Constellation Brands Inc (STZ) 2009 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome to the Constellation Brands first-quarter 2009 earnings conference call.

All lines will be a placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS).

Thank you.

It is now my pleasure to turn the floor over to your post, Patty Yahn-Urlaub, Vice President of Investor Relations.

Ma'am, you may begin your conference.

Thank you, Ray.

Good morning, everyone, and welcome to Constellation's first-quarter fiscal 2009 conference call.

I am here this morning with Rob Sands, our President and Chief Executive 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 a 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 Rob.

Thanks, Patty, and good morning, everyone.

First I would like to thank all of you who attended our recent New York City investor's meeting.

I hope that one of your takeaways from that meeting is that Constellation's management team is intensely focused on executing a strategy that delivers value by enhancing operating margins and profitability, improving our ROIC, and generating free cash flow, which enables debt reduction.

I believe our first-quarter results and fiscal 2009 financial goals demonstrate that commitment.

Another example of this a strategic execution is the recently announced divestiture of certain U.S.

line brands and assets that were acquired within the Clos du Bois and Wild Horse transaction, as well as some of our Northwest brands from Washington state and Idaho.

Collectively, these brands represented approximately one million cases of wine sold in calendar 2007.

Despite the fact that these were premium brands, the rationale for divesting was straightforward.

We simplified our portfolio, eliminated product redundancies, and better aligned the cost to produce our products with their corresponding price points at retail.

We received $209 million in cash with these brands, which we utilized to reduce debt.

We have an opportunity to receive up to $25 million in an earn-out if certain business objectives are met by the buyer within the next five years.

So now I would like to discuss our business and financial performance for our first quarter.

We are off to a great start in fiscal 2009.

Our results for the first quarter were solid and in-line with our expectations.

We increased sales and enhanced profitability in our North American and international operations above and beyond the benefit we received from the cycling of our U.S.

distributor wine inventory reduction initiative.

From an international perspective, we have been taking actions to improve profitability, operating efficiencies, and our competitive position in both the UK and Australian markets.

These actions have started bearing fruit, and we have improved our operating margins and profitability during the quarter.

We implemented planned price increases to retailers in the UK, which has enabled us to realize an increase in our net sales prices.

As a result, volumes have suffered somewhat but not as much as expected.

Having said that, the wine market in the UK remains healthy, growing at a rate of mid single-digits on a value basis in the multiple grosser channel per recent Nielsen data.

In Australia the wind market is also healthy, growing mid single-digits on a value basis.

Similar to the UK, we have recently increased prices in Australian to cover rising input costs and have seen a bit of volume reduction as we strive to improve profitability.

The 2008 Australian grape harvest is now essentially complete.

Although final data is not yet available, it appears that the current harvest estimate is approximately 1.7 million tons versus a harvest of about 1.5 million tons last year.

This outcome is a bit higher than anticipated due to the late season rainfall, but it still appears that supply is in line with demand.

Nevertheless, the cost of Australian grapes has increased significantly due to the fact that many growers paid for water supply during the growing season due to the drought conditions in this region.

This has created the unusual situation of higher harvest volume in the face of higher prices, which indicates that it is unlikely that we will see an abundance of lower-priced bulk wine availability.

I would also like to once again remind everyone with the UK and Australian markets combined currently represent less than 10% of our total company EBIT.

However, it is important to emphasize that despite volume impact from price increases in our international business, we have increased profitability during the first quarter.

Moving to the U.S.

wine business.

As you know, we completed our U.S.

wine distributor inventory reduction initiative during the first two quarters of our fiscal year 2008.

We have regained operating leverage as we have cycled this initiative, which negatively impacted last year's first-quarter results.

In addition, we also improved the margins of our branded wine business as a result of the favorable product mix generated by the addition of the Clos du Bois and Wild Horse brands and the divestiture of lower margin value brands, including Almaden and Inglenook, plus the rationalization of more than 60 brands within our value portfolio representing about 1,600 SKUs.

