Constellation Brands Inc (STZ) 2007 Q1 法說會逐字稿

Good afternoon ladies and gentlemen.

At this time, I would like to welcome everyone to the Constellation Brands first quarter 2007 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).

It's now with great pleasure to turn the floor over to your host, Lisa Schnorr, Vice President of Investor Relations.

You may begin your conference.

Thank you.

Good afternoon everyone and welcome to Constellation's first-quarter fiscal 2007 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 news 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, organic basis, and constant currency basis.

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

They 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.

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

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

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

Now, before I turn the call over to Richard, I'd like to take a couple of minutes of your time to discuss some changes in the way we communicate our financial information.

Many of you have told us that you find our news releases too long, too complicated, and generally speaking, shareholder unfriendly.

You told us you would like to see even greater transparency.

Well, we listened.

And we decided to do a better job providing you with the information in a format that will make it easier for you to see the underlying fundamentals of our business.

Therefore, we conducted extensive research.

We analyzed other companies' quarterly disclosures, and we spoke with many of you to better understand how you would like to see the information presented.

The result is that we've instituted a number of significant content and format changes.

Last quarter, we added a detailed analysis of our organic sales and an ROIC reconciliation to our website.

This quarter, we reformatted our news release to make better use of tables and present our results in a clearer, more concise way.

And we also increased our transparency.

Our news release now includes geographic net sales by product category.

As part of this process, we also looked at trends as they relate to both the nature and frequency of financial guidance.

We've incorporated some changes focusing on the primary drivers and below the line items like interest, taxes, and CapEx.

We're also considering changing our current practice of providing quarterly EPS guidance and moving instead to providing EPS guidance only on an annual basis.

We believe this would better reflect the way we manage and analyze our business for the long-term growth.

The changes we have made were implemented to improve the way we communicate with you, and we do welcome your comments.

And with that being said, I would now like to turn the call over to Richard Sands.

Thank you, Lisa.

Good evening everyone.

And thank you for joining us today.

We're conducting our call from the New York Stock Exchange.

Our Board of Directors joined us here today and we rang the closing bell.

Tom and I have been on the road meeting with investors recently both in the U.S. and Europe, and there were a few themes that came up at most of our meetings.

I'd like to take this opportunity to address some of those topics on today's call.

Let me first quickly touch on some of the first-quarter highlights for which Tom will provide greater detail later in the call.

Constellation's fiscal 2007 is off to a good start.

In our first quarter, we delivered strong topline growth in our branded businesses which increased 9% on a constant currency basis.

This was driven by imported beers and branded wine.

Importantly, all of our categories performed as we expected.

Branded wine net sales bounced back this quarter, increasing to 6% on a constant currency basis, driven by strong sales from North America that more than offset softness for Europe and Australia/New Zealand.

Our beer business grew 18%, driven by continued strong consumer demand combined with strong shipments in advance of the key summer selling season.

And we experienced solid growth in our branded spirits business, driven by growth in our premium spirits brands although this was more than offset in the quarter by a year-over-year decline in production services due to the timing of a bulk whiskey sale in the first-quarter a year ago.

You will recall that I said back in April, sales trends can vary dramatically quarter to quarter for a variety of reasons.

So I tend to look at longer-term growth rates to evaluate the underlying trends in our business.

For the past four quarters, constant currency organic net sales of our branded businesses grew 6%, 9%, 3%, and 9% respectively.

We delivered EPS in line with our expectations.

Our ability to manage through the cost challenges that we anticipated at the outset of the year demonstrates the strength of our portfolio as well as the strength of our decentralized organizational approach combined with our geographic diversity and scale.

Our return on invested capital grew to 9.7%, up from 9.6% at the end of last year.

Looking ahead, we would expect some near-term dilution in return on invested capital until we fully integrate Vincor and capture the full benefit of synergies of that acquisition.

Tom will take you through the results in detail, so I want to shift gears and spend the remainder of my time discussing three topics that seem to be on investors' minds.

First, I'll talk about the Australian wine supply and its impact on Constellation's business and the market in general.

