Constellation Brands Inc (STZ) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

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

At this time I would like to welcome everyone to the Constellation Brands Q1 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 session.

(OPERATOR INSTRUCTIONS).

Thank you.

It is now my pleasure to turn the floor over Patty Yahn-Urlaub.

Ma'am, you may begin your conference.

Thank you, Mia.

Good morning, everyone, and welcome to Constellation's first quarter fiscal year 2008 conference call.

I'm here this morning with Richard Sands, our Chairman and Chief Executive Officer; Rob Sands, President and Chief Operating Officer and Bob Ryder, our Chief Financial Officer.

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 included in the news release or otherwise available on the Company's website at www.cbrands.com under the investor's section.

These reconciliations include explanations as to why management uses the non-GAAP financial measures and why management believes they are useful to investors.

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 is defined in the news release and constant currency net sales information, which excludes the impact of year-over-year currency exchange rate fluctuations.

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

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

For a detailed list of risk factors that may impact the Company's 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.

Thanks, Patty.

Good morning, and welcome to our discussion of Constellation's first quarter 2008 results.

I am joined this morning by Rob Sands, our President and COO who will become our new CEO on July 26.

I would also like to introduce our new CFO, Bob Ryder, who assumed his role on May 15th.

As you know, Bob was most recently the chief administrative officer at IMG, the sports marketing and entertainment firm, and prior to that CFO for American Greetings.

He also spent 13 years with PepsiCo.

Bob brings to the Company a wealth of experience in a number of areas and is a great addition to our management team.

Welcome, Bob.

As I mentioned earlier this morning we announced via news release, an important management transition at Constellation Brands.

With Rob assuming my role as Constellation's CEO.

After 28 years with the Company, 14 of these years as CEO, I have decided in conjunction with the Constellation Board that it is appropriate time to pass the CEO baton.

The events leading to this decision were driven by the fact that as our Company grew we began evolving our management structure in order to meet the increasing size and complexity of the business.

As part of this natural evolution of our leadership, we began developing an organizational plan to maintain a decentralized structure, while at the same time establishing one that would have an even more direct unified and collaborative connection between our operating companies and our corporate group.

We have an extremely strong and dedicated management team in place, and we've accomplished a tremendous amount.

In a relatively few years we have grown from a domestic, single category company into the largest wine producer and marketer in the world, as well as the largest US imported beer marketer and one of the largest distilled spirits companies in the US.

I will continue in my role as Chairman of the Board and remain actively involved in the business providing input and guidance to Rob on matters such as acquisitions, strategy and the organization.

Our efforts will be collaborative, yet Rob will lead the Company through the next level of growth.

Rob has been an integral part of Constellation Brands for most of his professional career and is absolutely the right person to lead our business.

Rob has the full support of our Board and I am confident in its abilities and believe that Constellation's future is in the hands of a capable leader.

Congratulations, Rob.

And now I would like to turn the conference call over to Rob who will discuss in more detail other high-level management changes that will take place as a result of his appointment to CEO and then we will provide an overview of our first quarter results.

Thanks, Richard, and good morning everyone.

Before I begin our discussion of first-quarter results I would like to thank Richard and the Board for their vote of confidence and the opportunity to lead Constellation Brands going forward.

This is a very special day for me.

I feel privileged and enthusiastically look forward to filling the CEO role as we continue to pursue our true growth business strategy.

Richard's passion for the business and his dedication to the Company is unparalleled.

I have learned a tremendous amount from him in our many years of working together as business partners.

We will continue to work collaboratively in the future.

My focus will be to lead Constellation to the next level of growth and value creation in a way that will continue to benefit shareholders, business partners, customers and consumers.

With my appointment to CEO, I am taking the opportunity to effect two other high-level management changes to my team.

First is the creation of the chief administrative officer position, which will be filled by Keith Wilson, who is currently our chief human resource officer.

In his new role effective July 26 Keith will be primarily responsible for supply chain, information technology, human resources, corporate communications and community relations.

Secondly, Jose Fernandez who is currently CEO of Constellation Wines US will be promoted to the newly created position of CEO of Constellation Wines North America, which will include our business operations in Canada.

Previous to these changes, Canada, supply chain and information technology reported to me in my role as COO.

As I do not plan to appoint a COO at this time, these changes allow me to maintain a flat organizational structure and a lean top management team consisting of the four functional heads, the CFO, the CAO, the chief development officer and the chief legal officer and three operating companies' CEO's, Wines North America, Wines International and Beers and Spirits.

This structure also establishes a more direct and collaborative connection between the corporate functions and our decentralized operating units while ensuring that our business units work together to maximize revenue and cost synergies around the globe.

