Constellation Brands Inc (STZ) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

My name is Jason, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to Constellation Brands fourth-quarter 2006 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you.

It is now my pleasure to turn the floor over to your host Lisa Schnorr, Vice President of Investor Relations.

Ma'am, you may begin.

Thank you, Jason.

Good afternoon, everyone, and welcome to Constellation's fiscal 2006 year-end conference call.

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

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, comparable basis, organic basis, and constant currency basis.

Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial 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 the non-GAAP financial measures and why management believes they are useful to investors.

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

We will also discuss organic net sales information, which excludes the impact of acquisitions, and constant currency net sales information, which excludes the impact of year-over-year currency exchange rate fluctuations.

As noted in our press release on May 13, 2005, we effected a two-for-one stock split of Class A and Class B common stock distributed in the form of stock dividends.

All share and per-share amounts referenced during this call will reflect the impact of the split.

And finally please be aware that we may make forward-looking statements during this call.

While the statements represent our best estimate, 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 our SEC filings.

And now at this point, it's my pleasure to turn the call over to Richard Sands.

Good afternoon, everyone, and thank you for joining us for this review of Constellation's fiscal year 2006.

This was a great year in which we delivered strong topline growth and improved all of our key financial metrics -- profitability, free cash flow, and return on invested capital.

We significantly enhanced our product portfolio by integrating acquired brands and introducing a host of new products.

We also had some challenges to manage through during this year, including a very competitive UK retail market and rising fuel costs.

Meeting those challenges head on, we strengthened our leadership position in our core markets, and we're more excited than ever about our prospects for capturing our share of the vast, unharvested opportunities in the beverage alcohol business.

I will talk briefly about fiscal 2006 and then discuss why I'm so enthusiastic about our prospects for the future.

Afterwards, Tom Summer will review our fiscal 2006 financial results in detail and provide our financial outlook for fiscal 2007.

As I just mentioned, fiscal 2006 marks another year of strong financial performance.

Our topline constant currency growth of 13% drove a 23% increase in adjusted EBIT and an 18% increase in comparable EPS, demonstrating the ability to leverage both organic and acquisition-generated growth to higher levels of profitability.

This is largely because of our focus on our higher-margin branded wine, imported beer, and spirits businesses.

On a constant currency basis, organic net sales of our branded business grew 6% for the year, in line with our expectations.

We delivered record free cash flow of 303 million for the year, which represents a 51% increase from the prior year.

Our free cash flow combined with proceeds from Robert Mondavi asset sales enabled us to pay down a substantial amount of debt during the year, demonstrating our ability to deleverage quickly following an acquisition.

We exited the year with debt to trailing 12-month adjusted EBITDA of 3.1 times compared with 4.5 times at the end of fiscal 2005.

And as such, we're comfortable that we have more than enough debt capacity to complete the acquisition of Vincor which we announced earlier this week as well as other opportunities that may arise in the future.

Finally, our focus on balance sheet management enabled us to increase our return on invested capital by 23 basis points during the year, while at the same time taking on the Mondavi assets.

In other words, our ROIC would have grown more on a pure organic basis.

Turning to the operating performance in each of our branded business, I would like to begin with branded wine.

We seamlessly integrated the acquired Robert Mondavi and Ruffino brands into our U.S. wine business, and we're already seeing the benefits of our distribution scale on these brands.

Depletions, or shipments to retailers, for the Robert Mondavi brands were up a solid 5% for the year, and in line with the growth rates assumed in our acquisition model.

New products also contributed to our growth, as we introduced several new brands in the U.S. market.

Five out of these made IRI's list of top 10 new table wine brands for 2005 -- Twin Fin, Monkey Bay and 3 Blind Moose took the one, two and three positions, while Four Emus and Kelly's Revenge rounded out the list at 8 and 10, respectively.

Our new product introductions accounted for nearly one-third of all new product development growth for wines in the U.S. food and drug stores, according to IRI data.

Within our base business, we took steps to enhance the profitability of our popular priced wine portfolio.

Almaden White Zinfandel, our best selling bag-in-the-box SKU, was put on hiatus due to a tight supply of Zinfandel grapes.

Thanks to a strong 2005 harvest, there is now an ample supply of Zinfandel grapes to meet our demand, so we're in the process of reintroducing this popular product to consumers with a better margin structure.

We also increased prices on a large portion of our popular-priced wine portfolio early in fiscal 2006.

This led to slight share declines in the popular priced category.

