Constellation Brands Inc (STZ) 2005 Q4 法說會逐字稿

Hello and welcome to the Constellation Brands fiscal year 2005 year end earnings release conference call. [OPERATOR INSTRUCTIONS.] I would like to turn the call over to Lisa Schnorr, Vice President of Investor Relations.

Ms. Schnorr?

[Inaudible] everyone and welcome to Constellation's fourth quarter conference call for fiscal year 2005.

Richard Sands, our Chairman and Chief Executive Officer; and Tom Summer, our Executive Vice President and Chief Financial Officer, are here with me in Rochester this evening.

By now, you should have had an opportunity to read our media release, which has also 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, comparable basis, and pro forma basis.

Reconciliations between GAAP and comparable basis, and/or pro forma basis measures are available on the Company's website at www.cbrands.com under the investors section.

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

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

They will also discuss certain pro forma net sales information, after giving effect to the Robert Mondavi and Hardy acquisitions as if the Company had owned them in the same periods a year ago.

Please 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.

After the call if you have further questions, please call me or Bob Czudak, Director of Investor Relations.

Now, getting through all of that, I would like to turn the call over to Richard Sands.

Thank you, Lisa, and good evening everyone.

I'm glad you all are here with us today, and I hope you survived the winter, and are enjoying the swing into spring, as we say here in Rochester.

I also hope you're sampling some of our fine products, which are great in any season.

When we last spoke, we had just completed a trio of strategic transactions at the beginning of the fourth quarter.

I'm very pleased to be able to update you on our progress with them, talk about the solid performance of our business, and discuss why I think the Company is positioned for continued success in the future.

First, I'd like to reflect for a moment and say that fiscal 2005, in my opinion, ranks as one of most exciting years in the Company's history -- a year in which we exceeded $4 billion in net sales, delivered record earnings, and completed the acquisition of Robert Mondavi, the icon of wine brands.

I'd like to take this opportunity to thank the worldwide team of Constellation employees for their incredible efforts and dedication, which allowed us to achieve these great milestones.

Achieving these results was not an easy task.

In addition to completing the $1.39 billion acquisition of Robert Mondavi and making significant progress on the integration of this business, we also added the Ruffino and Effen brands to our portfolio.

Our people completed these transactions while ensuring the base business continued to grow prosperously.

I believe this execution reflects our commitment to our entrepreneurial business model and structure, which fosters decision making close to the ground, that is, close to our customers, our markets and our sources of production.

This structure promotes both a disciplined approach to running the business, while fostering creativity, vision, and the insight to see the opportunities for growth from both the base business and acquisitions, and then the ability to execute these opportunities rapidly, again, both from the base business and acquisitions on a simultaneous basis.

In addition to having the right structure, and good, capable people to execute our strategy, you need the right products, and I believe we have the right products across the wines, beers, and spirits categories.

I think this is evidenced by our strong fiscal year and fourth quarter results.

Our topline, pro forma, currency-adjusted growth for the whole Company nicely exceeded our targeted range of 6 to 8%, coming in at 9% for the full year.

The wines segment, which was the most significant contributor to our growth for the year, was driven by our branded wines' return to high single-digit growth rates on a pro forma and currency-adjusted basis as we anticipated.

Our wholesale and other business within wine on an FX-adjusted basis grew 10%.

Our branded wine growth in Europe of 12%, again, on an FX-adjusted basis continues to outpace the healthy category growth rates in that geography.

We continue to see strong consumer demand for Australian, New Zealand, and premium California wines, with the California wines greatly benefiting from the weak U.S. dollar.

Much of this growth came in our core U.K. markets, but in the expansion markets the story is much the same, with sales more than doubling in the rest of Europe, which includes our expansion markets of Ireland, Denmark, Sweden, Switzerland, and Germany that also are benefiting from the quickly-growing demand for new world wines.

We continue to gain traction in non-European expansion markets, which include Canada, Japan, and other Asian markets.

And we see substantial growth opportunities, although on a relatively small base.

Net sales of branded wines in the U.S. increased 5% for the year.

And that is before considering the net sales contribution from Robert Mondavi.

The growth rate accelerated throughout the year, reflecting a favorable mix shift towards our higher-margin premium products.

This growth is true growth, growth that creates an economic profit.

True growth is created by making incremental investments that produce results.

That is, profit beyond our cost of capital.

It is critical with our existing brands that we do not over invest and, obviously, underperform.

I believe that we very much right-sized the incremental investments we made to support focused brands, such as Alice White, Hardys, Blackstone, and Ravenswood and produced great results.

Based on IRI data, the distribution for these brands increased by 15 to 23%, and volumes have grown in the range of 25 to 75% in the last 12 months.

Our insight and disciplined approach to marketing support for strategic brands helps us maximize the return for each dollar we invest in a brand.

On a side note, these four focused brands each received the Adams Beverage Fast Track Growth and Impact Marketing Hot Brand awards.

La Terre, Covey Run, and Simi were also Impact Top Brand winners, while Estancia and Robert Mondavi Private Selection received Adams Established Growth Brand awards.

Other Adams award winners included Black Box, Nobilo, Papio -- Papio, excuse me.

And the Rising Star category -- those were in the Rising Star category.

Rising star is not one of our newest brands.

And Woodbridge in the Comeback category.