Overall I am enthusiastic about the opportunity ahead of me, and I look forward to working more closely with the investment community in the future.

Now I would like to turn my attention to a discussion of our financial performance for the first quarter of fiscal 2008.

Results for the quarter were in line with our expectations and as anticipated were impacted by our plan to reduce distributor wine inventories in the US and the ongoing challenges in the UK business.

The UK marketplace including the status of the Australian wine oversupply has not changed significantly from our recent discussions.

The 2007 Australian grape harvest is not complete.

Data is still being collected but based on our view and current industry estimates the harvest came in approximately 30% lower than the 2006 grape crush.

The effects of the ongoing drought conditions are also expected to reduce the output of the 2008 harvest.

Due to the lowest harvest in 2007 -- the lower harvest that is -- and anticipated light harvest in 2008, indications are that the availability of low-cost Australian bulk line, which the UK multiple grocers have used to quickly build private-label wines in the Australian category, is decreasing.

While the bulk wine market has started to firm from a pricing perspective, we have not seen any significant improvement in the overall competitive conditions in the UK marketplace, which have made it difficult to recover increasing costs like the duty increase implemented by the UK Government in late March.

However, we are not waiting for the competitive situation in the UK to change and continue to focus on increasing operating efficiencies and improving product and channel mix.

We are increasing marketing support behind brands like Echo Falls and Robert Mondavi and the launch of Melbourne Lounge is underway.

We believe these offerings provide margin enhancement opportunities as we work to increase our mix of business at higher price points.

In April we formed the joint venture with Punch Taverns for the Matthew Clark wholesale business.

This is another key step in our efforts to improve our competitive position in the UK, as we strengthen our on-premise route to market for our branded portfolio by partnering with the premier pub operator.

In addition, we received proceeds of approximately $185 million US from the transaction.

Shifting now to the United States.

Our planned efforts to reduce US distributor inventories worldwide are generally progressing as planned.

We estimate that we achieved approximately 55% of the targeted reduction during the first quarter and continue to expect to complete this initiative by the end of the second quarter.

The US wine market remains very healthy and reflects a significant amount of trade up activity by consumers.

Our mix is improving as our premium wine portfolio continues to perform very well in the marketplace.

As shown by growth in dollar sales at retail in the IRI food and drug channels and led by brands like Blackstone, Three Blind Moose, Estancia and Simi.

Our New Zealand wine portfolio is delivering strong growth with continued consumer preference for our Kim Crawford, Nobilo and Monkey Bay brands.

The other Vincor brands led by Toasted Head and Hogue are significantly outperforming the total premium category as they benefit from our scale and efforts to gain distribution.

I would also like to highlight how pleased we are with the continued resurgence of Woodbridge, the number one domestic premium brand and the largest premium brand in our portfolio.

According to IRI, for the 52 weeks ended May 20, dollar growth for the brand was 7%, and for the last two 13-week reporting periods it has outperformed the premium category by generating double-digit growth.

This success can be attributed to the following factors; enhanced quality and fresh in taste profile to better align with consumer preferences, improving scale and focused sales efforts which have led to increased distribution and promotional activity, positive consumer response to new labeling and leveraging the brand by extending it into some of the fastest-growing varietals, including Riesling and Pinot Noir.

Woodbridge has also benefited from growth in consumer, convenient 187 ml four packs, and given the success of the four pack format we launched 187 ml 12 packs in June and are the first in the industry to produce this packaging format.

Turning to Vincor, we continue to be extremely pleased with the results and integration of the business as we reach the one year anniversary of the acquisition on June 5.

As I mentioned, several of the key Vincor wine brands are performing well in the US.

In Canada we are seeing trading up trends driving a positive mix across our portfolio.

According to market data, Vincor's domestic brand portfolio is outperforming the category.

This has been led by Jackson-Triggs, the number one brand in Canada.

Sawmill Creek, the number six branded from the successful launch of Naked Grape, a unique, unoaked varietal brand.

Additionally, we are taking advantage of Vincor's leadership position and our strong portfolio of New World wines to capitalize on the fast-growing California, Australian, New Zealand and South African categories.

Kim Crawford and Kumala are delivering strong performance in the New Zealand and South African categories, respectively, and we are benefiting from new distributor listings of Woodbridge, Robert Mondavi Private Selection and Hardy brands in Québec.

To leverage the strength of the Jackson-Triggs brand in our sponsorship of Vancouver of the Vancouver Olympic Committee, we launched Jackson-Triggs Esprit in June, which is our Olympic cobranded product.

In spirits we completed the acquisition of SVEDKA, the fastest-growing major imported premium vodka in the US today, and we completed that early in the first quarter.

And the transition into our portfolio has been smooth.

