess, going forward?

Yes, for advertising, we remain a component of the mix and one component of the mix in addition to every other kind of labor that we can pull to accelerate volume on Woodbridge.

But, I do believe -- we believe that the management team that -- there is a very compelling story to tell about Woodbridge, that's unique in its segment, the fact that it's a real winery, the fact that you parallel-edge these lines, separate grower launch, we really, in effect, fact that the small winery tradition on a pretty grand scale, the small winery tradition that you'd expect to see out of a winery.

And that is very compelling differentiating story relative to our competition in one that we think have pretty good chances is compelling to consumers.

So, I think advertising and other mechanisms that we have will continue to be part of the Woodbridge marketing mix.

And specifically, do you feel it as the most efficient way to communicate, that is, thousand (ph) or is there going to be a rough dependence in terms of television, I guess, going forward and, you know...

Yes.

I think less dependent on television.

I don't consider that in this environment to be the most efficient way.

Keep in mind that, you know, for that -- for advertising to be effective, you still have to execute at the point of purchase, despite activity and so forth.

And -- so, you have to have a kind of all cylinders going and in an environment where small population of the American population is consuming like, you really want to be a target and focus as you can possibly be in getting that message out.

So, I think some other vehicles rather then TV allow -- afford you that opportunity to be more efficient.

Thank you.

Thank you, sir.

Our next question comes from Brian Chait (ph) with Clarion Capital.

Please go ahead with your question.

Good morning, gentlemen.

I like some insight, if you can give us into, you know, foreign currency, how this has helped to individual results and, you know, in the past and also how you see this going forward?

OK, Brian.

This is Bob.

What we are doing in foreign currency is we have hedges in place.

Clearly, it's a matter of policy to protect the kind of three key areas: receivables that we have in euros, receivables we have in Canadian and payables we have in euros.

So, we are going to be hedged out at any given point, you know, six months or so before the contracts.

So we have -- you know, we're not -- obviously, not in the business to trying to make money in the foreign exchange market.

We are trying to provide some certainty to our income statement and minimize risk.

Also, essentially, this pretty deserved -- freely sizeable glass folding up in wine, in France, due to demographic changes, do you see an impact on this at all?

Right.

I think the comments that I made earlier in my remark is about the global oversupply of wine and I think it's where I would resist that.

People are asking whether it's in France or Australia or Chile or California for that matter.

I think the wine industry environment has changed in the past because it's become more globalized and in other areas, it can be market in the US.

So, I think this is an important distinction for people to make when you think about the industry going forward.

I don't think you should automatically conclude because the US economy is picking up that the overall wine business is going to improve or get better in large step because I think the oversupply feature, particularly for wines under $15 is creating a very high level of competition discounting, that's pretty merging pressure on.

So, I see the French surplus, you know, into part of that overall construct relative to the industry.

France, per se, it is not concerned of the global oversupply, you know, as a factory does.

OK.

Thank you.

Thank you.

Your next question comes from Bryan Spillane with Banc of America Securities.

Please go ahead with your question.

Hi.

Good morning, guys.

Good morning.

Good morning.

Just a couple of quick questions.

The first is if -- I guess, Dennis, if you could fill us in on where you stand in terms of percentage of distribution on your new products.

Just curious to see how equally distributed they are, penetrated they are.

The second is if you guys could break out just some idea of how much new products generated or contributed to your profit growth this year?

And then finally, for Greg or for Hank, looking at the margin pressure here in -- so far in mid-year, it looks like even, maybe, continuing into the fourth quarter.

Speak about the next fiscal year, I'm just curious that how you guys are thinking about on cost reductions, whether it's -- how much you are beginning this -- how much you'll be able to see a flow-through in lower fruit cost and then also now you guys have spent quite a bit of time working on efficiencies in lowering your production cost, and is that a feature or something that will begin to think about as we look at our models into the next fiscal year?

Thanks.

Well, I'll take the first question, Greg, and let's say, Bryan, we're probably at third to -- probably about at third of the way to our distribution goals on our new products.

So, there's plenty of opportunity that continue to build that out over the next couple of quarters?

