Constellation Brands Inc (STZ) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Robert Mondavi Q4 fiscal year 2004 conference call.

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

Following today's presentation, instructions will be given for the question and answer session.

If anyone needs assistance at any time during the conference, please press the star followed by the 0.

As a reminder, this conference is being recorded, Thursday, July 29, 2004.

I'd now like to turn the conference over to Mr. Bob Phillipps, please go ahead, sir.

Good morning, this is Bob Phillipps, Treasurer and Vice President of Investor Relations, and I want to welcome you to today's conference call to discuss Robert Mondavi's fourth quarter and full year fiscal 2004 results.

Joining me today are Greg Evans, our President and CEO, Dennis Joyce, Executive VP of Sales and Marketing, and Hank Salvo, our Executive VP of Finance and our 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 MDMA in our annual report on form 10K for a discussion of the risks of the wine business.

To help you follow this call, we posted a copy of our prepared remarks on our web site, www.robertmondavi.com early this morning in our Investor Relations section.

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 will itemize some of the things excluded in GAAP, such as inventory step up charges, inventory or fixed asset writedowns, severance costs or 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.

For the next 40 minutes, we will cover three main areas.

First, we'll review the industry and Robert Mondavi's performance during the quarter.

Second, we'll summarize our performance during the fiscal year and third, we'll provide some context for the guidance we published about our fiscal 2005 on June 30.

Hopefully, we can limit the call to an hour and now Greg will get us started.

Thanks, Bob.

Let me start with the industry performance per AP Neilsen, U.S. food drug and liquor store data.

For the 13 weeks ended July 3, 2004.

Sales of wine in scanning channels slowed when compared to the growth rate during the March quarter.

Domestically-produced variety of wine volumes grew 1% in the June quarter, compared to 3% in the March quarter and 2% during the last 52 weeks.

Imports grew 10% in the June quarter, consistent with the 12% growth posted in the March quarter and 11% during the last 52 weeks.

The blended volume growth rate was 3% in the June quarter compared to 6% in the March quarter.

And 4% during the last 52 weeks.

Pricing in food, drug and liquor stores firmed up, rising 1% for both domestic wines and imports, although Australian wine prices declined 52%, despite a currency which has risen 6% in the last year.

Now let's move from the industry to our portfolio.

Although we reported a revenue decline of 2% from last year's quarter, we were nonetheless encouraged by the wholesale depletion trends for our core brands as well as new products.

Consolidated wholesale depletions grew 5%, reflecting solid performance from Robert Mondavi Winery and Robert Mondavi Private Selections.

Robert Mondavi Winery performance was particularly notable given that it overlapped a strong 8% growth comp from the year ago, but the brand surpassed without the benefit of the latest vintage of Cabernet Sauvignon Reserve, which has been moved to a fall release schedule.

And we were encouraged by this act that Woodbridge depletions were even with last year's level.

Q4 earnings were 26 cents per share, well above last year's 5 cents per share.

However, there were a number of items included in the GAAP earnings worth mentioning.

In the quarter, there were 8 cents per share in asset impairment charges included in operating expenses and 1 cent in charges included in equity income.

Last year's GAAP earnings number includes 29 cents per share in charges that are itemized in a table in a copy of our prepared remarks published on the web.

Excluding these items as well as last year's inventory step up charges, we earned 35 cents per share this year versus 33 cents per share last year.

Finally, we continue to make progress in improving asset utilization.

While total assets grew 2%, we finished the year with nearly $49 million in cash, which is invested in short-term money market securities.

The significant build up in cash is due to more disciplined capital spending and the progress we're making in divesting nonstrategic fixed assets and reducing inventories.

Excluding the cash balance, total assets declined 3%.

With that, I will turn over to Dennis to talk about the performance of our brands.

Thank you, Greg, and good morning.

As Greg said, total company wholesale depletions for the quarter ended June 30, 2004, grew 5% over last year.

Total company shipments grew 2% to 2,653,000 cases, which left wholesale inventories at 48 days compared to 51 days last year and 50 days at the end of March.

This includes about 1 extra day of inventory, excuse me, due to new products that were shipped into the trade at a greater rate than they were depleted.

Average price per case declined 4% to $44.71 due to heavier promotion spending in support of Robert Mondavi Private Selection and Woodbridge and the shift of the 2001 Cabernet Sauvignon Reserve release from spring to fall.

As a result, consolidated net revenue declined 2%, $118.6 million.