SVEDKA's momentum in the marketplace remains strong, and we look forward to building on the strength of the brand with our distribution capabilities.

SWEDKA is a perfect fit with our strategy to grow our premium spirits business and complements our efforts to develop our investment and priority growth brands, including Effen, Cocktails by Jenn, 1792 Ridgemont Reserve Bourbon, Meukow Cognac and the 99 Schnapps family.

Moving to the Crown Imports joint venture, the operational transition and building of sales teams has progressed as planned.

During the quarter the US Western region performed as expected with sales to retailers running in the high single digit range.

The Crown team continues to work through challenges resulting from actions taken by the former importer in the Eastern region which resulted in higher-than-expected wholesale inventories and lower than normal promotional activities early in the year.

Efforts to address these issues during the first quarter included implementation of strong sales promotions in advance of the Cinco de Mayo and Memorial Day holidays which resulted in solid portfolio performance during May.

In addition, the balancing of wholesaler inventories is progressing and targeted levels are expected to be achieved during the second quarter.

In closing, I believe we are taking the right steps to address current challenges, and we remain confident in our ability to execute our strategy and create long-term shareholder value.

This is supported by $500 million in common stock repurchases made during the first quarter.

Now I would like to turn the call over to Bob Ryder for a financial review of the quarter.

Thanks, Rob.

Good morning, everyone.

And thank you for joining us.

As Richard mentioned, I have now been with Constellation for just over a month.

I am excited to be part of the Constellation management team, enthusiastic about the opportunities ahead, and I look forward to working with the investment community.

As anticipated, Q1 had several items which impacted the comparability results and had significant long-term financial and strategic upsides.

On the operating front we saw the impact of the Vincor and SVEDKA acquisitions, the formation of the Crown and Matthew Clark wholesale joint ventures and our initiative to reduce distributor inventories in the US.

In addition, we were able to secure long-term financing at favorable rates and we redistributed cash to shareholders in the form of a $500 million stock buyback.

The first quarter represents progress on the path to achieving our full-year goals and continuing to execute on our strategy.

I would like to start with a review of our P&L for the quarter.

My comments will focus on comparable financial results.

Commentary for net sales comparisons will be in a constant currency basis.

Let's look at our net sales line.

As you can see from our press release on page 13, our consolidated net sales decreased 25%, reflecting a 13% benefit from the Vincor and SVEDKA acquisitions, more than offset by the move of US imported beers to the Crown Imports joint venture, and the UK wholesale business to the Matthew Clark joint venture.

These joint ventures are now an equity accounting, so they will no longer be reflected on the consolidated net sales line.

We also saw a 2% decrease in consolidated organic net sales, which was driven by our previously announced efforts to reduce US distributor wine inventories.

Excluding the net sales impact initiative we estimate that organic net sales growth would have been slightly ahead of our long-term target of mid single digits.

Spirits net sales increased 16%, driven by the acquisition of SVEDKA and a 2% increase in organic net sales.

We are quite happy with the performance of SVEDKA as it continues to grow at a high double-digit rate and perform within our expectations.

Worldwide branded wine net sales increased 16%, reflecting the addition of Vincor, partially offset by an 8% decrease in organic net sales.

Turning to branded wine geographic net sales on page 12 of the release, you will see organic branded wine net sales for North America decreased 13% due to the reduction in US distributor wine inventories.

We estimate that we achieved approximately 55% of our targeted reduction during the quarter, which was slightly below the 65% we had originally targeted.

We expect to complete this initiative by the end of the second quarter which will have a negative impact on Q2 sales.

The goal of this initiative is to assure distributors have sufficient inventories to meet consumer demand but to reduce any permanent buffer stock in nonpeak periods.

The completion of this program in the second quarter will drive a timing change in our US wine sales pattern for the second half of fiscal 2008 versus the prior year.

Under new shipment patterns in the second half of the year we expect to see a higher net sales growth rate in Q3 to meet the seasonal demand.

But we expect that this will be offset by a lower growth rate in Q4 to maintain the lower distributor inventory levels to be established at the end of the second quarter.

For Europe branded wine organic net sales increased 11%, reflecting increased sales of popular priced wine in mainland Europe and higher sales in the UK.

The market in the UK remains challenging as large retailers continue to benefit from Australian wine oversupply created in the previous years.

This has resulted in growth in private label brands and pricing pressure.

Australia, New Zealand organic net sales decreased 11% due to competitive conditions in Australia related to wine oversupply.

Now we look at our profits for the quarter on a comparable basis using information presented on page 14 of the release.

For the quarter our consolidated gross margin was 30.3%, up to 2.5 percentage points.

This primarily reflects the benefits of shifting the lower margin UK wholesale business to equity accounting in the second half of the quarter, and the mix benefit provided by the higher margin Vincor and SVEDKA acquisition products.