However, we gained dollar share in the growing premium category, with the biggest gains coming in the 9 to 12 price segment, where we focused the majority of our new product development activity.

These are great examples of how we manage our business as a portfolio of investment opportunities, making investment decisions based on a where we can generate the greatest value -- increasing margins and ROIC, while providing our customers and consumers with great brands.

That's a good segue into our spirits business, where we've taken a similar approach -- to advance our migration to the premium segment of the business which is experiencing tremendous growth and higher levels of profitability.

We have invested in this growing segment of the market with brands Meukow Cognac and Cocktails by Jenn to complement our investment in Effen Vodka that we made in the previous fiscal year.

New products were also an important area of focus in spirits during fiscal 2006.

We introduced premium spirits brands, including Danfield's Canadian Whiskey and Balblair Single Malt Scotch while continuing the national rollout of Ridgemont Reserve 1792 small-batch bourbon and increasing distribution of 99 Oranges, the most recent development in our 99 line of flavored cordials.

We did have some cost pressures in our spirits business, particularly for PET, which does move with oil prices.

To maintain profitability, we took up some pricing in our value-priced business, and experienced small share declines in some of our brands as a result.

However, we continue to remain the clear leader in value spirits while increasing our presence in the growing premium spirits category.

No review of our fiscal 2006 accomplishments would be complete without talking about our beer business.

Basically, it is not business as usual.

It's business even better than usual.

We continue to experience impressive growth across our beer portfolio despite a flat overall U.S. beer market.

Six of our seven beer brands were cited in IRI's top 30 beer brand performers for 2005.

So what have we done lately to drive such success?

It's great products combined with our sales, management, and marketing expertise, which includes very consistent brand positioning with consumers and constant innovation.

Our innovation in beer is more focused on providing retail customers and consumers with new convenient packet sizes.

For example, the 24 loose pack size, which we introduced about a year-and-a-half ago, has been a key growth driver for Corona Extra, Corona Light and Pacifico.

So we'll keep doing what we're doing, and we expect continued, strong growth for our beer portfolio in the future.

Now with those insights on our fiscal 2006 accomplishments, and how we have strengthened our position in the marketplace, I would like to shift gears and talk briefly about the opportunity in beverage alcohol.

I'd like to refer to the opportunity as a vast, unharvested opportunity.

What do I mean by that?

It is just another way to say that beverage alcohol is an extremely attractive category, and companies with the right product portfolios, strong routes to market, and consumer insights will capture -- or in other words, harvest -- their fair share of these growth opportunities.

I'd like to talk about one of these opportunities.

But before I go on, I just want to be clear that all of our product categories -- wine, imported beer, and spirits -- are important to us, and all are projecting good growth and positive demographic trends for the next three to four years.

However, my comments today are going to focus on branded wine, which represents approximately half of our total net sales.

In our core markets, more consumers are moving to wine than other beverage alcohol categories.

In the U.S. market, this is clearly illustrated by recent IRI data which shows that the wine category accounted for more than two-thirds of beverage alcohol growth in the U.S. food and drug channel.

So why is wine such an attractive category?

As I see it, it boils down to four primary reasons.

First, wine is the category with the greatest opportunity for innovation.

Consumers want variety.

From the ground to the bottle, each brand of wine, and in fact, each vintage, has its own unique characteristics.

Second, wine has the greatest trading up potential of the three major beverage alcohol categories.

Why?

Three reasons -- because trading-up behavior is aspirational; second, there's no price ceiling on wine; and third, with wine there is a direct correlation between price and quality.

Now the third reason why wine is such an attractive category relates to the fact that consumers want different wines for different occasions, and therefore are less likely to become tied to a single brand.

The typical wine consumer has a selection set of trusted brands from which they will choose based upon mood and occasion.

And it's a lot easier to get into a consumer's selection set then it is to change traditional brand loyalty.

Finally, the fourth reason why the wine category is so attractive is that it is the most pragmatic category within beverage alcohol.

As the global market leader, constellation has about a 4% share of the world wine market.

That compares to beer, where the global leader has approximately 11%, and spirits, where the global leader has approximately 9%.

So the fragmentation in wine means there is considerable opportunity to harvest additional global market share, which is great news for us, the global category leader.

So that's my view on the market opportunity in beverage alcohol and why I'm so optimistic about our future.

As we head into fiscal 2007, we have all the ingredients for success -- a stronger portfolio of premium brands, distribution scale in our key markets, and the right organization structure to capture our fair share of the vast, unharvested opportunities in beverage alcohol.

So now, I'd like to turn the call over to Tom Summer for a financial review.