Turning to the Robert Mondavi Winery brand, we were pleased with a fifth consecutive quarter of depletion growth.

Robert Mondavi Winery wholesale depletions grew 6% as a result of our efforts to focus distributor priorities on a few key wines such as our Napa Cabernet and Fume Blanc.

And making way for the September release of the 2001 vintage Cabernet Sauvignon Reserve, which, by the way, is a blockbuster of a wine, Robert Parker awarded it 95 points and the reaction so far from the trade has been very positive.

We've already presold much of this highly-anticipated wine.

Back to the quarter, shipments were flat to last year at 81,000 cases and average price per case was $160, excuse me, 4% below last year.

Which is entirely explained by the later release of the Cabernet Sauvignon Reserve.

Net revenues declined 4% to $13 million.

Robert Mondavi Private Selection had yet another good quarter, wholesale depletions grew 12% above last year, driven by strong results and growth rate 17% in that channel and liquor stores plus 13%.

Much of the growth for the brand is coming from secondary varietals such as Pinot Grigio, Pinot Noir and Johannisberg Riesling as Private Selection has focused on gaining distribution for these varietals.

And this strategy has helped bring the core varietals along as well.

The shipments grew 13% to 428,000 cases.

Net revenues grew 7% to $23.9 million on 5% lower average price per case and in U.S. scanning stores, volumes grew 7% while price per case declined 1%.

Private Selection really delivered on all cylinders in a tough category, which comes as no surprise given its strong packaging, quality of its wine and strong branding.

And recent consumer research indicates that Private Selection is one of the top two brands in its segment and perceived image, quality and value.

Turning to Woodbridge, Woodbridge depletions were even with last year.

Depletions of core Woodbridge varietals like Cabernet Sauvignon and Chardonnay posted growth during the quarter, were offset slightly by White Zinfandel and Sauvignon Blanc.

Shipments declined 4% to 1.9 million cases which leaves wholesale inventories in a good position.

Net revenues declined 9% to $61.6 million, and in U.S. scanning stores, Woodbridge volumes declined 7% while price per case grew almost 2% due to the inclusion of Woodbridge Select Vineyards series.

Woodbridge had nice growth from convenient stores plus 8%, where the 187 milliliter single serve package size has been a big hit.

This is a good demonstration of channel management relative to the introduction of new items.

The stabilization of the depletion trend line appears to be the result of a number of factors, such as increasing recognition of Woodbridge's great and consistent wine quality, exceptional sponsorships and tie-ins and brand extensions.

Just by way of example, we increased our efforts to leverage some of the awards and recognition Woodbridge has received in numerous wine competitions and in numerous reviews such as the 2004 San Francisco Chronicle wine competition, the San Francisco international wine competition and from The Washington Post, the USA Today and New York Daily News.

During the quarter, Woodbridge sponsored a 13-part PBS series called Barbecue University with Steve RAKELAND.

This is the second year of our promotion with Steve RAKELAND.

And has been extremely successful and will continue into the summer.

Woodbridge Select Vineyard Series is finding an audience with consumers who reflect a different flavor profile at a slightly premium price.

Velocity remains strong.

Recognition of the quality and the bottle is building.

Several wines won medals at the 2004 L.A.

County Fair and at the Pacific Rim International and San Francisco Chronicle wine competitions.

And there remains a significant opportunity for additional distribution build out so we're focused on that.

Finally, single serve Woodbridge 187 milliliters are doing well.

Importantly, the wines are priced as a premium to the competition.

Today, distribution is skewing heavily towards non-AC Neilsen measured channels, and so here, too, as with Select Vineyard Series, there is additional opportunity for additional distribution build out.

We launched a fifth variety in the series, Pinot Grigio, in May, and it's off to an excellent start.

Wholesale depletions of our other California brands grew 154% over last year, led by strong demand across the portfolio.

As you recall, this group contains a wide array of brands from Arrowood and Byron in the luxury segment to wines produced by Prospect Peak Cellars, who's mission is to develop innovative new wine brands that attract new consumers to wine.

Since many of our domestically-sourced new product initiatives are reported under "Other California," volume growth is strong.

The average price per case reflects a significant mix shift toward high growth, popular premium wines.

Shipments grew 170% to 174,000 cases, while net revenues grew 66% to $9.2 million.

Again, Papio, Prospect Peak's first product launch, continues to grow sales momentum and repeat purchases.

