Constellation Brands Inc (STZ) 2009 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Constellation Brands' second-quarter 2009 earnings conference call.

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

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

(Operator Instructions).

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

Ma'am, you may begin your conference.

Thank you, Pam.

Good morning, everyone and welcome to Constellation's second-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 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 fluctuation.

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 affect the Company's estimates, please refer to the news release and Constellation's SEC filings.

Thanks and now I'd like to turn the call over to Rob.

Thanks, Patty and good morning and welcome to our discussion of Constellation's second-quarter sales and earnings results.

We are pleased with our quarterly results, which were in line with our expectations and clearly demonstrate that we are on track to achieve our fiscal 2009 financial goals.

In the second quarter, we generated strong free cash flow, significantly reduced our debt, improved our comparable basis, operating margins and ROIC and reaffirmed our comparable EPS guidance for the year.

We are particularly pleased with our ability to rapidly deleverage using a combination of free cash flow and proceeds from the sale of assets.

From an operational perspective, we improved operating margins for both our wine and spirits businesses by improving our sales mix and increasing prices to offset rising input costs.

Collectively, these actions have been completed during a time of increasing financial market volatility and ongoing competitive challenges in some key markets.

During the quarter, we began the process of right-sizing our Australian wine operation, which includes the planned sale of production facilities and vineyard properties, consolidation of bottling operations and the rationalization of our extensive portfolio with the elimination of more than 30% of our SKUs.

This initiative is part of our ongoing efforts to enhance operating efficiencies and improve cash flow and return on invested capital.

In the second quarter, we also sold the US wine brands and assets that were acquired with the Clos du Bois transaction, as well as some of our Pacific Northwest facilities and brands from Washington state and Idaho.

We received more than $200 million in proceeds from the sale of these assets, which were used to reduce debt during the quarter.

Now looking at our US wine business, this will be the last period that we will be comparing for the cycling of our fiscal 2008 US distributor wine inventory reduction initiative, which benefited this year's second-quarter results by approximately $30 million in sales and $0.04 in EPS.

Above and beyond this benefit, we continued to improve the EBIT of the US wine business as a result of favorable profit mix created from the acquisition of higher profit premium brands, the divestiture of lower margin value brands and the resulting synergies generated by this ongoing portfolio transformation.

Nevertheless, sales for our US wine business in the quarter were a bit below our expectations for the following reasons.

First, we have seen a slight slowing of the US wine category market growth; although current growth levels remain solid.

Second, in an ongoing effort to enhance the profitability of the business, we have taken the lead at increasing prices across the majority of our wine portfolio in the US.

These pricing actions have resulted in increased profitability in the form of overall margin improvement and enhanced ROIC for our US wine business; although volumes have been unfavorably impacted in the short term.

Despite the slowing market growth trend I just mentioned, according to the recent 12-week IRI data, the US premium plus wine market remains healthy at a growth rate of mid single digits.

And many of our premium plus brands are exceeding this market growth trend, including Woodbridge, Estancia, Toasted Head, [Feeney], Kim Crawford and the recently acquired Wild Horse brand, all of which posted strong growth during the latest 12-week IRI reporting period.

As expected, the sales growth trajectory of our US wine portfolio has been impacted by the ongoing brand and SKU rationalization currently underway for our value wine portfolio.

Upon completion of this initiative, we discontinued more than 25% of the SKUs in our total US wine portfolio.

Although this represents a small number of cases, it is expected to negatively impact the growth rate of our portfolio by more than 2% in fiscal 2009.

We expect our sales growth for the US wine business to return to levels that are more consistent with market growth as we [lap] price increases and our SKU rationalization initiative and we complete the integration and restructuring activity associated with our recent acquisitions and divestitures.

From a US wine marketing perspective, we will be launching a new Robert Mondavi brand equity campaign, which honors the legacy of the iconic California wine pioneer, Robert Mondavi.

As you know, the Robert Mondavi brand has become one of the most important, recognized and valuable brand franchises in the world.

We are taking this opportunity to leverage the tremendous power of the franchise with new brand positioning and a new print campaign.

This initiative will become visible in the market in the coming weeks.

As is typical at this point of the year, I would like to provide an update relating to the US grape harvest, which is almost 75% complete at this point.

This year's harvest is expected to produce quality output despite a spring frost, extended summer heat and extreme winds during the cool period.

Although there are divergent estimates from varying sources relative to the expected size of this year's harvest, we are currently estimating that the 2008 US industry harvest may potentially decline as much as mid single digits from last year's harvest.

Prices for grapes are expected to increase in the high single digit range reflecting tightening supply for key varietals -- Pinot Grigio, Pinot Noir, Chardonnay and Cabernet.