Another true growth driver is our higher margin fine wine portfolio, which includes Franciscan Oakville Estates, Simi, Mt. Veeder, Columbia, Estancia, and new brands like Drylands from New Zealand, which is growing the whole portfolio in excess of 25%.

Sounds like -- sounds like a who's who of premium wines, even before you add the Robert Mondavi winery brands to the lineup.

To keep this momentum we also need new products.

Our recent introductions of Turner Road, Lorikeet, Monkey Bay, Twin Fin and Kelly's Revenge are receiving a good response from the market and have the potential to contribute to our future growth.

Now, acquisitions also provide true growth.

And strategically, we are always looking to enhance our existing portfolios in each category.

Our acquisition of Hardys continues to improve in terms of ROIC as the business, Australian and New Zealand wines, continues their dynamic growth throughout the world.

That brings me to the acquisition of Robert Mondavi.

Tom will talk about the economics of this transaction and how we're improving returns and quickly decreasing invested capital, so I will focus on the strategic side.

From a strategic point of view, the Robert Mondavi wines and strong brand equity complement the Constellation wine portfolio nicely.

Woodbridge fills a gap in our 5 to $8 price range, where it is the number one brand.

Private Selection adds to our arsenal of wines that sell for around $10, which is a popular and growing price point.

In fact, both Woodbridge and Private Selection are the largest selling brands at their respective price points.

And then by adding the icon, Robert Mondavi Winery, along with Ruffino to our Franciscan Estates business, we've established the most formidable fine wine portfolio in the world.

Early results have exceeded our expectations.

We're seeing renewed momentum from Woodbridge and continuing growth for both Private Selection and the Robert Mondavi Winery in the U.S.

We are planning on launching in Europe in a May, June time frame, and are encouraged by the interest the brands that we've seen as we plan the launch throughout that geography.

We've -- we've already achieved the majority of the SG&A synergies, and Tom will discuss the remainder of the cost synergies expected throughout our fiscal 2006.

But I wanted to comment that on an overall basis the integration has gone extremely well, due to the excellent planning and execution by our wine business team.

In summary, with both Hardy and Robert Mondavi, as more time passes we become even more pleased with these acquisitions and the contribution they have and are making to our Company.

As you will recall we became a 40% owner of the Ruffino -- of Ruffino, an Italian fine wine company.

Recent IRI data indicates the Ruffino portfolio has experienced healthy category growth in the United States.

This trend is encouraging as we became the U.S. importer of record for the Ruffino brands on February 1st.

While we've only had these rights a short time, we are pleased with the early results.

Mondavi and Ruffino have helped strengthen our position as the largest wine company in the world, with annualized case volume approaching 90 million cases.

And our position as the number one premium wine company in the U.S., which includes wines priced greater than $5.55, the fastest growing segment in the wine business.

In fact, we have leading market positions in each of our key markets.

Now, turning to beer, which posted a 7% increase for the year.

A significant portion of this increase came from the price increase on the Mexican portfolio that we implemented in January of 2004, which was our fourth quarter last year.

The remaining growth came from volume gains in our Mexican portfolio and from St. Pauli Girl and Tsingtao.

Net-net for the year, our beer business performed in line with our expectations following the price increase.

Quarterly results for fiscal '05 were skewed, due to the difficult comparison caused by the distributor buy-in ahead of the price increase in the third and fourth quarters a year ago and the flow of retailer buy-ins against the price increase in the fourth quarter and first quarter, resulting from promotions and attractive offers.

Now, if we look at the average growth rate for our beer business over the last two years, it's about 9%.

So when you normalize the impact of the price increases on a quarter-to-quarter basis, we have seen about 9% average growth.

In addition, the Mexican portfolio has made -- maintained retail market share versus a year ago, despite the price increase, which was not fully followed by others in the industry.

This clearly demonstrates the portfolio strength with consumers, and more importantly, the brand strength of Corona Extra.

Corona Light, Modelo Especial, Negra Modelo, and Pacifico all grew very nicely during the year, as did St. Pauli, which is our national brand, and grew in the mid-single digits, which outpaced the growth of the German import market.

So, overall, we feel very good about our beer business.

Now, let's move to spirits.

Spirits grew 10% on a solid 5% growth in branded spirits and a strong production service growth.

Barton Vodka, Montezuma Tequila, Black Velvet Canadian Whiskey were strong throughout the year.

In addition, Barton Vodka, Paul Masson Brandy, Skol Vodka, and Chi-Chi's all received Adams Established Growth Brand awards.

Our spirits business is performing well, and we continue to innovate and move our portfolio towards premium products such as the 99 family, Black Velvet Reserve, Ridgemont Reserve 1792 Bourbon, and the Effen Vodka brands from our new joint venture with jstar brands.

We are pleased with the early progress of Effen, which should benefit from our sales organization and distribution network.

I will tell you from personal experience that our Effen Black Cherry Vanilla is the best flavored vodka in the industry.

This has potential to become a hot flavor and drive the brand.

Ask for it next time you're out, and if the bar is not carrying it, tell them it's hot and they should order some.

The joint venture is also focused on developing additional high-end spirits for our portfolio.

We still believe there will be consolidation in the spirits industry.

And spirits does remain our first acquisition priority.

