Constellation Brands Inc (STZ) 2007 Q3 法說會逐字稿

Good morning.

My name is Denise, and I will be your conference operator today.

At this time I would like to welcome everyone to the Constellation Brands third quarter 2007, earnings conference call.

[OPERATOR INSTRUCTIONS]

Thank you.

It is now my pleasure to turn the floor over to your host Mr. Bob Czudak, Director of Investor Relations.

Sir, the floor is yours.

Thank you, Denise.

Good morning, everyone, and welcome to Constellation's third quarter fiscal year 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 morning.

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 information on a GAAP comparable, organic and constant currency basis.

Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial measures are available on our 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 discussion will generally focus on comparable financial results excluding acquisition related costs, restructuring and related charges, and unusual items.

They will also discuss organic best-sales information which excludes the impact of acquisitions and constant currency net sales information, which exclude 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 our estimates.

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

Thank you, and now I would like to turn the call over to Richard Sands.

Thank you, Bob, and good morning, everyone.

Thank you for joining us today and I hope all enjoyed the holidays.

While we had another quarter of record net sales and comparable basis earnings, the UK is presenting some challenges as a result of confluence of events.

Before getting into the details of the markets, I will briefly review our sales on a constant currency basis.

For the quarter, our organic branded business increased 4%.

Imported beers performed very strongly, delivering 16% growth.

Continued investments behind our premium spirits brand helped drive the 4% increase for our spirits business.

Branded wine organic net sales decreased 1% as growth for North America was more than offset by decreases in the UK where the marketplace is increasingly challenging.

On a year-to-date basis, organic net sales for our branded businesses are on track with 7% growth, driven by strength in our U.S. branded wine and imported beers.

So, the challenge right now is very much in the UK.

As I said in my introduction, there has been a confluence of forces that have created these challenges.

First, the UK has significant consolidation at the retail level with four multiple grocers controlling the lion's share of the off-premise wine business.

Second the Australian category is the largest category representing nearly a quarter of all wine sold in the UK off-premise channels.

And finally, the Australian oversupply has made very low cost bulk wine available, which has allowed the retailers to quickly create and build private label wines in the Australian category.

With growth in the UK wine market moderating and private label business soaking up a large portion of what growth is available and given Constellation's leading share in the branded Australian wine segment, it is easy to see why we have had some declines and difficulty recovering increased costs such as the annual duty increase.

The collective impact of these conditions has intensified over the last quarter, and as a result, we have revised our fiscal 2007 comparable basis diluted EPS outlook range to $1.65 to $1.70, and Tom will provide further comment on this change in a few moments.

While there are some signs that we could see a firming of the Australian bulk wine market, we believe that this challenging environment will likely remain in place for some time.

With this in mind, we will continue to focus on increasing operating efficiencies and growing other parts of our business to improve our mix.

These types of activities partially mitigate the challenges in the UK market.

There are signs on the horizon that the Australian oversupply could come into balance earlier than most had thought.

A few weeks ago, I visited Australia, which is experiencing extreme drought conditions combined with periods of spring frost.

The drought has severely impacted water availably in the main growing regions.

In fact, conditions are so severe that there is concern that after this harvest there will be further water restrictions that will limit grower's ability to replenish the vines.

Currently, industry experts are forecasting that the 2007 harvest could be up to 25% lower than the 2006 harvest.

If the drought continues and water allocations are reduced, the 2008 harvest size is also likely to be impacted.

The bulk wine market usually moves in advance of the harvest, so if the drought continues and the 2007 harvest comes in as short as predicted, one could see the bulk wine prices start firming.

In Australia, the domestic market remains competitive due to the oversupply situation, which has put pricing pressure on the box wine category, which is the largest table wine segment, as the market leader in box wine our volume has been impacted.

However, according to market data, we have experienced gains in the higher margin premium segment as we're growing faster than the market above $10 retail.

Looking at New Zealand, our investments there are generating great results.

Our New Zealand brands have performed well domestically, and in the U.S. -- and in the U.S. market we are the leader in the fast-growing category.

According to IRI, we have the three largest brands, with Nobilo, Monkey Bay, and Kim Crawford, which of course was acquired with the Vincor acquisition.

Shifting to the U.S.

The wine market remains very healthy.

