Constellation Brands Inc (STZ) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 full year FY '09 earnings call.

(Operator Instructions).

I would now like to turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations.

Good morning everyone and welcome to Constellation's fourth-quarter and fiscal year-end 2009 conference call.

I'm 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 exclude 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 on 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 estimate, please refer to the news release and Constellation's SEC filings.

Now I would like to turn the call over to Rob.

Good morning and welcome to everybody.

We have several items to discuss this morning, including our fiscal year 2009 results and our guidance for 2010.

We have reached the conclusion of an extraordinary year that reflected an increasingly challenging operating environment and rapidly changing market conditions.

Despite these issues, we have accomplished a great deal throughout fiscal 2009.

For the third consecutive year we generated approximately $1 billion in EBITDA.

We achieved record free cash flow of $378 million.

We decreased our debt by more than $820 million and then prepaid most of our debt obligations through fiscal 2010.

And we significantly enhanced our comparable basis operating and gross profit margins.

Now from an operational perspective.

We progressed with the transformation of our product portfolio, including the divestiture of certain US wine brands and assets that were acquired with the Clos du Bois and Wild Horse transaction, as well as some of our Northwest brands from Washington State and Idaho.

This allows us to simplify our portfolio and eliminate product redundancies.

We sold our Valley Field Quebec facility, which was primarily a contract production site for other suppliers.

This effort has streamlined operations, improved efficiencies, and eliminated excess capacity, while reducing costs.

And we recently completed the sale of our value spirits business, which is consistent with our strategic focus on premium, higher-growth, higher-margin brands.

We began the rightsizing of our Australian wine operations with the planned sale of production facilities and vineyard properties, consolidation of bottling operations, and the rationalization of our extensive product portfolio to the elimination of more than 30% of our SKUs.

We continue to rationalize our US value line product portfolio, which includes the elimination of smaller, lower margin, regional brands at price points generally less than $5.

We took advantage of favorable exchange rates late in the year by settling favorable hedge transactions, which enabled us to realize approximately $55 million in after-tax cash proceeds.

While our focus on portfolio pruning, operational rightsizing, and the implementation of pricing actions has impacted our growth, these are the right actions to take short-term in order to ensure the long-term health of our business.

As I have indicated before, our top priority is to manage the bottom line, which is absolutely the right strategy to pursue in this difficult environment.

Our portfolio includes some of the strongest brands in the entire beverage alcohol industry, brands like SVEDKA, Black Velvet, Woodbridge by Robert Mondavi, Black Box, Arbor Mist, and the Modelo Especial are currently exhibiting strong growth as we are seeing consumers turning to trusted brands that represent quality for good value during these tough economic times.

As you know, the premium segment of the market is comprised of beverage alcohol products that sell for greater than $5 at retail.

Our premiumization strategy focuses on wines with a $5 to $15 price tag, and mid premium spirits which are affordable price points, even in this difficult economy.

We have strategic projects that will continue to position our organization for the kind of success we are accustomed to, including the integration of our remaining spirits business into Constellation Wines US, creating an even stronger organization comprised of the best people in the industry, and leading brands that are must-have for our customers.

Project Fusion is the name we have given into a new initiative related to the implementation of a comprehensive, multiyear program that will strengthen and enhance our global capabilities and processes.

We will power this effort through the creation of an integrated technology platform to improve the accessibility of information and visibility of global data.

Over the next five years this project is intended to improve our capabilities and enable higher performance opportunities in key areas such as supply chain, global procurement, customer service and information management and analysis, just to name a few.

We have also initiated a strategic project to consolidate our US distributor network in key markets to implement a new go to market strategy designed to focus the full power of Constellation's portfolio of leading must-have brands.

This has been made possible as a result of our divestitures and SKU rationalization efforts, which has resulted in a much more focused portfolio of large consumer brands.

This distribution consolidation effort will make Constellation one of the highest profit providers of all wine and spirit suppliers in the US for the remaining base of distributors.

This new level of increased importance to our key distributor customers will better position us for future growth in a consolidating market.

Overall, we are executing our strategy and taking the appropriate actions to further position our business for success in the future.

Now I would like to discuss our business and financial performance for fiscal 2009.

My discussion today will primarily focus on full-year results, with the exception of the impairment charges recorded in the fourth quarter, reflecting business challenges experienced primarily in the UK.

I would like to spend a minute providing a bit more context around the impairment, and then Bob Ryder will provide additional financial details about the charges.

Constellation began its major participation in the UK market in 1998 with the acquisition of Matthew Clark, which had a major presence in the wine and cider markets as a leading independent drinks wholesaler.

As we have recently discussed, the UK has suffered structural issues stemming from the volatility of the pound, Australian grape oversupply, which created a surplus of wine for export to the UK, duty increases, deterioration of consumer prices, competition from private label, a difficult and concentrated retailer environment, and rapidly escalating consumer recession.

While these issues have been more persistent than we anticipated, and there are no simple answers, we are working on developing the appropriate strategy to stabilize and reverse the trend in these businesses.

And we will move rapidly to implement these plans once finalized.

This business, while very important to us, represents today a small portion of our profit and will not impede our future success.

We are also implementing a worldwide cost reduction program to mitigate the negative impacts from the turbulent global economy, but position us well for the future.

Bob will provide additional details in a few moments.

Moving to our North American wine business, fiscal 2009 was another year of significant progress for Constellation Wines North America.

Some of the highlights include the efficient integration of the Beam Wine Estates acquisition, which demonstrates our commitment to continuing to invest in brands that are providing incremental profitability for the business.