Somewhat offset by a temporary mix shift in the US due to the distributor wine inventory reduction and lower margins for UK branded wine.

Our consolidated SG&A for the quarter was 21.2% of net sales compared with 13.6% in the prior year.

This was primarily due to moving the imported beer business to equity accounting; the deleveraging impact of distributor inventory reductions in the US and higher planned brand marketing support in the UK and for SVEDKA in the US.

Consolidated operating income decreased to $82 million from $165 million for the prior year quarter.

This was primarily due to -- driven by reporting $73 million of equity earnings for the Crown JV compared to the first quarter of last year when $65 million of earnings for our beer business was included in operating income.

This year-over-year increase in beer business profitability reflects the economic benefit of having a national platform for the Medulla portfolio.

Operating income was also impacted by a $5 million increase in stock compensation expense and $2 million for the formation of the Matthew Clark joint venture.

Now let's turn to our segment operating income results which are reflected on page 11 of the release.

Wine segment operating income decreased $10 million to $86 million.

This was primarily due to the lower net sales associated with efforts to reduce distributor inventories, the UK business performance and higher stock compensation expense partially offset by the contribution from Vincor.

For spirits, operating income decreased $2 million primarily due to increased material costs.

For the quarter corporate and other expenses totaled $20 million compared with $14 million for the prior year.

The increase includes additional stock compensation expense and cost to support the growth of the Company.

Turning back to page 14, equity earnings totaled $76 million versus $1 million last year.

This increase was driven by Crown Imports, which was mentioned earlier, which contributed $73 million of equity earnings.

Interest expense for the quarter was $80 million, up 64% over last year.

The increase primarily reflects the incremental interest from funding the Vincor and SVEDKa acquisitions and the $500 million share repurchase.

At the end of May our debt totaled $5 billion with approximately $2.6 billion of bank debt and $2.4 billion of fixed term and other debt.

In May we completed the sale of $700 million, 7.25% senior notes that are due in 2017.

We used the net proceeds to reduce borrowings under the revolving portion of our senior credit facility.

With interest rate swaps in place through the end of fiscal 2010 approximately 70% of our debt is now effectively in fixed rates.

Our weighted average diluted shares outstanding were 233 million compared to 240 million last year reflecting the benefit from the share repurchase during the quarter.

Due to the many factors just mentioned, diluted EPS decreased 32% to $0.21 for the quarter.

Now let's turn to our cash flow on page 10.

For purposes of this discussion free cash flow defined as net cash provided by operating activities less CapEx.

For the first three months of fiscal '08 we used $104 million of free cash flow versus a $40 million usage in the prior year.

The increase cash usage was caused by timing of payments related to the earlier harvest in Australia.

In addition, cash flows related to the beer business were reduced as the newly formed Crown JV was initially building its working capital.

The impact of these items was partially offset by CapEx, which totaled $18 million this quarter versus $45 million last year.

CapEx for the prior year included expenditures for our New Zealand vineyard expansion.

Now let's summarize Q1 and discuss our full-year guidance.

From an earnings perspective we were pleased with Q1 results; excluding the positives and negatives of our many strategic initiatives on our results we feel that sales growth was slightly ahead of our long-term stated goals.

We do remain concerned with the impact of previous years' Australian bulk wine surplus but we feel that the current and next year harvest will begin to reduce this supply and demand imbalance.

The UK market remains a difficult environment but we feel we have the initiatives in place designed to improve future performance.

While free cash flow usage was higher than prior year it is due to timing and will reverse in the balance of year.

We remain comfortable with our $160 to $180 million free cash flow guidance.

Moving to our P&L expectations for the full fiscal 2008, we are reiterating our comparable basis diluted EPS outlook of $1.30 to $1.40 a share.

This guidance excludes acquisition related integration costs, restructuring and related charges and unusual items which are detailed on page 15 of the release.

For net sales our guidance assumes low digit, low single double-digit growth in organic sales and low single-digit incremental benefits from the acquisitions of Vincor and SVEDKA.

As a result of these increases and the impact of reporting Crown and Matthew Clark under the equity method, reported net sales are expected to decrease 30 to 32%.

Breaking this down by category we see branded wine, the base business growth of low single-digits, this includes the impact of reducing the distributor inventories and for spirits, based business growth of low to mid single-digits.

Additional assumptions for our full-year fiscal '08 guidance are outlined on page 5 of the release.

In addition, our strong capital base and free cash flow generation ability provides plenty of flexibility to fund further growth and we remain confident in the Company's ability to generate high single digit to low teens diluted EPS over the mid to long-term using fiscal 2007 as the base.