There continues to be a significant amount of trade-up activity by consumers as premium price points above $5.50 are growing double digits.

While popular priced wines are flat to down slightly.

We have improved our mix by focusing both new product development and acquisition efforts in the premium category.

Today in the IRI channel, 69% of our dollar sales come from our premium portfolio and our mix is much more in line with the market.

We continue to perform well in the key $9 to $12 super premium category with top 10 brands such as Robert Mondavi private selection, BlackStone and Ravenswood, and newer brands like Twin Fin and 3 blind moose.

Woodbridge has shown strength in the $5.50 to $9 premium categories that benefits from our focused sales efforts, new labels and packaging, and the addition of new Pinot Noir and Riesling varietals.

Rex Goliath growth has accelerated as ACV distribution for the brand has nearly doubled since joining Constellation's portfolio slightly over a year ago.

New additions like Hogue and R.H.

Phillips are growing faster than the category trends as they are fully integrated into Constellation's U.S. marketing and sales organizations.

While we focus on growth for our premium portfolio, we continue to manage our popular price portfolio prudently as we optimize pricing and profitability for these brands.

Some of you may be asking, why hasn't the Australian oversupply impacted the U.S.?

Well, the U.S. wine market is primarily a domestic market, as domestic wines represent close to 75% of the total market.

Australian wine accounts for only 8% of the total U.S. table wine volume.

Due to these factors, and combined with supplier and retailer focus on trading up trends, we are not seeing any indications that the Australian supply is creating market volatility as retail pricing for Australian wines remain stable in the U.S.

Looking at the California harvest, not much has changed since our discussion last quarter.

Our projections still indicate a decline of about 20% from last year, a slightly smaller than average crop size.

Overall pricing is flat with grapes for popular priced wines coming down a bit and those for high-end varietals moving up slightly.

All indications are that overall supply should generally remain in balance with demand.

Turning to Vincor, we continue to be pleased with the results and integration of the business.

Vincor's premium brands in the U.S. and Canada continue to perform strongly in the marketplace.

As discussed last quarter in the UK, Kumala has experienced volume declines as anticipated because Vincor had implemented a price increase prior to the acquisition, but brand profitability overall has improved.

Data shows that the Canadian market and our business lead by strong performance of Jackson Triggs, Sawmill Creek and Hardy, and from the launch of Naked Grape continue to grow in the mid-single-digits, and we are seeing trading up trends driving a positive mix across our portfolio.

I would also like to note that Vincor Canada has secured sponsorship opportunities for the Canadian Olympic Team for the next three Olympic games including the 2010 winter games in Vancouver where Vincor will be the official wine supplier.

This provides significant retail and on-premise promotion opportunities along with high-profile visibility at Olympic venues for the Vincor brand.

Shifting to spirits, our spirits business had another strong quarter as we execute on our strategy to increase Constellation's mix of premium brands.

We continue to maintain share for our value portfolio and build the premium portfolio with a focus on investment brands, including-- Effen Vodka, Cocktails by Jenn and Ridgemont Reserve 1792 bourbon.

In addition to priority growth brands such as Black Velvet Canadian Whisky, Meukow Cognac, and Chi-Chi's prepared cocktails.

I would now would like to conclude my remarks this morning by updating you on our imported beer business and related joint venture activities.

Our imported beer business delivered strong growth for the quarter as consumers trade up in the category and both the bottle supply and inventory levels Corona Extra and Corona Light improved.

The Crown Imports joint venture commenced operation two days ago on January 2nd, 2007.

This provides the Grupo Modelo portfolio Corona, Corona Light, Modelo Especial, Pacifico and Negra Modelo a single national importation marketing platform for the first time.

St. Pauli Girl and Tsingtao are also being imported and marketed by the joint venture.

Crown Imports offers excellent growth opportunities for this outstanding portfolio of brands.

We believe the upfront work which Bill Hackett and the Barton team in recruiting, hiring and training new personnel, together with preparation for the supply chain network has Crown Imports positioned for a seamless transition with the wholesalers in the eastern portion of the United States.

In closing, we continue to harvest opportunities from our existing portfolios, new products, strategic partnerships and acquisitions, while managing difficult market conditions in the UK.

