Constellation Brands Inc (STZ) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Robert Mondavi Q1 2005 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. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded today, Thursday, October 28, 2004. I would now like to turn the conference over to Mr. Bob Philipps. 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 first quarter fiscal 2005 results. Joining me today are Greg Evans, our President and CEO; Dennis Joyce, Executive VP and Chief Operating Officer; and Hank Salvo, our Executive VP and CFO; and also Ted Hall, our Chairman. 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 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 website, www.RobertMondavi.com, earlier this morning in our Investor Relations section, under news and events. 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 included in GAAP such as inventory step-up charges, inventory or fixed asset write-downs, severance costs, and gains or losses on the sale of fixed assets. A complete list of these items can be found on our website under financial information. For the next 30 minutes, we will focus on 3 remain topics. First, we will review the industry and Robert Mondavi performance during the quarter. Second, we will highlight some of the key elements of our recapitalization and restructuring plan which are more fully detailed in our proxy statement. And finally, Ted will address the process the Board is following to ensure that we maximize shareholder value. Now Greg will get us started.

Thanks, Bob, and good morning everyone. I will start with the industry performance for AC Nielsen U.S. food, drug and liquor store data for the 13 weeks ended September 25, 2004. Sales in wine and scanning channels remain steady in comparison to the June quarter. Domestically produced varietal wine volumes grew 3 percent in the September quarter compared to 1 percent in the June quarter, and 1.6 percent during the last 52 weeks. Imports grew 8 percent in the September quarter, slightly below the 10 percent rate posted in the June quarter, and during the last 52 weeks. The blended volume growth was 4 percent in the September quarter compared to 3 percent in the June quarter and 4 percent during the last 52 weeks. Pricing in food, drug and liquor store was strong, rising 1.5 percent for domestic wines and 1.6 percent for imported wines. Like last quarter, Australian wine prices declined despite a 7 percent rise in currency versus the U.S. dollar since last year.

Now let's move from the industry to our portfolio. We believe our results this quarter reflect good performance in a challenging environment. Consolidated wholesale depletions grew 3 percent reflecting continuing strong performance from Robert Mondavi Private Selection, Robert Mondavi Winery, Papio. Papio depletions nearly matched Robert Mondavi Winery depletions during the quarter. Operating expense growth was kept at half the rate of revenue due to productivity initiatives implemented late last fiscal year. The Q1 GAAP net loss was $3.47 per share compared to last year's earnings of 60 cents per share. Included in this year's number, were 14 cents per share in recapitalization charges, $3.76 per share in restructuring charges, and a penny of Arrowood step-up charges. Included in last year's number were 6 cents per share in net gains from the sale of non-strategic assets and 2 cents per share in Arrowood inventory step-up charges. More detailed lists of these charges is included in the press release.

Excluding these items, adjusted EPS was 44 cents in this year's quarter, compared to 57 cents last year, and was well above our guidance of 33 cents and the consensus estimate of 30 cents. Finally, we continue to strengthen the balance sheet. Total assets grew 1 percent or $10 million from last year, due to $54 million more in cash, $47 million more in deferred tax assets, less $32 million in inventory write-downs and less $45 million in fixed asset impairment charges related to restructuring activities. Debt, net of cash, declined $67 million to $325 million. With that, I will turn it over to Dennis to talk about the performance of our brands.

Thanks Greg. Good morning everyone. As Greg pointed out, total Company wholesale depletions for the quarter ended September 2004, grew 3 percent over last year. Combined with total Company shipments growing at 2 percent to 2.2 million cases, we made good progress in reducing wholesale inventories to 46 days. This was 3 days below last year's quarter and 2 days better than at the end of June, and it includes about 1 extra day due to new products that were shipped into the trade at a greater rate than they were depleted. Average price per case declined 1 percent to $48.53 due to new product rollouts and heavy promotion spending in support of Robert Mondavi Private Selection and Woodbridge. On the other hand, shipments of the 2001 vintage Robert Mondavi Winery Cabernet Sauvignon Reserve, helped firm up overall pricing. As a result, consolidated net revenue grew 1 percent to $105 million. Woodbridge continued to experience very competitive activity and showed a declined of 2 percent in depletions in the quarter, however, we do see some signs of improvement in recent trends.

Shipments declined 3 percent to 1.5 million cases. Net revenues declined 6 percent to $53 million on 4 percent lower price per case. In U.S. scanning stores, the prices paid by consumers were 1 percent higher. I should -- I would like to point out that, as I mentioned, we are encouraged by strong improvement in the AC Nielsen 4 week growth rates. And if you go back to June, where our growth rate was -12 percent, and in July -8 percent, August -3 percent, in September we saw an uptick of +2.3 percent. So we are encouraged by that trend. We can talk a little bit more about that in the Q&A. Robert Mondavi Private Selection had yet another good quarter. Wholesale depletions grew 9 percent above last year led by strong results in most channels. Like last quarter, filling out points of distribution helped spur growth in secondary varietals, such as Pinot Grigio, Pinot Noir, and Johannisberg Riesling. Shipments grew 5 percent to 354,000 cases, and net revenues grew 3 percent to $21 million on 2 percent lower average price per case.