Then I'll talk briefly about the UK wine market and what we're doing to maximize the value and profitability from this challenging market.

Finally, I'd like to share my views on the U.S. wine market and why I believe we're uniquely positioned to capitalize on positive consumer trends in this very healthy wine market.

Now, regarding the Australian wine situation, as you know, Australian wine is in excess supply, the results of several years of record or near record grape harvests, combined with a slowing growth rate for Australian wines in some key markets around the world.

While data is still coming in, preliminary estimates indicate the 2006 harvest came in about 2 to 3% lower than the 2005 harvest for the industry as a whole.

As it relates to Constellation specifically, our total intake for 2006 was about 10% lower than last year.

And, our cost per ton was down at a similar rate.

This clearly illustrates our discipline in managing inventories and grape contracts as we continuously work through these cycles.

It will probably take the industry two to three years of lighter Australian harvest before the supply comes into balance with demand.

So how does this affect the market for Australian wines?

We've seen the most significant impact in the UK and Australia where some suppliers have discounted their product in an effort to reduce inventory levels.

Such discounting has created pricing pressure for all Australian wine suppliers in these markets.

Fortunately, we've been able to offset most of this pressure through lower grape costs because we don't have huge inventories of high-priced wines, and we negotiate our grape prices on an annual basis unlike other suppliers who may have large inventories and are committed to long-term fixed-price contracts.

In the U.S., where Australian wine accounts were approximately 8% of the total table wine volume, we're not seeing any indication that the excess Australian supply is creating any market volatility.

In fact, retail pricing for Australian wines in the U.S. is down a mere 1% compared with a year ago, and this really appears to be largely a function of mix.

So to sum up the Australian wine situation, we continue to watch it very closely and we are carefully managing our inventories as we always do.

We have been through numerous grape cycles and are confident in our ability to properly manage through this one, too.

I would like to move now to the subject of the UK market, which has been challenging and we believe it will remain so for the foreseeable future.

The UK market has experienced 20 years of dramatic growth in which per capita consumption has doubled.

Some people believe the UK has reached a wine saturation point.

We disagree.

Clearly, the UK market has reached a point of maturity where volume growth rates will likely slow to low single digits.

However, we believe there remains ample opportunities for suppliers to create growth and value.

A significant portion of the growth in the UK has come in the off premise channel at price points below 5 pounds.

However, there is evidence that consumers are becoming more brand conscious and that they want to trade up to wines of higher quality.

Over the past three years, private label has declined from 30% to 24% of off premise wine volume.

Additionally, much of the UK wine growth in the recent past has been driven by the Australian category, which now accounts for more than 20% of all table wines consumed in the UK.

Now heavily penetrated, the rapid growth of Australian wines appears to be giving way to other New World wine countries of origin, namely the U.S., South Africa, and New Zealand.

These factors present a unique opportunity for Constellation, the clear leader in the UK wine market with brands like Robert Mondavi Woodbridge and Turner Road from the U.S., Nobilo from New Zealand, and Kumala, the top South African brand in both the UK and the world, combined with our leadership of the Australian category with brands like Hardys, or Banrock Station, we have an excellent portfolio brands from growing New World wine countries of origin to offer the UK consumers.

We have the breadth and scale to lead the market and increase our branded business at higher price points, continue transitioning business to strong brands from our countries of origin and increase our presence in the on-trade and impulse channels.

Clearly it will take some time to get where we want to go.

But we believe this strategy is right for the long run and that we have the right management in place to successfully implement our strategy.

In the interim, we will continue to leverage our leadership position and focus on opportunities to maximize profitability.

Now, I'd like to spend some time discussing the U.S. wine market, which is as healthy as I've seen it in many years.

We're projecting industry volumes to grow in the low to mid single digit range over the next three to five years.

Furthermore there continues to be a significant amount of trade up activity by consumers, which means dollar growth should outpace volume growth by a couple of percentage points.

The fastest growth is projected at retail pricing above $9 per 750 ml equivalent.

Conversely, wines that retail below $5.50 which we refer to as popular priced wines are projected to be flat to down slightly both in volume and dollar terms.