I'm confident in our ability to create value over the long term by executing our strategy and capitalizing on the many opportunities in the beverage alcohol business across categories and geographies.

Now, I would like to turn the call over to Tom Summer for a financial review of our third quarter.

Thanks, Richard and good morning, everyone.

I would like to start with a review of the P&L for the quarter where my comments will focus on comparable basis financial results and commentary for net sales comparisons will be on a constant currency basis.

Our net sales grew 16%, driven by the acquisition of Vincor and a 4% increase in organic net sales.

Net sales for our branded businesses, wine, imported beers, and spirits, increased 17%, reflecting the benefit of Vincor and 4% growth in the branded business organic net sales.

This included imported beers up a strong 16%, spirits growing at 4%, and branded wine organic net sales decreasing 1%.

Our base business branded wine net sales for North America increased 4% and that was more than offset by a 2% decrease for Australia-New Zealand and a 16% decrease for Europe as competitive conditions in the UK remain challenging.

Now, moving to margins.

For the quarter our gross margin was 31%, down 50 basis points.

This was primarily due to a number of factors in the UK, including the annual duty increase and the impact of lower sales on fixed cost absorption, as well as higher transportation costs for imported beers and increased material costs for spirits.

The impact of these factors was somewhat offset by a sales mix benefit from Vincor.

Operating margin for the quarter was 18.6%, a decrease of 50 basis points.

Operating income included $4.4 million of stock-compensation expense, related to FAS 123-R.

In addition, we recognized $1 million for our share of start-up and transition expenses for the Crown Imports joint venture.

Together those items accounted for about 30 basis points of the 50 basis point decline.

Wine operating margin for the quarter decreased 70 basis points to 19.4%.

This primarily reflects the impact of gross-- of the gross margin pressures I just discussed, as well as the impact of stock-compensation expense.

These factors were somewhat offset by synergies and mixed benefits from Vincor.

In beers and spirits, operating margin declined 140 basis points due to higher transportation costs for imported beers, increased material costs for spirits and higher spending behind premium spirits.

For the quarter corporate and other expenses totaled $13 million, compared with $15 million in the prior year.

This decrease was primarily due to lower management incentive expense.

We're targeting corporate expenses to be in the range of $62 to $65 million for the fiscal year.

Our SG&A for the quarter was 12.5 % of net sales compared with 12.4% a year ago.

The impact of stock-compensation expense and start-up costs for Crown Imports was offset by Vincor's synergies and the management incentive reduction.

Overall our operating income increased 15% to $279 million for the quarter, due to the addition of Vincor and our base business growth.

The 4.4 million of stock-compensation expense effectively reduced our operating income growth by 2 percentage points.

Equity investment earnings totaled $12 million, versus $9 million last year.

Equity earnings for the quarter relate almost entirely to Opus One.

Opus One's revenue and profits are very seasonable with the bulk of its annual revenue recognized upon the release of the latest year's vintage.

The 2003 vintage was released for retail distribution in September and Constellation's share of the profits was recognized in the third quarter.

Interest expense for the quarter was $73 million, up 52% over last year reflecting the impact of financing Vincor and higher average interest rates on our floating-rate debt.

Our average interest rate for the quarter on all of our debt was 7% compared with 6.5% for the third quarter last year.

At the end of November, we had approximately $2.6 billion of bank debt and $1.7 billion of fixed-term and other debt.

Our bank debt is primarily LIBOR-based debt with 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, approximately two-thirds of our debt is effectively fixed rate.

Our effective tax rate on a comparable basis came in at 36.1% for the third quarter, versus 39.3% last year.

As a result of these factors, our net income increased 13% for the quarter.

Our weighted-average diluted shares outstanding were 239 million, even with last year, and diluted EPS grew 12% to $0.58 for the quarter.

During the third quarter, we repurchased 652,000 shares of our class A common stock at an equity cost of $18 million or an average cost of $27.65 per share, this completed purchases under our 100 million share repurchase program.

The Company will evaluate future stock-repurchase programs with the objective of mitigating the dilutive effective of stock-option exercises.

Shifting to free cash flow, for the first nine months of fiscal 2007, we used $6 million of free cash flow.

This included capital expenditures of $136 million.

Our CapEx guidance for fiscal 2007 remains at $180 million, with free cash flow guidance in the range of $155 to $175 million.