Thanks, Richard.

Good evening, everyone.

I'm going to begin by discussing our free cash flow and deleveraging activity, and then provide a review of our FY '06 P&L before closing with FY '07 guidance.

And I'd like to begin with the balance sheet.

And echoing some of Richard's remarks, I really think that our deleveraging efforts in fiscal 2006 were awesome.

We exited the year with $2.8 billion of debt, a decrease of nearly $500 million, resulting primarily from debt paydowns driven by our free cash flow generation of 303 million combined with 171 million of proceeds from asset sales.

Free cash flow increased more than 50% versus fiscal 2005 -- for the year, net cash provided by operating activities totaled $436 million, and CapEx was $132 million.

There were three primary factors in our free cash flow increase, the first being profit growth, the second being reduction of accounts receivable DSOs, and finally, the $45 million benefit from the early termination of derivative contracts which are onetime in nature.

When you exclude that benefit from the fiscal 2006 free cash flow, that equates to a run rate of $255 million.

And as a reminder, our guidance for fiscal 2007 is 270 to $290 million.

CapEx came in 8 million less than expected for the year.

This is a timing difference.

Our CapEx guidance of $155 million for 2007 is sufficient to cover this timing shift, in addition to the incremental investments we're making in New Zealand vineyards.

Our free cash flow will be used primarily to pay down debt, but we still intend to use up to $100 million of our free cash flow to repurchase shares under our stock repurchase program that was authorized by the Board in February.

At the end of fiscal 2006, our debt to trailing 12 month adjusted EBITDA was 3.1 times.

That compares to 4.5 times at the end of fiscal 2005.

The improvement in this ratio reflects both the growth in our adjusted EBITDA as well as our healthy debt paydown, and demonstrates once again our ability to deleverage after we complete acquisitions.

Turning to the income statement, my comments will focus on comparable results.

Consolidated net sales grew 13% on a constant currency basis for the year, driven by Mondavi and Ruffino brands.

Organic net sales grew 4% on a constant currency basis, and were impacted by our wholesale and other business, which decreased 2% on a constant currency basis.

In the UK, our wholesale business was up slightly and in line with the UK on premise market trends.

Organic net sales of our higher-margin branded businesses -- wine, imported beers, and spirits -- increased 6% on a constant currency basis.

This includes imported beers, up a strong 13%; branded wine net sales, up 3% on a constant currency basis; and an increase of 4% for spirits.

Now moving to gross margin -- for the year, our gross margin was 29.7%, up 140 basis points from the prior year.

This increase reflects improved sales mix, due in part to the addition of Robert Mondavi premium products to our portfolio, and to the faster growth for our branded businesses.

On a percentage basis, our SG&A expense for the year was 13.2% of net sales compared with 13% a year ago.

For the year, corporate and other expenses increased $7 million to $63 million, reflecting increases incurred to support our growth and approximately $4.3 million of expenses associated with the Vincor tender offer that expired in December, and those expenses were recognized in the fourth quarter.

Operating income also included $6.4 million of expense recorded in the fourth quarter related to a UK pension plan adjustment that came about during our year-end audit.

Overall, our operating income increased 21% to $760 million for the year.

Operating margins for the year was 16.5%, an increase of 120 basis points from the prior year, due primarily to the favorable product mix I discussed earlier.

The mix benefit is evident in our wine segment, where operating margin was 16.4%, up 210 basis points from a year ago.

The beers and spirits operating margin was 21.4%, down 90 basis points, due to higher transportation cost for beers, higher levels of investment behind our premium spirits, and product mix.

As we discussed last quarter, we are addressing the transportation cost increases by looking across our markets at opportunities to take pricing, and we have implemented beer price increases in several of our markets.

Adjusted EBIT for the year totaled $770 million an increase of 23%.

Interest expense was $190 million, up 52 million over last year, reflecting the increase in borrowings primarily related to the Robert Mondavi acquisition and our investment in Ruffino.

At the end of February, we had approximately 1.8 billion of debt outstanding under our bank credit facility. 1.2 billion of that was fixed with five-year swaps that begin this month -- I'm sorry, last month, March of 2006.

In addition, we have just under $1 billion of fixed term and other debt.

So as a result of the swaps, about 75% of our debt is fixed, and our average interest rate for the year on all of our debt was about 6.3%.

Our effective tax rate on a comparable basis came in at 34.6% for the year.

This came in lower than our previous 36% guidance, due to the favorable outcome of certain tax positions that were clarified earlier than expected and at better levels than expected during the fourth quarter.