Private Selection's revenue was a new first quarter record over the last 7 years. So we are obviously pleased with that. In U.S. scanning stores, volumes grew 12 percent while price per case declined 1 percent. (technical difficulty). I will continue on with the Robert Mondavi Winery brand where we were pleased with a sixth consecutive quarter of depletion growth. The Winery wholesale depletions grew 20 percent of which was -- grew 20 percent of which was related to the release of Cabernet Sauvignon Reserve in the quarter, 15 percent of which is related to that release. Shipments grew 17 percent on top of a 16 percent growth comp from a year ago, to 77,000 cases. This meant shipments was just short of the levels achieved back in 1999 and 2000, when the overall wine market was much more robust than it is today.

And average price per case was $197, 15 percent above last year, which reflects the release during the quarter of the 2001 Vintage, CSR, Cabernet Sauvignon Reserve. Net revenues grew 34 percent to $15 million, the highest level of revenue the brand has achieved during our first quarter in the last 7 years. Wholesale depletions of our Other California brands grew 115 percent over last year led by continue growth from Papio. Shipments grew 70 percent to 126,000 cases and net revenues grew 30 percent to $6.8 million. Finally, import depletions were flat to last year. Shipments declined 5 percent from last year to 98,000 cases while revenues grew 7 percent to just over $7 million as the mix shifted from Chilean wines to Italian wines. With that, I will turn it over to Hank who will cover the financials.

Thanks Dennis. I will talk to GAAP primarily, but need to highlight some of the significant charges taken this quarter for both restructuring and recapitalization. Cost of goods sold per case was $44.07 during the quarter, compared to $29.07 last year. This year's cost of goods sold per case included $32.2. million in pre-tax inventory write-down restructuring charges, and 2 million -- $200,000 in Arrowood inventory step-up charges. Last year there were 619,000 in Arrowood inventory step-up charges. Excluding these charges, adjusted cost of goods sold per case grew 1 percent to $29.14. Gross profit per case was $4.46 compared to $19.72 last year. Gross margin was 9.2 percent compared to 40.4 percent last year. Excluding the aforementioned charges in each year, adjusted gross profit per case declined 3 percent to $19.39 and adjusted gross margin declined 100 basis points to 40 percent from 41 percent last year. Operating expenses were $104.3 million or 99.2 percent of net revenue. This included $69.8 million in pre-tax restructuring fixed asset impairment charges, selling expenses related to asset sales, severance and other. This also included $3.7 million in pre-tax recapitalization charges. For a detailed breakout of the charges see the press release. Excluding the aforementioned charges in each year and a net $1.5 million gain in last year's quarter from the sale of fixed assets, adjusted operating expenses grew 1.5 percent to $30.7 million and adjusted operating expense margin was 29.2 percent. We expect to see a higher rate of spending than last year in the second quarter due to the incremental marketing support we announced on September 15th. Operating loss was $94.6 million compared to operating income of $13.3 million last year.

Excluding the aforementioned charges in each year and last year's gain, adjusted operating income declined 9 percent to $11.3 million, and adjusted operating margin was 10.7 percent of net revenue versus 11.9 percent last year. Equity income from joint ventures was $5.4 million compared to $8 million last year, which was expected due to a smaller quantity of Opus One from the highly acclaimed 2001 vintage. This also means that we will have a difficult equity income comp during the second quarter. EBIT, or earnings before interest and taxes, was a negative $88.8 million. We think EBIT is an important indicator of our performances since it includes the full impact of our joint ventures which are not fully reflected in gross and operating profits or margins. Excluding the aforementioned charges in each year and last year's gain, EBIT was $17.1 million versus last year's $20.1 million, and EBIT margin was 16.2 percent versus 19.4 percent last year.

Net interest expense declined 8 percent to $5.1 million as a result of continuing positive cash flow which kept our revolving line of credit facility at zero for the quarter as well as the benefits from an interest rate swap from fixed to floating on one of our private placements. Tax rate for the quarter was 38.6 percent, up from 37 percent in the June quarter as a result of nondeductible expenses associated with the recapitalization plan. We expect this rate to continue to the remainder of fiscal 2005. Net loss was $57.7 million compared to net income of $9.8 million last year, and net loss per share was $3.47 compared to 60 cents positive last year. Excluding the aforementioned charges, in each year and the gain from last year, adjusted net income declined 21 percent to $7.4 million and adjusted EPS declined 23 percent to 44 cents. Operating cash flow was $11.7 million and capital spending was $5.6 million. At this point, we have not changed our outlook for the remainder of the fiscal year. We expect earnings before recapitalization and restructuring charges of $1.30 to $1.50 per share for the full year. The total charges expected are between $161 million to $200 million, with much of that occurring in fiscal 2005. Now I will turn it back over to Ted who will summarize some of the key elements of our recapitalization and restructuring plans.