At the end of the third quarter, our debt to trailing 12 months comparable basis EBITDA was 4.4 times compared to 3.1 times at the end of fiscal 2006.

This primarily reflects the increase in our debt balance, related to financing Vincor, while not having the full year benefit of Vincor's results.

Moving now to our expectations for fiscal 2007.

We have revised our comparable basis diluted EPS outlook to $1.65 to $1.70 from our previous estimate of $1.72 to $1.76.

This is primarily due to the increasingly competitive market conditions in the United Kingdom.

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

Our full-year diluted EPS guidance assumes the following: Reported net sales growth in the low double-digit to low teens range.

This includes about 9% benefit from the nine months of Vincor sales and an approximate 3 to 4% reduction in growth rate for the move of beer sales to Crown Imports for the last two months of the fiscal year.

Breaking it down by category, we see branded wine-based business growth in the mid-single digits, imported beers, low teens growth before sales move to Crown Imports in January 2007; spirits, low to mid-single digits; and wholesale and other, low to mid-single-digit with interest expense in the range of $265 million and stock compensation expense of $18 million.

Of the increase from our previous guidance for stock-compensation expense of $15 million primarily relates to expense to be recorded in the fourth quarter for the accelerated vesting of options for certain Barton employees who moved to the Crown Import's joint venture.

This action eliminates the potential expense volatility associated with these options, had the vesting not been accelerated.

We anticipate the comparable basis tax rate to approximate 36.9% for the fiscal year, and we're assuming weighted average diluted shares to approximate 240 million, which implies a relatively stable share count for the full year.

As a reminder, sales for the beer business moved to Crown Imports starting in January, and we will report our share of equity earnings from the joint venture for the months of January and February.

As a result, our comparable EBIT margin will expand in the fourth quarter.

Now, to briefly summarize.

We delivered record comparable basis results in the face of a challenging UK market in this third quarter.

In addition to the UK, our current results reflect the year-over-year impact of items like stock-compensation expense and higher interest rates, but when you look at our branded businesses, outside of the UK wine, we continue to experience solid growth.

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

And with that, I will conclude my prepared remarks and be happy to open the floor for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

And our first question comes from Bonnie Herzog of Citigroup.

Please go ahead.

Good morning, everyone.

Tom I actually just had a question for you regarding your preferred dividends.

You-- I guess decided not to pay them this quarter, and I was wondering why that decision was made and what we can expect in the future regarding dividends on your preferred stock?

Sure, Bonnie.

The preferred issue was a mandatory preferred -- mandatory convertible that converted, I believe, in September, and therefore, it's now part of our equity base and there will be no longer be any preferred dividends.

So just in terms of cash flow going forward, that wasn't part of the determinant.

It was just that now you have completed that requirement, and we shouldn't expect to see that in the future?

That's correct.

Okay.

Thank you.

Thank you.

Our next question comes from this Jonathan Feeney of Wachovia.

Please go ahead.

Good morning.

Wanted to ask about, Richard, would you say-- I'm not sure if you look at it like this way, still, but including or I should say excluding the integration expenses would you say Vincor was accretive this quarter at the operating margin line-- operating margin offsetting interest.

We-- we really don't look at it on a quarter by quarter basis, but Vincor is going very much according to plan, so for the partial year that we have Vincor, there is slight accretion.

Great.

Thanks very much.

Just a couple of questions for Tom.

Could you talk a little bit about the working capital growth?

It looks like if you just look at the accounts receivables and inventories and net that against the accounts payable and other accrued expenses, that grew something like $140 million sequentially, and I'm kind of wondering, is that evenly spread across the business and what is sort of going on there with the rising inventories and receivables?

It is with the exception of obviously the grape harvest is a North American phenomenon, but I would say across the business in the sense that our business has a holiday seasonality to it, there's a great deal of shipment activity in the month of November, and so we can see-- and relative to receivables and inventories, a lot of variability in our cash flow at the end of the third quarter, such that that's where you probably see from year to year the most-- the most variability in terms of cash flow.

However, that all kind of works its way through the system in the fourth quarter, and so we're still on track for our guidance for the year with our free cash flow guidance of $155 to $175 million.

Okay.