In addition, our fiscal 2006 tax rate benefited from the repatriation of foreign earnings.

On a run rate basis, we would expect fiscal 2007 to be more in the range of 36.5% effective tax rate.

As a result of all of factors I mentioned, our net income increased 21% for the year.

Our weighted average diluted shares outstanding were 239 million compared with 233 million a year ago.

And as a result, diluted EPS grew 18% to $1.59 for the year, and 16% to $0.36 for the fourth quarter, which was in line with our guidance.

Let me summarize some of the pluses and minuses relative to the composition of our results.

The lower-than-expected tax rate benefited EPS by about $0.03 and the UK pension plan adjustment negatively impacted EPS by $0.02.

So the net of those two items was a $0.01 benefit to the Q4 and full-year results.

I just wanted to make a couple of comments about our fourth-quarter sales, particularly branded wine, which did come in a little bit lighter than expected.

We did anticipate challenges surpassing the very strong 15% sales growth for the fourth quarter of fiscal 2005.

But in addition to that, through the course of the year, the UK multiple grocers reduced their inventory levels more than we expected.

While fourth-quarter branded wine was lighter than expected, we do feel that our branded wine portfolio is well positioned in the marketplace, and we are very comfortable maintaining high-single-digit branded wine guidance for FY '07.

Moving now to our '07 expectations, we are reiterating our full-year fiscal 2007 comparable basis diluted EPS guidance of $1.70 to $1.78.

This guidance excludes acquisition-related integration costs, restructuring and related charges, and unusual items, all of which are detailed in the press release.

For the first-quarter fiscal of 2007, we're projecting comparable basis diluted EPS in the range of $0.30 to $0.33.

Both the full year and first quarter fiscal 2007 guidance excludes the impact of the proposed Vincor acquisition announced earlier in the week, which will incorporate into our guidance upon completion of the transaction.

For full-year guidance, we expect the following.

Consolidated net sales growth in the 6 to 8% range driven by growth in our branded businesses, wine, imported beers and spirits.

Breaking it down by category, we see -- wine, a high-single-digit growth, with the U.S. contributing a higher rate of growth than Europe and Australia; imported beer in the high single digits; spirits in the mid single digits; and we would expect wholesale and other to report low single digit growth.

We're projecting adjusted EBIT of 830 to $860 million.

We expect sizable margin expansion, despite the cost pressures on certain items like freight, [PET], and glass, as well as the $8.5 million of expenses associated with the adoption of FAS 123R.

This is largely a function of keeping fixed costs under control, continuing to identify savings through our strategic sourcing initiatives, and creating efficiencies like the restructuring program we announced in February.

We also expect to see some lift from product mix in the wine segment.

We're targeting corporate expenses to be in the range of 67 to $70 million for fiscal 2007.

This includes the $8.5 million of stock-based compensation expense that I mentioned earlier.

Interest expense should be in the range of 180 to 190 million, and we expect the tax rate for fiscal 2007 to approximate 36.5%.

We assume weighted average diluted shares to be about 241 million, which implies a relatively stable share count for the year.

I would also like to note that we have entered into derivative contracts in order to hedge against the risk of foreign currency fluctuations in connection with the acquisition of Vincor.

We will be required to mark the derivative contracts to market, which could result in a gain or loss for the first quarter.

We will exclude the resulting gain or loss from our comparable statements in the same manner that we excluded the $24 million gain that we experienced prior to the Hardy transaction.

We have not factored this into our guidance for the quarter.

Now getting back to fiscal 2006, and to briefly summarize -- we delivered solid top- and bottom-line performance, reflecting strong growth of our branded businesses and strong margin expansion.

These results demonstrate the underlying strength of our diversified portfolio and operational scale.

We had strong cash flow, which was used to pay down a significant amount of debt, and our strong balance sheet positions us with plenty of flexibility to grow and further strengthen our portfolio, including sufficient capacity to fund Vincor and other opportunities that may arise.

Overall, we're very pleased with our fiscal year results, and we continue to be very optimistic about our prospects as we head into fiscal 2007.

That concludes my prepared remarks, and now we will be happy to open the call for questions.

(OPERATOR INSTRUCTIONS) Judy Hong, Goldman Sachs.

I guess just thinking about the sales growth outlook for fiscal '07, relative to the fourth quarter and the full year '06, what are some of the key swing factors that gives you confidence that the branded wine business will accelerate in fiscal '07 to get to the high-single-digit growth?

Good question.