Thanks, Hank. Good morning. As some of you know, I joined the Board in mid-December last year and became non-executive Chairman of the Company in January. I said at that time, that Robert Mondavi Corporation aspired to best practices in corporate governance and that as non-executive Chairman I would focus on board governance and effectiveness. Since that time the Board has taken a number of actions consistent with our focus on good corporate governance and by extension, shareholder value. In addition to having a non-executive Chairman, the Board composition is more independent than it was a year ago at this time. We also made the decision to propose a recapitalization of the Company to unify the share structures so that each and every share carries one vote, and to reincorporate the Company in Delaware where the law is state-of-the-art in terms of corporate governance. Importantly, the shareholders holding the Class B super voting shares with 10-1 voting rights, have approved the recapitalization and reincorporation, and we have a proxy in the mail to Class A shareholders and a November 30th annual meeting and shareholder vote to approve these two shareholder-friendly measures.

We believe strongly that completing the recapitalization and reincorporation is essential to enhancing shareholder value. In addition to governance measures, the Board has challenged Greg and his management team to examine our businesses and identify new ideas for enhancing shareholder value. After reviewing a wide range of alternatives we decided to focus the Company entirely on the premium and super-premium lifestyle wines and to divest all luxury in non-strategic assets and management is engaged in marketing those businesses with the assistance of our advisor, Citigroup. As you know, we have also received an unsolicited proposal from Constellation Brands to acquire the Company. Our response to this proposal is consistent with our focus on corporate governance and shareholder value. We have said that we have not rejected the proposal, but we have not agree to cancel, suspend or postpone our recapitalization and reincorporation plan. As I said, we believe strongly that our proposal for a 1 share, 1 vote structure is essential to enhancing shareholder value, and it's the right thing to do to complete this process.

As we move forward toward the shareholder meeting date, we're working closely and diligently with our devisers to carefully evaluate all strategic options including the unsolicited proposal and our recently adopted value/growth/divest plan. Let me be perfectly clear. We're not precluding any alternative, everything is on the table. Of course, we're not going to discuss or debate alternatives or their relative merits on this call. Rather we're going to continue to push forward the process that we have underway and we will be in the best position to act upon our strategic options and serve the best interest of all shareholders following the approval of the recapitalization plan at the end of the month of November. We have not declared that the business is "for sale" and we would like to complement our employees, growers, distributors and trade customers on continuing to execute their plans in an effective manner despite the distractions that have arisen during the past few months. Our first-quarter results reflect solid performance in a challenging environment. Now Bob has some housekeeping items.

Thank you Ted. Today's call is copyrighted material of Robert Mondavi and cannot be rebroadcast without our express written consent. Beginning at 9:30 AM pacific time until 5:00 PM today, you can listen to a replay of this call in the United States by dialing 1-800-405-2236. International callers can listen to the replay by dialing 1-303-590-3000. In both cases, the access code for the replay is 11010575. Today's prepared remarks can also be viewed, downloaded, or listened to in the Investor Relations section of our website under news and events, and then conference calls. Our next earnings conference call, covering our second quarter fiscal 2005 results is scheduled for January 27, 2005 at 7:30 AM pacific time. I want to thank you for your participation in today's call. Adam, if you'll go ahead and open up the line for questions.

(OPERATOR INSTRUCTIONS) Jeff Kanter with Prudential Equity Group.

Good morning gentleman. Two quick questions. Have you started to (technical difficulty) your incremental marketing spends yet for the year? It doesn't seem like you did -- for the 14 million that you plan to spend?

Most of that occurs -- will begin in the second quarter, although in the first quarter our marketing spend was about $2 million over the last year, but most of that will start heading up in the second quarter.

Okay. So there is essentially 12 more to go, 12 million more to go?

Yes, starting with the 14 incremental.

I will tell you that we did begin the Woodbridge advertising campaign in the first quarter.

So some of it was there. Okay, I was just expecting more of an even distribution, and that is probably why you probably beat consensus and what have you. Ted, I know you don't want to talk about what everybody wants to talk about, but I get 30 calls a day saying you would be crazy not to take Constellation's offer. Are you?

Jeff, our view is that we're very pleased that a number of parties recognize the substantial value in the assets of our Company. We have a wide range of alternatives. We are considering them carefully. We understand the significance of the Constellation offer and we have not rejected it.

But the wide range of alternatives include obviously this Constellation as well as your restructuring plan. Does it fall into those two buckets or is there alternative seat that we don't know about? Everything is on the table. We have a wide range of options. The Board is going through a careful process to assess those. We will assess all of our options including the proposal from Constellation.

Okay, thank you gentleman.

Tim Ramey with D.A. Davidson.

Good morning. Greg, when you gave the guidance for the 30 cent number -- or maybe I should ask the question differently. What changed in the 1Q versus your view of the 1Q three months ago? Was it timing shift on Cabernet Sauvignon Reserve? I know that was anticipated, but did it occur in a great fashion than expected?

