Constellation Brands Inc (STZ) 2005 Q2 法說會逐字稿

Hello, and welcome to the Constellation Brands second-quarter earnings release conference call.

As a reminder, all participants will be in a listen-only mode.

There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS).

This conference is being recorded.

If you have objections, please let us know now by pressing star and then zero.

Hearing no objections, I would like to turn the conference over to Phillippa Dworkin.

Ms. Dworkin, you may begin.

Thank you.

Good afternoon, everyone, and welcome to Constellation's second-quarter conference call for fiscal year 2005.

This is Philippa Dworkin, Senior Vice President of Corporate Communications and Investor Relations.

With me are Richard Sands, Chairman and Chief Executive Officer, and Tom Summer, Executive Vice President and Chief Financial Officer.

By now, you should have had an opportunity to read our media release, which was issued earlier today and has been furnished to the SEC.

This conference call is intended to complement the release.

During the call, we will discuss financial and statistical information on a GAAP basis and on a comparable basis.

Reconciliations between GAAP and comparable basis measures are available on the Company's website at www.cbrands.com under the investor section.

These reconciliations include explanations as to why management uses comparable basis measures, and why management believes they are useful to investors.

Richard and Tom's discussions will generally focus on comparable financial results, excluding restructuring and related charges and unusual costs or gains.

Please also be aware that we may make forward-looking statements during this call.

While those statements represent our best estimates, actual results could differ materially from our estimates.

For a detailed list of the risk factors that may impact the Company's estimates, please refer to the media release and Constellation's SEC filings.

If you have any further questions after the call, please call our Director of Investor Relations, Lisa Schnorr, at 585-218-3677.

At this time, I want to turn the call over to Richard Sands.

Good afternoon.

We are very pleased to be here with you to discuss our second-quarter results.

I'd like to spend a few minutes reviewing these results, and give you an update on some of the things happening in our industry.

We had another great quarter.

Our second-quarter results demonstrate strength across the board, in all categories and geographies, and we continue to gain distribution and momentum for our key brands.

Consolidated net sales grew 14 percent for the quarter.

Excluding a 5 percent benefit from currency, net sales grew 9 percent, once again exceeding our growth target of 6 to 8 percent.

Net sales in our beer business grew 17 percent, driven by both volume and price.

These results confirm what we've been saying all along.

Our beer business is different from others.

Our Mexican portfolio, particularly Corona, has tremendous brand equity, and represents the type of beverage alcohol product that consumers are moving towards today.

Put another way, not all of beer is experiencing a stagnant consumer orientation.

As we said after the first quarter, our beer results also confirm that the price increase is sticking.

We continue to believe this is largely due to four factors.

Consumers have become more accustomed to price increases in beer.

We had a better reception to the price increase from retailers.

Our competitors are closing the gap by also raising prices.

Just a few weeks ago, Anheuser-Busch announced price increases for California.

And finally, the Corona brand meets today's consumers' lifestyle and images.

Now, I imagine many of you are surprised by these strong results, because it was not apparent from the syndicated data that we all had the opportunity to review.

Keep in mind, syndicated data captures only about one-fourth of the beer category.

Since so much volume goes through on-premise and other channels, and since there continues to be a shift in consumer traffic from the scanned grocery channels to these channels and mass merchandisers or convenience stores, the data is unreliable for determining the trends of the entire category.

During the second half of the year, we expect our beer growth to moderate, as we come up against more difficult comparisons.

As you know, last year, we experienced very strong beer volume growth in November and December, ahead of the price increase that went into effect in January on our Mexican portfolio.

During the third and fourth quarters, we would expect low single-digit beer net sales growth, as price increases more than offset potential reductions in volume.

Now, moving on to our spirits business, total spirits were up 5 percent from a year ago, driven by volume gains in branded spirits and an increase in production services.

We continue to benefit from the overall growth in the category, and the much talked-about return of the martini.

We had volume growth across our key brands, traditional brands like Black Velvet Canadian Whiskey, Skol and Fleischmann's vodka, and premium brands like our 99 Cordials line.

And we continue to innovate.

Earlier this month, we introduced our new 1792 brand of Kentucky Bourbon.

For those of you who are wondering about the name 1792, it is the year in which Kentucky was admitted to the union.

Our production service business was up in the double digits, due to the timing of a large long-term contract.

While this represents a small portion of our business, production services gives us better utilization of our manufacturing facilities.