Overall, these trends are expected to keep supply and demand generally in balance with a bias towards tightening supply.

Although we may feel some pressure from a COGS perspective, we expect a more favorable pricing environment to more than offset these COGS increases.

Our Canadian wine business posted strong results for the second quarter, primarily reflecting sales growth from our premium portfolio led by brands such as Jackson-Triggs, Inniskillin and Naked Grape.

Although conditions remain challenging in our international wine business, we are working toward increasing the overall profitability of this business by taking prices; although doing so has negatively impacted volumes.

We are well-positioned with retailers for the upcoming holiday selling season in our key international markets and we are progressing as planned with our business realignment activities in Australia.

I would like to reiterate that the UK and Australia/New Zealand market combined currently represent 10% of our total company EBIT and should therefore not cause a significant amount of operational volatility.

During the second quarter, the spirits segment posted increased sales and operating profit, driven primarily by strong double-digit, top-line and market growth for premium products, including SVEDKA vodka, Black Velvet Canadian whiskey and Effen vodka.

In addition, Ridgemont Reserve 1792 bourbon, 99 Schnapps, Caravella and Meukow cognac also delivered solid sales performance.

The strong momentum surrounding SVEDKA continues to build from increased distribution points and promotional activities, as well as continued expansion outside the US.

During the quarter, we also closed on the sale of our Valleyfield, Quebec facility, which was primarily a contract production site for other suppliers.

This effort streamlines operations, improve efficiencies and allow us to eliminate excess capacity while reducing costs and enhancing ROIC.

I'm moving to the Crown Imports joint venture.

The Crown portfolio generated 1% net sales growth in the second quarter.

Strong sales for Corona Light, Modelo Especial, Negra Modelo and Pacifico products were offset by weaker trends for Corona Extra, which continues to be impacted by adverse economic conditions in the large Corona market, including California, Arizona and Florida.

As we discussed, there has also been competitive product introductions targeted at the Corona brand, which may have had some impact during the summer selling season.

However, the continued success of these product introductions remain uncertain with the close of the summer.

We are expecting improving results for Crown in the second half of the year as we (technical difficulty) easier comparisons.

In addition, most competitors have publicly indicated that they will begin to increase prices in order to offset rising input costs.

We expect these activities to better align price gaps versus the competition at more normalized levels as the significant price discounting, which permeated the summer selling season, is expected to dissipate.

New product introductions are expected to increase our share of shelf space at retail.

They include the Corona 18 pack, the Corona Light tall can and Coronita Light.

And we are currently market-testing Modelo Especial and Negra Modelo draft in selected US cities.

We had originally estimated Crown depletion rates for fiscal 2009 in the mid-single digit range.

Now that we have reached the halfway point for the year, we are revising our completion estimate for fiscal year 2009 to a rate that is about flat to slightly positive.

Despite this revision, I want to reiterate that the Crown portfolio is healthy, execution at retail is strong with solid promotional activities, market programs and new product introductions in place for the remainder of the year.

In September, we have begun to see positive growth trends for the entire Crown portfolio with Corona Extra returning to growth and other brands growing at high single-digit rates.

Now before I turn the call over to Bob, I would like to address the issue of rising input costs, as I am frequently asked about the magnitude of this impact on our business.

As you know, grape purchases represent approximately 40% to 50% of our COGS spend.

The cost drivers for this agricultural business are generally unrelated to the current macro factors affecting other COGS components, so higher energy costs.

We currently contract approximately 90% of our grape [needs] from grape suppliers around the world.

Packaging represents the next largest COGS component, including glass, labels, [closures], followed by transportation costs, many of which have obviously been impacted by rising energy costs.

Overall, we estimate that rising input costs have negatively impacted our COGS in the single-digit range.

However, we have increased prices at a rate that offsets the unfavorable COGS impact.

Now in closing, I am pleased with the results of the second quarter.

We continue to execute on all fronts, both tactically and strategically despite challenges from current marketplace dynamics.

We are entering our strongest seasonal period and believe we are well-positioned to achieve our goals for the year.

And now I would like to turn the call over to Bob Ryder for a financial discussion of our second-quarter business results.

Bob?

Thanks.

Good morning, everyone.

Thanks for joining us.

Our comparable basis diluted EPS came in at $0.45 versus $0.35 last year.

This, combined with our Q1 results, puts us on a path to achieving our full-year EPS goal of $1.68 to $1.76.

We generated $125 million of free cash flow in the first half of the year and we remain on track to reach our $310 million to $340 million free cash flow for fiscal '09.

Our deleveraging efforts have driven more than a $400 million decrease in our total debt level in fiscal 2008 year-end.

Now we will look at our Q2 fiscal 2009 P&L performance.