The guidance we gave, which I think was in the range of 30 cents to 35 cents for the quarter, we exceeded. In large part our operating expense line was quite a bit lower than that guidance. Jeff alluded to the marketing spend being lower. That perhaps contributed but what we're seeing is actually earlier indications of some of the benefits of restructuring, particularly in the overhead area, than we had previously planned on during the quarter. So that was certainly one element. The other element is the equity income from joint venture as well, lower than last year; was about a million dollars ahead of what we had previously expected because of the timing of release of Opus One. A topline came in just about where we thought it did when we gave the previous guidance. But I think we are managing the business pretty effectively and I think that is showing up in lower operating expenses.

In the average selling price per case for Woodbridge, does that say anything about the rate of change in the Select Vineyard series wines or did they continue to grow?

Select Vineyard (indiscernible), Tim, (indiscernible) continues to grow. I think what it really says is something about the competitive nature of the segment and our willingness to compete aggressively in the segment. But Woodbridge Select Vineyard series is (indiscernible) about 40 percent, 45 percent ACV distribution and is on the rise.

Okay, thanks.

Joe Pirapotta (ph) with Inverness Counsel.

Can you just address some concerns about the luxury business right now in the sense that there have been some concerns raised by the unsolicited bidder that the business is in disarray? Just give some kind of comfort level in terms of -- you say all options are on the table, but yet you're going forward, as we speak, with this plan. I just want to make sure the value of the assets is being protected in light of what is going on right now.

We obviously share your view in the value of these prime luxury assets. Let me make a couple of comments. We did hire a new President and CEO for Robert Mondavi Winery during the quarter, Jean-Michel Valette. He is effectively in charge of managing that business and his qualifications, I think, are well known to people on the call. We were very pleased with the first quarter results in general for the Company with depletions being up 3 percent in an environment that has been referred to as difficult. But in fact our luxury and imported brands, depletions rates were up 9 percent during the quarter. So we're obviously continuing to focus and put our efforts behind these luxury brands because we share the view that they are of very high-value and they need to be stewarded as well as we possibly can, but we think we're doing rather well with the luxury portfolio.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Tim Ramey with D.A. Davidson.

Hank, would there have been a -- I'm trying to reconcile the idea of an operating income benefit or a class benefit in the quarter. Would you have benefited from the inventory write-down and what line of business did the inventory write-down occur in?

No, Tim. The inventory write-down would not have benefitted -- I mean, our operating performance was better. The inventory write-down is sitting up in COGS, not in the operating line. There are some operating charges that are there, but we have broken those out so you should be able to see them in the financials. It really has to do with timing and spend, as we said, but we are seeing the benefit of some of the actions we have taken over the last year in terms of being more efficient in the way we run our business.

Did you mention which brand had the inventory write-down?

No, but it's both in the luxury and the lifestyle area. It's in both areas.

Okay, thanks.

Jim, this is Bob. I can add that if you look at the financial model we posted on our Web, you will see the specific charges, P&L geography, there.

Just to be clear, the numbers that I was referring to I think earlier with your question and with Jeff's question, are all on the basis of adjusted numbers. So any effect of COGS or other items that are written down would not have been reflected in my comments. These are the business as it operates basically.

And understand, the way the accounting convention works, you take the write-down as soon as you recognize the impairment. That does not mean we have sold anything or moved anything off the P&L balance sheet at this point. But the convention does require you to take the write-down as soon as you demonstrate the impairment and that is what we have gone. So in this quarter, we have taken about $106 million in write-down for a variety of reasons, across the P&L.

Understood. Were the severance charges for Tim and for Michael in the 1Q or will those be in the 2Q?

They are in Q1.

Thank you.

Tim Wallick (ph) with Halcyon (ph) Management.

Question on the restructuring. Is it clear that the restructuring will not happen prior to the recap vote?

Can I respond by asking you what you're referring to as the restructuring?

In terms of the sale of the luxury brands?

As Ted said, we're proceeding forward with evaluating all options, and one of those options is clearly the sale of divestiture of the luxury brands. That process is underway. And I think Ted has also made the comment that we believe that our decision will best be made with respect to any of these options after we get into Delaware which is after our annual meeting, November 30th. So you can assume that the process of our restructuring in that case would put us beyond the point of November 30th in evaluating all of these options.

So therefore again, just to say the luxury brands, none of the luxury brands will be sold prior to that?

The process, as I said, is one that we want to be in Delaware to make decisions in terms of implementing any of the options that are on the table where we think we have the best corporate governance context.

Could you just explain in a little more detail, if your plan is to sell the luxury brands, how is it -- or why is it that you hired Mr. Valette in the last couple of weeks, after you had already determined that the restructuring was the proper way to go, as to what his role is to be, even though you expect to sell off these brands?

Mr. Valette, we think, is a very talented manager and we are operating the Robert Mondavi Winery Estate on an independent basis currently. We needed a talented manager to help us through the restructuring in that business and to operate it in the effective way possible. I think a manager is often viewed as an integral part of the asset in terms of its value.

We're fully committed to protecting, enhancing the value of all of our assets irrespective of prospects of ownership. So we have taken all appropriate, and will continue to do so to take steps to protect and enhance the value of the Company's properties.

Thank you.

Mark Cohen with Goldman Sachs.