Constellation is the overall wine market leader in retail dollars and number two in volume.

We have quality brand offerings for customers and consumers at all price points.

Within the premium segment and above, which is retail price points of $5.50 and up, we are number one both in dollar value and volume.

Furthermore, we're the clear leader in super premium, $9 to $12 per bottle, with the top two brands Robert Mondavi Private Selection and Blackstone.

So, we're in the market leader, so we're the market leader in the U.S. wine and we have great -- a great line up of brands consumers want.

So what's the concern?

Some people have pointed out that our skew to the popular priced segment of the market makes it difficult for us to grow our market share in the U.S.

While we would agree that were more heavily skewed toward popular priced wines in the U.S. market as a whole, we need to look at market share growth in the context of long-term value creation.

Because we manage our business to grow return on invested capital, we are more concerned about growing marketshares profitably and in the right categories.

That's why we focused a lot of our new product development activities in the faster growing, higher margin, premium price segments with an emphasis on the highly attractive $9 to $12 segment through brands like Twin Fin or Monkey Bay or Three Blind Moose.

For the U.S. market as a whole, the $9 to $12 price segment represents about 10% of the wine volume and 16% of wine dollar sales.

Its growth rate is in the mid to high teens and it is a price segment where we can generate substantial incremental return on invested capital.

You may ask, how is that possible?

Well, let me explain.

At $9 to $12 per bottle, there is little in the way of incremental capital investment required.

That's because at these price points, you don't need to invest in vineyards.

The only incremental capital investment is for working capital related to aged inventories.

Margins are significantly higher in the $9 to $12 segment, which means greater [NOPATA] growth.

So growing our presence in premium wine categories like the $9 to $12 price segment can generate substantial NOPATA growth on low incremental capital investment, which translates to substantial incremental ROIC.

Now, our focus on premium wines doesn't mean we're abandoning our popular priced wine business, with brands including Almaden, Inglenook, and Vendage.

Our popular priced wines are significant portion of our business and very important to our customers, retailers, and consumers.

But we must manage our popular priced business responsibly, maximizing our profitability and not overinvesting in these brands.

Wrapping up my discussion in the U.S. market, I would like to reiterate that it is a very healthy market with a lot of great opportunity.

We're managing a portfolio brands in the U.S. which is a lot like managing any other investment portfolio.

With a full line up of brands across price segments, we have a lot of investment opportunities.

We're making investment decisions every day on the basis of both market trends and where we can generate the greatest shareholder value.

Before turning the call over to Tom, I would like to make a few comments on the Vincor acquisition which we closed on June 5th.

Vincor's premium brands, Toasted Head, Hogue, and RH Phillips, complement our existing U.S. portfolio and give us even more investment opportunities in the premium wines in the U.S. market.

Canada is a growing and profitable wine market that is experiencing similar trends to those in the U.S. -- healthy underlying growth combined with consumer trade up activity.

As our 5th core market, Canada will further increase our geographic diversity and strengthen our stellar brand portfolio.

We're extremely enthusiastic about the opportunity to leverage our strong roots to market to grow Vincor's brands from other New World wine countries of origin, such as Inniskillin and Jackson-Triggs from Canada, Ken Crawford from New Zealand, and certainly Kumala from South African to harvest incremental growth opportunities.

In closing, I want you to know that we are pleased with our first quarter results.

We delivered results in line with expectation amidst a number of challenges.

There will always be challenges, like grape cycles and difficult market conditions in our business.

But we have demonstrated our ability to meet challenges head on and deliver solid results.

I'm enthusiastic about our ability to continue to harvest opportunities in our markets and create long-term value.

Now, I'd like to turn the call over to Tom Summer for a brief financial review of our first quarter.

Thanks, Richard.

Good evening everyone and thank you for joining us.

I'm going to start with a review of the P&L, where my comments will focus on comparable basis financial results.

Our net sales grew 7% on a constant currency basis.

Net sales of our branded businesses, wine, imported beers and spirits increased 9% on a constant currency basis.

And this was driven by imported beers, up a strong 18%, and branded wine net sales up a solid 6% on a constant currency basis.