My comments will generally focus on comparable basis financial results.

First, net sales.

As you can see from our news release on page 13, our consolidated reported net sales increased 7%, primarily reflecting expanded wine growth, including the net benefit of adding brands like Clos du Bois and Wild Horse and divesting Almaden, Inglenook and certain Pacific Northwest wine brands.

On an organic constant currency basis, which excludes the impact of acquisitions and divestitures, the growth rate was 6%.

This growth rate includes the benefit of overlapping our initiatives to reduce distributor wine inventories in the US, which negatively impacted net sales in the first and second quarters of fiscal '08.

My commentary for the following net sales comparisons is on a constant currency basis.

Our worldwide branded wine organic net sales increased 4%.

Organic branded wine geographic net sales for North America, which appears on page 12 of the release, increased 7%.

This reflects the overlap of reducing US wine distributor level last year and solid growth in Canada.

Branded wine organic net sales for Europe and Australia and New Zealand decreased 3% and 1% respectively.

To improve margins and enhance ROIC for our international businesses, we have implemented price increases, which have impacted volume growth in the near term.

In the UK, we implemented a mid-single-digit price increase in January to cover cost increases and followed that up with another increase in March to offset the UK duty increase.

These actions have been supported with increased marketing investment.

In Australia, we also increased prices last March in the mid-single-digit range after we had already reduced some of our price promotion activity.

Volumes in these geographies were also impacted by SKU reductions of certain lower margin brands related to our business restructuring and realignment activities for our Australian operations.

We expect to see some negative impact on volumes from the SKU reduction for the balance of the fiscal year.

These markets remain very challenging and the pricing environment is quite tight.

Turning our attention to spirits, net sales increased 4%, led by double-digit growth from SVEDKA vodka, Black Velvet whiskey and Effen vodka brands.

As discussed on our recent conference calls, we estimated that last year's distributor inventory reduction initiative had a one-time impact of $110 million to net sales and comparable EPS impact of about $0.15.

Approximately 25% of that impact or about $30 million for sales and $0.04 for EPS came in the second quarter of fiscal '08.

Adjusting for the $30 million net sales impact in Q2 last year, we estimate consolidated organic net sales on a constant currency basis grew in the low single digits.

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

North American organic branded wine on a constant currency basis grew in the low single digits after adjusting for the distributor inventory impact as volumes in the US have also been impacted by the near-term SKU reduction and price increases.

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

For the quarter, our consolidated gross margin was 37.6%, up an impressive 2.4 percentage points.

This reflects the benefits of implementing price increases in our North American and international markets and favorable product mix shifts from adding the higher margin brands like Clos du Bois and Wild Horse and divesting the lower margin Almaden and Inglenook brands.

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

These activities should drive a long-term improvement to Constellation's profit profile and reflect the benefits of our [premiumization] strategy.

Our consolidated SG&A for the quarter was 22.4% of net sales compared with 21.2% a year ago.

This increase reflects increased marketing investments in branded wine in the UK, hedging losses and higher cost for stock compensation and professional services.

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

Consolidated operating income increased to $146 million from $125 million for the prior year and our operating margin increased 1.3 percentage points to 15.3%.

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

Wine segment operating income increased $24 million to $149 million.

This was primarily due to the contribution from Clos du Bois and Wild Horse brands, including the late related synergies, and higher net sales as we overlap the reduction of the US distributor wine inventories.

These benefits were partially offset by the divestiture of Almaden, Inglenook and certain Pacific Northwest wine brands.

For the spirits segment, operating income increased $2 million and operating margin increased 1.5 percentage points.

This reflects positive mix shift and reduced SG&A.

For the quarter, [corporate number] expenses totaled $26 million compared with $21 million for the prior year.

The increase primarily includes higher consultant fees associated with the (technical difficulty) of our Australian business and other process improvement opportunities, stock compensation expense, as well as additional costs to support the growth of the Company.

Equity investment earnings of Crown totaled $74 million compared to $79 million in the prior year.

For the second quarter, Crown generated net sales of $732 million, an increase of 1%, and operating income of $149 million, a decrease of 5%.

The operating income decrease was primarily driven by a contractual increase in product costs and year-over-year timing of [lining] activity.

As a reminder, over the first five years of the initial 10-year term, the joint venture agreement called for an annual increase for the cost of products acquired from Grupo Modelo, which we believe are below US inflationary levels.

Interest expense for the quarter was $81 million, down 7% over last year.

The decrease primarily reflects a decrease in our average interest rate during Q2 versus the prior year quarter.

Now let's take a look at our debt.

At the end of August, our debt totaled $4.8 million, which represents a $420 million decrease of our debt flow at the end of fiscal '08.