As a result of these portfolio changes, our value premium mix has changed dramatically in IRI channels.

Our U.S.

portfolio is now comprised of approximately 30% value wine and 70% premium wine on a volume basis and about 15% value versus 85% premium on a dollar basis.

From a marketplace perspective, growth in the U.S.

premium wine market remains very healthy at about 7% on a dollar basis according to recent 12-week IRI data through mid-May.

In particular, the super premium plus segment where wine sells for $8 and above at retail continues to grow in the double-digit range.

This segment includes brands in our portfolio such as Estancia and Kim Crawford and Robert Mondavi, all of which posted double-digit market growth during the 12-week IRI period ending May 18th.

Our Canadian wine business posted strong results for the first quarter, primarily reflecting sales growth from premium brands including Jackson-Triggs and Sawmill Creek and Naked Grape.

In the spirits segment, SVEDKA Vodka posted strong double-digit sales and market growth for the first quarter driven by new distribution points and increased promotional activity.

During the past year alone SVEDKA has gained new distributions at more than 4,500 national on- and off-promise accounts.

We are continuing to aggressively expand SVEDKA's export sales to countries outside the U.S.

SVEDKA is currently sold in over 25 export markets, including Germany, China, Australia, France, Brazil, and Canada, for example.

Our spirits business also reflects strong sales growth in the quarter from key brands including Black Velvet, Ridgemont Reserve bourbon, Effen vodka, Meukow cognac, and the Caravella family of liqueurs.

In an effort to streamline operations and improve efficiencies, we recently announced our intent to sell our Valleyfield, Quebec, facility, which was primarily a contract production facility for third parties.

This will allow us to eliminate excess capacity, reduce cost, and enhance ROIC.

This transaction is now expected to close during the second quarter as we work through the final details to ensure a smooth transition.

Moving to Crown Imports joint venture.

Crown generated low single-digit net sales growth against a tough comparison last year.

We saw strong performance in April offset by weaker performance in May, due to challenging comparisons to prior year promotional period for Cinco de Mayo and Memorial Day coupled with some impact from new competitive product introductions.

In addition, large markets, like California and Florida, continue to be challenged due to adverse economic factors in these areas.

However, the joint venture continues to target mid single-digit growth for the business as they head into the key summer selling season.

We believe Crown is well positioned for execution at retail accounts with solid promotional activity and market programs in place.

They are maintaining appropriate price spreads versus competitors and have a strong, fully staffed organization.

As a reminder, the Crown joint venture will overlap some easier comparisons in the second half of the year.

Before I move on, I want to briefly comment on a recent beer industry speculation regarding InBev, Anheuser-Busch, and others and how it might impact Constellation's investment in the Crown Imports JV.

Regardless of which scenario plays out, Constellation's contract with Modelo for the Crown JV remains intact as is through the initial term 2016 -- ending 2016, that is.

At that a time there are three potential outcomes as it relates to our contract with Modelo.

They are as follows.

Modelo can renew the contract, number one.

Number two, if Modelo decides that they would like to partner with another third party to import and market their portfolio in the U.S., they must pay Constellation our 50% share of eight times EBIT.

Number 3, if Modelo elects to become self-importer and is not prohibited from doing so by either federal or state regulatory authorities, then they would pay us our 50% share of tangible book value.

At this time I would also like to reiterate our assessment regarding the impact of the economic downturn on our business and the overall beverage alcohol category, as I am frequently asked this question.

From an economic perspective, there have been some venue shift from on-premise consumption to off-premise consumption.

Within the off-premise channel we are also seeing a shift to discount retailers including large mass merchants and wholesale club stores.

We remain generally insulated from the impact of these venue shifts because we sell directly to the distributor tier in the U.S.

at the same margin regardless of the end-user consumption.

The total beverage alcohol category grew 4% in the latest 52-week IRI period, which is in-line with the average industry growth rate for the past four years.

The growth trends for beer, wine, and spirits category which comprised the total beverage alcohol segment has not varied significantly during the last 12 months with the wine segment growing at a rate greater than that of beer and spirits.