With that, we would like to open up the line for questions.

(OPERATOR INSTRUCTIONS) Kaumil Gajrawala, UBS.

Thanks, operator.

Could you please talk about some of the strength of the international wine business outside of the UK and if you had entered into any new countries?

The international wine business outside of the UK has been fairly strong, and we've got a growing business in mainland Europe, and clearly our Vincor acquisition was all about adding Canada as one of our key markets.

And of course with the Vincor acquisition we have taken a leading role from a marketshare perspective by almost a factor of three to one in the Canadian market.

Generally the business is good around the world, and we've got an organization and routes to markets in place to take advantage of those opportunities as we see them materialize.

Thanks, Rob.

So the growth is coming from existing countries but not from entering into anywhere new, correct?

Yes, I mean generally that would be the case, although we have routes to market that cover pretty much the whole world.

Of course, we have five principle markets that we are focused on where we have leading positions, and that is where the growth is coming from.

For the European growth most of that was driven by growth in the UK and exports to Continental Europe, mostly Germany.

And the products that we are selling there were relatively low-priced, so they didn't carry any big margins with them.

Got it.

Thanks.

And last I just like to ask on your views of the UK retailers' ability to potentially source grapes from elsewhere should prices of the Australian grapes increase over the next few years.

First of all, I think that in terms of sourcing grapes in general it is a world market, and they should be able to source.

As it relates to Australia, I believe that the UK retailers currently have contracts in place with both wine producers that will carry them through for a period of time.

But with the diminishment of the oversupply in Australia due to the drought conditions, that bulk wine supply is likely to not be as available as time goes on.

So we would see availability of Australian wine, bulk wine for the UK retailers diminishing quite significantly.

Exact timeframe is hard to predict.

They would be covered in the short-term from the 2007 harvest as a result of contracts that they have in place.

Of course that is just my belief.

I have no independent knowledge of UK retailers' contracts.

That's useful.

Thanks, and congratulations.

Thank you.

Lauren Torres, HSBC.

Good morning, and congratulations, Rob.

Just a quick clarification on the US wine inventory reduction.

I think you said that you reduced 55% of the inventory in the first quarter and you do expect to complete that by the second quarter.

Is that correct?

Correct.

We said that we completed 55% of the inventory reduction program.

And was that slower than you were expecting and if so why?

Yes, it was a little slower than we expected.

I think originally we said that we thought two-thirds would get done in the first quarter instead it was 55%, and there is really no specific reasons other than the pace at which the program got underway.

But notwithstanding that the first quarter was a little bit slower than we expected we are quite confident that the program will be completed in the first two quarters or at the end of the second quarter like we originally planned.

So there will be a little more in the second quarter, a little less in the first quarter.

And then I guess thinking beyond that if you can with respect to your guidance a lot of the headwinds will diminish through the first half.

Now as we think about the second half can you just kind of run through your growth assumptions again for your branded wine and spirits businesses?

Yes I think we're back to what we think will be the longer-term net sales growth for the branded business.

But we do think that because of the implementation of the distributor inventory reduction, we do think it will slightly change the cadence of growth over the quarters.

Because what we are trying to do is bring the -- I will call it buffer stock that existed at the distributors because we are very aware and very conscious to keep enough inventory to satisfy consumer demand, but with the sophistication of the distributors increasing that level probably doesn't have to be as large as it used to be.

So we will still after we get the inventory levels down to sort of the level we want at the end of the second quarter you will see increased shipments from us in the third quarter as we build for the peak Christmas season.

When that Christmas season ends at the end of the third quarter we won't be building up the historic buffer stock in the distributors' inventories.

So you will probably see less sales growth in the fourth quarter, and I think all in all will end up the full year where we told you.

And as far as spirits growth?

Spirits growth will be back to what we have said in general, just low to mid single-digits.

Okay, thank you.

Tim Ramey, D.

A.

Davidson.

Good morning, congratulations on a really fine quarterly transition between the two of you as I am reading the rise and fall of the house of Mondavi right, it reminds me that it isn't always so smooth and it is really an accomplishment, so congratulations on that.

The questions on the fixed rate and the effective interest rate on the swaps that you put in place, can you tell us what your effective all-in cost of interest is at this point?

Yes, Tim, it is just south of 7% all-in, so the fixed rate notes that we issued raised it up a little bit, but it extended the duration of our debt and we also locked into more fixed versus variable rates.

So we are pretty happy with the issuance, especially given what interest rates have done since we finalized that program.

Okay, and on your comments on the UK, we are seeing less bulk wine in the market you acknowledge, but it hasn't resulted in higher bottle prices.

Do you think that is a timing difference, or just reluctance on the part of UK retailers to allow pricing?

Can you elaborate at all on that?