Looking ahead for spirits, we believe volume growth will continue to be in the low to mid single digits.

Now, on to Constellation wines.

First, wholesale and other grew 25 percent, including a 13 percent benefit from currency.

The primary driver was our UK wholesale business, which grew 28 percent, including a 14 percent benefit from currency.

This business continues to exceed our expectations.

The UK wholesale business gives our wine brand strategic access to the on-premise channel.

Nearly 20 percent of our wholesale division's wine sales are Constellation Brands, and this percentage has been consistently growing.

In addition, our scale in this business allows us to capitalize on national on-premise account opportunities.

So this is a very important segment of our business that really leads to very good branded wine results.

In fact, our branded wine business grew 3 percent, excluding currency.

Now, this was across the world, and this was largely due to volume gains, combined with a slight increase due to product mix.

We had double-digit gains in Europe and Australia, and our rest-of-world expansion markets also grew substantially, although on a much smaller base.

Our European and UK wine business was up 25 percent, including a 14 percent benefit from currency.

The breadth of our Australian and California portfolios positions us to capitalize on the positive consumer trends in the UK, where Australian brands like Banrock Station and Hardys Nottage Hill continue to experience strong double-digit growth.

Our – what we call domestic brands -- Stowells of Chelsea, which is bottled in the UK -- continues to grow nicely, and we are very excited about the UK launch of our new premium California brand, Turner Road.

Our Australasian wine business, which includes the domestic markets of Australia and New Zealand, grew in the double digits with brands like Hardys, Banrock Station or Stanley & Romano (ph) growing very nicely.

Our US branded wine business was down 2 percent from a year ago.

Now, you may recall that last year, we introduced an innovative new product, Arbor Mist Blenders.

And, as is often the case with new product launches, we had strong initial shipments, followed by consumer trials, which made it much more difficult to have positive year-over-year comparisons.

If we exclude the impact of the pipeline from Arbor Mist Blenders, our US branded wine business grew a healthy 3 percent versus a year ago.

And we believe this is due at least in part to the success of our incremental investments in marketing and advertising.

Distribution for key growth brands -- like Alice White, Hardys, Blackstone and Ravenswood -- has grown between 9 and 25 percent versus a year ago, according to the latest IRI data.

We're continuing to support these brands this fall, to ensure that we continue to grow our distribution during the upcoming holiday season.

For example, Blackstone, one of the fastest-growing brands in the US, will appear in print advertisements in the New York Times and the Wall street Journal.

And we just kicked off a big multimedia campaign for Hardys in California, which includes billboards in Southern California, and newspaper and radio advertisements in both Northern and Southern California.

We believe these marketing campaigns -- which are focused on increasing distribution and, of course, on the consumer -- combined with the breadth of our portfolio will continue to accelerate our US-branded wine business growth in the second half of the year.

We are well-positioned to take advantage of the positive consumer trends in the US, like the growing number of consumers trading up to premium brands and the trend towards Australia-New Zealand imports.

This is demonstrated in some of our second-quarter results.

Volumes for California premium brands -- like Ravenswood, Simi and Blackstone -- were up 46, 39 and 26 percent, respectively.

This is according to the most recent 12-week IRI data.

Our Australian brand, Hardys, grew 74 percent during that 12-week reporting period, a growth rate that is more than double that of the Australian category.

And our largest New Zealand brand, Nobilo, grew 113 percent during the quarter.

With more than one-third of the market -- that's of New Zealand wines -- Nobilo has a commanding lead in what is a very fast-growing import category.

Now, I'd like to switch gears and talk about the California grape harvest, and the impact on our business and the US wine industry in general.

As many of you are aware, the harvest is coming in early this year, due to the hotter-than-normal California summer.

Unfortunately, that weather never made its way to upstate New York.

I'm not sure it made its way to downstate New York, either.

Additionally, this year's harvest is lighter than expected overall, although things vary somewhat by region and by variety.

So this is two years in a row where we have had lighter-than-expected harvest, and this is very positive news for an industry that has been in an excess inventory situation for the past few years.

We are already seeing positive signs from the surplus standpoint.

That's the bulk wine market and the spot grape prices.

Both have moved up significantly.

This puts the viability for super value wines at risk, and in fact, I would say they will have to increase prices in the near future.

On the other hand, these changes have little impact on our overall grape costs.

So there you have it -- our portfolio performed well during the second quarter and our business remains extremely healthy.