In summary, fiscal 2005 provided us with some excellent momentum, and when we look forward, I believe we have put the building blocks in place to achieve continued success in this exciting industry.

These include -- our entrepreneurial structure that keeps decision making close to our customers, markets and sources of production; the incredible lineup of brands we have across categories, geographies, and price points; our financial discipline; and our focus on maximizing the return on our brands for growth, for cash, or both; and how we accomplish this by leveraging our selling and marketing expertise, along with the scale of our production and distribution networks.

We have the insight to identify opportunities early and execute on them, whether it's acquisitions, partnerships, or development of new products or line extensions to meet consumer trends.

With these building blocks, we have the potential to create significant value and achieve our goal of 15% top-line growth, with about half coming from existing businesses and half coming from acquisitions.

We have the products that consumer want, and our base businesses are performing well.

We'll continue to seek out our value-enhancing acquisitions to accelerate our growth.

I also believe we have the momentum to take this growth and generate EPS growth of 15 to 20% for the next few years as we remain committed to our true growth business model.

I am pleased to announce that our Board has approved 2-for-1 stock split.

Details of the record date and distribution date are in our press release.

I will now turn it over to Tom Summer, who will review our 2005 results in more detail and share our forecast for fiscal 2006.

Tom?

Thanks, Richard.

A lot of good things to talk about, and good evening everybody.

I am going to break with tradition today and change the order of my discussion.

I'm going begin with a review of our cash flow and balance sheet, followed by a discussion of the Robert Mondavi transaction, and then I'll review our income statement before closing with our fiscal 2006 guidance.

Today I'm celebrating the end to a great quarter and a great year.

I am wearing a T-shirt which has been prominently displayed on the wall of my office all quarter, and this T-shirt reads "Happiness is positive cash flow."

Needless to say, I feel very good, because in our fourth quarter we generated record free cash flow.

Free cash flow, which we define as net cash provided by operating activities minus CapEx, came in at $201 million for the year.

Our base business performed in line with the targets we set for the year, and that was offset slightly by a use of cash by Mondavi for the quarter.

Our capital expenditures were $120 million for the year, and depreciation and amortization totaled $104 million.

We received $38 million of proceeds from sales of non-strategic assets, most of which occurred in the fourth quarter.

About 10 million of the 38 million was attributed to Mondavi asset sales.

These proceeds are not included in our definition of free cash flow, but they do contribute to our debt paydown and did contribute to our debt paydown during the year.

We finished the year with $3.3 billion of debt, and our current debt level is $3.2 billion.

Now, I'd like to move on to the economics of the Mondavi acquisition.

As you know, consideration for the acquisition was 1.4 billion, which includes the assumption of certain Mondavi debt.

Prior to the acquisition, Mondavi had begun a process to sell certain non-strategic assets, including some of their smaller brands and several vineyards.

While we have made some adjustments to the specific assets we're selling, we have kept that process moving, and have already completed a number of sales.

We expect to generate 150 to $175 million from Mondavi asset sales during fiscal 2006.

These asset sales, combined with the asset sales in fiscal 2005, will effectively reduce our invested capital in Robert Mondavi.

To date in fiscal 2006, we have already generated $120 million from asset sales.

Our guidance, which I will review in a little bit, includes estimated accretion from Mondavi in the range of 3 to 5%.

This is consistent with our discussion during our third quarter conference call.

And many of you have already worked through the math to arrive at synergies in the range of 25 to $35 million.

If you look at the estimated synergies combined with Mondavi's historical reported EBITDA, along with the reduction in our invested capital due to asset sales, the returns from and the multiple pay for Mondavi are quite attractive.

Of course, this is just a starting point, and doesn't capture the incremental benefit of the Robert Mondavi acquisition will contribute over time.

The reason I walked you through this was to demonstrate our disciplined approach to this transaction and confirm that we feel very good about the economics of the acquisition and its ability to generate true growth and create shareholder value for Constellation.

Shifting now to our income statement.

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

Our press release includes a lot of detail on our net sales growth, so I'll just hit on a few highlights.

Pro forma net sales on a comparable basis for the year grew 13%, including 4% from currency.

The pro forma comparable net sales include Hardy, as if we owned it in March 2003, and Mondavi for January and February 2004, and exclude relief from certain excise tax, duty, and other costs recorded in the fourth quarter of 2004.

Pro forma net sales, excluding currency, were up 9%, slightly ahead of our targeted growth rate of 6 to 8%.

Once again, the breadth of our business enabled us to deliver strong growth.

All categories, branded wine, U.K. wholesale, beers and spirits contributed to growth for the year.

Richard already walked you through the dynamics of our revenue growth by category, so for the sake of time, I'm not going to go through those details again.

I'll move to gross profit, which for the year grew 15% and gross margins were 28.3%, even with our fiscal year 2004.

Selling, general, and administrative expenses increased 19% for the year and reflect the addition of Mondavi.

On a percentage basis, SG&A for the year was 13% of net sales, compared with 12.5% a year ago.

As we announced a year ago, we increased our investment level behind four focused wine brands in our Mexican portfolio this past fiscal year.

And those incremental investments clearly paid off, as Richard already discussed.

As a reminder this was a plan for the past fiscal year only.

For our fiscal year 2006, the dollar investment behind these brands should be in line with fiscal 2005 and decline as a percentage of net sales.

General corporate expenses for the full year increased 14 million to 56 million.