First of all, there is currently sufficient bulk wine supplies.

And we've seen increases in bulk pricing but as I said, the retailers currently, I believe have contracts that will at least carry them through the short-term.

We are not seeing significant upward pressure on -- I shouldn't say pressure, maybe that's not the right word -- we are not seeing significant upward activity on retail pricing at this point in time.

We've been hesitant to predict that because it is somewhat inherently unpredictable.

So we are not really projecting that that in fact will be the case in the short-term.

Consequently as I have said before, we have put in place a lot of programs to address our issues in the UK that are not dependent upon necessarily price increases, working on our operating efficiencies through our production footprint, developing our business in more profitable channels and with more premium products and addressing more profitable geographies.

These are the steps that we've taken to address the situation and if fortuitously prices start moving, we will be able to take advantage of that, as well.

That is pretty much where we stand in the UK.

And just one question on US wine supply.

Some of the industry reports are predicting tight supplies for US wine grapes.

Your previous position has been to sort of back-stop that with the global supply chain.

Is that still your point of view or do you think you want to start extending contracts for US growers?

Our grape position is well balanced.

We are not really suffering in any particular shortages.

So we feel pretty comfortable with our standard operating procedures going forward here.

We are not really seeing any big change.

Okay.

Thanks.

Judy Hong, Goldman Sachs.

Good morning, everyone.

First on US wine, if you adjust for the inventory destocking can you tell us what the organic sales growth would have been in the first quarter?

I think for the first quarter it was slightly higher than our long-term range.

But again, it is only one quarter so we are pretty happy with the results.

But not enough to change our full-year guidance at this point.

That's for US wine specifically?

Correct.

And is the depletion number pretty much in line with that number as well?

Yes.

Okay.

And secondly, just in terms of looking at your Crown Imports numbers and your comment about the inventory drawdown in the Eastern territories, can you tell us how much of that took place in the first quarter?

Because the sales number that you reported actually were pretty good and I am just wondering if in fact some of the inventory drawdown took place in the first quarter.

I'm not sure.

We see strengthening certainly from what we can see in the East, but we are just trying to get back -- we are at balance with depletions and what we are shipping in.

And then just a comment about the retail trends that you are seeing on Corona.

At least the scanner data that we have been seeing those show a little bit of softness on the brand.

If you could just elaborate on what you are seeing sort of on a broader channel perspective.

Basically what we've seen is the West is performing in accordance with our expectations and we don't see any issue there relative to our mid-term guidance on growth.

The East, as we've said in the past, has suffered from the fact that as the transition occurred with the old importer and the new importer, some of the promotional activities that normally would have taken place and would have been put in place by the old importer had not in fact occurred.

And therefore as we took over the brand, the promotional activity at retail was less than it should have been.

So we've been addressing that as part of our initial transitional activities in building up those promotional programs which we feel pretty good about how we've done that.

In fact coming into Cinco de Mayo in May we've gotten -- we've restored a lot of that promotional activity, and we are seeing a rebound in May in particular and consumer takeaways that promotional activity in the East is put in place.

So I think it is going pretty well.

And my last question in the UK wine business, given your comment about the retail pricing environment that still seems to be pretty challenging, can you just talk about the strengths of your business in the first quarter and what really drove that?

The businesses remains pretty strong, and what drives that is that we enjoy a pretty strong position in the UK market as the leader in wine in the UK.

Pricing is somewhat challenging in that with duty increases and with some slowdown in growth or growth moderating that is impacted margins.

And also versus last first quarter we do have a bit of a I guess I'd call it an easy comparison in that there was some significant retail destocking going on in the first quarter of '07.

So that is also generated or explains some of the performance in the growth that we had in the first quarter of '08.

Okay.

Thank you, and congratulations, Robert.

Thank you.

Reza Vahabzadeh, Lehman Brothers.

Just on the guidance for the year on free cash flow can you just flesh out the capital spending and working capital use embedded in that free cash flow guidance?

I don't think we're going to get into that kind of specificity.

We just gave the general guidance of 160 to 180 for free cash flow for the year.

Okay, but with CapEx used and working capital used the comparable with FY '07?

I don't have those numbers in front of me, so why don't you give a call to Bob Czudak for some details of what the estimates were versus prior year?

Okay, and can you talk about your appetite, if any, for additional share repurchases?

Sure.

We are just, we believe strongly in our stock, and we just finished a pretty aggressive program and executed it pretty quickly so that the shares -- we were able to give the cash back to shareholders in a hurry.

But I think for right now we are not anticipating anything in the short-term but we're always going to be trying to look at what is the right thing to do with our excess cash and try to balance that with our optimal capital structure.

Got it.

Thank you.