North America branded wine net sales increased 13% while Europe and Australia/New Zealand declined 7% and 3% respectively on a constant currency basis.

During the first quarter, retail inventory levels were further reduced in the UK.

The magnitude of this reduction was lower than the fourth quarter of 2006, but we estimate that it drove about half of the branded sales decline in Europe for the first quarter.

Moving to margins, for the quarter our gross margin was 27.8%, down 100 basis points from the prior year, primarily due to higher transportation cost for beers and higher beer product costs.

As we discussed in the past, around midway through fiscal 2006 the elimination of an advertising expense charge for the Company's Mexican beer portfolio was offset by a product cost increase.

This resulted in a classification shift between cost of goods sold and SG&A with no overall impact to operating margin.

Operating margin for this quarter was 14.3%, a decline of 10 basis points.

Our results included $3.6 million of stock compensation expense related to the March 1, 2006 adoption of FAS 123R.

This effectively reduced consolidated operating margin by 30 basis points.

Now that we've adopted the pronouncement and worked through the details, we're capturing the expense in each of the applicable operating segments rather than reporting it out -- all at our corporate segment.

Wine operating margin for the quarter decreased 20 basis points to 12.6%.

This segment's share of stock compensation expense reduced margin by 30 basis points.

And we estimate that the increase in UK duty impacted margin by an additional 20 basis points.

In beers and spirits, operating margin was impacted by mix, both within spirits and between beers and spirits, as well as an increase in transportation costs that primarily affected our beer business.

We expect the impact of higher transportation costs to moderate in the second half of the year as we cycle the dramatic increase in fuel cost that we began to experience around this time last year.

SG&A expenses for the quarter decreased approximately $1 million from last year.

We're getting scale improvement on our SG&A reflecting the benefits of our restructuring programs another cost reduction efforts.

In addition, SG&A benefited from a classification shift between advertising expense and cost of goods sold that I discussed earlier.

On a percentage basis, our SG&A for the quarter was 13.6% of net sales compared to 14.4% a year ago.

For the quarter, corporate and other expenses were essentially even with last year at $14 million.

Overall, our operating income increased 5% to $165 million for the quarter.

The $3.6 million of stock compensation expense effectively reduced our operating income growth by 2 percentage points.

Interest expense for the quarter was $49 million, up 3% over last year, reflecting the impact of higher interest rates on our floating-rate debt.

At the end of May, we had approximately $1.8 billion of bank debt and just under $1.1 billion of fixed, term, and other debt.

Our average interest rate for the quarter on all our debt was 6.8% compared with 5.7% for the first quarter last year.

In connection with the Vincor acquisition, we closed on a new $3.5 billion credit facility which replaced our previous $2.9 billion credit facility.

After Vincor closed, the Company had approximately $3.2 billion outstanding under the new credit facility.

This is primarily LIBOR based debt with current margins ranging from 125 to 150 basis points, $1.2 billion of which is fixed with interest rate swaps that are in place through the end of fiscal 2010.

As a result, just over half of our debt is now effectively fixed-rate.

As we previously discussed, in early April we entered into a foreign currency forward contract to fix the U.S. dollar cost of the acquisition of Vincor.

Since then, the Canadian dollar strengthened relative to the U.S. dollar, so when we settled the contract in early June, we realized a pre-tax gain of $55 million. 52.5 million of that amount flowed through the first quarter income statement as noncomparable, and the balance will be recognized in the second quarter.

We also finalized the sale of our Strathmore water business on May 31st.

This resulted in a $14.1 million noncomparable pre-tax loss in the first quarter.

Our effective tax rate on a comparable basis came in at 36% for the first quarter versus 35.6% last year.

And as a result of everything that I just mentioned, net income increased 5% for the quarter.

Our weighted average diluted shares outstanding were 240 million compared to 238 million a year ago.

And as a result, diluted EPS grew 3% to $0.31 for the quarter, which is in line with our expectations.

Now, shifting to free cash flow.

Our cash flow is very seasonal historically.

We are often a net user of cash in the first quarter.