The biggest reason for this increase was Sarbanes-Oxley 404 costs incurred through the year, combined with increases to support the Company's growth.

As we previously mentioned, the cost of Sarbanes-Oxley 404 implementation did exceed our expectations.

Although our efforts are not totally complete, we feel very good about where we are in the implementation process at this point in time, and my thanks go out to everyone involved in this process for their excellent efforts on what is a challenging initiative.

With most of the initial Sarbanes 404 work behind us, we're targeting corporate expenses in the range of 56 to $58 million for fiscal 2006.

Operating income increased 12% for the past year.

And operating margins for the year were 15.3%, a decrease of 50 basis points from the prior year.

This is due to the incremental investment spending I mentioned earlier, combined with the mix effect due to the substantial growth of our U.K. wholesale business in the past fiscal year, and also due to the higher corporate expenses that we've already discussed.

Interest expense for the full year was $138 million, down slightly from our fiscal 2004.

Our interest expense increased in the fourth quarter.

I think the increase in borrowings related to Ruffino and Mondavi and Effen.

On December 22nd, we finalized our new $2.9 billion credit facility and used a portion of the proceeds to complete the Robert Mondavi acquisition.

The new facility is composed of a $600 million term loan A, a $1.8 billion term loan B and a $500 million revolver.

The interest rates are LIBOR-based with current spreads ranging from 150 to 175 basis points.

Also in December we entered into a series of interest rate swaps, which we restructured in March.

Due to recent changes in interest rates, we had an opportunity to lock in some gains in March, and allowed us to extend our hedged position to the end of our fiscal 2010 without changing the overall economics of our hedging program.

In effect, $1.2 billion of our floating-rate debt is now hedged through fiscal year 2010 at an effective average LIBOR rate of 4.1%.

Our tax rate remained at 36% for the year, and as a result net income increased 18% for the year.

For the year, our weighted average diluted shares outstanding were 116.5 million, compared with 106.9 million a year ago.

The increase in diluted shares reflects the impact of our higher stock price on diluted share calculation, as well as the July 2003 equity offering.

Comparable basis diluted EPS grew 8% to $2.70 for the year and 15% to $0.62 for the fourth quarter.

This reflects about $0.03 to $0.04 of accretion attributable to Mondavi, which outperformed our expectations for the fourth quarter by contributing $84 million of net sales.

Now, if I can move on to our expectations for our fiscal 2006.

We finished refining our fiscal 2006 operating plan, and we've updated our EPS guidance that we provided previously in January.

Our comparable basis diluted EPS guidance has been raised to 3.09 to 3.21.

For the first quarter of our fiscal '06, we expect comparable basis diluted EPS in the range of $0.56 to $0.60.

The full-year guidance includes the following assumptions -- consolidated net sales growth in the mid to high teens including the benefit of ten additional months of Mondavi.

This assumes a mid-single-digit growth rate for beer, a mid- to high-single-digit growth rate for spirits.

It reflects a high-single-digit growth rate for base branded wine, that is, without the incremental sales from Robert Mondavi, and mid-single-digit growth for wholesale and other.

Operating margin expansion should come primarily from our wine segment, due to cost savings and mix, while operating margins in our beers and spirits segment should remain stable.

Interest expense should be in the range of 200 million to $210 million.

Our tax rate is expected to remain at 36%.

And we are assuming a weighted average diluted shares somewhere in the range of 120 million.

Our guidance for fiscal 2006 does not take into account the impact of the 2-for-1 stock split and excludes the impact of FASB 123-R share-based payment which the Company expects to adopt beginning with our third fiscal quarter of 2006.

In terms of our cash flow and balance sheet metrics we expect the following -- for fiscal 2006 we are currently estimating cash provided by operating activities in the range of 380 to $400 million, minus $140 million of CapEx, resulting in free cash flow in the range 240 to $260 million.

Our free cash flow target is taking into account the outlay of cash required to fund the Mondavi restructuring and integration plans.

Our fiscal '05 year-end debt balance stood at $3.3 billion.

As always, our primary use of free cash flow is to pay down debt.

Based on our free cash flow projection of 240 to $260 million, combined with asset sales in the range of 150 to $175 million, we expect to exit fiscal 2006 with approximately $2.9 billion of debt.

Assuming no acquisitions in fiscal 2006 and assuming growth in EBITDA, we would expect debt to trailing 12 months adjusted EBITDA to be in the low 3s at the end of this fiscal year, '06.

So to briefly summarize, we've delivered net sales growth on a pro forma and currency-adjusted basis ahead of our targeted range of 6 to 8% for fiscal year 2005.

And our results demonstrate the underlying strength of our business and the benefits of our diversified portfolio.

The Mondavi acquisition and our investments in Ruffino and Effen position us to accelerate our net sales growth and margin expansion and incrementally contribute to true growth in fiscal 2006 and beyond.

Again, our strong balance sheet and ability to generate free cash flow positions us with plenty of flexibility to grow and further strengthen this portfolio.

This is a great business and we're very excited about the prospects for fiscal 2006 and beyond.

With that, I will open the phone for questions.

Amy, we'd like to begin the Q&A session, please.

[OPERATOR INSTRUCTIONS.] Our first question comes from Kate McShane of Smith Barney.

Hi, good afternoon.