Both domestically and overseas.

OK.

So I think on -- that the new product process percentage, Brian is not one that we're going to be willing help you out on because we think that's somewhat confidential in place. .

So, now actually, I'm thinking just and how much did it contribute to your sales growth?

Not in sales growth this year.

So, here is the way to think about it.

Generically that if we ended growing it at 4% this quarter.

You can sort of think about the Robert Mondavi Winery and Private Selection growth was pretty significant where we felt pretty good about that, that's more, degree that offset the Woodbridge negative 2% growth.

The increment could be attributed or more or less to new product and imports.

So, it was in another of it self it was a very significant piece of that total in incremental growth.

OK.

As we indicated at lower margin in our investments.

OK.

With regard your comp sales and mostly done, we are -- remember Brian that -- and again on the P&L from an inventory standpoint is from two years ago, so I too got probably couple more years, before we're start seeing the benefits, of the at the efforts we took last year, we'll see a little bit next year because Woodbridge cycle is more quickly, that's sort of in those projects that's a lot of couple more years.

And we have identified those savings, we've affected most of those but we're just in that inventory mode, where it will come out of the ground for few years.

So, it won't be a big factor in fiscal '05.

No.

OK.

You know, I think that -- I'll be a little more, I guess clear and cut about it -as I -- I think we had achieved our cost saving initiatives has outlined, we had visibility in those long term of production size and those will require some significant, innovation into eagerly group quality with our wines, but as we've indicated that you take that period of time to roll through inventory that Hank is suggesting in there, there is no operating way to speed that effect us but, I just want to be clear that we have implemented that program and we feel pretty, growing that, that's going to be out there in fiscal '06, fiscal '07 and fiscal '08.

OK.

So just to kind of out closer loop on that and just I mean its seem to be, you're incrementally little bit more cautious about the fourth quarter and it seems to me, it's the margin pressure and the margin pressure is really driven a lot by the mix because Woodbridge didn't performed quite as well as you thought and is that fair to say first and second thinking about 2000 in fiscal '05, is it sort of getting Woodbridge stabilized but we're growing a little bit, really the key in terms of the swing factors on margin?

You know, I think those are both fair characterizations.

Brian, I think what's Dennis was referring to, is some sort of an industry issue, well certainly a company issues that you know we don't think long-term to the way they continue to grow and achieve growth in that category is through price reduction and price discounting.

And that a brand like Woodbridge should have the ability to invest back in its brand equity and overtime and in some of the cost reductions that we have put in place for Woodbridge should allow us to have that margin, to continue to stay in that sort of brand building and makes sense for a consumer product like Woodbridge.

In the short-term, we're not there yet to be able to offset those investments that, you actually do more brand building that Woodbridge and I believe the industry has to do more brand building around the category to really pull consumers in, as opposed to continue the price discount and push products.

Sure.

That's great.

Thanks, guys.

Thank you, sir.

Our next question comes from Marc Cohen with Goldman Sachs.

Please go ahead with your question.

Hi, good morning guys.

Good morning, Cohen.

Good morning.

Greg, I think you answered some of this but -- I'm having trouble really understanding clearly what you see and just sort of sequentially here as worsening in the atmosphere and coming up with the challenges specifically for Woodbridge its sounds to me to like you feel today that whole industry supply situation actually it is marginally worsening you did it, not too long ago, number one.

Number two that the price competition is worse and number three that you're about to unload a pretty serious marketing effort, behind Woodbridge is going to depress margins?.

Can you just ......

Let me comment on the first two.

And I think your - you're correct to pick up on the term here and from what we've said in our last call, we were looking at Ag supply over hang to be somewhere, we thought in the 6 to 12 months horizon.

So, we've changed.

Since, I call, two things of change that have changed our thinking, about it.

In addition to observing, what is continuing to happen in the market?

The first thing is that there was a adjustment to the Californian grape harvest number upward, so that it came back up to a little bit over 3 million ton, - so it was not as low on numbers, we thought relative to the earlier call.

And second, probably more important is the information that we -- that we've look at from the standpoint of us.