We streamlined and simplified our US portfolio through the divestiture of Almaden and Inglenook, and concurrently rationalized many of our value wines by discounting more -- discontinuing more than 60 small regional brands, representing about 1,600 SKUs.

As previously mentioned, we also divested wine brands and assets that were acquired with the Clos du Bois and Wild Horse transaction, as well as some of our Northwest brands from Washington State and Idaho, because they were duplicative with our existing portfolio.

More recently, we have begun to integrate the remaining spirits business into the North American wine business in order to simplify our organizational structure and achieve the benefits of synergies.

We significantly enhanced the EBIT of North American wine business in fiscal 2009 as a result of our continued focus on managing the business for profit growth.

In addition, our EBIT benefited from the favorable profit mix generated from the acquisition of higher profit premium brands, the divestiture of lower margin value brands, and the resulting synergies.

Although this achievement was somewhat offset by the impact of negative sales mix during the fourth quarter, we are gaining share in the IRI premium price segment and are beginning to see more positive growth trends from some of our top brands as we begin to overlap our pricing and SKU reduction initiatives.

The culmination of these activities has resulted in a US wine portfolio that we believe will be well-positioned to drive sales growth, margin expansion and improved ROIC once we clear the headwinds from this challenging external environment.

Overall, Constellation has a strong portfolio of US wine brands in all profitable price segments.

From a marketplace perspective, growth in the US wine market remains healthy at about that 5% on a dollar basis according to recent 12-week IRI data.

In particular the premium segment where wine sales in the $5 to $8 range continues to grow in the IRI channels at a rate of mid-single digits on a dollar basis for the most recent 12-week reporting period.

Within this price point our largest brand, Woodbridge by Robert Mondavi, is growing at a double-digit rate of growth.

The super premium plus wine segment is also posting mid-single digit dollar growth according to the most recent IRI data, and includes Constellation Brands such as Estancia, Simi, Kim Crawford, Wild Horse, Clos du Bois, Blackstone and Ravenswood.

Our Canadian wine business posted strong results for the year, primarily driven by the premium wine portfolio, including Jackson Triggs, Sawmill Creek and Naked Grape, which all contributed to solid sales growth for the year.

In the Spirit segment SVEDKA Vodka had a great year and generated phenomenal sales growth of 50% versus last year.

It has begun the fastest-growing major spirits brand in the world, and the third-largest imported vodka in the US.

Black Velvet also posted solid sales results for the year.

Moving to Crown Imports, during the Company's fiscal 2009 the Crown joint venture generated almost $2.4 billion in net sales and then more than $500 million of operating income.

Crown continues to have the leading marketshare in the imports category in the US, with five of the Modelo brands represented in the top 20 import brands.

Corona is the number one imported beer, and Modelo Especial is now the number three import.

As we have previously indicated, volumes for the business have been impacted for the economy, particularly in the convenience and on premise channels.

However we are seeing some success with a number of new SKUs and packaging introductions.

In particular, Crown successfully test marketed Modelo Especial and Negra Modelo on draft in select areas.

Introduced Corona Light 24 pack and the Corona Light 12 cans pack and launched Corona and Corona Light in 18 packs.

Modelo Especial, one of the few major super premium brands that continues to experience double-digit market growth, is now available in both 18 and 24 packs.

These formats offer our wholesale and retail customers additional options to service consumer demand across a wider range of venues and consumption occasions.

For fiscal 2010 Crown is implementing a number of new promotional activities targeted at key markets and consumers in order to reinvigorate the Modelo portfolio of brands.

Therefore, going into Cinco de Mayo and the key summer selling season, Crown is positioned to maximize execution at retail.

Before I turn the call over to Bob, I want to discuss our EPS guidance for fiscal 2010.

As you can see, our EPS range $1.60 to $1.70 demonstrates that we are attempting to be realistic with our estimates, despite the uncertain business conditions that have and will continue to impact distributors, retailers and consumers.

We have been impacted by the global slowdown, but are taking the necessary actions to fortify the Company for the short term and to ensure that we are appropriately positioned for the inevitable upturn.

Overall our business strategy remains intact.

We have clear direction and continue to execute against our strategic imperatives.

Now I would like to turn the call over to Bob Ryder for a financial discussion of our business and results.

Good morning everyone.

I think full-year fiscal 2009 reflects positive performance in a number of areas, especially given the increasingly challenging conditions we experienced across our key markets as the year progressed.

I am very pleased with our significant cash flow generation and debt reduction.

And even with disappointing fourth-quarter P&L results, we were able to expand comparable basis profit margins and grow our comparable EPS for the year.

The higher margins generated by pricing actions and portfolio transformation in our US wine business are evident in our income statement.

This, combined with our cost reduction actions, positions us well to work through the current environment, take advantage of the recovery when it occurs, and focus on improving our international performance.

Our comparable basis diluted EPS for the year came in at $1.60 versus $1.44, an increase of 11%.

The really great news is that we generated $378 million of free cash flow.

This, combined with significant cash from asset sales, helped to decrease our total debt level by more than $820 million since the end of fiscal '08.

This has also driven a dramatic reduction to our leverage, and provides us with ample liquidity as we enter fiscal 2010.

The $210 million in net proceeds from the recently completed sale of value spirits business has already been used to reduce debt, which further advances our deleveraging efforts.

Selling the long-standing Almaden and Inglenook and value spirits businesses were difficult decisions.

It required significant effort.

I think this reflects our commitment to improving margins and ROIC and keeping leverage at manageable levels.