Just wondering about the Corona brand, and with the beer market being what it is, being very competitive and the import segment, in particular, getting very competitive with increased marketing spend by Heineken and the introduction of Brahma in a lot of markets by InBev, are you going to be doing anything different to market the Corona brand during your fiscal year 2006?

Kate, that's a good question.

Basically, we believe that the Corona brand and other Modelo brands has very, very strong brand equity.

It demonstrated this with the last price increase, which was not followed thoroughly throughout the country.

And we've seen continued, good, strong consumer momentum.

We've really seen, over the course of the history of the brand, that with -- really with much less marketing spend than other imports and other domestics that are equal size -- the domestics equal size, there is no imports the same size -- that with much less spend, we accomplish a lot more.

So we believe that the environment, while it's changing slightly, it's not going to impact, again, right-sizing the investment and our promotional strategies to any material degree.

And that we should see low, mid-single-digit growth, certainly from Corona, and higher levels from the smaller Mexican brands.

And just a quick follow-up on that.

When comparing the spending on Corona last year, when you were supporting the brand while the price increase was happening, is spending going to be less in 2006, or would you say it's comparable?

Spending will be more than 2006.

More than 2005.

But comparable on a per-case basis.

Okay.

Thank you, very much.

Our next question comes from Marc Greenberg of Deutsche Bank.

Good afternoon.

A couple of questions for you, Tom.

First, you talked about some asset sales in the range of 150 to $175 million in fiscal '06.

Is there any upside to that number based on identifying other things that you may want to sell, or affirming in wine prices leading to higher valuation on the assets?

Marc, I would say, at this point, I wouldn't expect any upside.

Really that is our best view at this point in time.

So, I wouldn't look for any upside.

Okay.

And then just secondly on your characterization of the interest cost and the LIBOR plus on your facility.

If -- if we think about the carry on your debt of something like an average of 3 billion on a full-year basis, based on the numbers that you just gave, isn't that less than 6% weighted average debt cost?

And can you help me reconcile that with a interest expense of 200 to 210?

Because I'm coming to a much lower number.

I, unfortunately, am not going to do it in a split second here.

Why don't you follow up with myself or Lisa or Bob.

But there's a lot of detail behind that.

The -- the LIBOR rate and the spread only apply to a portion of our debt, so maybe that is the difference.

But we'll work through it with you.

Okay.

Great.

Thank you.

The next question comes from Jon Feeney of Wachovia.

Hey, guys.

Richard, you talked about the renewed momentum in Woodbridge, and clearly you have done a great job there.

Could you get any more specific, I mean, is it fair to say that renewed momentum is that mid-single-digit growth is, that growth year-over-year?

It's low levels of growth that we're talking low-single-digit growth, but that's versus low-single-digit declines.

And I -- I think that, really that renewed momentum is coming from multiple sources.

One, the distributors and the retailers know that we are extremely focused on the brand and that we're not going to change strategies or become defocused by other concerns, as maybe had occurred in the past.

And two, the negative impact of the super-value winds continues to be mitigated as super-value wines are having to go up in price and are declining in popularity, and are actually down in the 20% range.

So both of those things feed into this renewed momentum.

Thanks, Richard.

I just wanted to follow up with Tom.

When you look at the $43 million in comparable Mondavi sales from the Jan-Feb '04 period.

Mondavi sales rep here are, actually, like, 98 million, if you count the three months, did you exclude stuff like assets sales or something?

Is there something I'm missing there in the comparability of the 43 versus the 84?

You're look -- is it -- are you looking at three months versus -- ?

Yes, I'm looking at three months.

But if you did two-thirds, call it, that would 65 million.

In December we shipped --

Oh, it's December -- oh, it's yes, December is just a big month.

So, right, that's all.

Okay.

You can't go two-thirds December is very large.

Okay.

That makes -- that makes perfect sense.

And finally, Tom, just the 240 to 260 in free cash flow, this may be something we want to get in offline but could you -- what would be the comparable, kind of, free cash flow number you'd be comfortable with for '05, just so I can kind of track what you're doing year-over-year, I guess, somewhat organically?

It's going to be hard to get too specific, because as we talk about our fiscal '06, the way that we've integrated Mondavi, it's all -- it's all put together now.

But I think -- I think as a rough gauge the restructuring -- the Mondavi restructuring costs are somewhat offsetting the cash flow that's being generated.

And so as a very broad statement, I would say that a base -- a base-to-base increase, you're looking at a base-to-base increase, this number over a fiscal '05.

Right.

Okay.

Thank you, very much, guys.

Our next question comes from Timothy Raney.

Good afternoon, and congratulations.

Thanks, Tim.

The -- a couple of questions that relate a little bit to Mondavi.

First, your expectation of 150 to 175 million of assets sales must imply that you've somehow come to a meeting of the minds on Opus One and that that won't be sold.

Is that a fair assumption? .

I think that it does not include Opus, and we really have no comment with respect to Opus.

It's still something that we're working on very hard.

Can you comment at all about Ornellaia, or is that sort of in the same boat.

Ornellaia has been sold.

It has?

Yes.

Okay.

So that would be in the $120 million number that you've done year-to-date?

Yes.

Yes.

Okay.

And the Gomberg numbers showed some very strong shipments in January.

And I heard anecdotally from people in the trade that they thought your February was very strong as well.