I may have missed a few of these things because we were on another call, but if I have and you want to refer me to call later, I would be happy to. I wonder if, first of all, you could talk about operating expenses and just what changed in the cost structure year-over-year to allow you to contain the operating expense growth as much as you did, because I assume that the difference in what you produce on the bottom-line here and what you had been talking about had a lot to do with that operating expense control.

That is not necessarily the case, Marc. Let me just give you some generalized comments on the key parts of the P&L. This is on an adjusted basis. Gross margin compared to a year ago at the margin level, we were just slightly below where were last year. On the operating expense level, we were slightly above where we were last year in total. As you missed earlier, Jeff Kanter asked the question about marketing spend. Marketing spend is up a couple million dollars from the prior year, but that was offset in other overhead areas during the period. In the other category, that was an offset versus the prior year. In a significant way was the joint venture equity income, where last year in the first quarter we had a very large first quarter and this year we had a very small result based on the smaller sized (indiscernible) when harvest. That is the story versus last year. The story versus the guidance that we had given previously at 33 cents, is that the margin was probably about a million dollars stronger.

Gross margin?

Yes. Probably about a million dollars stronger. And the operating expenses were probably as much as $4 million lighter. That is really where we see the effect of the increased efficiency from the early implementation of our restructuring plan coming through on most accounts. There is a little bit of timing because we expected to spend a little more on marketing during the quarter and that will flop over to the second quarter. Finally, the equity income from joint venture, although it was lower than last year, it was about $1 million higher than what we had thought our guidance due to the timing and the sale of Opus One.

Greg, of this 13 million or so increase in marketing that prompted you to cut the expectations by 50 cents, how much of that fell into this quarter and how much of it flips into the subsequent quarters?

I don't how if we can be specific about how much fell into this quarter. I think I did point out so I will share it with you, that I think the marketing spend this last quarter was about $2 million higher than it was last year. But I don't know if that is all incremental. Much, we think, will fall in the second quarter and I think Dennis would tell you that this would be a timing difference at this point, not a permanent difference, because it's our goal to invest heavily behind the lifestyle brands. We think that is what really makes sense in this environment.

So separately, you talked about being encouraged about the improvement in the Woodbridge trends as the quarter went on. How real is that? And can you talk about putting it in context of comps and talk about how real that is and what you think is driving it because it doesn't seem like you spent the incremental money yet.

Let me give you my perspective on that. First as it relates to comps, with Woodbridge going over -- going against a comp of last year where in the first quarter Woodbridge grew by 4 percent. That is a pretty significant number for Woodbridge. The quarter-on-quarter comp was fairly significant. As we look at the trends as measured by Nielsen over the last four months, we have seen an improvement in those trends culminating in a 2.3 percent growth rate in September. That is the most recent data we have and that is on a four-week basis. I think it is really, as I think about it, it's a function of a number of things. We have made some significant changes as you know, in our organizational structure and in our people, leading key functional areas like our sales organization, like our marketing organization, our public relations department and so forth.

And so I don't think it's an accident that over the last year Woodbridge has received over 150 accolades on its wines, that we have received incredible public relations coverage in magazines like Real Simple and Redbook, and just last -- oh about a week or ten days ago, in the USA Today. We have got an ad campaign around our small winery traditions that significantly beat in testing not only wine advertising norms, but alcohol beverage. So including wines, spirits and beer, on all key measures, recall, importance (ph) purchase intent and the like. So there are a number of good things happening on the brand, but I think distributors and retailers are buying into the program frankly. And I think this focus organization -- I was amused last night when I was watching the baseball game and heard Curt Schilling talk about -- and attribute the Red Sox win to a total organizational focus, and from the owners through to the trainers and the bat boys, and frankly I think that is the kind of transformation that we're going through right now.

Two follow-up questions on that Dennis. First of all, maybe I should know this because you guys post this, but was the comp in September in those Nielsen numbers for Woodbridge any easier or more difficult in the earlier end of the quarter? And secondly, can you give us a sense of the base Woodbridge brand versus some of the line extensions, I guess the (indiscernible) that you introduced last year?

For the comp, I don't have that comp in front me versus the prior quarter, but I can tell you that what is important and provocative -- and again Marc, granted these are four-week numbers, right? On a business like this you've really got to take a 3 month, a 6 month horizon. But I will tell you that in that September quarter we saw growth on what we call Woodbridge classics. So Woodbridge, excluding Select Vineyard series, and excluding 187's, our new line extensions for Woodbridge, we saw a growth of 1.8 percent on classic. That was the first time we saw growth in the four-week period for that month. So that was the first time we saw growth on classic in over 60 weeks. So again, I don't want to over promise here, but these are pretty encouraging signs and we think that the focus that we have, the quality of the programs and the investment expectations for the fourth quarter -- I'm sorry, the second quarter -- that we will be in good stead with Woodbridge.

Can I ask one last question then?

Absolutely.

Marc, before you go to that let me add to the other piece. I just looked up the growth comps for Woodbridge in the year-ago period -- I'm sorry, I got the wrong year. I will come back.