Now let's look at our fiscal '09 P&L performance where my comments will generally focus on comparable basis financial results.

First, net sales.

As you can see from our news release on page 16, our consolidated reported net sales decreased 3%, primarily due to the impact of year-over-year currency exchange rate fluctuations.

The benefit of adding the Clos du Bois and Wild Horse sales was more than offset by the divestitures of Almaden, Inglenook and certain Pacific Northwest wine brands, and certain spirit contract production services business, as well as the impact of reporting the Matthew Clark joint venture under with the equity method.

On an organic constant currency basis, which excludes the impact of acquisitions, divestitures and foreign exchange rate changes, net sales increased 4%.

Spirit's organic net sales increased 6%, led by a 50% growth from SVEDKA Vodka and solid performance of Black Velvet.

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

Our worldwide branded wine organic net sales increased 3%.

Organic branded wine net sales for North America, which appears on page 15 of the release, increased 8%.

[Core] performance in North America reflects solid growth in Canada and the benefit of overlapping the US distributor wine inventory reduction initiative, which negatively impacted net sales in fiscal 2008.

Adjusting for the estimated $110 million one-time net sales impact from this initiative in fiscal '08, we estimate that North American organic branded wine net sales grew in the low single digits.

Branded wine organic net sales for Europe and Australia/New Zealand decreased 9% and 3%, respectively.

Our global branded wine growth has been impacted by a challenging worldwide economic environment and its impact on Q4 mix shifts, continued pressures on our international business, our price increases and planned SKU reductions.

We believe the price increases and SKU reductions were the appropriate actions to take, as they contributed to worldwide wine margin enhancement for the year.

Now let's look at our profits on a comparable basis using the information on page 18 of the release.

For the year our consolidated gross margin was 37.1%, up an impressive 2.2 percentage points.

This reflects the benefits of implementing price increases across our markets and favorable product mix shift from adding the higher-margin Clos du Bois and Wild Horse brands and investing the lower margin Almaden and Inglenook brands.

These actions reflect the benefits of our ongoing premiumization strategy, and should drive long-term improvement to Constellation's profit profile.

Our consolidated SGA for the year was 20.8% of net sales, compared with 20.4% a year ago.

The increase to this percentage was primarily driven by foreign currency losses, increased stock compensation costs, somewhat offset by a lower fiscal '09 bonus pool.

Consolidated operating income increased 10% to $598 million, and our operating margin increased a healthy 2 percentage points to 16.4%.

I would now like to turn to our segment operating results on page 14 of the release to provide highlights of this change.

Wine segment operating income increased $63 million to $622 million.

Profits benefited from the addition of Clos du Bois and Wild Horse, and overlapping the FY 2008 initiative to reduce distributor wine inventories in the US, somewhat offset by the US wine divestitures and international business performance, especially in the UK.

For the year corporate and other expenses totaled $93 million compared with $86 million for the prior year.

The increase is primarily due to higher stock compensation and consulting expense.

On page 18 you can see consolidated equity investment earnings totaled $270 million versus $274 million in the prior year.

Equity earnings include $252 million from Crown, which was down back 1% in FY '09.

Interest expense for the year was $316 million, down 7% versus last year.

The decrease in interest primary reflects a decrease in our average interest rate versus the prior year as LIBOR decreased for our variable rate debt.

Now let's take a look at our debt and cash position.

At the end of February our debt totaled $4.4 billion, which represents an $824 million decrease from our debt level at the end of fiscal '08.

The change in debt was primarily driven by strong free cash flow generation and proceeds from asset dispositions.

Our average interest rate for the year was around 6.3%.

By the end of fiscal '09 we had already prepaid fiscal 2010 term loan payment requirements under our senior credit facility, as well as a portion of our 2011 obligation.

We have $155 million of sterling notes coming due in November '09, and we currently expect that this will be met through free cash flow generation.

As you can see, we are deleveraging at a rapid pace as our debt to comparable basis EBITDA ratio at the end of February was 4.3 times versus the 5.3 times level at the end of fiscal '08.

This reflects our earnings improvement and debt reduction.

If you factor in the $210 million in after-tax proceeds from the sale of the value spirits business that we completed in March, that ratio would decrease to 4.1 times.

Our comparable basis tax rate came in at 36% compared to 33% last year.

As a reminder, the fiscal 2008 rate benefited from a cumulative impact of favorable foreign tax rate changes during the year.

Due to the many factors just mentioned, diluted EPS was $1.60 a share versus $1.44 last year.

Although (inaudible) 2009 reflected very positive improvements in profits, margins, cash flow generation and debt pay down, the EPS performance was below our previously stated guidance of $1.68 to $1.72 due to weak performance in the fourth quarter.

The challenging global economic conditions intensified during the quarter, impacting our markets and driving lower sales growth and negative mix shifts in all of our key markets.

Our UK and Australian business in particular saw accelerated deterioration, and were the primary drivers of our soft Q4 performance.

In the UK our holiday promotion activity was undercut by aggressive pricing from our competitors, which drove lower-than-expected demand.

The various factors I just described contributed to a 4% decrease in branded wine organic sales on a constant currency basis, a $39 million decreased in wine segment operating income, and a negative impact to margins during the quarter.

During the quarter we increased SG&A cost reduction efforts to mitigate these impacts.

We are focusing on capturing additional cost reductions with our fiscal 2010 restructuring initiative.

I will outline those details in a few moments.

During the fourth quarter, and in conjunction with our annual impairment testing, the Company recorded $358 million of non-cash impairment charges related to goodwill, intangible assets, and equity method investments, primarily related to the Company's UK business.