Is a lot of that just sort of shipping to your distribution network, either in the U.K. or other places, or can you comment at all on those numbers?

We -- I -- it's -- it's hard to go month-by-month.

But I would say that, overall, we think that our shipments are pretty much in line with consumer takeaway, and there might be slight increases in what is in trade channels.

But that's fairly normal with a growing business.

What's in trade channels should grow with the business.

It's growing at 8, 9, 10%, should grow in the same range.

So for the most part, over longer periods of time -- quarters, years -- things are pretty well balanced.

Okay.

We don't really look month-to-month.

Richard, your plan of increasing investment spending behind three or four wine brands this time last year looks like it worked really in spades.

And just wondering why you wouldn't be coming to us today with a plan to do the same with some of the Mondavi brands?

Well, I -- I think that one of the reasons that, in essence, you don't think we're coming with a plan to do that, whether it's with Mondavi or other brands, is that the level of synergies that we are generating from the Mondavi transaction allows us to return some of those synergies to invest in growth of the brands, as opposed to just drive to the bottom line.

So we're really balancing our bottom-line growth with investing in brands for future bottom-line growth through top-line growth.

But it's just not obvious because the synergies are so big.

Got it.

Thanks, so much.

The next question comes from Mark Swartzberg of Legg Mason.

Thanks, Operator.

Good afternoon, everyone.

Richard, on your beer business.

I guess, two questions.

First, when do you expect, reasonably, to start seeing shipments again -- growing again?

And then, relating to that, if you're disappointed in the business, in spite of its strong health, just simply doesn't grow as expected, as you look around your broader businesses at areas of flex, including Mondavi synergies and Mondavi bounce here, where do you think your flex is most significant to offset a disappointment there?

Answer to the first question is we could see beer grow in Q1.

There's some competing forces here.

And what was the second question?

If your -- well, that -- the second question relates to flex.

But I'm interested in your first comment already.

Can you elaborate why you think your business might be up in Q1 and on these competing forces?

Yes.

The completing forces are, during Q1 last year, beer shipments exceeded our expectations because there was a lot of promotional activity at retail, and there was a lot of activity, in particular, in California because the chains had come off strike and were using Corona as a loss leader, I'll say.

So that would lead us to believe that we are looking at potentially a tough quarter.

On the other hand, there has been a load-in at the distributor level in Q4 of 2004 that made Q1 soft to start with of 2005, and our groups, beer group has adjusted their promotional schedule to try to show more growth early in the year.

So, you put all that together, and we think we're going to see some nice growth in the first quarter.

That's great.

And then the second part of the question was this -- if that growth doesn't materialize or it fizzles out and you look at the broader -- your broader business, where are your biggest sources of flex, in terms of incremental profit offset?

Oh, our ability in spirits and wine to reduce our marketing spend would be the biggest flex point, if any parts of our business aren't coming in as planned.

And I -- I'm sure you're not saying this, but I just want to -- well -- well can you comment on Mondavi synergies because connecting dots, it sounds like you're saying there might not be upside there.

But I -- I don't know that you're really saying that?

I -- Mark, it's Tom.

I think that -- I think the reality is, is that -- and this is, I'm really trying to tie back to this is really the first time that we've given segment guidance on the top line.

And if you -- if you listen to what I said, we're looking for a very strong year in spirits, and we're looking for a very strong year in branded wine.

And we're very excited about that.

And that should make you less concerned about what happens in the out quarters with beer.

Although, we're not concerned about that either, because we're looking for a strong year from beer as well.

Fair enough.

Thanks, guys.

Your next question comes from Jeff Kanter of Prudential Equity Group.

Good afternoon, everybody.

Tom, thank you for breaking out your guidance, that was -- to that level of detail.

That was helpful.

Thank you, Jeff.

Your guidance itself for 2006, based on what you were thinking last conference call, where is the delta?

Really the delta is in the performance of the Mondavi brands.

The Mondavi brands had an excellent fourth quarter.

And the -- the trends -- the trends look strong.

And so we've incorporated that into our thinking between then and now.

So that 25 to $35 million in synergies with the 3 to 5%, that's clearly -- we're on the high end of that range, obviously then, right?

Whereas, maybe before, you were on the lower end?

Is that -- is that fair, too, or no?

No.

I mean, it's still a range of guidance, and I think that all -- in every area where we gave you a range, it's because that's the range we're looking at.

And it should -- it should all put, hopefully Jeff, though.

No, I wouldn't say we're at the top end of the range.

I think that we're just using those assumptions to get to the range that we've given you.

And -- but they don't end in 2006, do they?

They keep on going.

Can you give us an indication on what 2007 may look like?

Or do they end?

The synergies?

Yes.

Clearly the synergies that we've referred to are mostly in achieving cost reductions versus the cost reductions that existed in the Mondavi structure.

And those would be ongoing cost savings.

Okay.

But that -- ?

But we're not -- but we're not going to be giving guidance on the following fiscal year this early in the game.

But my -- but it's not -- just to say that there are not -- there's still not going to be some cost saves in 2007 from Mondavi, that's not the case; is that correct?

Do you mean the total pool of cost savings from time zero, will it increase in 2007 on an annualized basis?

Will there be incremental cost saves, that's correct.

A little.

A little.