Jon Feeney, Wachovia.

Good morning, and let me add my congratulations, Rob.

Just one question.

It seems like you've put together a few niche spirits brands over the past few years, yet you sort of don't have too much of -- you don't have an across the board, I guess what I would say is a premium offering.

How urgent is it to go out and grow a premium spirits offering through acquisition or internally for your three to five-year plan here?

Urgent is not the word that I would use for it.

We clearly want to become more premium.

We want our portfolio to be more premium, and we will do that in a variety of ways, number one, clearly new product development has been one way that we are addressing it with products like 1792 and 99 Bananas.

Also acquisitions will continue to supplement that as we see opportunities that we think are a good fit with the Company and also are valued appropriately.

We are not going to -- we're not going to put our financial disciplines aside in building our premium spirits portfolio just like we wouldn't in any other case.

And we're going to have to look at the opportunities as they arise and see if they meet our criteria.

So we do as a strategy, desire our portfolio to become more premium but that will be done in the context of as I said, new product development and the opportunities that are available to us that meet our financial disciplines going forward in the future.

We've got a very nice spirits portfolio as it exists now, and mix towards premium is getting much better with the SVEDKA acquisition.

We picked up the fastest-growing, premium spirits brand in the United States pretty much, and we are pretty excited about what we've got right now.

So hopefully there will be more opportunities in the future, but we are always pretty careful to be working against our existing portfolio as well.

Mark Swartzberg, Stifel Nicolaus.

Good morning, everyone.

Maybe a question for you, Richard.

Don't want you to be entirely left out remaining as Chairman here.

I wonder, Richard, if you could talk a little bit about broadly speaking your acquisition strategy and thinking from a go forward perspective, both in terms of size, any particular reason to think you become interested more on the bolt-on side of things than the larger, call it billion dollar plus transactions we've seen over the years.

Area focus -- we've heard area focus update from you guys in November, but when you step back and say look at all that has happened to Constellation since November, I think it is fair to say it has been more than what is commonly occurs over a relatively short period of time.

And of course you're more levered up than you've been in the past on an internal basis; you've said you don't want to do absolute.

So can you give us some thinking about acquisition strategy broadly speaking, A?

And then B, we know there have been some business issues here underlying the profit warning from a while back.

We have a good quarter here but beyond kind of immediate business challenges of destocking in the US or UK wine market, from a strategy perspective as you think about the business long-term and some of the disappointments versus what you were saying in November, have there been any other big strategy changes other than what you might say here on acquisitions?

First of all thank you for being concerned about my feelings about being left out, but I never feel left out.

With regards to acquisition strategy, we really have what I would consider to be a great deal of consistency even from November to now, which is that we will continue to service three priorities.

The first is really our European expansion where we will look for transactions that strengthen our routes to market and facilitate our leading New World wine position.

And Rob has talked about that in the past, and Rob and the team continue to actively engage in that.

The second area really is this premium spirits growth, and we continue to look at acquisitions albeit we are not going to chase something as pricey as Absolut.

And as Rob mentioned, we will not violate our financial disciplines.

But we do believe that there will be many acquisition opportunities in this area, and some of them will be Bolt-on acquisitions.

Some of them may be much larger acquisitions that could constitute really additional businesses almost like SVEDKA.

So, the third area continues to be filling out our wine portfolio around the world, and this is the area where we have said and continue to say, we don't see this continuing with these $1, $2 billion acquisitions.

It is more likely that it could be smaller, bolt-on acquisitions that fill in niches in our portfolio around the world.

On the other hand, you can never tell what is going to become available and if it will be an acquisition of size.

So we've been pretty steadfast in terms of this statement of priorities, which are simultaneous priorities.

I don't want anybody to think that is 1, 2 or 3.

And Rob and the team will continue to pursue these acquisitions as they have.

With regards to our strategy, and I am going to call it sort of bumps in the road since November, we've been pretty clearcut about what the bumps have been.

The Australian supply, combined with the UK and then a decision on our part, and I want to make this quite clear, it was our decision to lower distributor inventories in the US.

We thought that is what is best for our business and their business.

And we really don't see other issues, challenges emerging beyond that.

In fact, again we've been pretty steadfast that we believe we will return in the medium to long-term back to the growth targets that we set in that November meeting off of the 2007 base.

So we have a high degree of confidence that we are on that trajectory and we will get there without any additional issues.

That is very helpful.

Thank you.

One quick follow-up.

You commented a bit in your prepared remarks, Richard, about the why now question and it is very clear that Rob, you've got -- you've been with the Company for a very long time and you've got the executives you have reporting to you and the trends over the long-term very clearly demonstrate success there.

But you still sit here and say like why exactly now, versus some other period of time.