To further demonstrate my point let's look at the 12- and 52-week IRI industry trends.

In the wine segment, 12-week IRI value trends for the period ending May 18th are as follows.

Total wine up 5%, premium wine up 7%, and super premium wine, which is greater than $8 at retail, is up 12%.

The 52-week IRI trends almost exactly mirror the 12-week trends for the total wine, premium, and super premium wine categories.

As you can see, the super premium plus wine segment, where Constellation has a leading market share, is experienced double-digit growth exceeding the trends of the total U.S.

wine segment.

We are well positioned in this category due to our continued premiumization efforts.

The results are similar in the spirits category with premium spirits growing 4% on a value basis for both the 12- and 52-week IRI periods.

Imported beer continues to grow at an industry growth rate of 2% to 3% for both timeframes.

While we are all aware of the economic challenges impacting many industries, beverage alcohol products are not expected to be as significantly impacted as other consumer discretionary goods.

In closing, our momentum continues for many of the strategic actions we have undertaken during the last 12 months.

We are off to a great start in fiscal 2009, and we are on track to achieve our goals and objectives for the year.

Now I would like to turn the call over to our CFO, Bob Ryder, for a financial discussion of our first-quarter business results.

Bob.

Thanks, Rob.

Good morning, everyone.

Overall, I am pleased with our start to the year and our results for the quarter.

On a comparable basis then EPS coming at $0.34 versus $0.21 last year.

This is in-line with our expectations and put us on a path to achieving our full-year goal of $1.68 to $1.76.

We used $55 million of free cash flow in Q1 versus a use of $104 million for the prior year.

We are still on track to reach our $310 million to $340 million free cash flow goal for fiscal 2009.

As a reminder, historically we are a net user of cash in the first quarter.

We believe our Q1 results demonstrate that the many significant steps we have taken over the past 12 to 15 months have increased our profit generation profile to drive improved financial results in fiscal 2009 and beyond.

Now let's look at our Q1 fiscal 2009 P&L performance, where my comments will generally focus on comparable basis financial results.

Let's look at net sales.

As you can see from our news release on page 13, our consolidated reported net sales increased 3%, primarily reflecting branded wine growth including the net benefit of adding brands like Clos du Bois and Wild Horse and divesting Almaden and Inglenook.

We also saw a favorable foreign currency translation partially offset by the impact of moving the UK wholesale business to the Matthew Clark joint venture.

The growth rate was 16% after excluding the impact of acquisitions, divestitures, and joint ventures, and 13% on an organic constant currency basis.

This strong growth rate includes the benefits of overlapping our initiative to reduce distributor wine inventories in the U.S., which negatively impacted net sales in the first and second quarters of fiscal '08.

Commentary for the following net sales comparisons will be on a constant currency basis.

Worldwide branded wine organic net sales increased 15%.

Organic branded wine geographic net sales for North America, which appears on page 12 of the release, increased 28% reflecting the overlap of reducing U.S.

distributor wine inventory levels last year and solid underlying growth in both the U.S.

and Canada this year.

Branded wine organic net sales for Europe and Australia/New Zealand decreased 6% and 3%, respectively.

For our international business we have implemented price increases that have impacted volume growth in the near-term but have enhanced overall margin and profitability.

Volumes in these geographies were also impacted by SKU reductions of certain lower margin brands.

Turning our attention to spirits, net sales increased 9%, driven by strong double-digit growth of the SVEDKA Vodka brand.

As discussed in our fiscal '08 year-end conference call, we estimated that last year's distributor inventory reduction initiatives had a one-time impact of $110 million to net sales and comparable EPS impact of about $0.15 with approximately 75% of that impact, or $80 million of net sales, and $0.11 of EPS coming in the first quarter and the remainder hitting in Q2.

Adjusting for this estimated $80 million net sales impact for the distributor inventory initiative in Q1 last year, we estimate consolidated organic net sales on a constant currency basis grew in the low single digits.