I mean there's -- there's obviously opportunity to garner some production cost savings in the future that aren't fully recognized in year one.

But I would say that the big chunk has been realized early in the game here.

And those synergies, do they include the reduction in SG&A that you mentioned in your prepared remarks?

Yes.

Okay.

How much did you get in the quarter, about?

Any -- can you give us any guidance there?

Jeff, let me just, I need to just sort of get you to a little higher level.

We can't talk about dollars and cents and quarters and so on and so forth.

But on this issue, which I think is a very good and interesting issue of how do the synergies build over time.

Right.

We have taken an approach here to generate synergies very rapidly and a portion of those synergies are being re-invested in Mondavi brands, in other brands around the Company to drive future growth, which drives future bottom line growth, as that's leveraged through the P&L.

Right.

So, I go back to what I said.

This is a balancing act.

And it's a balancing act of producing dynamic, short-term results and making sure that we have the engine to produce equally dynamic long-term results.

Okay.

And -- and to sort of get too detailed or micro, we can't really answer the questions, I think, gets away from that general concept.

No worries.

And finally, Tom, your cash flow guidance -- your free cash flow guidance, you said includes some Mondavi restructuring spends?

Yes.

Not getting into too much detail, but how much are we talking about?

Is it 20, 30 million?

More?

Well, the restructuring number, I think, is spelled out in the press release.

Oh, okay.

All right.

We use those numbers.

Okay.

Yes.

And really, I think -- I think the point of doing that is that where we believe we're going to end our fiscal '06, in terms of our debt balance is exactly where people thought we were going to be, but there was a little bit of lack of clarity on the math to get there.

So we just wanted to help people do the math.

No, and I appreciate -- again, I appreciate that level of detail.

Richard, would you -- last question, would you use stock to make an acquisition if one came across the transom that looked compelling and added to your return on invested capital.

Gee, I don't think, with our debt levels coming down so fast, that one would need to.

So, I think it's a question of at that moment in time what's the size of the acquisition and what are our debt levels?

So it's not answerable.

Thanks for -- thank you, very much.

Be good.

The next question comes from Zafar Nazim of JP Morgan.

Yes, hi.

I was wondering if you can provide us your pro forma EBITDA for fiscal 2005?

And also, if you can give us your guidance for '06 and -- in terms of EBITDA?

We -- the pro forma EBITDA is a measure that we're really not able to provide, because it's not a -- not a GAAP measure that we reconcile.

So we would -- we would have to go back to a GAAP measure.

I think we've provided those for you.

And there's a reconciliation in the back of our press release.

Okay.

And so can you tell us what the EBIT, the operating income contribution, was from Robert Mondavi in '05 for the fiscal year?

I think Tom already provided an accretion number in the fourth quarter.

Okay.

But not for the full year.

I'm sorry?

But for the full year, if I want to estimate for the full year?

No.

Okay.

No.

Okay.

Okay.

That's it for me.

The fourth quarter was the full year of 2005.

Right.

Okay.

That's right.

There is no -- Robert Mondavi could not be broken out on a separate basis in fiscal 2006 because it's a fully-integrated business.

Okay.

Thank you.

The next question comes from Alec Patterson of RCM.

Yes, good afternoon.

Just a couple quick ones.

One, on the spirit side, just looking at production services, up 49%, again, a very strong component.

Is that going to be ongoing?

Because it seems like this has been running in a robust manner a little bit longer than I would have thought?

Or is this kind of the end of new contracts? .

Yeah, that won't be ongoing.

It's a -- it's a very volatile number year-to-year.

Okay.

Not ongoing, meaning it rolls right back down to more of a broad spirits trendline number?

Yes.

I mean, it's -- it's -- when I say it's not ongoing, I mean quarter after quarter after quarter, if one looks at how the contracts are coming on, going off, so on and so forth, we could see a couple more quarters of growth, and then you might see little bits of decline.

Okay.

All right.

So maybe a couple more quarters, because these are contract based.

So you should have visibility out for the next couple quarters, right?

Sometimes there's spot sales because it includes spot sales of bulk.

Okay.

All right.

And on the branded spirits side, up 6%.

Just a quick read, how much of that was volume versus price?

How much was volume versus price?

Or price mix, yes.

Yes, for the year?

The 6%, I think, was the quarter number.

So whichever one is easier for you to put together.

The year ran about 4%, right, guys?

Yes.

The year ran about 5%.

It's mostly volume. 80% volume.

Okay.

And then, I -- it's kind of hard to read into the working capital numbers off the cash flow statement and how much Mondavi is affecting that.

Any, maybe, just a qualitative assessment on where you feel your working capital position is?

Yeah, happy to.

I think the thing you really need to do is just take a look at working capital.

I mean, the big -- working capital is the big driver.

I think we made planned and excellent progress in the fourth quarter against receivables and inventory, and that was really the big driver.

And that's -- that's primarily, really is our base business.

So most of -- I would say, for the most part, it came from our base business.

It came from working capital.

It came from receivables and inventory.

So are your days sales and days inventory where you want them to be?

I would say there's always room for improvement.

But I wouldn't be looking for mountains of cash to be pouring off the balance sheet at this point in time.

Okay.

And lastly, the depletions out of the beer side, what did they run in the fourth quarter?