And just finally, would-- can you explain, Tom, how this is all going to work when you contribute your share to Crown Imports?

Is any asset you have going to come off of the balance sheet?

How is that going to work?

Yes, the assets related to our beer business are being contributed to the joint venture.

We will then be the 50% owner of the joint venture, and our 50% share of the joint venture's earnings will be reported as equity and earnings below operating income.

Starting on January 1st.

Starting as of Jan 1.

When we get our numbers as of the end of Feb., all those balance sheets numbers will have all the beer contribution out of it?

Yes, and just -- the fourth quarter will obviously have one quarter, the old -- one month the old way and two months the new way.

I think you will find that our disclosures on the joint venture will be every bit as replete as our disclosures on the rest of our business, so there will be plenty of information there for everybody to see exactly what happened.

Great.

Well, thanks very much, guys.

Thanks.

Thank you.

Our next question is coming from Judy Hong of Goldman Sachs.

Please go ahead.

Hi, everyone.

My first question is related to the wine margin behavior.

Tom, I was just wondering if you could go through in more details about the margin issue?

How much of the compression we're seeing is related to the UK duty increase?

Are you not getting as much benefit from the merger synergies and the restructuring savings as you had anticipated, and then what is going on with the U.S. wine margin?

Okay.

I think that first of all, most of the swing is due to the UK, although when I say the UK, I really mean the UK and Australia, a portion-- a portion of the impact is that the lower volumes in the UK translate into unfavorable fixed-cost absorption and other cost impacts in Australia.

So really, looking on a see-through basis to those markets, that's where most of the unfavorable variances in margin have come from.

We have had benefits from Vincor's synergies and sales mix.

I obviously mentioned the impact of stock options.

The U.S.-- the U.S. margin had a little bit of a swing, but it was paled by comparison to the impact of what was going on in the UK and Australia.

Okay.

And then Richard, I think you have indicated in the press release that you are looking at-- or you are evaluating some strategic options in the UK.

Can you just elaborate on what those options are and how you weigh on those options going forward?

And what is the timing in terms of coming to a decision?

Well, I think that really means we're looking at our business, and we're looking at how we increase our penetration of what I will call less competitive channels, and thereby improve our business mix, along with how do we increase, improve, our operating efficiencies, get more out of our business?

So there really isn't a lot more detail to put on that at this stage, but it's an ongoing activity that we will continue with throughout this period of challenge.

So there isn't really a lot more light to be shed on that.

Okay.

And then just final question, in U.S. wine, I know the quarterly shipment numbers are pretty volatile, but the third quarter we saw 4% increase, which is a deceleration from the past couple of quarters.

Can you just give us depletion numbers and what is going on at the consumer level for U.S. wine?

Yes.

Depletions are pretty close to our shipment levels, and it appears from the IRI data that you have pretty similar consumer movement.

Of course IRI data only represents 20%, 30%.

So you can't really say what is going on at the consumer level with any accuracy.

Okay.

Thank you.

Thank you.

Our next question comes from Mark Swartzberg of Stifel Nicolaus.

Please go ahead.

Thanks, operator.

Good morning, everyone.

Richard two questions for you on the UK.

First you commented that growth is moderating there from a broader category perspective.

We have seen data that suggests it has gone to basically flat in terms of shipment year-on-year growth.

What is your own take on what the category's growing at, if at all?

And as you think about your outlook for demand for wine in general, what do you expect and how do you think Australian wine might differ from the broader category trend?

And then I had a second, unrelated question.

Okay.

Well I'll answer the question first.

You are correct that if you look at shipment data into the UK, you will see flat to declining shipments.

Part of that versus actual consumption behavior is continuing inventory declines by the major multiples.

So that is really the answer to your first question.

We would target overall wine growth more in the low-single digits.

And that compares to, as you remember, high single-digit growth last year, and the year before.

Now, the specifics about the Australian category are probably even more interesting, because this is clearly the focus of the major multiples private label activity.

And so these brands that the major multiples are coming out with and have just come out with, are growing incredibly fast.

And so I think when we look at the Australian category as a whole, what we will see is -- is that it does continue to grow, but the important thing is it is growing on the basis of the private label, and the branded side is actually suffering declines.

Obviously, at some point in time when the supply-demand situation in Australian wines and therefore bulk wines won't be so low cost, may not even be available, this will turn around.