The fun packaging design is creating trial and the flavor profile is bringing people back for repeat purchases.

During the quarter, the wines began to receive their first accolades.

You will notice a trend here.

And in the case of Papio, all three varieties won silver medals at the 2004 San Francisco Chronicle wine competition.

Finally, import depletions declined 14% from last year, due primarily to weak Chilean wine sales.

Shipments declined 10% from last year to 115,000 cases while revenues declined 3% to $8.9 million.

In closing, this quarter's results point to the value of a balanced portfolio and an integrated approach to marketing and selling, promotional support to protect share, and advertising to build brand equity.

With that, I'll turn to Hank who will cover the financials.

Thanks, Dennis.

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

This quarter's balance sheet included $111.8 million of these leases.

Last year's fourth quarter included $113.5 million.

After the adoption of FIN 46, last year's fourth quarter EPS was restated to 5 cents versus 6 cents as originally reported, due to interest expense recorded on the consolidated debt.

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

Now, let's talk about the quarter.

Q4 net revenues were $118.6 million, 2% below last year.

Cost of goods per case declined 10% to $27.37 during the quarter from last year's level of $30.30.

This last year's number included $749,000 pretax in [INAUDIBLE -- LOW VOLUME] inventories step up charges. $4 million in inventory writedowns and $1.2 million in great contract buyouts.

The apples to apples comparison shows cost of sales -- cost of goods per case declining 2%.

Gross profit per case grew 6% to $17.34, $16.30 last year.

Gross margin grew 380 basis points to 38.8% from last year's 35%.

However, excluding last year's aforementioned charges, gross profit per case declined 7% and gross margin declined 110 basis points to 38.8%.

Operating expenses declined 4% to $35.4 million or 29.8% of net revenue, decrease of 60 basis points from last year.

This year's number included $2.2 million in asset impairment charges taken in anticipation of upcoming asset divestitures.

Last year's number included $2.9 million in employed severance charges, partially offset by $1.2 million gain on the sale of fixed assets.

Including this year's impairment charges, last year's charges and gains, operating expenses declined 5% and operating expenses as a percent of net revenue declined100 basis points.

Operating income grew 94% to $10.6 million compared to $5.5 million last year, and operating margin was 8.9%, 440 basis points above last year's 4.5%.

Including the aforementioned charges and gains in this year's quarter and last, operating income declined 3% to $12.8 million and was 10.8% of net revenue.

Equity income from the joint ventures was $659,000 compared to $1.5 million last year.

This year's number included $226,000 in charges related to the restructuring of our Australian joint venture production service agreements.

Last year's equity income included a one-time $248,000 credit.

EBIT, or earnings before interest and taxes, grew 73% to $12.1 million versus $7 million last year, and EBIT margin was 10.2% of net revenue versus 5.8% last year.

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

Excluding this year's charges and last year's charges and gains as noted previously, EBIT was equal to last year's $14.5 million but EBIT margin grew 300 basis points to 12.2% of net revenue.

Interest expense declined 9% to 5.3 million as a result of higher cash generation during the second half of the year, which left our revolving line of credit facility balance at 0 for the year as well as the benefits from an interest rate swap from fixed to floating on one of our private placements.

Capitalized interest expenses were $86,000, down from last year's $136,000.

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

December, California manufacturing -- manufacturers investment credit or MIC, expired.

As a result we adjusted our full year tax rate provision from 36.5% to 36.6%.

Which meant we had to force a difference into the fourth quarter at a rate of 37%.

For fiscal 2005, we estimate the tax provision to be 37.5%.

Net income was $4.3 million compared to $768,000 last year.

And EPS was 6 cents compared to 5 cents last year.

On a non-GAAP basis as we previously defined, net income grew 6% to $5.8 million and EPS of 6%, 35 cents.

Q4 2004 balance sheet was $978 million, $17 million or 2% larger than last year due to buildup of cash.

Inventories declined 1% and net PP&E declined 4%.

As Greg said earlier, the balance sheet declined 3% in size, excluding cash.

Operating cash flow of $39.4 million and capital spending was $4.3 million.

Full-year Cap Ex number came in about $9 million below our guidance due to timing.

There will be some carryover into fiscal 2005; however, we still expect spending in the 25 to $30 million range in 2005.

Now, will let me summarize some of the key full-year numbers.

Wholesale depletions grew 4%. [INAUDIBLE] grew 4% to 10.1 million cases.