Thanks Bob. Hank, there is -- maybe this has been asked already, but there is enormous lack of clarity about how you get to $400 million to $500 million after taxes. Do you care to give us more insight about that?

I think we have covered that pretty well in a number of our presentations. We feel that there is an arbitrage capability in the luxury businesses which has not been realized by sitting as part of the lifestyle business. I think a Forbes magazine article a couple of weeks ago, kind of points out what we are talking about. The Giants (ph) lost $35 million a year ago and they were valued at $355 million. So it's a business that EBITDA does not work on. It is a business that just kind of cash flow, does not necessarily make any sense. That is our feeling. I know there is a lot of people out there who don't feel the same way we do, but we are comfortable based on our valuations and our consultants and our investment banker valuations, that that is what it's worth.

Is that because you have land value data that we just can't calculate and make up the difference? Or is it that there is a greater fool out there?

Partly the land values, Marc. It's very hard to value brands, as Hank said, with high-end unique real estate properties, and Robert Mondavi Winery Napa Valley has the largest single vineyard holding in Carneros (ph), the largest single vineyard holding in Stags Leap and the largest single vineyard holding in Oakville. And if you just took the To Kalon (ph) Vineyard in Oakville with some very real world comps of $300,000 an acre, you would have $150 million of dirt value underpinning that asset without looking at the brand, without looking at the winery, and so on and so forth. We think this is part of the reason why we started off this exercise with the view that ultimately a private buyer who perceives the value of real estate and has often a longer-term horizon, is probably the most likely buyer to pay up for that value.

We remain comfortable with that range of value. Obviously it is something that we don't want to provide specificity around because we think it can distract from us actually realizing the highest value for those assets, and it also includes the impact of non-strategic assets. I want to make that clear because I saw a lot of people in print referring to that number as the proceeds from only the luxury assets, and in fact it includes the net proceeds from our non-strategic assets as well, which are not insignificant.

These are newly identified non-strategic assets, not the ones that you and Hank were talking about months ago?

Those assets that we have had on the balance sheet previously of about $44 million would represent a very small part of this. But these are newly identified non-strategic assets, mostly vineyards, mostly associated with the lifestyle business, so on and so forth. Again we continue to look at the number. We are evaluating the value growth plan as we go-forward. We are sorry that we cannot provide more insight into it, but obviously when we're talking to prospective buyers, we don't want to have numbers out there that we have disaggregated to give people comfort.

I understand. Thank you very much.

Lori Hahn with Deutsche Bank.

Good morning. It is Marc Greenberg. Gentlemen, again, let me also apologize if I have missed this, but your current restructuring plan assumes that lifestyle remains the going concern. The wine industry growth, as we have seen it the last few years, is really accruing to both the biggest and the most aggressive players in terms of promotional activity. To better evaluate the other potential offers, and particular Constellation's offer for everything, can you please elaborate as you why you believe Woodbridge and Private Selection can become more effective competitors once you lose the halo effect from the (indiscernible) winery, and as your financial resources and scale get smaller? I mean essentially you talked about execution improvement in your programs, but what shear market power? Are you going to be more willing to get aggressive on price? And are you going to become permanently more efficient in terms of grape procurement? Thanks.

Let me tackle the strategic nature of the question, that the value growth plan that our Board approved included the divestiture of the luxury and non-strategic assets that Marc Cohen just asked about which we expect to yield 400 million to 500 million in net proceeds after-tax. And the pursuit of the lifestyle business, which includes Woodbridge, Robert Mondavi Private Selection, Papio and a host of new products that Dennis and his team plan to bring forward. And a key component of that new business beyond the focus that we expect to have is the ability to drive costs out of the business, particularly on the product side, and to a lesser extent on the operating expense side. We have historically been constrained with brand investment in the lifestyle business by the need to subsidize luxury business.

So if you think about it as a portfolio activity, that by taking the luxury business out of the Company, we free up funds to redeploy into the lifestyle business into the organic growth of our own brands and potentially into the acquisitions of additional lifestyle brands. A portion of that additional investment is going to come from the cost savings that we drive out on the product side. We spoke to that a number of times, getting comfortable that we can drive $30 million in costs out of the business, which again we have a high degree of confidence in. And with this focus and clear consumer products orientation towards building brands, we think we can present a very attractive program both to the trade distributors and ultimately to the consumers. So we think it is a winning strategy. The element that we would like to add to it that we don't have, probably the only element, would be additional scale. So in that sense, we would agree with you that if we had an additional scale emphasis, another large power brand, that would truly be an exciting prospect.

Marc, I would add that we have a really good understanding of what our competitive cost structure is, including the Australians. And our goal is to be able to compete with anybody in the world. Some of the non-strategic assets that we're moving off the balance sheet will allow us to be much more nimble in our pricing, in our ability to source product. That is very important to this goal, and we have taken a hard look at all of our vineyards over the last 6 months to 9 months and have -- we're moving in this direction specifically to get those costs competitive. We think we have one of the most efficient wineries in the business, but we can always make it better. We are making changes to be able to do that.