The decrease was primarily driven by $204 million in net proceeds received in early June from the sale of certain winery assets and our free cash flow generation.

At the end of the quarter, we had approximately $2.3 billion of bank debt under our senior credit facility and $2.5 billion in fixed term and other debt.

Our average interest rate for the second quarter was around 6.3%.

We had $845 million of revolving credit under our senior facility at the end of August.

We believe there is no issue accessing this facility, which is in place through June 2011.

The next significant funding requirement is the maturity of $155 million of pound sterling notes due in November '09.

We continue to deleverage at a rapid pace as our debt to comparable basis EBITDA ratio at the end of August was 4.6 times versus the 5.3 times level at the end of February.

This reflects our commitment to earnings improvement and debt reduction.

With the strong free cash flow and earnings improvement plan for fiscal 2009, combined with the asset sale proceeds just mentioned, we continue to believe we can reduce this ratio to the low four times range by the end of fiscal '09.

Our comparable basis tax rate came in at 29% compared to the 35% last year.

The lower rate drove some favorability in the quarter and reflected the settlement of uncertain tax positions during the second quarter.

This benefit was already factored in our full-year tax rate projections as we continued to project our full-year comparable base rate to approximate 37%.

Our weighted average diluted shares outstanding for the quarter totaled 220 million compared to 209 million last year.

Due to the many factors just mentioned, diluted EPS was $0.45 a share versus $0.35 last year.

Now let's turn to cash flow on page 10 of the news release.

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

For the first half of '09, we generated free cash flow of $125 million versus $131 million in the prior year.

Net cash from operating activities was consistent with last year as the increase in net income plus non-cash items was offset by a higher net use of working capital.

We have seen higher inventory due to an increase in our Southern Hemisphere harvest intake and higher accounts receivable [as] increased sales versus the prior year.

Additionally, CapEx for the first half of '09 were $52 million compared to $47 million for the same period last year.

As mentioned earlier, fiscal '09, we are targeting free cash flow 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, we are reiterating our comparable basis EPS forecast 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 mid single digits and organic net sales to increase mid to high single digits.

This includes the benefit of lapping the distributor inventory reduction initiative.

Due to favorability and average debt balances, interest expense is now expected to be in the range of $325 million to $335 million versus our previous guidance of $335 million to $345 million.

This improvement essentially offsets the impact of the low growth targets of Crown Imports discussed earlier by Rob.

Assuming weighted average diluted shares to approximate $422 million, our comparable basis guidance excludes acquisition-related integration costs, restructuring charges and unusual items, which are detailed on page 17 of the news release.

During the second quarter, we recorded approximately $129 million or $122 million after tax of charges and write-downs.

$109 million of the pretax charges was associated with the previously announced business realignment activities for Australian operations.

This included $48 million of inventory write-downs, $26 million for impairment of intangible assets and an equity method investment and $35 million of restructuring and other charges.

All but a couple million of these charges were non-cash.

In addition, we recorded a non-cash loss of $8 million on the sale of our Valleyfield spirit (technical difficulty) at the end of Q2.

This is primarily why we have revised our FY '09 reported guidance by $0.03.

The remaining charges recorded in the quarter were primarily related to other previously announced restructuring and business realignment activities.

Before we take a look at your questions, I would like to (technical difficulty) actions and results for the first half of the year combined with our full-year goal continue to demonstrate our overall focus on, one, improving our sales mix, increasing operating efficiencies and implementing pricing to offset input cost inflation and enhance overall margin and profitability.

Our Q2 and year-to-date operating margin improved 1.3 and 3.1 percentage points respectively, demonstrating number one.

Two, generating strong free cash flow.

We are maintaining our guidance of $310 million to $340 million after producing strong free cash flow results last year.

And three, paying down debt.

Debt is down over $400 million this year and we have reduced debt to comparable EBITDA margin 0.7 points to 4.6 times.

With that, we are happy to take your questions.

(Operator Instructions).

Tim Ramey, DA Davidson.

Hello?

Can you hear me now?

Yes, we can hear you.

You mentioned hedging losses.

Was that currency hedges or what exactly was that and the order of magnitude please?

It was mostly transactional currency hedges, Tim, and the total for the quarter was probably around $8 million.

So we had some ineffectiveness and some other things going on in the hedging portfolio.

So we look at that as a one-quarter aberration.

And I think your sales guidance implies an acceleration of kind of organic performance in wine for the second half if I am not mistaken.

Is that -- I mean seasonal is with us every year.

What gives you that confidence that we will see that?

Yes, Tim, this is Rob.

Your deduction is exactly right.

There is a lot of things going on in the portfolio.

Probably the most important thing is that we have taken a lot of pricing.