First of all, when we look at our sales growth, we always look at actual movement to the retailers.

So depletions are very strong in the U.S.

IRI movement or Nielsen movement from the chains in the UK to the consumers are very strong.

And whatever weakness we saw in the fourth quarter, in our opinion, is very anomalous.

It is a result of going up against a very strong fourth quarter in fiscal '05, 15%.

If you average basically the fourth quarter in fiscal '06 with the fourth quarter in fiscal '05, you have a 7% run rate average.

If you look at actual movement, everything suggests this high-single-digit growth for the branded wine business.

And we are very much, we believe, on target.

So there's no reason to believe that there's weakness here.

Can you give us those depletion numbers for the U.S. and the UK markets so we understand a better sense of what is happening at the consumer level?

Yes, if you look at the IRI data for -- I think it's actually Nielsen data -- for the UK, and you look at the -- what they call light table wine, which is the bulk of the business, the moving 12-month average is 12, 13% increases year over year.

And I believe on branded wine, U.S. branded wine, our IRI depletions are looking 4 to 5%.

And what are you assuming in the UK market as far as the inventory reduction is concerned?

Are you expecting that to be essentially done now, with the retailers taking down inventory enough?

Yes, we think that the retailers have pretty much gotten to what we would call stable maintenance levels.

Actually, in our planning and forecasting, we are prepared for a little more, but much less impact in '07 than it had in '06.

Jonathan Feeney, Wachovia Securities.

Richard, you mentioned, you were -- a lot of success in new products.

Do have any ballpark measure of how much sales in the wine business, of, say -- a percentage came from new products launch in the past 12 or 18 months?

How much of our sales?

Of your sales.

In dollars, or as a percent of the increase?

In dollars.

Obviously, we have the data.

But I would prefer if you give Lisa or Bob a call, and they can give you a better idea with data that is available through the syndicated services that is public data, because we can't get at that level of detail with our internal data.

So Bob and Lisa can help you out on how to look at the public data to come up with that.

Okay, thanks.

And you mentioned Zinfandel getting more plentiful.

Could you comment -- allowing you to restore the Almaden product after the hiatus.

Could you comment on the U.S. grape supply more broadly and what that means for your pricing maybe prospectively over the next couple of years?

Yes, sure.

First of all, when I answered Judy's question, I forgot to mention that we have a big swing in this Almaden White Zinfandel situation.

It took a heavy toll on our sales trends.

We do greater then 1 million cases, and it represented 1% share point decline.

Now so we actually should see the flip side to that, because we're reintroducing the product.

It's a very, very popular product.

And so I would hope to see that we get that million cases back, and at better margins than it was before.

So that is really predicated on the grape supply being there for Zinfandel, which it is, and prices for Zinfandel coming down from their very high levels, which it did in the 2005 crush.

Now, as everybody knows, I think the 2005 crush was quite long.

And this really was of great benefit, because supply/demand was balancing out, and we were moving into a potential period, where demand, because of continuous growth, was going to start outstripping supply.

And we could have seen prices moving up.

And when they do move up, they start to move up quite precipitously.

We believe that the length of the crush was so great that, absent a very short harvest, it probably forestalled this shift to a tight market for a good two years.

So we're looking for the next couple of years the grape supply to be plentiful, inventories to be very good, and prices of grapes to be very stable.

And after that, I would say we will start seeing an uptick in pricing representing the potential imbalance.

Okay, thanks.

And just finally, if I could -- Tom, you mentioned higher transport costs in the beer and spirits segment.

I was little bit surprised it could have that big of an impact.

I mean, is it -- could you give me a sense -- you said it's primarily due to the 200-basis-point contraction.

I mean, is that like primarily 175 basis points, or is it like just over 100?

You know, actually, Jon, I think some of your numbers were not accurate in there.

I mean, I think --

(multiple speakers) Well, do you have a measure of transport costs or [profitability] (multiple speakers)

Let's just do this as a follow-up point, and we will help you break it down a little bit.

Bill Leach, Neuberger Berman.

Tom, I was just wondering -- when you gave your guidance earlier and you repeated it recently, were you aware that your tax rate was going to be only about 25% in the fourth quarter?

It just seems like it's a very material item you didn't tell us about.

Yes -- no; it is a material item.

And I didn't tell you about it because I wasn't aware of it.

And so, just to kind of repeat what was going on here, we did get the benefit of repatriation.

We repatriated a little bit more than we expected to at that point in time.

And you know, we also had some uncertain positions that got resolved.