The Australian grape harvest - as we guessed that Australian grapes are going to be priced down between 5and 10% below where they were, the prior year.

So, that means the grapes that are made out of wineries (ph) for Australia, will come to the market in May '04 and probably through '05.

We think those two factors have made us view a differently the degree of competition is likely to be out there from the over supply standpoint.

I'll let Dennis -- and we kind of factored that into our planning.

So, Dennis can comment on the advertising, the costs about brand building and advertising, around Woodbridge, which we do think as our forte.

Yes.

I -- frankly, I think -- simply repeat what I said earlier, is that pricing that Woodbridge stands to benefit given its size in market and its equity with consumers and with the trades and recalls for that matter.

But wherever stand to gain from investment and in great equity and in trade promotion program.

So, I think its fair to characterize that we remained committed to investing in Woodbridge, as we've remained committed investing in all of our programs.

So, Denis, I mean, it sounds to me like you're a describing a pricing problem for Woodbridge and your answer to it is, to invest in advertising and display.

I mean can you just comment it that for us because it's very ---it's really not clear that, what your solution is?

Yes, so the solution is multi-prone.

But the solution overtime as Greg has alluded to, is not to continue to the best prices and lead this segment down into a non-profitable segment.

Or we will build, continue to build the equity of Woodbridge, that would allow us to demand a price for stable price point to expand the product line and look at other assets of the marketing mix, whether its whole relations programs, packaging programs and so forth to continue to develop the brand.

I guess --- my final question on this would be, what is the price gap between Woodbridge and its Australian competition today versus 6 or 12 months ago and what are you thinking this lower grape pricing in Australia is going to do to that price gap?

And part b would be, why are these display events in advertising events going to be enough to overcome but looks to be a pricing problem?

Well, I think there is couple of answers to that.

One is that, overtime Woodbridge has been able to command the price premiums, over competitors and gain shifts and so we're doing.

And that -- as Greg alluded to you, part of what we're addressing is kind of our cost structures, on across the company to enable us to be more competitive on that front.

And finally, I would say that at some point, on the Woodbridge business, there's not a generic answer, if you will to how you'll handle in this case your reference to the Australian on a price point of rather, it's a market-by-market plan, and every market has a different price gap.

We believe that overtime through investment and equity, we can afford a certain price premium relative to have competitors from many more around the world.

You know Marc, I think, we said early in the call, that there are certain price points, we're unwilling to go to, and we'll be discount at time but there are price points but not willing to go down to, and our competition has been willing to go there.

And if you go into any of the major retailers, you look side-by-side with Woodbridge to see Woodbridge at a specific price, we see the competitor at $1 less on a 1.5 maybe $2 less it's a 1.5.

And that is something that we're going to continue to see.

The only way, we can improve margin therefore, because we don't want to play that game, to take it out of cost and as we said, it doesn't happen overnight.

It's going to take us about another, especially, a Woodbridge product is a quickest because it turns the fastest and so if you're leasing -- you are out, before some of these costs programs will help that margin performance.

So, in the meantime, we're just going to talk you through this and we think that the push that the industry is been doing is destroying some of the equity, in some of these brands, and we think a poll strategy, we still believe if that's appropriate, we may spend the money differently, in that poll strategy than we have before but we think that's important to differentiate our sales and give the consumer that right to buy the brand, (inaudible).

But just going to your stores and look to what's on the shelf and you'll see, what's going on with all the competitions.

It's a buck or two -- $1 or less than we are.

And year ago that buck or two (ph) was -- $0.5 to $1.

A year ago, it was the couple of brands now its 4 or 5 brands.

What was the same gap?

4, 5 big brands with better buying space, able to buy space and able to buy distribution.

So that gap has --- well, actually that the branded a year ago its was a buck less than that in our $2 left, same going down with dollar and they've been, specific gap been replaced by the (inaudible) of the world etcetera, with some of the new brands at a buck less.

So Yes -- I said, its some of those brands that actually got less become probably away from us in the last year.

OK.

Great.

Thanks.

Thank you sir.

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

If you're using speaker equipment, we do ask you to please lift your handset, before pressing the numbers.