Typically you see the effect of pricing on volume occurring to a greater degree the closer to the actual pricing action was taken and to a lesser degree as you start going up.

So as we get farther away from the point in time where we have taken the pricing increase and the market has adjusted -- the market has adjusted to the pricing and competitors have reacted, we are expecting stronger sales growth in the second half.

Terrific.

Thanks a lot.

Reza Vahabzadeh.

Good morning.

You talked about the grape cost increase in the US and then also about the packaging cost increase as well for the wine business.

It wasn't clear to me what the total COGS inflation that you expect for next year and the price increase that we need to offset that for the wine business.

And then the same thing, if it's possible, for the beer business.

Yes, what we said was that we are experiencing about mid single digit COGS increases and that we are more than offsetting that with price increases and our price increases have been in the mid-single digit range.

So mid single-digit price increase has more than offset mid single-digit COGS increases (inaudible) percentage on a smaller base versus a larger base.

Then in beer, we have contractual cost increases from the supplier, Modelo and those contractual cost increases are very small, less than inflationary rates.

And we are really not subject to a lot of other COGS or input cost pressures in the beer business.

We are pretty insulated from that due to the nature of the business.

Would those cost and pricing dynamics, the COGS inflation and pricing dynamics for your wine and beer business in the US, would those relationships generally hold going forward though?

Yes.

The relationship holds about 40%, 50% in the wine business of our COGS, the grapes.

The rest is packaging and other components.

And as I said, we are seeing about mid single-digit inflation and input costs across the board and pricing has been in the mid single-digit range.

So we see that kind of thing holding.

I appreciate that.

And then, Rob, obviously the Company has deleveraged over the last 12 months through organic cash flow and also asset sales.

And you talked about more deleveraging going forward.

But to the extent that there are attractive wine portfolios for sale in the next six months, how would you -- how does the Company gauge and characterize its interest in terms of acquisitions in US wine assets?

Yes, our position on that is that our main focus at the current time is improving efficiencies, improving ROIC, paying down debt, deleveraging.

What we have said is that we are not going to categorically say that we won't ever do an acquisition or we won't look at acquisitions, but the focus has been on driving efficiencies and generating free cash flow and I think that you can see some pretty good results in our rapid deleveraging and ROIC improvement.

So that is pretty much where we are at there.

Thank you.

I appreciate it.

Kaumil Gajrawala, UBS.

Thank you.

Good morning, everybody.

First question is, Rob, so much of your commentary was around pricing.

Could you -- given what is going on with the economy, can you talk about if you are seeing any down-trading?

And then also if strategically there is something that you might be doing differently given the economic situation that we are in and then hopefully some insights by region instead of just an overall view.

Yes.

The basic answer to your question is there really is almost no evidence of down-trading.

If you look at IRI data sort of segment by segment in the wine business, you'd see the exact same pattern that we have seen in the past, which is value products are either flat to declining and then as you start moving up the price tier, growth is occurring at faster and faster rates largely.

In spirits, I think you have seen some moderation in the premium segment with the premium segment coming more in line with the value segment and the value segment increasing a little bit.

So you might say that there is some trading down going on in spirits even though, as a general proposition, there isn't a trading down.

In beer, there isn't really trading down either.

There is some shifting around.

The imports have been weak, but that is driven largely by our portfolio, being the largest in the import category and the fact is it has affected our portfolio.

Excluding our portfolio, imports are pretty strong and [crafts] are very strong.

In the domestic front, the premiums and more premium are pretty strong.

So you really haven't seen too much trading down as a general proposition.

Now you can look at specific brands and you can see some what could be trading down.

Our SVEDKA vodka, for instance, which continues to grow at huge rates, 40%, 50% growth in SVEDKA on a very large base, it could be the beneficiary -- it is the beneficiary of I think both trading up and trading down.

You have got people that are trading up from say the domestic vodkas that are slightly below it and then you might have people trading down from some of the very high-priced vodkas, which definitely have seen some slowdown.

But as I said, as a general proposition, trading up continues to be a pretty strong trend across all beverage alcohol categories.

You asked me about regionally.

I don't think that we are really seeing any huge regional differences that are worth noting.

As it relates to our beer portfolio, there are some states in the US that have been particularly hard hit by the economic downturn, especially as it has impacted housing.

I mentioned California, Florida and Arizona in that regard, some of the border states, Arizona, California that is.

So that is pretty much, I would say, a good summary of the state of the industry as it relates to your question about trading down versus trading up.

Okay, good.

And then just any contingency plans or anything you might be doing differently?

It sounds like you feel fine about the category that there is nothing strategically or changing in the economy, correct?

No, we are not -- the beverage and alcohol business -- the growth remains pretty healthy in our industry.