We used $37 million of free cash flow in the first quarter of fiscal 2007.

Capital expenditures were $45 million.

And as we discussed last quarter, some of our New Zealand vineyard purchases were delayed from the fourth quarter of our prior fiscal year and closed in the first quarter of this fiscal year.

You'll note that we refined our definition of free cash flow because under FAS 123R, excess tax benefits from share-based awards previously reported as a component of cash flow from operating activities are now required to be reported in the financing activities section of the cash flow statement.

Therefore, in order to show free cash flow on an apples to apples basis, we revised our definition accordingly.

Our CapEx and free cash flow guidance for the year remain unchanged from April.

CapEx guidance is $155 million and free cash flow guidance is 270 to $290 million.

Both of these amounts exclude the impact of the Vincor acquisition.

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 as authorized by our Board in February.

While we remain opportunistic, we have not purchased any shares to date because our trading window has not been open.

At the end of the first quarter, our debt to trailing 12 month adjusted EBITDA was 3.2 times compared with 3.1 times at the end of fiscal 2006.

Growth in our adjusted EBITDA was offset by an increase in our debt balance driven by seasonal working capital needs.

Now, moving to our expectations for fiscal 2007.

The guidance we're providing represents our base business only and excludes the impact of the Vincor acquisition.

We are in the process of finalizing the integration and operating plan for Vincor and that is progressing on schedule.

We expect to be in a position to announce a Vincor integration plan in mid-July, and at that time we will also provide updated reported diluted EPS guidance to reflect the impact of the integration plan.

We continue to expect a total impact of the Vincor acquisition to be modestly accretive, $0.02 to $0.03 on a comparable basis for diluted earnings per share for this fiscal year 2007.

And that assumes approximately $75 million of incremental interest resulting from the 104 -- 1.44 billion of debt associated with the acquisition.

And we expect the accretion benefit to come in the second half of this fiscal year.

Exclusive of Vincor, our full-year fiscal 2007 comparable basis diluted EPS guidance is unchanged at $1.70 to $1.78.

For the second quarter of fiscal 2007, we are projecting comparable basis diluted EPS in the range of $0.42 to $0.44 which assumes adjusted EBIT growth of 6 to 10% on Q2 FY '06 adjusted EBIT of $198 million.

This 6 to 10% adjusted EBIT growth includes the FAS 123R stock compensation expense in fiscal '07 which was not part of fiscal '06 adjusted EBIT.

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

Our full-year diluted EPS guidance assumes the following and as a reminder, all of these assumptions exclude the impact of Vincor.

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

And breaking that down by category, we see wine high single digit growth with the U.S. contributing a higher rate of growth than Europe and Australia/New Zealand.

Imported beers, high single digits; spirits, mid single digits; and wholesale and other, low single digit growth.

We expect margin expansion despite cost pressures on certain items like freight, pet, and glass as well as the 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 getting lift from product mix in our wine segment.

We're targeting corporate expenses to be in the range of 61 to $64 million for fiscal 2007.

This is lower than our previous guidance.

Our previous guidance included the total impact of stock compensation expense that we're now capturing in the respective operating segments.

Now that we've adapted -- adopted FAS 123R and finalized our Black-Scholes valuation and all the other variables for our [April grants], we're increasing our estimate for stock compensation expense to $12 million.

We expect about 60% of that expense to be reported in the wine segment, 20% in beers and spirits, and 20% at corporate.

Interest expense is expected to be in the range of 180 to $190 million.

We anticipate the comparable basis tax rate to be approximately 36.5%.

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

And so now let me briefly summarize some key points from the quarter.

We delivered solid topline performance with strong growth in our branded businesses.

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

And our earnings, which were impacted by a number of items which were anticipated, were in line with our expectations.

Even after the Vincor acquisition, our strong balance sheet and ability to pay down debt following an acquisition positions us with plenty of flexibility to grow and further strengthen our portfolio, including sufficient capacity to fund other opportunities that may arise.

We continue to be very optimistic about our prospects for this fiscal year and beyond.

Now, before I close, I just want to reiterate what Lisa said about our ongoing initiative to refine the presentation of information in our quarterly press release to be more concise and strategy focused and to further increase transparency.