Net revenues grew 3% to $468 million.

Average price per case declined 1% to $46.39.

Cost of goods sold per case declined 3% to $28.13.

This year's number included $1.6 million or 16 cents per case of net charges.

Last year's number included $16.1 million or $1.66 per case in net charges.

Excluding the net, the charges in both years, the cost of goods per case grew 2%.

Gross margin grew 150 basis points and 39.4% of net revenue.

Including inventory step-up and other net charges, however, gross margin declined 180 gross basis points to 39.7%.

Operating expenses declined 1% to $130.7 million or 27.9% of net revenue.

There were $1.4 million charges in net charges in this year's number as well as $2.1 million in net charges in last year's number.

Including these items, operating expenses declined .5%.

GAAP operating income grew 35% to $53.5 million, and operating margin grew 260 basis points to 11.4% of net revenue.

EBIT grew 26% to $61.7 million and EBIT margin grew 240 basis points. 13.2% of net revenue.

Including the aforementioned net charge in each year, EBIT grew 3% to $71.3 million and EBIT margin declined 10 basis points, 13.2% of net revenue.

Full year net income grew 53% to $25.6 million and EPS, 51% to $1.55.

Including the net charges in each year, EPS grew 6% to $1.91.

Full year operating cash flow was $83.5 million, backing out $16.5 million in Cap Ex, the free cash flow number was $67 million.

Now Greg will cover our outlook for the next year.

Thanks, Hank.

This is basically the outlook for fiscal '05.

On June 30 we issued a press release containing our financial guidance for 2005.

In it we said we expected earnings per share would range from $1.80 to $2, excluding the effect of any further asset divestitures, based on projected sales volume and revenue growth of between 2 and 4%.

In today's press release, we listed a number of items explaining why Q1 fiscal 2005 earnings would be approximately 27 cents per share below last year.

I'm not going to cover these, but they are detailed in both the press release and a table in the prepared remarks of this conference call posted on our web site.

The overall fiscal '05 guidance reflects our view that while there has been a chronic oversupply of grapes in the old world for several decades, the oversupply in the new world is a relatively new factor based on expectations of a continuation of demand growth trends from the late '90s, but in hindsight we're overly optimistic.

We think that the oversupply will last a while and will create margin pressure across a number of the luxury and lifestyle price segments.

However, we're optimistic about our position as we look ahead because we have compelling assets.

Woodbridge is still the most popular wine sold in America as measured by dollar sales in scanning stores.

Robert Mondavi Private Selection continues to show strong growth in a very competitive segment, and consumers are increasingly viewing Private Selection as the category image and quality leader.

Robert Mondavi Winery is the number one revenue brand above $14 per bottle and uniquely able to generate large volumes across multiple price points.

And helps comprise what is arguably the world's most compelling luxury wine portfolio, including brands like Opus One, [INAUDIBLE], Sena, Byron, Luce and Arrowood.

So, we are focusing on consumer needs that help us maintain our leadership position in offering top quality, high value wines and exciting new products.

Our fiscal 2005 plan reflects our strategy to invest more heavily in building equity for our brands in order to reduce reliance over the long-term on promotional spending to drive growth.

We strongly believe that the strength of our brands enhances value for all Robert Mondavi shareholders, and we continue to work diligently on ways to improve financial returns through a combination of achieving efficiencies and divesting low return assets.

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.

Pacific time today until 5:00 p.m. today, you can listen to a replay of this call in the U.S. by dialing 1-800-405-2236.

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

In both cases, the PIN to access the replay is 11002879.

Today's prepared remarks can also be viewed, downloaded or listened to in the Investor Relations section of our web site under news and events and then conference calls.

Finally, our next earnings conference call covering our first quarter fiscal 2005 results is scheduled for October 21, 2004, at 7:30 a.m.

Pacific time.

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

We will now open up the line for your questions.

Thank you, sir.

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

If you have a question, please press the star followed by the 1 on your push button phone.

If you would like to decline from the polling process, press the star followed by the 2.

You will hear a prompt acknowledging your selection.

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

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

One moment, please, for the first question.

Tim Ramey with DA Davidson, please go ahead with your question.

Good morning.

Good morning.

Good morning.

Hank, you mentioned in your remarks that you were transforming the Australian JV into production service agreements.

Can you fill out a little bit what that means?

Is this the end of the Australian JV?

Tim, it's Greg.

The -- the restructuring in that joint venture is invisible to the trade and the consumer.