This is a little below our mid single-digit target due to the lower UK and Australia/New Zealand sales performance for the reasons I just discussed.

However, North American organic branded wine, on a constant currency basis, grew in the mid single-digits after adjusting for the distributor inventory impact.

Now let's look at our profits on a comparable basis using information on page 14 of the release.

For the quarter, our consolidated gross margin was 36.4%, up 6.1 percentage points.

This reflects the benefits of implementing price increases on our North American and international markets and product mix shift from adding high margin brands like Clos du Bois and Wild Horse and a divesting lower margin Almaden and Inglenook brands.

The overlap of the distributor inventory initiative also provided operating leverage versus the first quarter last year.

We also experienced favorability from shifting the lower margin UK wholesale business to a joint venture structure last April.

Our consolidated SG&A for the quarter was 22.3% of net sales compared to 21.2% a year ago.

This increase reflects moving below our SG&A UK wholesale business to a joint venture structure and increased marketing investment behind our premium spirits brands.

This was partially offset by the impact of lapping the distributor inventory initiative.

Consolidated operating income increased to $131 million from $82 million for the prior year.

I would now like to turn to our segment operating income results on page 11 of the release to provide highlights of this change.

Wine segment operating income increased $58 million to $145 million.

This was primarily due to higher net sales as we overlap the reduction of the U.S.

distributor wine inventories, contribution from the Clos du Bois and Wild Horse brands, and profitability improvement in the international business.

For the spirits segment, operating income decreased $5 million, primarily due to the higher investment behind our premium brands discussed earlier and higher raw material costs.

For the quarter corporate and other expenses totaled $24 million compared to $20 million for the prior year.

The increase primarily includes higher consulting service fees associated with our review of our Australian business and other process improvement opportunities, as well as additional costs to support the growth of the Company.

Equity investment earnings totaled $72 million versus $76 million last year with $70 million coming from our Crown Imports investment, compared to $73 million in the prior year.

For the first quarter, Crown generated net sales of $673 million, an increase of 2%, and operating income of $139 million, a decrease of 5%.

The operating income decrease was driven by the year-over-year timing of marketing activities and an increase in product cost.

As a reminder, the joint venture agreement calls for a limited annual inflationary increase for the cost of products acquired from the Grupo Modelo Company through calendar 2011.

Interest expense for the quarter was $87 million, up 9% over last year.

The increase primarily reflects incremental interest from funding the Beam Wine brand acquisition.

Now let's take a look at our debt.

At the end of May, our debt totaled $5.3 billion, which was fairly consistent with our debt at the end of fiscal '08.

At the end of the quarter, we had approximately $2.6 billion of a bank debt under our senior credit facility and $2.7 billion of fixed term and other debt.

Our average interest rate for the first quarter was around 6.5%.

We had $580 million of revolving credit available under our senior facility at the end of May.

Our debt to comparable basis EBITDA ratio at the end of May was 5.1 times.

This ratio improved from the 5.3 times level at the end of February, reflecting our earnings improvement.

In early June we received $209 million in proceeds from the sale of certain winery assets, which were used to reduce borrowings.

If these asset sales had occurred before the end of Q1, our debt to comparable basis EBITDA ratio would have been around 4.9 times.

With the strong free cash flow and earnings improvement plan for fiscal 2009 combined with the asset sale proceeds just mentioned, we now believe we can reduce this ratio to below four times range by the end of fiscal 2009.

Our previous guidance was in the low to mid four times range.

Our comparable basis in tax rate came in at 37%, in line with our targeted full-year tax rate and compared to a 38.3% rate last year.

Our weighted average diluted shares outstanding for the quarter totaled $219 million compared to $233 million last year, reflecting the benefit from the share repurchase during the first quarter of last year.

Due to the many factors just mentioned, diluted EPS was $0.34 a share versus $0.21 a share last year.

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

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

For the first quarter, we use free cash flow $55 million versus the use of $104 million in the prior year.