We feel we made some excellent improvement in these areas this quarter.

We hope you feel the same way and we do welcome any feedback that you may have.

That does conclude my prepared remarks and we'll be happy to open the floor for questions at this point in time.

(OPERATOR INSTRUCTIONS).

Judy Hong, Goldman Sachs.

Richard, you showed a very good growth in the U.S. branded line business in the quarter, up 13%.

Can you talk about how this number compares to the depletion trends or consumer take away trends?

And if you can just help us understand whether this is really a true underlying number that we are seeing here.

Yes.

We believe that we actually saw a slight reduction in distributor inventories.

And as you know, we don't have a good handle on retail inventories, so we really look at it as a pretty in line number at this stage.

Okay, and can you give us a little bit more color in terms of your performance of the U.S. wine by different price segments -- popular versus premium and super premium?

Sure.

It's really very much what we described in the past.

Popular priced wines are flat to slightly declining.

Your price points above $6 or $5.50 are growing.

Nice growth in that $9 to $12 segment and good growth in what I'll call the fine wine segment, $12 and above.

So you're holding share in the popular wine segment and you’re gaining share in the premium and above.

Is that fair?

No, I would say we’re actually strategically maybe even losing a little share in the popular wine business because we have such a sizable business that we don't need to chase -- I am going to call it unprofitable incremental business to hold volume.

So we're down maybe 1% higher than the market in popular wines.

And then you're growing share in the premium and above premium lines?

Yes.

Thanks.

Christine Farkas, Merrill Lynch.

Also a question on the branded wine business.

Specifically, the margins, Richard.

The topline growth was quite strong.

Yet the margins at 96 million were flat with a year ago.

I know there was some discussion about the stock option expense as well as the UK duty.

Can you talk about why we didn't see greater expansion in the wine business?

Was this a structural item or is there something else offsetting what we could've seen in U.S. profit growth?

It's Tom.

If you don't mind, I'll take this question.

I think the FAS 123R expense and the UK duty accounted for something like 40, 50 basis points.

So we did have -- so I want to start by saying without those we did have expansion of margins in the wine business.

So was it less than we expected?

It's actually -- it's a light quarter in the business and it really was in line with our expectations.

So I think as we get into the latter quarters of the year and we see bigger volume growth with more -- a better mix, we should get more lift from mix and see more margin expansion in those quarters.

And these earlier structural comments about shifting out of SG&A into cogs, did that have an impact on the wine segment sales -- wine segment margins?

That specific dynamic related only to the beer business.

Only to beer.

And then on the spirits, you're still talking about full-year guidance of low single digits.

I know it was a tough comp for spirits in the first quarter and there was a timing issue with the bulk whiskey sales.

In terms of your branded business and a lack of bulk timing, then clearly you're comfortable with that business accelerating throughout the rest of the fiscal year?

Yes, our branded spirits business in the first quarter grew by 3%.

So I think we should be comfortable.

Okay.

Final question.

The 80 basis point margin contraction in your beer segment, certainly a lot of that had to do with the growth of that business.

Last quarter you give us a bit of a split on how much came from transportation and from mix.

Can you do that again this quarter?

Yes.

Can you circle back with Lisa on that?

Will do.

Thank you.

[Alex Paterson], RCM.

First of all, Tom, thanks very much for the increased disclosure, thanks you to all of you.

I appreciate that.

Just was curious -- the Strathmore sale and the loss -- I think you said about 14 million booked on that.

Where did that show up in the P&L?

I guess I am missing it.

It's in SG&A.

Okay, so it is just netted against SG&A, but it wasn't called out in your reported versus comparables.

It should be on the reconciliation table.

It is?

I must have missed it, sorry.

It's the reconciling item in the SG&A line, in the non-GAAP reconciliation schedule.

That's the structural change thing?

Yes.

There's a footnote there that gives you the detail behind what was in that column.

Okay.

And then in the basic to fully diluted share count, dilution of factors seems to have stepped up a bit.

Is there something behind that?

You're saying that the fully diluted shares increased?