These were positions that got clarified much earlier than we expected, and at a different level than we expected.

And as you are well aware, Bill, under the accounting rules, you've got to recognize when it happens.

It happened very late in the quarter.

And so we have accounted for them properly, and we let them flow through.

That was the right accounting.

And so the last guidance we gave in February, we were not aware of either of these items at that point in time.

Were you aware of the charges that you took in the operating income which offset the tax rate?

No, we were not.

That, again -- that's something that came up during audit.

It had to do with the amortization of service cost, which was from a frozen plan, and we had been amortizing over a number of years without any comment.

And during the audit, it was acknowledged that we needed to shorten the amortization period, and we agreed that that was the right accounting, and adjusted our accounting accordingly.

So those two things basically offset each other, and you weren't aware of either one of them when you gave the guidance.

It wasn't intentional.

But yes, they do.

And were the charges recorded in corporate or in the segment income?

The pension costs were recorded in the UK wine business.

And the tax rate is obviously a corporate item.

And the Vincor charge -- is that corporate?

The Vincor charge is also a corporate.

That is correct.

Christine Farkas, Merrill Lynch.

A couple of questions -- Richard, could you go into the UK just a little bit more closely?

You talked about lowering inventory.

How much of that is really timing, just given your confidence of what sounds like positive growth coming out of Europe going forward?

A lot of it, if not all of it, is timing.

I think what we're trying to say is that over the course of 2006, the UK trade has been quite aggressive in bring down bringing down their inventory levels, and that that will continue probably a bit into our first quarter, but not even as aggressively.

But there is a level that they just really cannot go lower than and properly run their business.

So we see it as having very little impact on 2006, while it's had a great impact on -- very little impact on 2007, our fiscal year, while it had a very significant impact.

If you look at that 12% takeaway rate from Nielsen versus our shipments, [geez], I think there is 8, 9 points of difference, as I recall.

So it's not timing.

It is simply -- shipments are not equaling takeaway when the retailer is systematically lowering their inventory.

And it's not a seasonal thing that they are doing here.

They're not going to increase their inventories, in our opinion.

Okay.

So if we were to look at your first-, second-, and third-quarter European organic growth, which was all positive -- 8 to 2% and 10%, the fourth quarter certainly marks a big swing.

And you can see that largely due to the differences in [STRs] and shipments is what you are saying?

No, not exactly.

This was going on to a more or lesser degree quarter by quarter.

There are other factors that influence those quarterly figures, which is always the case.

Even absent inventory shifts, there's always going to be a great deal of volatility in quarter-to-quarter growth rates.

And so you cannot say one quarter is worse because the inventory change was more extreme in that quarter.

Okay, so if we were to ignore that issue, can you talk maybe about on-premise trends or any other factors or trends that you're seeing in your UK business?

Yes, the on-premise has been, I'll say, weak.

That is the most evidenced by the total lack of growth in our wholesale business.

We have moved from a wholesale business which is directed to the on-premise that had been double digits, and now it is flat.

What is most interesting to us is that one should not think that just because our wholesale business is flat that we can't grow our wholesale EBIT, which is a much smaller percentage of sales than other businesses.

But actually, our EBIT and percent of sales representing wholesale EBIT is growing, because what is declining the most are things like the RTD segment, the Smirnoff Ices, the Bacardi Breezers.

Those are our lowest-margin products.

And so our margins are improving.

And by good customer selection, which really comes down to building your business in regional accounts, you can also significantly enhance your profits, even in a flat market.

So that's what we are doing.

Our product mix is better from a profitability perspective.

And we are focused on our regional customers, which are more profitable.

And don't forget -- the real importance of our wholesale business is to have direct control over the on-premise business for our branded wine business.

And our branded wine business is growing very nicely as a result on premise, and therefore again helping our wholesale margins and helping our brand owner margins.

Great, that's really helpful.

Just as a separate question on beer pricing, Richard or Tom -- you talked about increasing pricing to help offset transportation costs or other pressures.

Is this in addition to your earlier plans?

Did you have to take pricing up a bit more than you thought, and can you comment on what beer pricing did do in your fourth quarter?

No, it is actually not in addition to, but it is a reiteration of the strategy that we communicated earlier that we would be looking market by market for opportunities, and selectively assessing the opportunities on a market-by-market basis.

Our guidance assumes a modest, say, 1% increase for the year in pricing [of] beer.

And that is no change from what we were saying before.

Okay, great.

And then the fourth quarter price growth?

It was somewhat limited, because the strategic pricing initiative that we talked about really didn't start going into effect until January.