The lower use reflects improved earnings and increased distributions from the Crown Imports JV versus the prior year first quarter.

We saw higher inventory in the first quarter due to an increase in our Australian harvest intake.

Accounts payable is also higher as some of the payments for the harvest will occur in Q2 versus last year when the payments incurred in Q1 as the result of an earlier harvest.

Accounts receivable was also higher as we lapped the distributor inventory reduction.

As mentioned earlier, for fiscal 2009 we are targeting free cash flow to be in the range of $310 million to $340 million.

This includes CapEx in the range of $150 million to $170 million.

Moving to our P&L outlook for the full year 2009, we are forecasting comparable basis diluted EPS in the range of $1.68 to $1.76.

As reflected in the outlook section of the press release, we expect reported net sales to increase in mid-single digits.

Interest expense is expected to be in the range of $335 million to $345 million and we are assuming weighted average diluted shares of approximately $222 million.

Our comparable basis guidance excludes acquisition-related integration costs, restructuring charges, and unusual items, which are detailed on page 16 of the news release.

I believe our results for Q1 and our full-year goals demonstrate our overall focus on improving our sales mix, increasing operating efficiencies, and implementing pricing offset input cost inflation and to enhance overall margins and profitability.

Generating strong free cash flow and paying down debt.

With that, we are happy to take your questions.

(OPERATOR INSTRUCTIONS) Tim Ramey, D.A.

Davidson.

Congratulations on a great quarter.

I think you said this and I missed it, but the comparable wine sales excluding the impact of the inventory drawdown was what in the quarter?

Throughout mid single-digits in North America, Tim.

There is still some of the impact of the drawdown that will fall into the 2Q.

Can you help us for our modeling purposes?

It will be about $30 million in Q2 because about three-quarters of last year's $110 million occurred in the first quarter.

So what's left is around $30 million of sales and about $0.04 of EPS for Q2.

Great.

Appreciate it.

I was on CNBC this morning getting asked whether you guys would buy pieces of Foster or Beringer.

I think you made a strong case here, and on the road with me, that your focus is on hunkering down.

Can I get you to repeat that one more time -- hunker down and pay down debt?

Well, Tim, clearly our focus is on hunkering down and paying down debt.

So it is as we have said, which is we are focused on generating internal efficiencies, improving free cash flow, improving ROIC, and paying down debt.

So these are key initiatives for our management team.

I think you saw that in the first quarter.

That is what we did.

That is terrific.

Thank you.

Lauren Torres, HSBC.

Good morning.

I was hoping you could be a bit more specific with respect to the price increases that you took in the quarter.

Any sense of the magnitude?

Or give us a sense of how much of an increase you took, where you took it.

Also just going forward, is there more to come or are you pretty much took as much as you can, or as I said, take more going into the second quarter?

It varied a little bit by geography, but I would say in the U.S.

in the wine business it was probably around 3% kind of pricing.

As expected, it had a bit of a volume hit and it will take a while to build out of that.

I don't think we are looking at significant pricing in the balance of the year in North America for wine.

Spirits also took pricing in the first quarter.

I think they are looking, because they have a little more input cost inflation, they are looking to take some additional pricing [balance of] the year.

As we talked internationally, the UK originally had their pricing increase -- I say on there it was around again 3% to 4%.

But then when the duty came in they actually increased it to match the duty.

But I think they are pretty much done with their pricing for the year.

Australia also took some pretty significant pricing in the first quarter, like 5% to 7%.

I think they are looking at may be taking some additional pricing balance of the year, because as Rob had said, they had to pay a bit more for grapes this year because the farmers had to buy a lot of water, which is reflected in our cost (inaudible).

Again, we are trying to balance improving our margins and using pricing to do that (inaudible) being the volume impact of that, because when we price we can certainly see some volume productions.

But on a worldwide basis, certainly in the wine business, the supply of grapes is pretty much matched up with the demand for them.

So we do think this is the right time to do what we are doing.

You said there was a volume hit with respect to U.S.

wine.

How much of a hit was that?