We delivered topline currency adjusted growth of 9 percent during the quarter and continued to meet or exceed our target of 6 to 8 percent growth.

We are very excited about the momentum in our business and are looking for strong trends in the second half of this year.

At this point, I would like to turn the call over to Tom Summer who will take us through details of the second quarter numbers.

Tom?

Thank you, Richard, and good afternoon everyone.

We are very pleased with our second quarter results and I will take a few minutes to walk you through some of the details and show our views on the second half of the year.

As is customary, my comments will focus on comparable basis results.

For the first time in the Company's history, net sales exceeded the $1 billion mark and were up 14 percent from a year ago.

For the first time in more than a year, we're up against a normal comparisons since the prior year numbers reflect a full quarter of BRL Hardy, which was acquired in March of 2003.

Our net sales benefited 5 percent from currency and on a currency adjusted basis, our net sales grew 9 percent from a year ago.

Again, this exceeds our long-term targets of 6 to 8 percent.

The primary drivers of our second quarter growth continue to be the usual suspects -- imported beer, premium wine in the U.S., wine in the UK and our UK wholesale business.

The beers and steers (ph) segment grew 14 percent, driven by gains in both volume and price.

Our branded wine business grew 8 percent, including a 4 percent benefit from currency.

Now I know that Richard just told you that branded wines grew 3 percent and 8 minus 4 equals, so just so there is no confusion, our branded wine business did grow 3 percent, excluding currency; the difference is due to rounding.

Our gross profit for the quarter grew 9 percent on a year-over-year basis and gross margins were 28 percent, down 120 basis points from last year, driven primarily by sales mix in the wine business, growth in our wholesale business and the gross margin impact of wine blenders.

Sales, general and administrative expenses increased by $10 million, or 8 percent compared with our 14 percent increase in net sales.

So on a percentage basis, SG&A was 12.8 percent of net sales, compared with 13.4 percent of net sales a year ago, demonstrating significant operating leverage, even as we increased spending behind certain wine brands, and we're also reinvesting some of the additional gross profit from the beer price increase into additional support behind the Corona brand and the remainder of the Mexican beer portfolio.

General corporate expenses increased 3 million year-over-year in support of the Company's growth.

We did incur some higher than expected expenses in the quarter, some of which were onetime in nature and others, like Sarbanes-Oxley related costs, will be ongoing.

As a result, we now expect the quarterly run rate for corporate expenses to run in the range of $11.5 to $12.5 million per quarter for the remainder of the year.

Our operating income increased 10 percent year-over-year.

Operating margin was down 60 basis points to 15.3 percent of net sales, driven by the shift in business mix and the impact of Arbor Mist Blenders.

When you exclude Blenders, consolidated operating margins would have declined by only 10 basis points from the prior year.

In the second half of the year, we expect wine margins to be more in line with a year ago as the majority of the initial sales of Arbor Mist Blenders occurred in the second quarter of last year.

Moving onto interest expense, this was down nearly $11 million from the second quarter last year.

Most of this can be attributed to a significant reduction in our debt balance from a year ago resulting from our equity offerings last summer, combined with ongoing debt paydowns.

We continue to take advantage of favorable interest rates to reduce our overall borrowing cost and ongoing interest expense.

Last March, we retired $200 million of our fixed-rate debt and replaced it with floating-rate debt for a significant savings in interest expense, $11 million annually based on the rates at the time of the debt retirement.

Then in August, we completed a refinancing of our term loans A and B, reducing our spread over LIBOR by 50 basis points.

Because the refinancing occurred late in August, it had a negligible impact on our second quarter results.

However, it will save us about 2 million in interest expense during the second half of the year.

Our average borrowing rate for the quarter was just under six percent and our tax rate remains at 36 percent.

Net income increased 24 percent.

We have 116 million shares outstanding on a diluted basis compared with 104 million a year ago, due primarily to last year's equity offerings.

As a result, our comparable basis EPS grew 11 percent to 71 cents per share for the quarter.

Now, I will spend just a few minutes on our cash flow and balance sheet before wrapping up.

CapEx for the quarter was $29 million, depreciation and amortization were $25 million.

During the quarter, we generated $72 million of free cash flow, which we define as net cash flow from operations, minus capital expenditures.

Year-to-date, we generated 3 million of free cash flow, making up a lot of ground from the first quarter where we used cash due primarily to the Australian grape crush.

We expect free cash flow generation to accelerate in the second half of the year and continue to target a full year of free cash flow of $235 million.