Subsequent to our March 25 earnings pre-announcement, we determined there were some inventory reporting issues at our Australian subsidiary.

As a result, we recorded a non-cash inventory adjustment primarily related to prior years.

The amount related to prior years has been excluded from comparable earnings.

We quickly corrected the error and improved internal controls in this area.

However, as a result of this issue, management will report a material weakness as part of its assessment of internal controls for fiscal 2009.

Now let's turn to cash flow on page 13 of the news release.

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

For fiscal 2009 we generated free cash flow of $378 million versus $376 million in the prior year.

Net cash from operating activities reflects the benefit of approximately $55 million in after-tax proceeds related to the favorable settlement of certain foreign currency hedges, which we announced in early December.

As discussed, we took advantage of a strengthening US dollar to close out favorable hedges and generate cash.

Operating cash flow was negatively impacted by higher inventory, primarily reflecting the impact of lower than expected sales in the fourth quarter, and an increase in our Southern Hemisphere harvest intake during the year, and higher tax payments.

These factors were somewhat offset by lower CapEx spend.

For fiscal 2010 we are targeting free cash flow to be in the range of $230 million to $270 million.

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

The decrease in free cash flow versus fiscal 2009 is expected to be primarily driven by higher taxes paid, including a $65 million tax payment related to the sale of the value spirits business, and our expectation that the $55 million hedge gain realized in fiscal '09 will not reoccur in fiscal 2010.

One of the drivers of increased CapEx is the Fusion project, which Rob discussed earlier.

If you look at the average CapEx for fiscal 2009 and '10, it is generally in line with our targeted levels.

Moving to our P&L outlook for fiscal 2010, given the difficult and uncertain global economic conditions, and potential impacts to distributor, retailer, consumer and competitor behavior, we are forecasting comparable basis diluted EPS in the range of $1.60 to $1.70 for fiscal 2010.

Our reported sales will be negatively impacted from the divestiture of value spirits and production service businesses.

Combined they contributed about $250 million in net sales for fiscal '09.

On an organic constant currency basis we are targeting flat to slightly up net sales growth.

This reflects the impact of continuing difficult economic and market conditions, especially in the UK and Australia, and negative product mix shift in our North American wine business.

On a consolidated basis, we expect some slight comparable basis operating margin expansion as we benefit from the disposition of the lower margin spirits business.

The benefits from planned workforce reductions and our cost containment efforts are expected to offset higher glass and grape costs for our North American wine business, anticipated negative product mix, and higher stock compensation costs.

We expect stock compensation costs to approximate $58 million to $46 million in fiscal 2009, as we recognize the last year transition effect of stock-based compensation accounting.

Equity earnings for Crown Imports are expected to be somewhat down in fiscal 2009 from fiscal 2009.

Crown volumes are expected to be flattish as the continued impact of the economy offset planned promotional investment benefits.

Crown also has a small net contractual cost increase planned through the year.

Interest expense is expected to be in the range of $265 million to $285 million.

The healthy improvement is being driven by our significant debt reduction during fiscal 2009 and free cash flow generation for fiscal 2010, which will be used to further reduce borrowings.

In addition, the $210 million of net proceeds and $60 million note receivable from the spirits transaction will produce net interest savings and help offset the lost operating income from the value spirits disposition.

The net interest benefit, combined with the synergies from consolidating the retained spirits brand into our North American wine operations, should result in a slightly dilutive impact in fiscal 2010 comparable basis diluted EPS related to the value spirits divestiture.

The comparable basis tax rate is expected to increase to 38% due to reduced tax benefits from our UK business.

We are assuming weighted average diluted shares to approximate 222 million.

Our comparable basis guidance excludes acquisition related integration cost, restructuring charges and unusual items, which are detailed on page 20 of the news release.

On pages 6 and 7 of the release we outlined our plan to implement operational changes to simplify the business, reduce our global cost structure on a sustainable basis, and increase efficiencies and ROIC.

The Company expects these actions to result in the elimination of approximately 5% of its workforce, and the rationalization of certain facilities in the UK and North America.

We believe these actions will produce cost savings of more than $50 million by the end of fiscal 2011, with approximately $25 million of savings in fiscal 2010.

These savings include the significant reduction to our spirit's SG&A infrastructure and consolidation of the retained spirits brand into the North American wine business.

As I mentioned earlier, the savings in fiscal 2010 will help offset anticipated headwinds in glass, grape and stock compensation costs and negative mix shifts.

We expect to incur about $112 million in restructuring and other one-time charges related to these activities.

We expect approximately $83 million of this amount to come as cash charges for employee and contract terminations and other related costs.

The remaining amount will be non-cash charges for accelerated depreciation.

Before we take your questions, I would like to note that I believe we have taken many positive actions over the past 18 months to improve the profit, cash flow and ROIC profile of the Company, which positions us well to work through the current environment and take advantage of opportunities when conditions improve.

We have transformed our portfolio and advanced our premiumization strategy with the addition of the higher-margin premium wine brands, disposal of lower margin, lower return wine and value spirits brands and rationalization of underperforming SKUs.

We have also reduced our SG&A.

While our international business continues to be very challenging, we are adjusting the cost structure in these markets.

Through the divestitures and our strong free cash flow generation, we have already paid for the acquisition of Clos du Bois and Wild Horse.

The positive results from all of these efforts are further demonstrated by our 2 percentage point improvement in comparable basis operating margin, and rapid deleveraging as our debt balance decreased by more than $820 million, and our debt to comparable EBITDA ratio decreased a full point during fiscal 2009.