I think for volumes we were a little bit light on the prices -- on the products that we priced.

I think the two brands, specifically, if you look at IRI where share probably keeping pace is a brand called Vendange and Clos du Bois.

Vendange is a sort of a lower end brand so it tends to be more price sensitive.

We are managing it more for profitability versus share of market.

In the Clos du Bois, and I think we mentioned on previous calls, we took -- the previous owner took about 6% to 7% pricing at the end of the calendar year.

That is a pretty significant price increase for a wine brand.

So the volumes on that has actually taken a hit commensurate with that.

But as we get further passed that price increase, and we are like in month six, we see the volumes beginning to recover there and our market share beginning to recover, as well.

Are you seeing your competitors take similar pricing?

Yes, we are seeing pricing across the marketplace and pretty much in all the geographies.

Everybody is under the same pressures we are.

I think everybody else sees the same supply/demand dynamics that we see.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) Bryan Hunt, Wachovia.

Thank you.

In line with your focus to hunker down and generate free cash, looking at your target of $310 million to $340 million it appears that there is a significant amount of opportunity in working capital.

Could you talk about your working capital targets for the year and how much that $310 million to $340 million comes from working capital benefits?

Yes, I would say in general we are much more focused on generating cash flow at the Company.

I will say a couple things around that.

Number one, I think the results show that if you look at fiscal '08 and fiscal '09 and sort of average it, we would be generating about $350 million a year, which I think is much higher than we generated historically.

At the New York investor's conference, I think I said that as a company we are trying to increase the EBIT flow through to free cash flow, which the last three years has probably been in the mid 30% range.

We are trying to get that to sort of the mid-40% range.

Meaning the amount of EBIT that as a percent of free cash flow.

We have changed the incentives within the Company so that people -- part of their bonus metric is now based on free cash flow.

We are seeing a much increased opportunity, a much increased focus on generating free cash flow, because if you look at our balance sheet, we have a sizable investment in net working capital.

The big investment is in inventory, of course.

I think we -- you have seen some activities to improve that, like reducing less profitable SKUs.

Because when you look at it from a return on capital perspective, it is difficult for those SKUs, because they are lower margin and they sort of tie up a lot of working capital, generate -- it is difficult for them to return the cost of capital.

So we are not setting specific working capital goals, but I think you will see it as we proceed.

I think you are seeing in the bottom line as we speak.

Okay.

Thank you very much.

Mark Swartzberg, Stifel Nicolaus.

Good morning, everyone.

A question about Canada, which is doing very well.

I think you said up double digits in the quarter.

Can you give us a little more detail on what is going on there and, of course, with an eye towards sustainability, give us an idea of the growth you see in the market going forward?

Canada is in general a great market for us.

People are consuming more wine.

The consumers are very loyal to Canadian wine.

There is big trading up going on into the VQA segment.

In general, it just remains a strong market.

I would say that we don't see that abating for any particular reason.

I think that the trends are pretty firmly intact.

I think we should continue to enjoy favorable trends.

Our portfolio is really well positioned in terms of the products that we have to take advantage of those trends.

We are pretty optimistic about the market.

Just the other thing on this, I mean we are the market share leader up there.

It's a country which actually some countries in Europe are looking at.

It has a minimum net pricing, so it tends to help the brand owner.

There is a big opportunity there, big market shift towards imported new world wines -- so from Australia, New Zealand, and the U.S.

We are very well-situated to take advantage of that opportunity.

We see, albeit it is not a huge market especially compared to the U.S, but we see some pretty good opportunities for Canada going forward.

When you say growth not abating -- what is really driving my question is it's not normally low double-digit kind of growth there.

So do you -- low double-digit sustained and is that distribution?

Is that new products?

Obviously, it appears you are taking share.

Just trying to understand what is upticking there.

I think in general Canada, you know, the market probably grows 5% to 7%.

So I think you are right, this quarter I don't think we would expect double-digit growth going forward.

There is some timing impacts there, but it is a strong top line in Canada.