Is there anything more you can add to us for us, Richard, in terms of why this change is happening right now?

We hear you loud and clear on the acquisitions and you are staying involved in some of the other aspects of the business; but any more color that either of you can give us on the why now?

I think that basically Rob and I have led this Company in what I would call a partnership form.

And we're going to continue to do that.

This is an evolution.

This is not a big, dramatic change.

We felt that we are better with unifying the corporate side of the business which I have been leading with the operation side, which Rob had been leading and putting that under one that leadership.

But at the same time, I just want to make clear that I'm staying actively involved, and Rob and I are going to work very, very closely together.

At the end of the day Rob is running the business effective July 26.

And I have, as I said, the utmost confidence that he will lead the business to the next level of growth and shareholder value creation.

But I am not going anywhere, so this continues to be a partnership and Rob is just taking the lead partner role, is the way that I look at it.

Excellent.

Thank you, Richard.

Congratulations, Rob and even congratulations Bob.

Bryan Spillane, Banc of America Securities.

Good morning.

Just a quick question.

Rob, if you can talk a bit to some of the dynamics in terms of the mix in your US wine business, are you seeing similar trends that you've seen in recent quarters where your value wines, you are sort of managing a decline in the volumes but an improvement in the margins and then most of the growth or all the growth coming from sub premium?

Yes, we are seeing the (technical difficulty) of those trends; we've got a very positive mix shift that continues to occur as our value and more popular price products are at lower growth rates, and our premium portfolio which is the strongest in the industry continues to take advantage of a very healthy market for the growth of premium wine.

So it is pretty much stay the course in that regard, Bryan.

And just one related question on the inventory reduction.

Some of your competitors have cautiously tried -- attempted the same things, and I guess it has been a cautious approach because there has been some concern about increasing out of stock.

Part of the reason why companies have manufacturers have caused or asked wholesalers to carry more inventory is been to guard against out of stock.

So as your inventory levels have gone down at the wholesale level has there been any impact at retail in terms of out of stock?

No, and we are very careful in that regard and making sure that our distributors have the right level of inventories on a SKU basis to ensure that we don't have out of stock issues.

And as we've said in the past, part of the rationale behind the distributor inventory reduction was the fact that our distributors do have systems and capabilities that they haven't had to the same degree in the past to ensure that they are able to understand the needs of the retail marketplace on a very detailed level.

And we've had no issues at all with out of stock.

Great.

Congratulations again, and we will speak soon.

Christine Farkas, Merrill Lynch.

Thank you very much.

Rob, I'm looking for just a little bit more detail on your inventory management.

You were clear about the timing and what came through the first quarter but is there anything meaningful about mix?

We know what is selling and what may not be selling.

I guess I am trying to get an understanding of what the wholesalers were holding too much of.

So is there a different mix within your inventory destocking?

No, I don't think there is anything really meaningful there relative to mix.

So relative to your overall business the destocking is pretty general across the board?

It would be consistent with how our mix is evolving with regard to the business in general.

Okay, that's helpful.

And then just a quick question on Woodbridge.

Could you draw an analogy given how strong Yellow Tail had been in the past and how it slowed materially now; could that be a help in terms of boosting the Woodbridge brand in the US?

I think that is hard to make a judgment about the cross elasticity of two very specific brands like Woodbridge and Yellow Tail.

The facts are the facts, which are that Woodbridge, which is a long, established, well-known and very popular premium brand is performing very well.

And it is a function of a variety of factors which I've mentioned that relate to our efforts and our capabilities in the marketplace, as well as strong consumer demand for the product, which it's got a great name, it has got a premium image, it is a good value for a premium product.

And that is how brands are built for the long-term.

It is not a flash in the pan like a Yellow Tail, potentially.

It is a great brand.

Okay, that's great.

That's all for me.

Thanks, Rob.

Thank you, everyone.

That is all the time we have today.

Thank you for joining our call.

The quarter has certainly been an eventful one.

We've added SVEDKA Vodka to our premium spirits portfolio and SVEDKA continues to perform fantastically.

We greatly strengthened are on premise route to market for our branded portfolio in the UK through the formation of our joint venture with Punch Taverns.

We are executing our US wine distributor inventory reduction program.

We repurchased $500 million of our undervalued shares.

We had a good start to the year from a financial perspective and believe we are well positioned to achieve our full-year EPS and free cash flow targets and on track to getting back to our growth targets that we talked about in November.

And finally, we announced what I think is a great management transition that positions us well for the future.

Thanks again for your participation.

We hope you enjoy some of our excellent products.

In fact, you should go exclusively with our products this Fourth of July holiday.

Thank you very much, everyone.

Thank you.

This concludes today's call.

You may now disconnect.