Constellation Brands Inc (STZ) 2010 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Constellation Brands second quarter 2010 earnings conference call.

(Operator Instructions).

Thank you.

I will now turn the call over to Patty Yahn-Urlaub.

Please go ahead ma'am.

Thank you, Christy.

Good morning everyone and welcome to Constellation Brands second quarter 2010 conference call.

I'm here with Rob Sands, our President and Chief Executive Officer, and Bob Ryder, our Chief Financial Officer.

This call compliments our news release which has been furnished to the SEC.

During this call we may discuss financial information on a GAAP comparable organic and constant currency basis.

However, discussions will generally focus on comparable financial results.

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 Web site at www.cbrands.

com under the investor section.

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

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

For details as to risk factors that may impact the Company's estimates, you (inaudible), please refer to the news release and Constellation's SEC filings.

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

Thanks, Patty.

And good morning and welcome to our second quarter conference call.

Now that we have reached the midpoint of the fiscal year, I would like to take a moment and reflect on the decisive actions we have taken during the last 18 to 24 months, which represent a period of significant accomplishment and strategic redirection for our Company.

During this time frame, we have focused on building profitable, premium scale brands, optimizing ROIC, at the brand and SKU levels, improving margins and free cash flow and paying down debt.

We have also engaged in operational streamlining of the business including significant SKU rationalization efforts worldwide, consolidation of our global production footprint.

Integration of our US wine and remaining spirits business into a single functionalize organization which we believe will provide synergy benefits and improved efficiency and effectiveness with our trade partners, consolidation of our distribution network in key markets which I will discuss in more detail shortly.

And we have implemented our global cost reduction initiative designed to help us deal with the pressures of the global economic slow down.

Overall our plan is to continue to execute this strategy into the foreseeable future.

The culmination of these activities has provided a great opportunity to implement one of our most strategic initiatives planned for this year.

In July, we announced the signing of multiyear agreements with several US distributors giving them the rights to sale Constellation's portfolio of wine and spirits exclusively in the respective markets.

This initial transition which commenced on September 1st, encompassed 19 states, representing more than 50% of our total US wine and spirits volume.

During the next 12 months, we plan to transition the remaining 11 states with this kind of consolidation as feasible representing another 10% of our US wine and spirits volume.

By this time next year, we anticipate the the distributer network consolidation will be complete and will include exclusive distributer relationships in 30 states representing approximately two-thirds of Constellation's total US wine and spirits volume.

As I have mentioned previously, the ultimate goal of this fundamentally different distributer model is to drive profitable organic growth through fully dedicated distributer teams initially comprised of nearly 900 sales people and 19 states, who will be focused on Constellation's product portfolio.

Investment of significant incremental marketing and promotional support behind the Constellation brand.

And an enhanced distributer incentive structure implemented to significantly increase distributer performance with a focus on higher margin, higher ROIC priority brands.

Once the chosen distributors were appointed in late July, actions were taken to ensure that they were in a position to begin serving the market including the building of inventory so that they would be ready to sell on the effective date of the transfer.

This facilitates maximum levels of customer service between our distributors and their retail customers during the transition period.

Beginning September 1st, dedicated distributer sales force hiring began with greater than 75% of hiring needs for the almost 900 new sales people already fulfilled at this point.

In addition these distributors began participation in Constellation training to ensure maximum focus on our entire portfolio of products as well as alignment with our strategic focus.

Overall, I believe these collective actions place us in a good position to execute during the key holiday selling season.

And now I would like to focus on the operational aspects of the second quarter beginning with the north American wine business.

During the quarter, we completed the implementation of our new go-to-markets sells and marketing structure into a single integrated organization.

We continue to rationalize our production footprint as we recently closed an under utilized facility in California and announced the closure of another in New York state.

We expect to benefit through consolidation of existing production in nearby locations.

Second quarter EBIT from our US wine business improved as a result of our diligent cost savings and operational efficiency efforts.

From a marketplace perspective growth in the total US wine market remains healthy at about 4% on a dollar basis according to recent 12 week IRI data, with the greater than $8 price segment also growing mid single digits.

The on premise channel remains challenging although we believe it is stabilizing and the mass merchandising club channel appears to be out performing the IRI channel.

As expected retail performance in the second quarter was impacted by our distributer consolidation activity as we pull back on promotions over the summer months, so we can refocus on the holiday season beginning in September and October after the consolidation activities were essentially complete.

Nevertheless many of our leading well-known brands continue to perform well in the marketplace including Roferts by Robert Mondavi, Rex Goliath, Nobilo, Simi, and Kim Crawford just to name a few.

We also recently received some note worthy portfolio accolades.

Wine and Spirits Magazine recently named Ravenswood Winery as one of their wineries of the year.

And in the recently published October edition of Wine Spectator Magazine, the 2006 Robert Mondavi Cabernet Sauvignon Napa Valley reserve was awarded a score of 96 points.