And remember, it's a market-by-market approach, so it really isn't that significant over the course of two months.

Mark Swartzberg, Stifel Nicolaus.

I guess two questions -- firstly, Richard, U.S. wine on an organic basis -- basically flat to down slightly.

You talked a little bit about compares and this Almaden issue.

But can you give us a little more granularity on what happened in the quarter there?

And on that comment about Almaden, was it really 1 million cases in the quarter?

And when do you expect that reintroduction to happen over the course of fiscal '07?

And then I have an unrelated question.

It was 1 million cases in a year.

And I am an annual man.

I refuse to forecast quarters.

I don't even like to talk about quarters, because there's too much volatility in growth rates quarterly.

There's too many factors that influence them.

So basically, I go back to -- I said our branded wine business grew 15% in the fourth quarter overall a year ago.

That's a hard comp.

Our branded wine business grew 12% in the fourth quarter of fiscal '05 for the U.S. -- that's a hard comp.

So we really have the -- I'm going to say almost the exact same dynamics.

This is about basically the type of anomalies that happen every quarter.

This is not about weakness.

And yes, we're very optimistic on fiscal '07 for our U.S. branded wine business that we will see very nice growth rates, which are reflected in our depletions and in our IRI results, especially when you take into consideration that we dropped 1 million cases of White Zinfandel, and we're introducing that White Zinfandel, and when you look at our new product momentum, and when you look at the momentum that we have with the Robert Mondavi brands.

And I'm surprised no one has congratulated us on what a great quarter we had.

(laughter) This probably won't qualify as a congratulations.

It's more of a clarification on that subject, Tom, on the tax rate -- I heard what you said in the back-and-forth with Bill there on the 25.8% -- didn't know that in February.

What I didn't follow was -- is there an unanticipated onetime charge that has offset that, a charge that has happened since mid-February?

We knew about the Vincor costs before then.

I may have missed it, but if I have, what is it?

No, the other unanticipated -- the unanticipated charge was the pension adjustment that I mentioned earlier.

That is something that came out during the audit, and we just accounted for it properly.

So we [didn't] know about that in February.

If we hadn't had that pension charge, we would have I think reported higher numbers.

Matthew Riley, Morningstar.

Yes, I actually wanted to change gears a little bit and ask about the spirits sector.

I know that you had said that midprice spirits were an area of interest, and that was, I guess, as Vincor was kind of playing out.

Is that still an area that you are interested in?

Absolutely, yes.

And it's mid- to premium-priced spirits.

And we're still very interested in them.

Okay.

And also on the wine -- not to harp on it too much, but kind of the concern that I have looking on an annual basis is when you look at last year compared to this year, going from a comp of 13% to 3%, do you think that most of that is an inventory situation, or is there a fundamental -- is there a difference in the wine sector going forward now?

The comp for an annual basis -- fiscal '05, our branded wine base was up 6%, fiscal '06 it is up 3%.

A good piece of that is driven by the White Zinfandel situation that we discussed, and a good piece is driven by some of the UK destocking at the retail level.

And some is driven by -- fiscal '05 was artificially [tied] from the fantastic fourth quarter, which just can relate to promotional calendars and all sorts of other external factors.

Marc Greenberg, Deutsche Bank.

A couple of questions.

First, Tom or Richard, I wonder -- there's been a fair degree of speculation lately about the imported beer rights.

And rather than talking about deal terms or anything related to them, can you discuss the benefits to Constellation, and Barton in particular, of having national Corona distribution?

Are there scale things that we're not thinking about?

Well, I think there is a way to discuss that, which I guess what I would like to say is that we believe, and we have always believed, that having a single national importer would benefits the brands.

And part of that does have to do with cost synergies.

But most of it has to do with consistency in marketing and positioning and sales management across the East and the West, where what you see is the customers, especially large retailers both on- and off-premise, obviously cross the Mississippi.

For some reason, they didn't decide some of the retailers should be on the west of the Mississippi, and some should be on the east of the Mississippi.

So, that is where the real benefits is.

It is a strategic benefit.

And it is a brand-based benefits.

But again, I have to emphasize that we are not a part of the arbitration, never were a part of the arbitration.

And we have to just see what happens.

I appreciate your comments.

I wonder if I could follow up on the UK wholesale business.

Rather than talk about what did happen, I wonder if you might give us a sense of what might happen to see things get more restorative?

And ultimately, in years past, that wholesale business had growth run rates that were much higher than the low single digits that you are talking about now.