Yes, if I'm reading the numbers right and again, I read the release as quick as I can.

But it seemed as if the actual count -- I am sorry -- never mind.

I see actually -- I got the wrong number on that one.

So never mind on that.

Lastly, just in the interest of feedback, on the disclosure site of it, the one thing that's still a little bit tricky in following what's going with you guys is how the cash-flow statement is using reported net income.

And so reconciling what's going on with these comparable adjustments, where they are flowing through the cash-flow statement, in other words, if I'm to think of the business in comparable terms, I need to be able to think of the cash-flow statement in those comparable terms.

Is there any way either now or later you can provide a little more guidance -- disclosure on that?

I think you can get a lot of help if you go to the Web schedule and look at the ROIC detail.

That in fact is one of the big pluses of why we thought it was a good disclosure to include for our investors.

So as you know, our cash-flow statements follow a GAAP format, but we do take -- we do make adjustments for noncomparable items in our ROIC calculation.

Okay.

So I should be able to use that website to find out where in the cash-flow statement these comparable adjustments are flowing back into the cash-flow?

In other words, for me to feel good about your comparable net income numbers, I'd like to think I could see them in the cash-flow statement somewhere.

And you're saying that they're there on the website.

Yes.

If you look at our ROIC schedule on the website.

Okay.

All right.

Thank you very much.

Tim Ramey, DA Davidson.

Good afternoon.

Just a couple of questions on the revenue line.

That's easier to understand for me.

The beer number was huge, and I think there was a pretty tough comp there last year if I am not mistaken.

Can you give me any color on how you drive that number as hard as you did?

I would not say that it was a particularly tough comp.

Beer was up 10% in the first quarter a year ago.

That's a tough comp.

Well, it's not given the trendline of beer.

I do think it's important to note that depletion growth is not at 18%.

There is, we believe, a good amount of inventory build in anticipation of a very good summer selling season.

So depletion growth is a little above what you see in IRI trends.

But it's definitely not 18%, but it's a good sign for the summer season that the distributors have a good deal of confidence that we're -- they're going to see good, maybe hopefully double-digit momentum.

Also just flipping over to the Vincor acquisition, Richard, I -- how it interfaces with the price point discussion that you made earlier, if I'm not mistaken, is it all in the $9 and above price point or how does that break down?

Okay.

In the U.S., Toasted Head is closer to $12.

RH Phillips is $9, $10 and Hogue is around $9.

So the U.S. portfolio that's U.S. produced is really $9 to $12 centric.

Obviously, there's good sales of Kim Crawford.

Kim Crawford is one of the highest end New Zealand sauvignon blancs and pinot noirs, so that's well above that $12 -- closer to high teens, maybe even $20.

So that's how it fits into the U.S.

It -- so in that way, it helps our mix in the U.S. and it gets us closer to the industry split, which we’re four or five points off of -- with that.

Now, in Canada, their portfolio is a nice broad portfolio with a very healthy segment of premium lines, which again are growing much faster than popular priced in Canada.

Looks a lot like the U.S.

Terrific, thanks for your help.

Bryan Spillane, Banc of America Securities.

Please go ahead.

Couple of questions.

First, when does the -- and I might have missed this.

When does the window for the share repurchase open and you feel comfortable buying stock back at this level?

I'm sorry, but I really can't comment on when the window is going to open.

Okay.

Because of -- why?

Because I can't comment on the window.

Okay, and then with the price point information that you spoke about earlier, I just want to make sure I am clear.

Your expectation for the growth in the UK market is low single digits.

That's a bit -- is that lower than what you were expecting previously?

No.

We've been talking about baseline growth of low single digits.

For most of last year we talked like that, that's what we expected in the future.

It has been mitigated a bit negatively by the destocking that's taken place in the UK.

But consumer trends, we believe, will be in the low single digits.

Just finally, Richard, if you could just comment a bit on the potential opportunity at accounts like Wal-Mart.

We had a conversation there where they were clearly looking for and wanting to sell more wine, and still searching for the right way -- they hadn't really picked a category partner yet.