We continue to use our free cash flow to pay down debt.

At August 31, our total debt stood at just under $2 billion, and our debt to trailing 12-months adjusted EBITDA stood at 2.9 times.

To briefly summarize, we're pleased with our results for the first half of the year, and we are pleased with the overall health of our business, demonstrated by strong consumer take-away trends.

During the second half of the year, we expect topline growth in our beer business to moderate, as we come up against more difficult comparisons, due to last year's third and fourth quarter buy-in ahead of the price increase in our Mexican portfolio.

We expect slight reductions in volumes year over year to be more than offset by the price increase in that part of the business.

In our wine business, we see topline growth of high single digits, as we are up against fairly normal comparisons against the prior year.

Based on our results for the first half of the year, we're reiterating our full-year EPS guidance and tightening the range, since half of the year is already behind us.

We expect full-year comparable basis EPS in the range of 2.62 to 2.67, and for the third quarter we expect comparable basis EPS in the range of 82 to 86 cents.

Thanks, everyone, for your time, and now we'll open the call to questions.

(OPERATOR INSTRUCTIONS).

Tim Ramey, D.A. Davidson.

Good afternoon and congratulations.

You are generating an awful lot of free cash, getting debt down to where you want it.

There are some significant wine assets on the market.

How do you feel about your overall financial condition to be making acquisitions, and what is your appetite for future acquisitions in the wine business?

Well, obviously with our debt-to-EBITDA ratios coming down, in the 3 range, and really by the end of the year dipping below the 3 range, we are in a very good position to make acquisitions in any category that we so choose.

We've been quite specific about what our priorities are, and certainly spirits acquisitions are very important, and we have a very nice, broad portfolio of wine brands.

That's not to say that one cannot add to those, if it makes strategic sense.

But all in all, our financial condition is such that we're well-positioned to make acquisitions in any category.

Richard, just a clarification.

I think I know what you meant, but you said distribution was up between 9 and 25 percent, and I assume those were share points, rather than percentage changes?

No, those were percentage changes.

So what would you say your ACV is?

Can you give it to us in share point changes?

Is that still relatively modest versus your goals of getting up to 75 to 80 percent ACV in some of those brands?

We are making very good progress on a brand-by-brand basis, so we are very happy.

But at this stage, we are not giving ACV by brand.

Jeff Kanter, Prudential Securities.

Tom, a quick question for you.

You disclosed the currency benefit to the top line.

I was hopeful that you could give us a sense of what it was to operating income.

You know, we have not been doing that, Jeff.

And I think that really since we have a hedging program in place it would be, probably, overly complicated and not particularly germane for us to do, anyway.

I think that's really the point, is that we do have an active hedging program in place that does insulate our shareholders from surprises in our stream of earnings, and I would not expect us to start giving that kind of detail out.

So there was no impact?

Is that what you mean by the hedging?

We do have most of our foreign earnings hedged, yes.

So I would say that there was very little impact from fluctuations in foreign exchange on our operating income.

And SG&A as a percentage of sales went down, but you said that spending went up.

Can you give us a color as to what is happening in that line, and particularly the spend levels?

Well, I was referring to some fairly, some relatively, and the scope of our whole company.

But the increases in our corporate expenses were really due primarily to things like Sarbanes-Oxley and a few rather minor one-time items.

But overall in the Corporation, our SG&A ratios have improved.

Everyone knows that we have made some select investments behind some of our key growth brands.

Otherwise, it would have improved even more.

So I think we're very happy with our SG&A position overall in the Company.

Do you feel the need, with Mondavi putting more money into the marketplace, that those span levels are going to need to increase?

No, not at all.

Mark Greenberg, Deutsche Bank.

First, a question on gross margin, and Tom, referring to your comments about the negative mix in wine -- familiar conversation, I guess.

Can you give us your sense of where we are, at least in your mind, in terms of the retail price curve, and maybe talk about it by certain price segments?

That would be very helpful.

Mark, this is Richard.

If you don't mind, I'll answer the question.

First of all, the negative mix impact within wine is primarily a result of the huge increases in our wholesale business -- which is a very low-margin business, although it's very strategic -- combined, really, with the mix change with Arbor Mist Blenders not being pipelined this quarter.

Arbor Mist Blenders were a very high profit margin item.

So, outside of that, we are really seeing fairly normal mix changes in our business, which really means that the higher gross margin, higher price point items are growing much faster than the popular-priced wines.