Should we mentally adjust our go-forward to think about how that business could grow?

I think there's two aspects to this.

As you know, we put the wholesale business, along with some other business in what we call "wholesale and other."

It is not in our branded business.

And the important driver of profit growth, of EBIT growth, is our branded business -- our branded wines, spirits, and imported beer business.

And it is interesting -- when we were having -- geez, I think it was high double-digit growth in -- high teens in our wholesale business, we were highly criticized, because it's such a low-margin business, people were very quick to point out that it was causing margin dilution -- EBIT margin dilution, gross margin profit dilution -- I mean, all the way down the line.

And we were quick to point out, but, you know, we're getting marginal EBIT growth and good return on invested capital.

So what we are trying to get everyone to focus on is it really doesn't matter whether the wholesale business grows or doesn't grow, because it is a low margin business.

What is far more important is how we run that wholesale business to benefit our wine brands and our branded business, which is the growth driver of our profitability, and how we run that wholesale business to maximize profitability, given our product base and our customer base.

And that's what we are doing.

And so I almost say people should forget about it in the top line.

It doesn't really matter.

And focus on -- what is Constellation's branded business growth going to be?

And we continue to say it will be in that stated range, which is, we say 6 to 8%; sometimes we say mid to high single digits, but right in that range.

And that is what we lever off of both to have higher EBIT growth rates, and ultimately either higher EPS growth rates. (multiple speakers) The wholesale business is strategically important as a driver of our branded wine business in the UK.

Tom, just one for you.

The guidance that you gave of adjusted EBIT 830 to 860 -- can you give us a comparable base and growth rates for that?

I think (multiple speakers) it's in the press release, isn't it? (multiple speakers)

We're looking it up for you.

And we'd direct you to the press release.

We don't need to --

It's actually a table in there (multiple speakers)

-- that reconciles for you, Marc.

I think we have time for one more question.

Tim Ramey, D.A. Davidson.

Let me be the last, but the first to congratulate you on a good year, because I am an annual man too, Richard.

Good -- thank you.

You know, you have sometimes give us a breakdown in terms of the growth rates by the various price points in wine.

And we know that the popular segment was depressed because of the White Zin situation.

Can you kind of give us an outlook for '07, breaking it into maybe the popular, the 6-to-10 and 11-and-up type of price points?

Popular, 6-to-10 and 11-and-up?

Or however you would like to break it, if you (multiple speakers)

My off-the-cuff is -- we will see popular flat, okay?

And again, why flat versus down?

It's going to come to this White Zinfandel issue, okay?

We're going to see our 6-to-10, which in many regards -- yes, 6-to-10 is fine -- in low teens.

And we would hope to see 10 and above in the high teens -- mid to high teens.

That is for our portfolio.

And if you had to kind of break down the drivers of growth there between, say, the big harvest of '05, and new products and just organic baseline growth, how would you evaluate those or anything else?

Well, one of the problems with this question is our brands, like Ravenswood Vintners Blend, Blackstone, Mondavi Private Reserve, are right on the $10 cusp.

So in many regards, we prefer to sort of talk 5.50 and below, 5.50 to $9, and $9 plus, because then we know where to put those brands; otherwise, we don't.

But those brands for us, plus some of the new products that we have just entered or just put into the marketplace, really fit into that 9 plus growth area.

And that's that focus.

And I don't want to say it's new products, because we have a commanding lead with Blackstone and Mondavi Private Reserve and Ravenswood Vintners Blend.

We have a commanding lead in this area, and we are driving that very, very, very heavily.

So that push is very, very important.

I would then say when you get into your 12, $13 and above, it's the industry itself that is driving the high growth rates.

The consumer is trading up.

And we can see 20% growth levels up their against a category that might be performing in the high teens.

But the real drive behind that is the consumer moving up as opposed to us -- I'm going to say using our muscle, whether it is advertising or distribution muscle, as we are doing in that 9 to $12 category.

So I don't know if that answers your question.

I think it helps a lot.

Thank you very much, and looking forward to a good '07.

Great.

And Tim, again, thank you for the compliment.

I'm glad to hear you are an annual man.

And we are looking forward to a great fiscal '07.

Our portfolio of brands across categories, across geographies, is positioned for growth, for great organic growth.

And we're obviously very excited about that.

And we're excited about the potential that Vincor has to offer.

So thank you very much, everyone, and have a good evening.

Thank you, ladies and gentlemen.

This does conclude today's teleconference.

You may disconnect all lines at this time, and have a wonderful day.