The question is when.

Yes.

And that's what we don't want to be overly aggressive on.

Fair enough.

And on that low single-digit category outlook, what are you seeing in the way of actual consumer demand there?

You mentioned flat to declining going into the retail, but inventories are an issue at retail.

Are you seeing the category demand at that low single-digit rate?

Yes, that was what I was really speaking to, was consumer demand, we believe, is growing in the low single-digit rates.

Fair enough.

And then just a more short-term thing.

Obviously the secular challenges are significant, but if we look back on your third quarter of fiscal '06, I think you had a pretty good bounce back, if you will, prior to trends going into that third quarter.

Do you think that in any way some of your weakness there in the quarter was compounded by just difficult compares?

Oh, I think there's a little bit of that, but I wouldn't put too much weight on that.

This is a story of significant increasing challenges in the UK, and we'll deal with them and over the long term, the business will be as healthy as ever.

So I wouldn't put too much weight on difficult comparisons.

Okay.

Fair enough.

Thank you, Richard.

Thank you.

Our next question comes is coming from Christine Farkas of Merrill Lynch, please go ahead.

Thank you very much.

And good morning.

Richard, a question for you a little bit more detail on North America, if I could.

Specifically in the U.S., the Company showed some strong organic growth of 4% and was mentioned this did slow from the second quarter.

And I think Tom indicated that margins did soften a little bit in the U.S.

Now given the trading up and the acquisition of Vincor, can you just talk about what would have resulted in softer margins in the U.S. market?

Yes.

I would-- first of all, you understand the 4% is without Vincor?

Okay.

Okay?

Yes.

And-- it is so difficult to analyze margins in the U.S., because you have both mix in terms of price and geographic mix.

So we really feel the slight margin deterioration is not indicative of anything that we would call a trend that we're concerned about.

Not because costs have gone up.

It's not because promotions have gone up.

It just simply what we consider to be normal volatility in margins.

Tom?

You might add to that.

No, I agree.

Okay.

There's nothing in terms of the pace or the rate of trading up that's changing to cause you any concern or view that this is the beginning of a trend?

No.

Okay.

Following up still in North America on Vincor.

The actual branded wine revenues were about flat with a year ago, and if I understood correctly, it sounded like the Canadian market was up maybe mid-single digits, but I know there were some discontinued brands.

Can you just reconcile why that number didn't show more growth if the underlying trends are more favorable for Vincor.

Okay.

You said that Vincor sales versus a year ago for the quarter were flat?

In the branded portion, about 140 million.

Where is that in our --

141 million versus 144 million a year ago.

And I know we had a similar pattern in the second quarter, whereby there was some discontinued brands and that resulted in the slight declines.

I was just wondering how much of that is carried into this quarter.

If there's underlying organic growth?

Yes.

One piece of that is the Kumala situation where we have increased gross profit, operating profit per case I'll say, dramatically, but we have significant declines in overall volumes and overall sales.

So that's part of it.

There have also been discontinuations primarily, really in the UK of certain pieces of the business.

Tom?

I just-- if you look outside of the UK, and if you look in North America in particular the-- the results are outstanding, so I think that it must be a combination of that, and there may be some other noise in the base period that I think if you follow up with Bob, he can probably get you there.

Okay.

That's helpful.

And then the last question just on your beer and spirits margins, which declined or narrowed in the quarter, certainly we're aware that transportation fuel is up, but it seems to be up only modestly, and that could actually help you in the coming quarters.

So is the bulk of that margin pressure then really coming from the spend behind the spirits, and do you expect that kind of level to continue?

There's two things, with beer growing at 16% and it being a larger-- a lower-margin business, you have a mixed impact, and that is significant.

So beer transport does have an impact, and as you said, we should be coming to periods of easier comparisons on beer transport versus a year ago, the fourth quarter, beer costs-- beer transport costs were pretty high.

And that portion of the costs will ultimately show up in your joint venture equity income; is that right?

Yes.

So we'll never really quite be able to track it apples to apples, but as Tom said we're going to try to be quite transparent about the inner workings of the joint venture.

Okay.

And then the spending behind spirits then would you say would continue at a current pace or would you expect that to accelerate in the next fiscal year?