Our next question is a follow-up question from Marc Greenberg with Deutsche Banc.

Please go ahead with your questions.

Hi guys.

For have -- going to pickup much pricing and a little bit and ask a few more, in terms of the issues that you're outlining around, what's increasingly sounding like a secular decline in wine prices.

Can you discuss, whether or not you think this has anything at all to do with scale issues, the fact that your portfolio in relative terms is smaller than the gallows of the constellations of the world?

Yes.

Let me first comment of the secular decline in wine prices.

We'll be thinking about differently for wine that are sold in supermarkets and for high-end wines and wines sold in restaurants and shall meet the highest end of the market, because I think the oversupply pressure is much greater on the wines, that is sold in a match framework and for very strong luxury brands, such as, Opus one for instance we've really haven't seen price pressure, to the same degree.

So I think about those differently, in that case, but I'm answering not the question, from the company's standpoint and then trying to talk about scale and that if we get back to our cost savings initiatives and what we believe we can do with Woodbridge cost structure the ties into the end of the strategy, Dennis has outlined is - Woodbridge has had a relatively high cost structure over the last couple of years because of its strategy to source through long-term contracts that now allow us to participate in stock market purchases and lower product costs in the short-term.

We've been set with a higher cost structure then some of the competitors, particularly Australian competitors who have had not just low economic costs but the benefit of currency.

Those factors, we believe, are coming back into line because Woodbridge has put in place a cost savings' program that will develop some significant cost reductions over a period of time and the Australian currency at the same time is putting itself in fact more in a framework that's realistic vis-à-vis as ours.

So if you look down the road three or four years then we think Woodbridge would be on an equal playing field with the major competitors from a cost and a quality standpoint and it has a very strong franchise in the US in terms of being able to execute its brand.

So at that point the (inaudible) of having an advertising strategy and a brand building strategy, we think, will create a competitive advantage for Woodbridge, which remains, I want to remind everybody, remains the single largest revenue brand sold in supermarkets in the US.

Just a follow up then, Greg, in terms of thinking about, sort of industry macros and how you manage your business, I give you guys tremendous credit for managing the cost side better.

But is this the kind of thing where we should reasonably expect that overall revenue per case, or whatever measure you want to use, for the US wine industry is going to be declining 2% to 3% a year despite stable volumes and upward pressure on imports?

Our view of the math in the supermarket segment is that there will be continued price pressure over the next 12 to 24 months due to the -- again in our model -- due to the overhang of the great surplus as opposed to the economy, which is improving, and that's the point that I am trying to make is, yes the economy is improving, demand is good but there are so many low cost grapes and wines out there that through both, additional discounting for producers try to get their product on the shelf and trade down to new products being priced at lower levels, we would assume that the effective average price of wine will continue to decrease, over the next 12 to 24 months in those channels.

Can I just ask one more follow up, and should I infer that the high end business, the good-on-trade business is more constructive on pricing, not only stable but potentially improved pricing, as the economy gets better, travel and tourism picks up, are you actually hopping to achieve some pricing power there?

No we don't have a visibility through Nielsen to read that business nearly as rationally in terms of data but we do see more strength in the on-premise channels and it -- in a sense, the brand power, particularly at the very high end in that category can be quite strong so, our expectation is that there would be incredibly less price discounting and perhaps some opportunistic price increases, where you can really support that price increase either through scarcity or demand for that particular product.

I don't think you are going to see across the board increases for wine's priced over $25 just because the economy is improving, but I think there is less structural price pressure.

Thanks very much.

Thank you, sir.

Our next question comes from Dara Mohsenian, with JP Morgan.

Please go ahead with your question.

Hi.

Can you guys give us any sense of how April's depressions have gone so far this quarter?

No.

We can't and that's not something that we would comfortably be able to do on it current basis.

OK.

Fair enough.

Thanks.

Thank you sir.

Gentlemen, at this time we have no additional questions.

Please continue with any further statements you wish to raise.

If there are no other further questions, I think we're to conclude the conference call.

Thank you sir.

Thank you gentlemen.

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