With that, we are happy to take your questions.

(Operator Instructions).

Kaumil Gajrawala, UBS.

It seems like pricing in the beer industry has been pretty strong, but we think about your commentary, and we think about some of the anecdotal evidence that has been around, across the country it seems like you're planning to be a lot more aggressive this summer than your competition.

Can you help us understand the game plan, or if there is a volume trajectory that you are targeting, and how much you're planning on promoting to try to hit that?

This is Rob.

Yes, we are planning on being aggressive this summer season with our beer business.

And we obviously do hope that that is going to be positive as it relates to its impact on volume.

Now relative to your question about the economics of that, obviously that has been fully taken into account in our guidance.

But, yes, there'll be a cost to the promotional activity, but as we have said, we are expecting profits on Crown for the year to be slightly down.

Profits on Crown will be slightly down.

We expect the promotions to be sort of self-liquidating within the year.

And the thing driving the profits down is essentially the contacted cost of goods sold increases in the Crown contract.

As it relates to your cost savings plan, are there any specific targets that we should be thinking about over the next few years?

If you mean --

What might fall to the bottom line?

I think I have given those numbers.

On an annual run rate basis it is around $50 million.

And for FY '10 it is around $25 million of savings.

And that all to the bottom line, then nothing that is getting reinvested or --?

No, that's correct, it is to the bottom line.

Now in FY '09 we think most of that is going to be offset by some inflation in grapes and glass in FY '10.

Judy Hong, Goldman Sachs.

First, in North American branded wine, if you look at the organic sales growth in the fourth quarter of up 1% can you tell us how much of that was volume and then price and mix, because you talked about the mix being a negative there?

If you look at the third quarter release obviously that has come down a lot from what we saw in the first three quarters.

The majority of that was negative mix shift.

So trading down to lower price premium products.

As you think about fiscal '10 outlook, and you have talked about the sales growth being flat to up slightly, it sounds like maybe we are at the beginning of the mix deterioration.

You've got pricing that you have taken last year that you would be lapping, so I am just wondering even getting to that flat to up sales growth is realistic for fiscal '10?

We think it is.

We pulled back on some of the pricing initiatives we are anticipating in fiscal '10, although we are taking some pricing on products to maintain or increase ROIC and margins.

But we feel at this point relatively comfortable with the flattish sales growth.

Then in terms of your margins, in the fourth quarter clearly you saw a significant deterioration in your margin trends.

Can you maybe strip out what happened in North America versus international?

And then when you think about your business, you have taken a lot of the restructuring charges in order to get cost savings.

You have obviously premiumized your brand portfolio.

But the fourth quarter you just really didn't get any of those margin benefits.

So how can we be confident that you're going to get that margin expansion on a sustainable basis over time?

I would say as we look at the fourth quarter, okay, which we are not very happy with.

I am sure you're not either.

We really saw an incredible mix shift change around the globe.

We don't think that that mix shift or that the mix of sales in the fourth quarter is going to continue 100% into fiscal '10.

We think it was a negative microcosm.

Although we are not -- we are anticipating negative mix shift in fiscal '10, but not as much as the fourth quarter.

And we saw that across all our businesses.

But even with that, for the full year we did get margin expansion.

And we are saying for next year we are assuming we will get slight margin expansion, because sales are relatively flat for fiscal '10.

As we said, Crown's profits are going to be down a little bit.

And as you'll recall, we have had some EBIT from the value spirits business, which has now moved down kind of to reduced interest expense, because we sold the business and we paid off debt.

So the worldwide wine business is essentially offsetting the loss in Crown EBIT and the lost from value spirits.

And we are going to get on a comparable basis a slight uptick in EBIT.

So we are expecting a slight margin enhancement, but nothing like we have gotten in fiscal 2009.

Maybe it would be helpful to just get a little bit more color on that mix issue in the fourth quarter.

Really what was the magnitude in terms, if you look at your brand portfolio, how quickly did the value or the lower end of the premium grow, and how much weakness did you see in the upper premium part of your business?

What do you think really drove that mix deterioration specific to the fourth quarter, and why you think that that will start to abate as you get into fiscal '10?

I would say what happened in the 4th quarter -- and I think you had, and you will see in a lot of your consumer product companies, I presume -- some pretty quick consumer and retailer reaction to the economy.

Consumers were just -- if they could save $2 on a bottle of wine, they might buy a lower end product.

We basically saw a mix shift down to less expensive products, which for us generally means lower gross profit margins.

But again, there was probably some overreactions from distributors, retailers, and consumers in the fourth quarter, and we don't really expect that to continue to that extent in fiscal 2010.

Reza Vahabzadeh, Barclays Capital.

Bob, on this free cash flow and deleveraging front, obviously the Company has made a lot of progress in the last year.

And you obviously have the asset sale proceeds, not to mention the Company's organic free cash flow.

Can you talk about the intentions around the free cash flow and your thoughts on your -- on the right leverage in the next year?

We definitely will continue to deleverage the business in fiscal year 2010.

You have obviously seen our cash flow guidance is below our normal, what we believe is that our normalized range, primarily due to two factors.

I will say one in particular, which is the tax on the [pride] proceeds being included in the fiscal year '10 free cash flow.

But that being said, we anticipate that our leverage will move down into the 3s in fiscal year '10.

We started the year, this year, in the 5s.

We have ended the year in the low 4s, taking into account the proceeds from [pride] -- from the sale of our value spirits businesses, that is.

We are very close to 4.