Just a follow-up on that. How dramatic, in your mind, is the difference in terms of procurement costs or efficiencies when you go from a 7 million, 8 million case wine producer to a 25 million or 30 million case wine producer? What kind of competitive advantage do the lead players have now?

I would tell you that it really becomes a factor in two things. From a procurement side you have to understand that despite the fact that we are not huge, we are a 7 million, 8 million case brand in those two brands. We have a -- we single sourced our glass. We have a very good contract with our supplier. We have made pretty good strides in the last year in reducing costs across our procurement side as we have been very aggressive in rebidding most of our deals. There are efficiencies obviously in bottling, specifically, because our bottling line can handle a lot more volume than it is going through right now, very simply. There are efficiencies in obviously go-to-market because as we become more sales focused, in lifestyle business, our sales force does not have to spend time pouring and popping corks. This is a business where our case is more consumer product. So there is definitely efficiencies there which we think, as we grow and hopefully are able to affect our plan and maybe acquire a few businesses, maybe add onto that growth. But there are definitely efficiencies of being twice the size we are, and we have measured some of those and we think that we are making some progress but we are not there yet.

I would simply add the lifestyle brand are the brands that drive our market class today. With continued and enhanced focus on those brands I think our clout will improve even more and that is certainly the feedback that I have gotten from disturbers.

Dennis, let me ask that question and turn that around on you. In terms of market clout, what do you think it is that the brand portfolio loses by way of essentially selling away the halo that is Robert Mondavi Winery. What will those brands mean to consumers and distributors when someone else has the higher end of the portfolio?

Actually, Marc, I don't think it loses anything. In fact, Woodbridge is a brand that stands on its own. Robert Mondavi Private Selection, the brand will not go away. It will still be Robert Mondavi Private Selection. Any future owner of Robert Mondavi Winery I would think would continue to want to manage that as one of the fine luxury wine estates in the world which will continue to have a positive halo effect on any of the lifestyle brands that carry the Robert Mondavi brand.

Thank you, gentlemen.

Bryan Spillane with Bank of America Securities.

Good morning gentlemen. Dennis, I wanted to follow-up on your response to Marc Cohen's question earlier, where you mentioned that you are seeing retailers have a pretty positive response to some of the programs you have put into place behind Woodbridge. What I'm after is -- it seems like you're just at the beginning of that first, so I am assuming you see that as a good sign. But in terms of how they respond, are retailers looking or willing to offer you more shelf space, more display space, extra merchandising in response to your efforts to step-up the marketing behind a brand?

Absolutely. If you think about -- you've got to keep in mind that this is the number one brand in the world, in its segment, and certainly in the 1.5 (ph) segment has the leading varietals. So to the victor, goes the spoil. The extent to which we can continue to come to the market with a focused selling story, and we know from our category management initiatives that when put on display no other brand in the segment provides the return or the turns that Woodbridge provides. So a combination of investment in both the trade and consumers, a data driven selling story and a focused sales organization, Bryan, I think are what are going to propel Woodbridge growth.

If you look at the gap between the selling story that the wine industry makes today to large retailers relative to other consumer packaged goods companies, which you agree it is a pretty large gap and there is room for that gap to close for the wine industry?

I would say there is room for the industry, not much room for this Company. I, as you may or may not know, have a fairly deep consumer packaged goods experience prior to coming to Robert Mondavi and spent a lot of time with sophisticated market analytics, category management initiatives, going back 10, 12 years now. What we're doing at Robert Mondavi Corporation is as sophisticated as the best consumer packaged goods players. I think what it's incumbent upon the retailers to come around.

One last question. On pricing, if you could just give any commentary in terms of what you are seeing at the super value end. Are you beginning to see signs that that is firming up? If it does, is that going to maybe create some opportunity for you to raise prices on Woodbridge?

I will be perfectly honest with you Bryan, I see competition sustaining and I don't see us in the near-term taking price on Woodbridge.

Okay, great. Thank you.

Caroline Leavy with UBS.

Hello everybody. I was just wondering if you would elaborate on the comment about subsidizing the luxury brands? I think you perhaps touched upon it when you said that the sales force spent a lot of time popping corks and so on. But it really would be helpful for us to understand how that tied up assets, and do you mean financially subsidizing as well. How does that work?

My comment, Caroline, was made from the perspective of both P&L subsidization and cash flow subsidization, and it's particularly with regard to the wholly-owned assets of the Corporation. As you know some of the joint venture luxury brands, Opus One and Ornellaia tend to be very attractive on both cash flow and P&L basis. From the standpoint of financial subsidy, we have often had to forego additional investments in the lifestyle brand arena in order to provide funds for subsidized losses that would have occurred in the luxury portfolio. To get a sense of that, we have provided a pro forma in our Proxy of luxury and lifestyle segments relative to 2004 and I think that will demonstrate effectively what I'm saying from a financial standpoint. Dennis could comment on any subsidy that occurs in the market in the sales force, but that is not the driver of my comment.

I don't think there is anything really to add, Greg. I think the way you characterized it is accurate.