So, for example, our Simis, our Estancias, our Franciscans, which are very high margin, are growing dynamically.

And our Blackstone, Ravenswood -- which are, I'll say, good margins -- are growing double digits.

And then our popular priced wines are in most cases flat to maybe slightly down.

So we are actually seeing, outside of wholesale and Arbor Mist Blenders, a positive mix shift.

And pricing in the wine category in general, across categories, has remained firm.

You are not seeing a lot of discounting.

And then, just a follow-up question on the beer business.

I guess a lot of us are a bit confused, and your comments were helpful.

Would you mind giving us some kind of FTR (ph) indication for the Barton Beer portfolio, and talk about whether or not the 8/31 quarter end benefited or did not from Labor Day shipments?

The FTRs are pretty much in line with shipments.

They are slightly lower, and there is some benefit from end-of-quarter shipments that may be attributable to Labor Day.

That would be my guess also, but there may be other factors, too.

Caroline Levy, UBS.

I'm just trying to get at the same issue, I think, that Mark was about the margin compression from the growth in wholesale, because I understand the Arbor Mist Blenders will be a lot less of an issue in the back half.

Is that correct, or does it take a little longer than that for the Arbor Mist issue to clear up?

No, it's not that there is not any of it, but there is relatively very little in the third quarter versus what we saw in the second quarter.

And if I was to look at your branded wine sales were up 14 percent, your profits were up 4.

Can we attribute -- how much of the differential do you think was the Arbor Mist versus the wholesale shift?

I don't have quick math for you, and I would recommended that you follow up with Lisa or myself.

But I would say that the growth in the wholesale business exceeded our expectations, and it has been a very dynamic quarter.

It's been a very dynamic first half of the year.

It's not going to continue to exceed our expectations forever, and I think basically that is what we are seeing.

So we want our wholesale business to continue to grow strongly.

We see the very positive momentum in our branded wine growth business, but I think the mix within the wine division between wholesale and branded wine should come more back into line, and therefore the margin should become a little more normalized going forward.

And then, if I might, just looking at the pricing environment, you said it has been firm.

Would you call that an improvement, then, from where we have been over the last 12 months?

Do you think there is room for prices to now go up over the next 12 months, prices to wholesale?

I think, as we indicated, I think the super value brands will be forced to raise their prices, as spot rate prices and the bulk wine market are moving up so significantly.

I don't think that there will be a lot of pressure on your traditional popular-priced varietal wines and your premium or fine wines to go up in price, but if you look at the table wine category in general, pricing was up 3.6 percent, according to IRI, in the last 12 weeks.

Most of that was mix.

Your premium category, $5.50 to $9, was up 0.5 percent, your ultra-premium was up 2 percent, Australia was down 2 percent.

I view that mostly as mix, too.

More of that 5 to 10 category coming in.

So I don't think that most anybody in the industry, other than super value wines, are going to have a lot of pricing pressure on them.

Grape costs are moving up on what we call generic grapes somewhat, so there may be some move by the producers of Chablis and burgundies to move prices up a little.

Kate McShane, Smith Barney.

Just a quick question really focusing on volume growth of your eight core markets that you are focusing on for the new brands -- Almaden (ph) in particular.

How was volume growth during the quarter?

You were very difficult to hear.

We believe you asked about the eight export markets?

Yes, that's correct.

Sorry.

We had very, very healthy growth in the European export markets, and very healthy growth in the Asian export markets.

We had talked about growth anywhere from 20, 30, 40, 50 percent, and we are seeing that type of growth, albeit on a small base.

So it takes time for that growth to compound into a big business, but we are seeing good developments in those key priority markets.

Jon Feeney, Wachovia.

Just a quick question -- a little bit of a follow-up about the pricing and competitive environment.

A lot of your import competition are talking about redoubling their efforts to kind of gain market share in the US.

Can you comment about what you see -- have you seen any of that competition come in the way of pricing?

Do you see more rather than less import competition over the next six months?

And what effect does that have on your outlook?

You said import competition.

That's correct.

In addition -- I mean, obviously, you guys are substantial importers, as well.

Yes.

And what countries do you feel have suggested they are doubling their efforts?

I just meant redoubling in terms of intensifying their efforts -- comments from Southcorp, Foster's, Allied Domecq.

Yes.

I would say that we are not seeing any significant increase in promotion, and in fact, the weakness of the dollar has, in many regards, reduced promotional efforts, along with people like Southcorp in particular, and Foster's, trying to get their house in order.