Our focus is going to continue to be on rapid deleveraging, which we think is the right thing to do in the current economic environment, and the right thing to do for the Company at this time.

That makes sense.

Can you also share with us your outlook for the North America and Australia grape harvest?

I know it's a little early right now, but just what is your outlook is at this point in time.

It is too early to have an accurate outlook for the North American grape harvest, although we generally feel that grape supply and demand in the United States is pretty much in balance, maybe beginning to tend towards slight undersupply of various varieties that continue to grow nicely, like Chardonnay and so on and so forth.

Right now the Australian harvest is in progress.

And I think we believe that versus last year we expect it to be down in the 10% to 20% range.

It is a little hard to predict right now.

I think last year's harvest -- total harvest was 1.8 million tons.

If I was going to -- nobody can accurately pinpoint an estimate, but if I was going to pinpoint an estimate, I would say maybe the 1.6 million tons to 1.7 million ton range for this year.

So we are going to see a smaller harvest this year.

But at the same time, we also expect to see prices -- harvest prices decline -- grape prices decline in Australia.

That is a little different than one might expect if you think that the harvest was going to be lower that you might have higher prices, but in fact, last year everybody expected the harvest to be a lot lower, but it turned out to be -- prices ended up higher.

This year it is more apparent that the business and volume is not growing for Australia at the same rate that it has historically.

And therefore despite the slightly lower harvest, prices have been -- prices for grapes are actually declining quite considerably.

Lastly, your guidance on the Crown Imports joint venture EBIT, you went through all the different factors moving around, but is the bottom line that the EBIT for that business is going to be relatively flat year-over-year, given cost savings and offset by higher costs?

No, the EBIT for the Crown business will be slightly down in fiscal '10 compared to fiscal '09.

Sales will be flattish and EBIT will be down low single digits.

Bill Leach, TIAA-CREF.

I just have a couple of questions.

Can you just put some framework around the international downside?

That seems to have been the big problem in the wine business in the fourth quarter, and as we all know this has been going on for years.

You really feel like it has gotten to be a small percent of the Company and it can't be that significant, and yet it obviously dragged you down very significantly in the fourth quarter.

Is the business actually losing money right now?

Yes, it did drag us down to a greater extent than we anticipated in the fourth quarter.

I would say that the impact of the economy and some of the other factors that we talked about were fairly extraordinary.

And that factored themselves very late in the fourth quarter.

So clearly what occurred was beyond our expectations and largely unanticipated.

We have taken the position, and I believe that it is the right position, that we are going to pass through these duty increases, which we continue -- that is our position.

We did do that.

We therefore did not participate in the UK in particular in a lot of the pricing activity, price promotion activity that occurred.

Frankly, our competitors continued to promote fairly aggressively.

And the retailers certainly were driving that kind of behavior.

We declined to participate and it impacted our volume to a much greater degree than we would normally expect.

As far as the business going forward, we are not planning on a lot of growth.

We are basically at this stage focusing on making sure that our cost structure and our cost base is appropriate, frankly, in the future to weather these kind of extreme matters that are affecting this business.

Unfortunately, with the end of the holiday season being so big relative to our UK, and the holiday being at the near end of our fiscal year, when we had the extraordinary circumstances that manifested themselves in the UK business, which of course has a knockout effect on the Australian business, because that is a large component of what we sell in the UK, it was difficult for us to make adjustments to offset that.

Obviously now it is currently moved into fiscal year '10, we are making the adjustments.

And I will say that we are not planning on a great economic environment or significant growth, primarily because we are not going to sell our product at a loss in the United Kingdom.

Therefore, we are going to address the cost base to make sure that we are sufficiently protected if we have this kind of volatility in the future.

Another question I have here, the market is obviously very skeptical about your guidance.

Your PE is 6.7 times the midpoint of your guidance.

Under these circumstances would you consider maybe selling your interest in Crown to have a massive reliquefication of your balance sheet and try to get the stock going?

There is no intention to sell our interest in Crown.

So I guess the answer is no.

Lastly, can you give us any sort of rough quarterly guidance as to what we should expect in fiscal '10?

Is it going to be a slow start and build as the year progresses?

We can't -- we don't give quarterly guidance.

Not even in a narrative sense?

Slippery slope.

Marc Greenberg, Deutsche Bank.

My question -- first question relates to, Bob, what you said about material weakness in accounting practices.

In the past with other companies this has been a very serious issue.

You could certainly provide some comfort here by talking about what steps you have taken, why it happened, and what confidence you have in the future accounting practices so this kind of thing doesn't impair our ability to look at your numbers.

Sure.

Good question.

What we had was -- we had some employees who weren't following standard control procedures.

Essentially we had some assets on the balance sheet, specifically in inventory, that should have been put into cost of goods sold that hadn't been put into cost of goods sold.

It was an oversight.

What we did was we corrected the issue in the fourth quarter.

It is not material enough to require any kind of restatement.

So we will just flush the entire amount through the fourth quarter.

The wide majority of it is related to prior years.

We also took -- on the control side we took the correct action on the people involved.

We have since done a -- and we continue to do a pretty robust reconciliation of the balance sheet in Australia, and we haven't found anything else.

We are going to increase processes and procedures around revealing even the most basic of inventory and cost of goods sold control, not just in Australia, but around the world.

Rob, a question for you around deleveraging.

Noting that the cost of Clos du Bois has been largely paid for with some of these asset sales.

I am just wondering, as you headed into that transaction if you had considered the amount and the need of deleveraging that you have done, was that the plan at that time or have the circumstances in the marketplace as well as the economy caused you to move faster than you would have?