Depletions on the beer side during the fourth quarter were, I believe, pretty much in line -- no, the fourth quarter depletions should be down significantly because the fourth quarter last year, retailers were buying in.

So they were down about 4%.

And Alec --

Because retailers were -- retailers were buying in against their price increases, where the distributor was increasing the price to them on March the 1st.

Right.

And, Alec, as we talked about on the last quarter conference call, we had -- we had told people that we would -- we expected the depletions in beer to be down in the fourth quarter.

Right.

No, no, absolutely expect.

I just wanted to be clear.

Is that down 4 on a sales basis, or volume basis.

Volume.

Okay.

So there's some pricing on top of that?

Yes.

Okay.

Great.

Thank you, very much.

Good.

I think --

I think we have time for one more, Lisa?

That's correct, we have one more.

We have a question from Bryan Spillane of Banc of America.

Hi.

Good evening, everybody.

My --

Good evening, Bryan.

My -- Richard, just a question on -- on potential acquisitions.

And you said in your comments that you are -- your first priority, first interest, is in spirits.

And I'm curious, is there an opportunity, or do you see an opportunity to have a bigger presence for your spirits business in Europe?

And would that be something that you would look at aside from just potential opportunities in the U.S.?

I -- I think that we will always be more interested in improving our spirits business in our core markets.

And when I say our core markets, I mean our core beverage alcohol markets, so that's U.S., U.K., Australia, New Zealand, provided there's compatibility between wine and spirits, which there is.

There's also the potential case to be made that spirits, in the expansion markets, can help with our roots to market in those markets.

And so, we would look, potentially, at spirits acquisitions of certain types in those markets.

So that's how we would, in essence, sort of, weight the various markets in terms of spirits priorities.

Okay.

Great.

And if I can, just one last question.

Tom, what I'm thinking about, wine margins increasing in 2006, can you just give me some direction on how I should think about input cost inflation, and then what the dynamic is -- how much improvement in margins are you expecting from rate increases?

How much from better mix?

And, then, again, what the -- what the effect of input costs will be?

It is a great question.

Unfortunately, we really do not want to be disclosing wine margins specifically.

I mean, I think you got -- you got all the right math.

Our mix is improving.

We're getting cost increases.

We're taking costs out.

But we're too -- it's -- it's just not a good idea for us to be getting into that level of detail.

Okay.

Great.

Thank you.

Okay.

Another question?

I think we -- yes, we do have a couple more people from the queue from what we understand.

So we're going to extend for just a few more minutes.

We we will take a question from Caroline Levy from UBS.

Thank you, so much.

Richard I was interested as to what the retailer or distributor response might have been since you made the acquisition of Mondavi, and further the acquisition of BRL, but as you go into your distributors and talk to them is this helping them to get incremental shelf space with retailers?

Just more of the qualitative feel of what this means for your business?

I'm actually interested in the U.K. as well, as to what the upside is for Mondavi.

Yes.

I think, certainly within the distributors -- with the distributors in the you United States, Hardys, Mondavi, basically the distributors know us, know us well, know our tenacity, how we support brands, what we expect of them, and, therefore, they're getting a lot more, I'm going to say, consistency and focus and management by our sales force than they may have otherwise gotten, and I would -- I would hope, more effective marketing tools to take the brands to the retailer.

So I think, in general, distributors are happy when we buy brands, especially those that may have been in trouble.

The retailer in the United States, it definitely puts us in a much better position to partner with retailers to be category leader, and help them make wine more profitable and give a better return, which as you know, is very important today, especially with the major supermarket.

In the U.K. especially on the off premise side, where you're going direct to the major multiples, you really have the same effect by combining our Matthew Clark business along Hardys, and ultimately bringing Mondavi, we are a better partner to these major multiples and can help them with the category management tasks and space planning, and so on and so forth.

And we're seeing a large appetite for that.

So, all in all it's very good.

That's a great answer because one of the things I'm hoping we get to discuss next week at your meeting is that you've Costco and Sam's Club, I think, rolling out sort of premium-priced private label.

And I think private label wine is 50% of the market in the U.K.

And I'm just wondering if that impacts your growth outlook, or if you feel the retailers, because you're so big, you become an even more important partner?

Okay.

Well, we'll talk about that when you're out there.

I have a last question, which is Allied Zimec (ph), it looks like it's in play.

And I'm -- I'm wondering will you just take -- you did talk about spirits being a primary target.

Are you still thinking about low-end spirits, or have you expanded your definition of where you want to be in terms of acquisitions in spirits?

Well, Caroline, it's Tom.

I guess, I -- look, we always -- we say and we do, always evaluate every potential opportunity in the space.

So we can't comment on Allied specifically, but we do always look at every potential opportunity in beverage alcohol.

Great.

Thank you, so much.

Okay.

I think we're going to -- I think we're going to wrap up.

Sounds good to wrap up that.

We think we had a great quarter.

We think there's more great quarters to come and a great year to come.

We're very happy that everybody is so inquisitive about our business, involved in what we're trying to create here.

And I thank everybody for their participation in the call.

And I look forward to seeing many of you next week and expose you to a much broader group of people, and actually sharing some of our products with you.

If we have one thing next week, we got some good drinking.

I think on that note we'll wrap up.

Bob and I will be available after the call and tomorrow for follow-up questions.

So please feel free to give us a call.

Thank you.