Basically what we've done, because the volumes are fairly small at this point, is to disinvolve the joint venture structure, which involved two different companies, two separate boards and so forth, and make it an intercompany production service agreement.

So, it doesn't change the nature of what we're trying to do from a brand standpoint or a relationship standpoint, it really just changes the corporate form of that venture and will create a more efficient structure for us both to go forward.

Greg, is that in anticipating making the -- the business bigger or smaller or about the same?

It allows us more flexibility to -- to really move that business in either the California or the Australian brand in any direction, you know, in which we want it to go.

It doesn't affect at all the business prospects.

Okay.

And then on Private Selection's decline in average selling price per case, is that due to the mix shift in varietals?

Or due to promotions?

Or how would you describe that?

It's really a function of the competitive environment and the marketplace.

So, it's really promotional activity-driven.

Okay.

And, Dennis, would you mind saying how -- how big Papio is now?

It's -- it's pretty big and getting bigger!

It's -- it's --

Bigger than a baboon, I guess.

Well, it's a six-figure number.

And Jamie and distribution rep will be not only here in the U.S., but in other countries around the world.

So, what we're excited about is the fact that it is truly becoming a global brand pretty quickly.

And I will tell you that its sales velocity, given its distribution rate, its sales velocity is quite significant compared to other new products that we've tracked over time.

So, we anticipate that as distribution builds out, as that sales velocity holds, we will have a pretty sizeable business on our hands.

Are you still on track for five or six brands by the end of the calendar year?

I think you were talking about from Prospect Peak.

We had a combination of brands that are coming from Prospect Peak as well as from our Canopy Management Group.

So, the answer to that would be yes.

Thank you.

Ladies and gentlemen, if you there are any additional questions, please press the star followed byte 1 at this time.

If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

Looks like we have a follow-up question from Timothy Ramey.

Please go ahead, sir.

I guess this is my call here!

You're the only one listening, Tim! [ Laughter ]

How big is the -- how big is the revenue shift for -- for the Robert Mondavi Cabernet Sauvignon Reserve?

You know, out of -- out of fourth quarter and into first quarter?

Can you quantify that at all?

That may take us a moment to get there, Tim.

It's -- it's -- it's not entirely going to be first quarter.

Because it's late fall.

But we can certainly pin down the fourth quarter shift.

Okay.

But it's -- is it a material -- I guess maybe you will get back to me on the number?

Tim, for the brand it was material.

For the total company it -- it was not material.

Okay.

It was about -- about $1 million of revenue.

Got it.

And, you know, I noticed, not trying to open any sores, of course, but you -- you referenced Parker, you referenced several gold medals, you didn't reference Wine Spectator in any other sort of individual evaluations of product.

It seems there is kind of a ongoing standoffishness between the -- between Wine Spectator and your organization.

Am I wrong in thinking that?

Yes, I think you are wrong, Tim to tell you the truth.

Listen, when you get a 5-point score out of Robert Parker, that's something we would choose to highlight.

We continue to have a healthy relationship with the Wine Spectator.

We participate in their events.

There are some wines that we sent to them for review.

Others that we don't.

And we will advertise with them on some of our brands in the future.

So, no, I -- I would characterize it quite to the contrary.

It's quite a healthy relationship right now.

Thank you.

Bryan Spillane with Banc of America Securities securities.

Please go ahead with your question.

Hi, good morning, guys.

Good morning.

Just a question on cash flow.

You guys are in a pretty good cash position here at the end of quarter and have been doing a good job of driving free cash flow.

Can you just give us an idea of, you know, what you see as uses for cash and more specifically are you considering it all, you know, potentially a share repurchase in the future?

Bryan, you know, we've got some things we're considering and what we'll be taking to the board, but I can't get into it anymore more that.

What I will tell you is that we are headed into our harvest season and last year our -- our -- I think our biggest -- call it deepest red in our line of credit was about $65 million.

So, we -- we will -- we anticipate using this cash to start paying our growers as harvests start coming in.

But to your point, we are looking at different prospects for it.

Okay.

Great.

Thank you.

Mr. Philipps, there are no further questions at this time.

Please continue with any closing statements.

Okay, we don't have anything else.

I guess we will conclude the call.

Thank you.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the Robert Mondavi Q4 fiscal year 2004 conference call.

If you would like to listen to a replay of today's conference call, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11002879.

Thank you for participating.

You may now disconnect.