I would say that, if you look at the growth rate across most of the categories, beer is actually growing very well at the current time.

Wine, I think we have seen some moderation in growth overall, but I would say it is actually moderated to the more historical growth levels as opposed to the very high levels that you were seeing maybe eight, nine months ago.

And spirits growth is pretty healthy for spirits in mid single-digit range.

So it is a pretty healthy industry in general and pretty noncyclical, so it doesn't really call for any strategic shifts to deal with the economic conditions as might be the case in other industries that are more clearly or directly impacted by what is going on.

Okay, thank you.

And then quickly for Bob.

Any contingency plans for the debt coming due in 2009?

And given the credit environment, are there any issues with suppliers, grape suppliers or anything that we need to be thinking about?

No, we are really not worried at all about any of our debt maturities.

We have about $210 million coming due this year on Term A.

I think [$90 million] had happened year-to-date.

Yes, the sterling notes come up next year and really our discussion is do we put in more sterling notes or do it in the US is more the concern.

Right now, we have got zero drawn against the $900 million revolver, so we feel very comfortable with our liquidity position.

Okay, thank you.

Lauren Torres, HSBC.

Good morning.

Just first a housekeeping item.

Bob, can you just go back and give us the reason why the tax rate was so low in the quarter?

Yes, essentially, Lauren, it was just a fallout of a tax position that we had taken that had become more clarified.

So under this new FIN 48 rule, you sort of have to sort out your tax rate on a quarterly basis.

So we don't see an impact to the total full year tax rate.

It is more just a timing thing.

So for your tax rate, your comparable tax rate to still be around 37%?

For the year, we expect more than that in the second half?

Yes, because year-to-date you are less than that, correct.

Right.

Okay.

And also I am not sure if you mentioned this, Rob, when talking about Corona imports.

But as you expect a better second-half performance and you expect your competitors to pass through some pricing, can you talk about, if you can, what your pricing strategy is for the remainder of the year?

Yes, our pricing strategy is not to take any pricing.

And in light of --.

We took our pricing last year.

We have no plans to take any pricing this year.

So this is going to be I think a pretty favorable -- this is going to be pretty favorable relative to growth of the portfolio in the second half of the year.

Domestics are taking pricing now.

In anticipation of that pricing, there has probably been some buy-in at the retail level.

That will dissipate.

Price gaps are closing and look, we said -- I said -- what I said about anticipated growth for the year, which we are now saying is flattish to slightly up, but I would say that the second half of the year, we are pretty optimistic about the portfolio and we are already seeing some signs of growth returning to the portfolio.

But given the performance in the first half of the year, the math doesn't get us to the previous guidance of mid single-digit growth.

It is as simple as that.

But the portfolio is healthy and we are seeing growth return and we are pretty optimistic and I think the headwinds are diminishing significantly.

So looking at the costs that you are facing this year in the beer segment, you are comfortable with not taking that pricing?

Costs?

Yes, we don't have much cost increases, Lauren.

Very, very little and I think Bob pointed in his talk and as we pointed to you all before, the only real cost increase we have is contractually-dictated cost increases from the brewery.

And it is very -- those are very small cost increases.

It's below US inflationary rates.

So we don't suffer from the same kind of thing that manufacturers suffer from in the beer business.

I'd say we -- the Crown joint venture.

Lauren, this is Bob.

Also if you look at the Crown operating margin versus year ago, it is down a bit and 60% of that is timing due to market -- just how the marketing flows through the P&L.

Okay.

And if I could ask just one last question on your wine business.

I think you mentioned this, Bob, too.

If you exclude the inventory reduction a year ago, your North America branded wine sales would have been up what?

Did you say low single digits?

Yes.

Okay.

All right.

Thank you.

Carla Casella, JPMorgan.

Hi, this is [Mimi] for Carla here.

Just to clarify, you paid down $400 million of debt this quarter.

Could you break it out between revolver and term loan or what the break-out was?

Yes, most of it came out of the revolver.

The only other piece is the Term A loan.

We paid off $90 million.

The rest came out of the revolver and as I said, I think as of right now, we really have nothing drawn down against the revolver.

All right.

Thank you.

Mark Swartzberg, Stifel Nicolaus.

Thanks and good morning, everyone.

I just want to apologize.

This seems to be a fire drill going on here, but we are not going to move, but you might hear some noise in the background.

Sorry, go ahead, Mark.

Okay.

Rob, I was wondering if you could give us a kind of state of the union on the restructuring exercise if I can simplify it that much.

You have been engaging in restructurings for several years now and it is, with the exception of Crown, it is covered and I guess to an extent, with the exception of spirits, it has kind of covered all your businesses.