We expect to take advantage of that.

Can you help us connect the dots between the market and the growth you saw in the quarter?

What was the sizing of that in the release in terms of named brands really changed there?

Well, we can get back to Patty or Bob on some specifics on that market.

But it is a combination of factors, new SKUs and product introductions, things to that effect.

I think as much as Bob told you that you probably would expect growth in Canada to be in excess of U.S.

growth, probably mid to high single-digits.

But we are not going to project sustained double-digit growth.

So I think that is what you should probably take away for now.

Great.

Thanks, guys.

(OPERATOR INSTRUCTIONS) Bryan Spillane, Banc of America.

Good morning.

Just a couple questions or a question, I guess, regarding some of your cost savings initiatives and efforts to improve return on capital.

First, you had mentioned at the analyst day a program to reduce SKUs, eliminate some lower margin or low return brands.

If you could talk a little bit about how that, if that, had any impact on your sales in the quarter.

Then second, if you guys could just talk a bit about where you stand now in terms of your project list.

What is currently being worked on and then what you have sort of in the pipeline in terms of initiatives to continue to boost returns and grow margin.

First of all, as I mentioned in my talk, we discontinued in our value segment about 60 brands, about 1,600 SKUs.

That is definitely one of the factors that has impacted our sales growth.

Even though our sales growth in North America, by the way, in general is well in-line with target.

Notwithstanding the fact that it has been impacted by the couple things Bob mentioned -- Clos du Bois pricing, the way that we are managing the Vendange brand.

The third item is the fact that we now don't have those 60 brands flowing through as well, but nevertheless, on a purely organic basis taking into account the distributor inventory reduction, even including the factors, we are growing the business in North America at about a 5% rate, which is exactly consistent with our mid single-digit growth.

We have got lots of initiatives to reduce cost of goods sold.

I think a good example of that is our recently announced disposition of our Valleyfield facility, primarily a contract production facility, although maybe about 20% of it in various waves was utilized for our products.

We have got a brand new modern facility in Lethbridge, Canada, in Alberta that we can consolidate production into.

So these are the kind of moves that we continue to make to boost margins, to improve ROIC.

The disposition of the brands that we recently announced that we are selling, there again we have developed a, what I will call a disposition discipline, as we have got brands that we don't see are strategic that we believe can be sold in excess of the net present value of our forecasted cash flows of those brands.

Those are the kind of ROIC improvement initiatives that we are undertaking.

Bob, you have anything to add?

No, I think the other thing we talked about buying, and it relates back to some of the projects on which we are working, is we are looking pretty intently at our Australian business.

Looking at the return on capital and profitability by brand and actually by SKU.

That will most likely result in some reductions to the SKU count on brands that can't return their cost of capital.

That should improve our margins down there and should improve our working capital as we have just fewer things hanging around in the warehouse.

I think that to, coupled with the pricing we have already taken, and maybe some additional pricing we will be looking at balance of year, should improve our profitability in both Australia and the UK.

So I think there are some of the things that we are looking at.

Great.

Thanks, guys.

There are no further questions at this time.

I would like to turn the floor back to Rob Sands for any closing comments.

Okay, well, thank you, everybody, for joining our call today.

We are very pleased with our results for the quarter.

As I mentioned, I think that we are off to a great start for fiscal 2009.

I believe we are well positioned to achieve our free cash flow and EPS goals for the year.

Our recent actions demonstrate that we continue to execute our strategy.

A few examples include the divestiture of the California and Northwest assets that I just talked about.

Of course, we used those proceeds to pay down debt.

We have realized pricing and thus increased profitability in our international markets where we have a strong presence.

Overall we planned continued margin expansion and ROIC enhancement as we drive internal efficiencies and further premiumize our portfolio.

Thanks again, everybody, for your participation.

We hope you enjoy some of our excellent products during the Fourth of July holiday.

Thank you.

This concludes today's Constellation Brand's first-quarter 2009 earnings conference call.

You may now disconnect, and have a great day.