So we don't see a lot of activity in the marketplace that concerns us in that regard.

So it sounds like you are saying it's actually getting better, you're seeing less competition?

Yes;

I would say from a promotional basis, yes.

The main brands coming out of Australia actually have improved their pricing.

Again, this is on a SKU-by-SKU basis.

There is no question that more companies are trying to attack the $6 price point or $7 price point or $8 price point, but in general, you are not seeing, on a brand-by-brand basis, people lowering their prices.

It's very hard to do with a weak dollar.

Interesting.

Just one question on the --

I think this redoubling the efforts isn't a price concept.

And it's not an advertising concept; it's a -- just like it says, they are redoubling their efforts.

They are thinking more.

Just one question on the beer.

I guess this beer performance in the past couple of quarters has been fantastic.

What would you say if you had to name one factor -- the single biggest factor that helps -- the Barton import franchise outperformed the entire US beer industry for the past six months so handily.

What would you say the single biggest factor is?

The consumer's affinity to Corona, and what it means as a brand -- what it means in terms of the imagery and the lifestyle to people who are drinking the product.

In other words, the brand building and marketing that has taken place over the past 20 years has really left a very important, lasting impression in the consumer's mind.

And you just say at the margin, you guys are doing a lot better job than the big guys are?

You know, first of all, I wouldn't say we're doing a better job than the big guys.

We have a different job than an Anheuser-Busch with a brand like Budweiser.

So we are just very fortunate to have a great brand and a great marketing campaign and great employees.

But, when you take a brand the size of Budweiser, it's very, very hard to make a brand like that move against the general consumer trends.

So I thank Budweiser is doing a fantastic job.

They just have a different brand and a different problem on their hands than we do.

Okay, thank you.

Bryan Spillane, Banc of America Securities.

Hi, good evening guys.

Two questions.

One, Richard, over the last six, nine months, you have been in front of retailers making the pitch for wine -- incremental merchandising, incremental display, you're spending more on branding, doing the real consumer packaged goods marketing effort behind it.

And I'm just curious -- one of the things that we have heard from the beer industry, or at least it sounds like we're hearing, is that retailers are paying attention, and they're looking to allocate more space and more of their resources to wine.

So I'm curious to hear from your perspective whether or not you think that is true.

And then second, if you could give us some sense for how well you have done, relative to your targets, in terms of gaining more distribution for your wine brands?

We've done very well against our targets, in terms of gaining distribution on our wine brands, and I don't believes that what is going on in this "shift" from beer to wine and spirits has to do with retail space allocation, and I would not say that we found that retailers are giving more space to wine and taking it away from beer.

Basically, they're giving the same amount of space as they always have.

What it really has to do with, and this has nothing to do with categories, is the young entry-level to 10-year old consumer -- that would be a 31-year-old -- is drinking differently than the entry level consumer did 10, 15, 20 years ago.

And they are drinking across categories and they are drinking in an aspirational fashion.

They are drinking products that make them feel good about themselves.

So Corona makes them feel good about themselves.

That consumer who might have reached for a Milwaukee's best 20 years ago has a popular priced beer, today might reach for a Corona.

I have to tell you -- the next time that person is out drinking, they might reach for a Captain and Coke.

And the next time they are out drinking, they might just have a New Zealand Sauvignon blanc.

This is not about space allocation, this is about the entry-level consumer.

And I would say the consumer who's 40, 50 years old and been drinking beer as their mainstay and been drinking a domestic beer as their mainstay, continues to do so.

So it's I believe mostly about capturing the mind of the new consumers coming into the drinking category.

I don't believe it's about space allocation.

Alright, thank you.

Mark Astrachan (ph), Legg Mason.

Good evening, guys.

I have a question on the increased marketing expense you guys instituted you talked about in February.

It seems to be working pretty well.

Given the results to date, are you guys still expecting to throttle back this investment in fiscal '06, or have you started to reconsider given the results in the beer and the wine (indiscernible) very good?

I think I would reiterate what we said in February, and I would not use the word throttle back.

That sounds a little bit more than what we had in mind.

I would say that -- what we said was that the same amount of investment over a larger base would return our ratios back to what they were prior to this here, and that continues to be what we expect.

Okay, thank you.

Marc Cohen, Goldman, Sachs & Co.

Good evening, guys.

I just have two things.