Continue at the current pace.

Thank you, very much.

Thank you.

Our next question is coming from Lauren Torres of HSBC, please go ahead.

Good morning.

Regarding your revised '07 guidance, I was hoping you could be just a little bit more specific about what has changed or what you have seen changing just over the last several months, looking back from your last quarter when you took down full-year guidance.

What is causing you be even more cautious at this point, be it in the UK of any of your other markets?

This is Tom, Lauren.

The primary driver is the UK.

It is just that simple.

I think I already mentioned our holiday season is a big- - a big thing for us in terms of-- certainly in terms of our cash flows, but in particular, in the United Kingdom, November and December are hugely important, and a little bit more variable than in North America, and so I -- what basically happened was we walked into the latter part of November, and saw that our -- shipments weren't meeting our expectations, and that our expectation for the balance of the year flowed consistent with what we were seeing in November, and that really translates into pretty much all of the difference between our prior guidance and our current guidance.

There's a little bit of -- there's a little bit of tweaking with the U.S. in the beer and the spirits business but the change in the UK and Australia, really does account for just about 100% of the change in our guidance.

So you are saying it's mostly seasonal?

I'm saying that because of the -- the way -- because of the way the market -- because of seasonality and because of the way the market works in the United Kingdom, that we had a new set of facts and circumstances facing us in the latter part of November and then throughout December that lead us to conclude that our guidance needed to be taken down to this level for the year.

Okay.

Also on raw material costs, just on an absolute basis, just kind of looking at the breakdown of your costs, is there anything that that has become more of a concern to you?

Do you see it becoming less or more manageable over the course of the year?

Of the cost we mentioned, really, there's not a lot of impact from grape costs.

So that hasn't been a factor of -- a material factor in any of these variances.

Beer transportation is a factor within spirits.

A little bit of plastic costs, and a little bit of grain neutral spirits costs, so there are some input costs that I think we would expect that we need to manage with those cost issues going into next year.

They aren't huge in the greater scheme of things, and they are manageable, but thinking about all of our costs around the world, I think those would be the major items.

Thank you.

Thank you.

Our next question comes from Robert van Brugge of Sanford Bernstein, please go ahead.

Good morning.

Question for Tom.

As we're thinking about modeling out fiscal year '08, should we start thinking along the terms of your long-term growth algorithm, or are some of these restructuring savings from your current programs going to be additive to that?

That's a good question, Robert.

I think our savings from our restructuring programs are coming through as previously billed.

I think relative to our long-term targets, we-- we-- we have spent a lot of time developing those.

We think those are good targets for the long term.

So I would still stand behind those as good long-term targets.

Relative to fiscal 2008, as I say in this conference call at every time this year, we're really right in the heart of our planning process, our-- our numbers are just starting to come together.

When our plan is finalized, we will communicate our guidance for fiscal '08.

So it's really just a little premature for me to start talking about fiscal 2008, at this point in time.

We would expect towards our year end, that our plans will be finalized, and as we normally do we would issue guidance for 2008.

Okay.

Thanks.

Thank you.

Our next question comes from Bryan Spillane of Banc of America Securities.

Please go ahead.

Hi, good morning.

Just a couple of questions, first, to follow up on the UK.

In this quarter, did you get any benefit at all from the restructuring actions that you have started?

I guess I'll start with that.

You-- the restructuring activities that we started in the UK?

Correct, yes.

Did you realize any benefit from those actions in this quarter?

Or are you seeing any benefits from those actions yet?

So cost savings.

Actions.

While some of the expenses needed to be booked, those actual actions don't have any impact for quite a while, actually.

Okay.

And then, on the excise tax duty or the inability to pass the tax duty through to the consumer, could you give us some idea of how big that is?

I think if you look at that on an annual basis, it's probably worth something on the order of $0.05.

Okay.

Okay.

And so it would have been worth about a penny or so in this quarter; is that fair to say?

Yes.

Okay.

And then-- what is your expectation in terms of the ability to begin to pass that through?

I mean, are you now building into your guidance and part of what is built into your expectations here, that you are not going to be able to pass that through, at lease in the medium term?

You know, in a way this is related to Robert's question, and we-- I think, should all be conservative in this regard.