And so could you just talk about those types of things as opportunities for you guys?

Yes, we have been working closely with Wal-Mart.

Actually, we're working across the total beverage alcohol category and directly in the wine category.

I think Wal-Mart sees that we have the -- obviously most significant dollar share in the U.S. and more importantly, that we have great breadth across price points.

Their customers desire breadth across price points and obviously, we have the most knowledge and the best portfolio spanning across price points.

So we have a very good relationship with Wal-Mart and they are actually through our distributors, obviously, one of our largest retail customers today.

Mark Swartzberg, Stifel Nicolaus.

Thanks operator.

Good afternoon guys.

Tom, on your margin outlook, I was wondering if you could give us a little more insight into some of the comments you made towards the end there.

And specifically, what I was hoping to understand a little bit better is if you try to rank order to what's going to provide the margin expansion you anticipate as you move through the year, how would you be thinking U.S. wine margin expansion contributes?

What level of benefit are you anticipating in terms of reduced transportation expense in your beer business?

And when you talked about sourcing providing opportunity were you -- what exactly did you mean there?

And then on a related point, what assumption are you making about your margins in the United Kingdom wine market?

Okay, well I think the first thing I would say is, I'm not going to be getting into specific guidance by market or by category, (technical difficulty) excuse me.

However, I will say we have ratified our guidance for the year.

So the implication there is that there is margin expansion later in the year if you do the math.

I think that as I said in the conference call, most of that benefit is going to come from more growth and better mix.

And exactly where the growth is going to come from and exactly what the dynamics are in the mix, I mean, I think -- I'd say look, we know that the option expense is pretty well set.

What happens with cost is really going to be a function of a lot of externalities, but we're certainly not counting on any windfalls there.

So you really need to think about it in terms of growth and product mix primarily.

And -- okay.

So order of magnitude, you expect a little bit of a sequential improvement on the expense side of things in beer transportation, but it's not -- I don't want to put words in your mouth.

You're saying that's not a major contributor to your improvement -- the overall margin improvement you anticipate as you move through the year.

That's correct.

And then what are you thinking from a UK perspective?

What assumption are you making about your margins in that market as you move through the year?

I don't really think were looking for any earth shattering near-term changes.

It's a tough market.

We're putting some good strategies in place.

I think that they should be a big benefit to our business over the medium to long-term, but I really wouldn't look for any huge changes in the near-term.

Great.

Thanks Tom.

Christine Farkas, Merrill Lynch.

Just quickly, could you comment on Woodbridge depletions and how that brand and the line extension is doing for that brand?

Then Tom, as a follow-up, just to understand the guidance range then which is intact, it excludes Vincor, but it does include a slightly higher stock option expense for the year.

Thank you.

I will take the Woodbridge depletions.

IRI showed Woodbridge up a couple percent; depletions are very much in line with that.

We are very satisfied, gratified with that level of growth on that size of brand.

We are introducing new varietals like pinot noir, Rieslings coming onstream.

And really across the board, across all of our brands, we're this year focused on hot varietals like pinot noir and pinot grigio.

So we have a very positive outlook on what we can do with most of our brands -- premium brands those above $5.50 and up.

So Tom's going to answer your question -- your second question.

Thanks Richard.

First, that Woodbridge pinot noir is awesome, by the way.

Christine, you're absolutely right.

We have affirmed our guidance for the year and that is taking into account an assumption of higher stock option expense than we were forecasting when we initially set the range.

No Vincor --

And with -- and there is -- that is exclusive of Vincor.

So the $0.02 to $0.03 accretion on a comparable basis from Vincor is not included in that number.

Thanks a lot, Tom.

Thank you.

At this time, I would like to turn the floor back over to Lisa Schnorr for her closing remarks.

Please go ahead.

Thank you and thank you very much everyone for joining us this evening. [Bob Dudek] and I will be available for some follow-up calls this evening for a while, and then we will be returning back to Rochester tomorrow and will be available beginning late tomorrow morning as well.

Thank you very much.

Thank you.

This does conclude today's Constellation Brands conference call.

You may now disconnect and have a wonderful evening.