Did you have separate sales forces then?

We did not. We currently do have a separate sales force that Jean-Michel Valette launched on the 1st of October that now exclusively handles the Robert Mondavi Winery estate wines.

Thank you.

Joe Pirapotta with Inverness Counsel.

Has the Board met with Constellation yet to discuss their offer, or is this something that's going to be on hold until after November 30th?

We are evaluating all of our options and we are speaking to multiple parties in the process of doing that, in conjunction with advice from our advisor, Citigroup. We are diligent, active, and we will take all steps to find attractive options to enhance shareholder value.

Jeff Kanter with Prudential Equity Group.

Just a quick question. Total severance, was that 3.2 million in the quarter? That's about 12 cents a share and I'm assuming that was in SG&A? Is that correct?

It was severance charges in the quarter were --.

For Tim and Mike?

No.

Sorry about that.

I'm sorry. What was your number?

I've got 3.2 million (indiscernible) and 1.7 million.

I think that's what the 8-K said.

Okay, and that is in SG&A?

Yes. That doesn't include some of the option pieces retired in that, but I think it is all detailed in the public record. It is actually more like 4.7 for the two.

In onetime payments, I guess, right?

Yes.

That is in SG&A?

Yes. One onetime payment. The payment on the severances is over 30 months. There was a stock option non-cash charge we haven't taken.

Okay. You broke that out, so there is nothing in -- so that is all in the restructuring charges and none of that is in the SG&A then?

Right. (indiscernible). There is nothing. It is all behind us.

Thank you.

Marc Cohen with Goldman Sachs.

Let me just clarify what you told Jeff. Those severance charges are in special charges, right? They're not in operating expenses right?

Well they fall into that category, and we've broken them out on page 5 of our press release, so you can see what the after-tax effect is.

They fall into which category, Hank, the special charges with the number 2 footnote?

Yes, number 2, that's where they fall.

Can you talk a little bit about where we are in the wine cycle? In other words, we had a bit of a short harvest here right? What we have been seeing, I think what we have been seeing in the industry is some tightening up of capacity, certainly demand growth has been good. But put into perspective where you see the wine cycle and how this may play into -- finish prior prices, as you look out over the next 12 months to 18 months?

I think we have been, perhaps, more bearish or slower to see the turn around than some other views. But I would say that we have apparently reached the bottom in terms of the effect of the oversupply on promotional pricing and activity, and we are encouraged by the fact that pricing was actually up 1.6 percent during the quarter. So I think there is an argument that we're starting to see price pressure actually lift as opposed to just be stable. The effect that we will see, because it is a smaller harvest, it's a good quality harvest, the effect we will see will be certain varieties like Merlot, like Chardonnay, will actually begin to increase in price in the bulk wine market and that we think will start to be reflected in producer prices as they hit the shelves.

I think you're right. I think you're suggesting a turn is starting to happen and we would share, cautiously share that view, that as we look forward particularly for those varieties, there may be a little bit of price relief going forward. Jeff asked the question, are we ready to take prices up? It is far too early to take that position but there may be less price promotion in the next 12 months to 18 months than there has been in the previous 12 to 18.

I'm interpreting that you're looking at it just a little more optimistically than say 3 months where you were talking about 18 months before things got better?

That is correct. The harvest is coming in at we think 2.8 million to 2.9 million and we think the number that was previously put in front of us was 3.1 to 3.2, so that obviously helps.

Okay, great. Can you elaborate a little bit on this acquisition? Obviously if you get this $400 million to $500 million you're sitting with a fairly strong balance sheet. You have got debt now, net debt about $325 million. You would get -- you have $50 million or so of cash. You get another $400 million or $500 million of cash. How are you going to think about this, the use of this money? I know that is part of the process that Ted is talking about, but can you talk about the -- what is on your mind in terms of acquisitions and how we should think about that because it sounds like you are more inclined to use it for expansion of the business than say a shrink -- a recapitalization of the Company, shrinking the equity base.

That is way downstream in terms of our thinking. What I was trying to say and what we really believe is that the lifestyle opportunity on a global basis is one that we think is truly exciting and it is expansion possibility. But the use of cash, we have already stated in our comments about the plan, could be devoted to growing the business internally or externally, to repay debt which is certainly also a possibility in creating financial flexibility, or returning capital to shareholders in some form. We obviously want the flexibility to evaluate each of those options going forward at the appropriate time. We have no specific acquisition plan in mind at this point.

I think what you are really observing is that the lifestyle business is a very attractive strategic platform, irrespective of ownership, and that we will do all appropriate things to extract full value from that asset.

Thank you.

Gentleman there are no further questions at this time. Please continue.

I think that concludes the call. Thank you all very much, and look forward to the next call.

Ladies and gentlemen, this concludes the Robert Mondavi Q1 2005 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 800-405-2236, with an access code of 11010575, is the access code. Once again if you would like to listen to replay of today's conference, please dial 303-590-3000 or 800-405-2236 with an access code of 11010575. Thank you for using AT&T teleconferencing. You may now disconnect.