We will not be able to pass through duty increases until a point in time comes when the bulk wine pricing firms up quite substantially because, basically, the four major multiples aren't going to let us do it, in the sense that they'll just simply stop promoting those products if we increase the prices, and right now we're, I will say, competing for attention with their own private labels, which are extremely profitable to them.

So you don't get out of this conundrum until bulk wine prices firm up and the availability of wine becomes such that there isn't this marginal pool of wine to support the private label business, and when is that going to happen?

We don't know.

It will happen, we believe, and when it happens, the- - I'll call it profitability of our business, the growth momentum that we have had, which has now turned around, will come back, but this is why-- I-- you can't apply long-term targets to one year, especially when you are facing very challenging market conditions in a market like the UK.

Okay.

All right.

And just finally, if you guys could comment at all on the search for Tom's replacement?

It's proceeding well, but I don't know if we'll ever be able to--

Thank you for that, Richard.

-- Mr. Cash flow.

All right.

Thank you guys.

Thank you.

We'll take our final question from Tim Ramey of D.A.

Davidson, please go ahead.

Thanks for squeezing me in.

The beer sales were great, and just wonder if there was anything timing related or any discontinuity there that we should be aware of, and also I think you had discussed maybe the fact that in the east Gambrinus had taken a price increase which you expect to role back, or would have rolled back a couple of days ago.

Can you tell us about some of those timing issues that might impact performance either in the fourth quarter or in the third quarter?

Well there's no question that there -- part of the 16% increase for the imported beer business was the restocking of inventory levels from the glass shortages and supply shortages on Corona Extra and Corona Light.

I would absolutely say from the data that we have that the consumer take-away growth is not 16%.

I think it's high single-digits, low double digits.

And so that's what you are really seeing, is this restocking situation.

Now, when it comes to the eastern territory, none of our 16% has anything to do with that, and the adjustments that were made in certain markets on pricing came in to effect on January 2nd, the quote, roll-back as you call it, and again that really had no impact of our third quarter beer shipments.

So, from our perspective, the east coast, which started January 2nd, is proceeding very well.

We're getting pricing where we believe it should be for the market-- for the consumer on a market-by-market basis and the distributors are working very well with us.

Okay.

And just focus back on the U.S. wine, kind of the internal mix shifted, you have often described of declining popular, and then rising super premium or premium.

Can you throw some numbers around that just for U.S. or North America as you have in the past?

Yes, for the industry as a whole--

I would be more interested in what you did, if it is available on an organic basis.

That was kind of the one missing number.

Yes, well, we really don't present it that way.

But for the industry as a whole in dollar terms, okay, and this is from IRI data, popular-priced wines, wines less than $5.50 represent about 27% of the industry.

Therefore premium wines represent 73% of the industry.

We are basically skewed 4 points off, in other words popular represents about 31% for us, and premium represents about 69%.

Now for the industry as a whole, on a dollar-growth basis, I believe popular-priced wines are flat to declining, 1% or 2%.

What do you have there, Bob?

Yep.

Okay.

And premium is growing high-single digits, almost double digits, low double digits, low teens.

We are doing a little worse in popular, and significantly better over the long-term in premium.

So that's basically-- gives you a flavor.

We have better trade-up activity than the industry, but with have a skew that is four percentage points off the industry working against us.

Thanks very much.

Thank you.

I would now like to turn the floor back to Mr. Czudak for any closing remarks.

I'm just going to make one closing remark.

Obviously, you can see that we have a challenging UK market that is affected the third quarter.

We believe it will affect the fourth quarter.

I think you'll find we believe in the long run it will affect next year, but we believe the long-term value of our portfolio of our business is not in any way impacted by this short to moderate-term one to two-year problem.

So I think that is an important thing.

We're very optimistic about our business.

We have a great portfolio.

We are the leader of world-wide wines.

It's a dynamic business, and what we have done in the beer segment with the joint venture and what we're doing in the spirit segment with our focus on premium brands, will just continue to build a stronger and stronger well-diversified portfolio across the categories and across geographies, and three years, four years from now, no one will remember the UK.

So we're optimistic in the long term, and we hope everybody will stick with us.

Thank you and have a great beginning of the year.

Thank you.

This does conclude today's Constellation Brands conference call.

You may now disconnect your lines, and have a wonderful day.