What inning do you think you are in in this whole restructuring process of the Company now that you are more focused on internal performance versus acquisitions?

And then if you're not in the seventh or eighth inning, where do you think there remains significant opportunity and what sort of magnitude are you seeing?

Well, Mark, as you pointed out, we have done a lot in this regard and it has touched a lot of different parts of the business.

Yes, I would say seventh, eighth inning is probably as good a characterization as any.

Clearly, we are way beyond any beginning stages of restructuring activities and it is not to say that there isn't opportunities as we go forward, but we have been knocking off the opportunities fairly rapidly.

I would say that, over time, we'd really like to get away from having to do restructurings.

That is why we have been pretty aggressive in getting as much done as we can upfront, but we look at restructurings as an investment.

We analyze it in terms of return on it -- we analyze restructuring in terms of return on investment and we are also pretty conservative in that regard in that our restructurings -- we demand very high returns on restructuring activities.

So to the extent that we would have more restructuring activities in the future, which I am not really commenting on, other than I would just say that I would agree with your characterization of the seventh, eighth inning.

But to the extent that we have them in the future, this is going to be a positive thing, not a negative thing in that our restructurings are high return investments.

So that is I guess the state of the union that I would give you.

Okay, great.

Thank you.

Okay, we will take one more question.

Bill Leach, JWL Capital.

Good morning.

I just wanted to follow up on this tax rate question.

(technical difficulty) for the year, it would seem like the tax rate would be around 41% in the second half.

Why would it be so high?

Again, it is all around timing.

So the second quarter is sort of abnormally low and the things that are reversed aren't necessarily for this year.

Some are for prior years, some are for future years.

So it is very difficult to deal with quarterly tax rates.

So I would say for your models and everything, just assume a 37% for the full year.

(technical difficulty).

Don't you think it'd be correct to expect over 40% in the second half?

Yes.

You can't really look at it on a quarterly basis.

I know you're supposed to, but the tax rates aren't specific for the quarter.

There are a lot of things that hit a quarter that actually belong in other quarters.

So I would (technical difficulty) the math would sound like it's around 41% to keep your full year at 37%.

Okay, thank you.

By the way, I am told that we have a little extra time here, so we will take a few more questions as opposed to only one more.

We don't think it is a real fire; it is just a false alarm.

We are under great pressure with the fire alarm here.

Judy Hong, Goldman Sachs.

(technical difficulty).

It's very hard to ask questions here, but I was just trying to understand better the possibility of (technical difficulty) US wine business.

I know a large part of that is really driven by mix impact as (technical difficulty) and changing your portfolio.

But beyond that if you can talk about how some of the efficiencies that you have indicated before, driving margin (technical difficulty) other than mix give us sort of your -- or other than acquisition if you look at your underlying winds, are you seeing (technical difficulty) improvement there and what is the magnitude of these?

You kind of cut in and out a little bit, but I think your basic question was about mix shift in how is that impacting efficiencies and what is going on beyond the acquisition front.

You know, in general we have got a pretty significant mix shift occurring.

It is occurring both organically as well as through acquisitions and dispositions.

Clos du Bois acquisition and the Almaden/Inglenook disposition.

But going back to the point about premium products growing at a faster rate than value products, this is also driving mix shift in business.

You know, we have been able to take advantage of that and drive inefficiencies in our production organization as we've moved out brands, as I said, like Almaden or Inglenook, or we have discontinued brands through our SKU reduction initiative.

We are making room for the growth in our premium portfolios without having to add extra PP&E.

That is really the key there.

That is what driving the efficiency.

Therefore, we are getting a higher and better use out of our assets all the time as the mix shift occurs both organically and through acquisitions and dispositions.

So this is a trend that we are taking a [data jump] and this is something that is driving efficiencies in the business both organically, as well as not organically as I have stated.

Judy, this is Bob, just to add on what Rob said.

It's a combination of things.

If you just take -- this is all sort of deliberate.

If you just take the Clos du Bois/Inglenook transactions, okay, we bought Clos du Bois and its portfolio, which, of course, has a much higher margin than only owning Inglenook.

The combination of those two things improved our gross margin in the US wine business by 250 to 300 basis points and remember, net debt -- we have almost paid off all that incremental debt because we paid like 880 for Clos du Bois.

We brought in about 130 for Almaden and Inglenook.

We are generating cash flow and we paid off $420 million of debt year-to-date.

So we are sort of left much with a faster growing, more profitable portfolio.

And with those higher gross margins, we are able to leverage our SG&A infrastructure better as well.

So that is sort of what we are trying to do.

Okay.

And then just quickly, I know -- can you give us your ballpark (technical difficulty) numbers for US wine and Crown Imports?