And as a consequence of that, might you have exited certain businesses that you otherwise might not wanted to?

No, we anticipated right from the beginning -- certainly selling off the Clos du Bois assets or the Beam Wine Estate assets that were in fact sold off, that was always part of our plan.

Then the other assets that we sold, we would not have not sold those assets.

It is a double negative to say that I firmly believe that selling those assets was the correct thing to do, and we would do it again.

The value businesses that we sold off are very low margin, very low return business.

It frankly doesn't matter whether they are growing or shrinking.

We would have no interest in remaining in those businesses regardless of how fast they were growing, because they don't have any shareholder value.

Very commoditized businesses with almost, as I said, no very -- very low to no margin and not something that we are generally interested in.

Our premiumization strategy focuses on wines between $5 and $15, as we said.

These are very affordable price points.

They are the right product even in the current economy.

And we are seeing a lot of our products on the wine side, things like Woodbridge, for example, or even brands like Estancia benefiting from the economic downturn.

On the spirit side we are talking about brands, mid-premium, there is no premium, so to speak.

It goes from value to mid-premium, don't ask me why.

But mid-premium is above $10, value is below $10.

And again, the brands that we have retained are the sort of the perfect brands in the current environment, because they've got margins and return characteristics that make them worth owning, regardless of whether they are increasing in volume, which they are.

And we are seeing some of the benefits in spirits there -- spirits is probably the one category that is exhibiting some significant trading down.

You're seeing the very high-end premium products, the growth has really slowed down.

You are seeing mid premium products accelerate and grow.

So a brands like SVEDKA, a brand like Black Velvet is seeing the benefit of that.

Those are products that sell for just over -- if you're talking about a 750 ml package, you're talking about brands that sell for a little bit over $10 a bottle.

So we have the right portfolio for even the existing economic conditions.

As I said, the things that we sold, we got far more out of them from the perspective of shareholder value then we would have retaining them.

Our disposition discipline is fairly fundamental, which is we project the cash flows of the businesses that we think are not strategic to us, and discount them at our WAC, and then our disposition criterion is that they have to be able to be sold for in excess of that amount.

We feel pretty confident that the moves that we have made in that regard are the right moves regardless of economic conditions.

This is Bob.

If I can just add onto that, because I think it is a good question to summarize some things.

And really when we did the [Cobra] acquisition we had the Almaden and Inglenook sale in mind, because we wanted to reduce SG&A and use the same sales force to sell products that had 2X the gross profit margin of Almaden and Inglenook.

If we go back just briefly, the Clos du Bois acquisition cost about $885 million.

And we used the revolver and issued some senior notes to do that at that point in time.

Pretty soon after that we sold off the brands we didn't want within the Clos du Bois acquisition for about $206 million.

Then we sold Almaden and Inglenook for about $134 million.

And the spirit sale, the net cash is about $272 million.

If you add in the FY 2009 free cash flow of $378 million, we have actually, within about 12 months, paid for the Clos du Bois acquisition and have an extra about $100 million of cash left over.

We paid down that considerable debt.

And Clos du Bois gross profit margins is about 30% to 100% higher than the businesses we sold.

So we think the remaining portfolio -- and in a normal economic situation it is growing a lot faster than the businesses we sold as well.

We think that within 12 months we really made a real favorable improvement to the economic profile of the business.

Just one last follow-up, if I might.

Rob, you talked about consolidating in the trade.

You're going to be using, it sounds like, fewer houses to go to market with wine.

We have seen quite a bit of that on the beer side with Miller, Coors and ABI.

I wonder if you can just offer a few broad comments about challenges for brand houses with regards to a consolidating trade and how you managed to keep focused?

This is all about -- first of all, we have a completely different portfolio than we had several years ago.

When we had brands like Almaden and Inglenook that competed against each other, it really necessitated having multiple distributors in the same market to distribute those products, because they did compete against themselves.

The same with the value spirits business, was another major reason why we had multiple distributors in the same market, because we would had three or four or five different brands -- take for instance value vodka -- all competing against each other.

And if they were all in the same house, really only one of those grants would have gotten sold.

Today we don't have those brands that are competing with each other.

Okay, we are one of the largest -- to the whole wholesale distribution network, we are one of the largest gross profit and operating profit providers to that network.

We have a very streamlined portfolio compared to what we used to have.

And very few in that streamlined portfolio of our key brands, very few that compete against each other.

So we've got a nice tiered portfolio of major brands that are much easier to prioritize by a single distributor than our portfolio of several years ago.

So we get the advantage of combining our total business with one distributor, making us amongst their top two or three most important suppliers, and therefore we will get the benefit of that with regard to the attention and resources that are put against our brand.

And then because of the fact that our portfolio is nicely tiered, it doesn't have a lot of products that compete with each other, prioritizing those brands is not the kind of -- not as difficult as it was historically.

It is no more difficult for us than any of the other major suppliers that have consolidated.

It is the right move for us to make at the current time, and it is a move that is part of our plan to ensure that we will have the growth in the business that we expect in the future.

Tim Ramey, D.A.

Davidson.

I've heard you say probably a dozen times this mantra, four things -- we are going to deliver the guidance, we are going to generate cash, we are going to pay down debt, and we're going to increase the return on invested capital.

Of course, we didn't deliver the guidance this year.

I noticed in your summary comments in the press release that is no longer in the litany -- well, now three things.

Is delivering the guidance no longer on the list of things to do?

We will call that an oversight.

Yes, it is definitely on the list of things to do.