First of all, if you look at the wine business, I just want to make sure, Tom, I have gotten your vision of what we're looking at here in the second half correct.

It looks like Arbor Mist, the Arbor Mist Blenders' lap (ph) cost the sales line in wine, just the branded wine, probably about 300 basis points.

And in talking about acceleration to the high-single digits for the second half of the year, really adding that back to get the trend is part of it.

But, were you also talking about some acceleration in business performance beyond that?

Yes, somewhat.

I think that as we look at our expectations for the business, it's more than just saying -- take out the effect of Blenders and FX adjust it, and we're in the high-single digits anyway.

It's also saying we have good momentum in our business, we have some growth in our higher, more profitable parts of our business.

And so we are expecting some expansion on top of just taking Blenders out of the equation, yes,

So two questions.

One is -- can you give us more insight about where you see some pickup in the second half of the year in the portfolio and relate that to the comment that you think the wine business margins are going to be more stable in the second half of the year?

And I assume there, you are saying that that's the case, even though the wholesale business still may grow as a percentage of sales?

Yes.

Again, I think there were maybe two parts to your question.

But we don't continue -- we don't expect this type of growth out of our wholesale business every quarter.

I think I was fairly clear about that.

But also, yes, we have had great growth in Australasia, we've had great growth in Europe and we expect our U.S. business to accelerate.

Finally, in the beer business, clearly, you're expecting a pipeline sales challenge.

I wonder if you could -- and consequently, it sounds like your shipments for the Mexican portfolio of Corona will be expected to be down in the second half.

Can you give us some sense of the extent to which that also is a challenge on FTRs?

And if it is a challenge on FTRs, what are your expectations of the retail picture for Corona in the second half of the year, where you should not really have that lasting problem?

You know, Marc, I mean, I think that the expectation -- really, if you strip the load from last year, there really isn't that concerning on an FTR basis.

There's still basically good, healthy consumer takeaway with the brand.

So in other words, taking out the load, the expectation that you are describing is one where you've basically got consumer take away growth in the second half of the year?

Correct.

Thanks a lot.

I just might also add one little factor, which is I believe, and we can doublecheck this, that any FTR increase that was related to the price increase was more in the fourth quarter than in the third quarter.

In other words, some of the loads that did go into distributors did go out to stores who bought in heavily, who also promoted heavily and moved it out.

So it's a very -- it isn't easy math.

But, I'm getting the sense that you don't believe that that (indiscernible) present a situation where retail takeaway is going to be really impaired in the latter part of the year (indiscernible) comps on shipments and FTRs?

The comps will be affected because FTRs -- and quite honestly, I'd have to look, but let's say the month of January and February, were very high in percentage terms.

The numbers would be affected -- I think what we're trying to say is that a buy-in adjusted FTR, our expectation would be that consumers' takeaway is still healthy and the brand is doing fine.

Just to be clear about one last point on that then.

Do you believe that the consumer retail takeaway on Corona was influenced at all by this price increase in that fourth quarter timeframe?

Yes.

The retailers bought in ahead of the price increase from their distributors and put the product on heavy promotion.

So it does have a tough lap (ph) form a retail perspective as well?

Yes, but going back to what I think Tom's point was, if you forget about percentage increases at each level and just talk about the volume that will move to consumers or will move to retailers, we will continue our current seasonally adjusted volume.

What is going to become confusing is the numbers on a comparative basis.

That's what you're saying.

Thanks.

There is one more question.

David Setkowicz (ph), Neuberger Berman.

Can you talk to us a little bit about where you stand with respect to working capital and what steps you need to take with working capital to achieve the $235 million full-year free cash flow target?

I mean, thank you for asking that question.

I think we do I would say generally good management practices.

We watch our balance sheet ratios very carefully, we control our capital expenditures very closely, we review with our divisions and with each of the operating units within the divisions, all of their targets on a monthly basis, and everybody in our company is very serious about cash flow.

So it's something we are very proud of.

I think we have a great track record and the numbers speak for themselves.

So that is the main thing that we do, is we all take it very seriously and manage it very carefully.

No, understood, and you do a very fine job of managing it.

The question is more specifically with respect to the working capital elements -- anything that we should expect to see there over the course of the next few quarters?

I don't think anything out of the ordinary, no.

I don't think there is any huge hidden opportunities, or there are certainly not any surprises expected.

Very good, thanks.

Thank you very much, everybody, and we look forward to talking to you in three months.

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