Ballpark numbers for what?

Ballpark depletion trends?

Well, we are sticking to the guidance that we have given.

For the third quarter, Rob?

Third quarter?

Third quarter?

Yes.

(multiple speakers).

We don't give -- we are not -- obviously, we don't give quarterly guidance in any event, but we are looking for mid single-digit growth in wine and beer.

We are looking at flattish to slightly up.

I'm sorry.

In the second quarter, was the depletion trend (technical difficulty) in the second quarter, sorry, for the wine and the beer business?

Beer was a little bit on the downside and wine is -- our wine sales have been lower than we expected primarily due to, as we said, the price increases.

So slightly down.

Okay.

Did you get that?

You said --.

We apologize with this fire alarm thing going on, but --.

Okay.

That's okay.

Thanks.

Christine Farkas, Merrill Lynch.

Hi, there.

I hope you can hear me.

Just a quick one on inventory levels or working capital issues at your distributors.

Are you seeing anything going on there with respect to the credit crisis and just a greater desire to manage working capital?

Is that hurting shipments to depletion ratios?

Yes, Christine, this is Bob.

No, in a word.

There is a constant to and fro between us and the distributors on inventory levels, but we took our distributor inventories down last year and we are really not seeing anything out of the ordinary.

Now maybe our competitors, many of whom have higher inventory balances, are seeing that, but we really are not.

We are hearing basically high-end products because the cost of carry might be higher.

So I know you have taken your inventory levels down.

I am just wondering if perhaps some of your higher end spirits are facing some of those issues.

No, we are not seeing that.

Okay, great.

Thanks a lot.

Bryan Spillane, Banc of America Securities.

Good morning, guys.

Just I guess a follow-up on Judy's question on the profitability of the US wine business.

The first question, the $8 million hedging loss that you recorded, what segment did you record that in?

Mostly in the wine division.

Mostly in the wine business.

I'm sorry.

I didn't catch the last piece, Bryan.

All right.

So you recorded that -- the $8 million loss was recorded in the wine business?

Yes.

Most of that is in the wine segment.

And that's $8 million pretax?

That is pretax.

It is $6 million to $8 million, in that range.

Okay.

And then in terms of going forward, are there other hedges -- do we have to think about other hedges as we are modeling out margins for the back half of the year?

No, we think that will be much reduced in future quarters.

Okay.

And then -- so as we are looking at -- because when you look at the margin in the back half of the year as you've now pretty much lapped the impact from the inventory destocking last year, I guess the question is going to be what is your confidence in your ability to grow margins off of sort of the higher-margin base?

And if I am thinking about this right, your margin performance in the second quarter would have been better had you not recorded the hedge loss.

But are there any other factors we should think about in terms of margins in the back half of the year that would sort of give confidence to be able to grow margins off a higher base?

I mean it's sort of -- the back half of the year, I would agree with you.

I would expect our margins to get a little bit better in the back half of the year.

I think there was some timing stuff in the SG&A for this quarter that I would expect to smooth out balance of year and I do think the distributor inventory reduction is behind it.

So that actually helps our margin versus prior year this year, but you sort of have enough of those numbers.

So I would expect the balance of the year (technical difficulty) to get a little bit better.

Okay.

And then just one follow-up, in terms of the price increases that you put through on your wine business generally, has all of that pricing now been put through or are there going to be more price increases between now and the end of the year?

I think we are always looking at pricing and impact on volumes, so I don't know if we have made those decisions.

I would say the majority of them are behind us, but we may be looking at some incremental ones.

Probably it won't be an overall increase like we have had.

It might be on specific brands.

Okay.

Thanks, guys.

At this time, there are no further questions and this does conclude today's Q&A session.

I would now like to turn the floor back over to Mr.

Rob Sands for any additional or closing comments.

Okay, well, thank you all for joining us for our call today and I apologize for our fire alarm here, but I think that we were able to hear the questions and I think that you were able to hear us.

In general, I am very pleased with our continued execution towards meeting our financial and operational goals for the year, especially given the tough macro environment we are facing.

During the quarter, I would point out we generated strong free cash flow and rapidly deleveraged.

We improved our comparable gross profit and operating margins and we enhanced the profitability of our US wine and spirits business.

Our plan clearly is to continue the strong execution throughout the remainder of the year.

We will be participating in investor conferences through the year-end so we look forward to seeing many of you while we are out on the road.

Our next quarterly call is scheduled after the new year, so please be sure to enjoy some of our excellent products during the upcoming holiday season.

Thank you, again, for your participation in the call.

Thank you.

This concludes today's Constellation Brands' second-quarter 2009 earnings conference call.

You may now disconnect your lines and have a pleasant day.