So on delivering guidance we are going to create efficiencies, we are going to improve return on invested capital, and we are going to continue to focus on generation of free cash flow and debt pay down.

Clearly we desire to deliver the guidance.

This is Bob.

The fourth quarter was -- and I am sure you're probably seeing this a lot in consumer product companies -- it was not what we desired.

The issue was after the Christmas season you don't have that much time to react to offset it.

If you look at the quarterly P&L in the press release, you will see that SG&A savings were relatively big in the fourth quarter.

We did try to react as quickly as we could and cut costs to offset the mix shift.

But the mix shift in the fourth quarter was just too big to offset, and unfortunately it made us miss guidance.

We are not happy about that, and we certainly don't want that to happen again.

What we are trying to do for next year through the SG&A reduction is to make more of our guidance within our control, so we are less reliant on consumer behavior and more reliant on our own behavior to save costs and to offset the negative mix shift, which we are assuming will continue in FY '10, just not to the extent of the fourth quarter.

Just to follow up on Mark's question on the material weakness, did you give an order of magnitude on the size of that?

I assume in your K you'll have to if it is a material weakness.

Yes, in the K we will actually give the dollar amount and which year it impacted.

What I will tell you is it had an impact on this year's comparable.

It wasn't all prior years.

It probably cost us about $0.01 in FY '09 comparable.

The non-comparable -- the total number was right around $30 million.

So the non-comparable piece would be the amount less the $0.01 this year.

But there will be enough disclosure in the K for you guys to get the numbers that you want.

Finally, if we just take a step back and say, gee, in 2007 you did $1.68 and now we've got guidance of $1.60 to $1.70.

The Company has have a lot of transformation, a lot of cost reductions, $500 million of share repurchase, why are we not getting more traction?

All I can really say relative to that is I do believe the Company is extremely well-positioned.

But obviously we are expanding some unprecedented times.

The economic conditions out there on a global basis have not been without impact on us.

I think that we are very well-positioned relative to delivering the kind of goals that we have talked about historically in economic times that are more consistent with the past.

But there is a degree right now of -- a high degree of unpredictability just simply as a result of the fact that we are seeing a lot of just extreme variations in many things that we have never seen before.

Whether it's extreme fluctuations in currency.

Whether it is extreme economic conditions in a recessionary environment, and consumer behavior that we really haven't seen over the last however many years you really want to talk about.

It is really -- in recent memory, even going back to the 2000 and 2001 timeframe, we didn't see anything as extreme as this.

Clearly we are concerned about the economic conditions and we are acting accordingly.

It has certainly tempered our expectations until we see some improvement in the economy.

What I would also say is it is a fair question.

We have been treading water for a number of years at the same kind of EPS level.

But what I would say is the international business over the last several years has been eroding, while the North American business is actually quite healthy with good growth prospects, good margins, very good cash generative abilities.

Now the fact that EPS has been treading water I don't think in our stock price.

Our PE ratio is under 8, which is a pretty low level, even given the fact that we have proven we can generate some very strong cash flow.

And we are using it to pay down debt to kind of reduce some of the risk in the business.

And we've got two years before our debt re-prices and we have to to go back out to the market.

We would like to be as optimally leveraged as possible when that happens.

But I do think that where we're making all our money, which is in North America, it is a much healthier business than it has been historically.

Lauren Torres, HSBC.

On your restructuring or your cost savings plan for this year, can you just give us a sense of where we should expect to see a majority of these headcount reductions, and also where we will see these rationalization of the facilities?

Is this something that is occurring now or should we just think about this more as phasing out over the course of the year?

This will happen throughout the year.

I would say that the majority of activity will happen in our second quarter.

The headcounts are coming out relatively uniformly, but on a percentage basis more will be coming out in international than domestic.

The facility rationalizations will be some in the US, some in Canada and some in the UK.

So most of the savings will be coming out of SG&A, but the facility rationalizations, the savings will be coming out of cost of goods sold.

So that is how you would see it panning out through fiscal '10.

Also I was curious, last year seeing some brand divestitures and some SKU reductions, is there more of an opportunity for that this year or are you pretty much done there?

We are always looking at opportunities to improve ROIC and improve margins.

We don't have any plans right now.

I think we showed through the sale of the value spirits business -- and really we eliminated kind of a whole business unit -- and the sale of Almaden and Inglenook, which is a long-standing -- I think our largest volume brand.

We try not to be emotional about these things.

When it is the right economic thing to do, and we can get the right price, and it improves our economic profile, we pursue the opportunity.

Right now I would say there is nothing on the front burners, but we are always looking for these kind of opportunities.

Just lastly, Rob, do you have a debt to EBITDA goal for this year for fiscal '10?

Yes, it is just the math.

It will work out to about 3.8 (multiple speakers) where our debt is now and what cash flow would be given [guidances].

Thank you, ladies and gentlemen, this does conclude the Q&A portion of our conference call.

I will now turn the floor back over to Mr.

Rob Sands for any closing remarks.

Thank you everyone for joining our call today.

We are disappointed with our fourth-quarter results, but we are pleased with the progress that we have made throughout the year despite the headwinds from a difficult and challenging economic environment.

We are particularly pleased with our strong free cash flow generation, our significant debt reduction efforts, and our operational improvements, including significant margin enhancement.

Our accomplishments in fiscal 2009 position us well for success in the future.

And we have several key initiatives underway in 2010 that will help us to achieve our longer-term strategic objectives.

So again, thank you for your participation in the call.

Thank you all for participating in today's conference call.

You may now disconnect.