This represents the highest score that the wine has ever received from this publication.

As is typical at this point in the year, I would like to provide an update related to the US grape harvest which is 60% complete at this point.

Although there are divergent estimates from varying sources relative to the expected size of this year's harvest, we are currently estimating that the 2009 US industry harvest will be similar in size to slightly larger than last year's harvest.

The growing season has been fairly even and cool on the coast and warm in the interior region with this year's harvest expected to produce a quality output.

Prices for grapes have softened slightly due to the current market demand trend as well as the possibility of a slightly larger crop.

Overall these trends are expected to keep supply and demand generally in balance.

SVEDKA Vodka posted another great quarter and generated double digit sales growth versus last year.

We continued to be successful in expanding distribution of the brand in both on and off premise channels.

Our Canadian wine business is meeting expectations but continues to be impacted by negative mix trends especially for the high end products like Ice Wine which has been affected by the recession.

Positive sales results were recorded by leading brand in our premium wine portfolio like Jackson Triggs, Sawmill Creek, and Naked Grape.

And now moving to our international business.

The operating environment in Australia and UK remains challenging for all reasons we have previously discussed.

We continue to restructure our business in these geographies in order to align them with the realities of the respective markets.

As a result, we continue to take out costs, decrease our networking capital investment and increase efficiencies by consolidating as much production as possible.

We also continued to sale underperforming assets as our goal is to generate cash and improve gross profit.

The recent management changes in our international structure enable us to better align our businesses in the UK and Australia to provide opportunities for cost savings and increase efficiencies.

Moving to the crowd imports joint venture, the summer selling for the US beer industry was particularly challenging, as virtually all the major brands lost volume and share to craft beers and sub premiums.

From Crown portfolio perspective, the joint venture is beginning to realize stabilizing trends and share gains in the grocery channel, which is the result of targeted marketing efforts and programming against this key channel.

However, this positive momentum is being more than offset by economic driven trends particularly in the on premise and convenience channels.

We originally estimated crown depletion rates for fiscal 2010 to be in line with fiscal 2009 with profits declining slightly as a result of the annual contractual cost increase from Modelo.

Now that we have reached the half way point for the year, we are revising our depletion estimate for the fiscal year 2010 to a rate that is down mid single digits with profits expected to decline in the high single digit range.

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

Some examples include this month's launch of the Corona Extra and Corona Light 24 ounce cans specifically targeted for the convenience channel.

Increased national media buys for Corona Extra and Corona Light during the National Football League games and Major League Baseball Playoff, areas where we have not participated in the past.

In addition, we recently expanded distribution to additional states with Modelo Especial, Corona and Corona Light 18 pack, Corona Light 12 pack cans, Modelo Especial 24 pack cans and Corona Extra and Pacifico 24 ounce bottles.

And we continue to expand the roll out of Modelo and Negro Modelo Draft in key markets throughout the US.

Modelo Especial, the number three import in the United States continue to be one of the few major super premium experiencing double digit market growth.

In closing, I am satisfied with the outcome for the second quarter, and despite the challenging on going, the on going challenges of a difficult operating environment worldwide, we continue to decrease debt and realize benefits from our cost reduction efforts.

As expected during the second quarter, US depletion growth was temporarily impacted by the timing of promotional activities related to the distributer consolidation effort.

However, we and our distributors are well positioned with focused promotional and market activities throughout the remainder of the year, especially as we enter the key holiday selling season.

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

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

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

Bob.

Thank, Rob.

Good morning, everyone.

Let me start by saying we have a number of positive items to discuss in our future results.

Our global SG&A reduction initiative which we announced last year continues to have the desired effect of helping us to offset consumer migration to less expenses and lower margin products.

Our efforts to continue generating strong free cash flow are also going quite well as we continue to reduce debt and interest expense in ROIC.

Our initiative to consolidate our distributors in the US is a significant strategic shift to improve our great sells and mix trends into the future.

This will produce more distributer investment, focus and alignment behind our brands and should help us further distinguish ourselves as the category leader.

However, the second quarter was impacted by the distributer transition activities.

Although this is difficult to see in our financial statements, it was visible in our IRI market share trends.

We believe our recently integrated sales force combined with our newly aligned distributors to have dedicated head count, incremental brand investment funds and aligned incentives should reinvigorate our market place growth trends.

In addition although Crown has gained IRI volume share during the summer period, sales were below our expectation.

Our comparable basis diluted EPS for the quarter came in at $0.54 versus $0.45 last year.

The quarter saw some timing benefits which should reverse in the balance of the year.

Our effective tax rate for the quarter was 31% versus our targeted full year tax rate of 38%.

The Q2 rate drove about $0.05 to $0.06 of EPS favorability in the quarter.

In addition, as Rob mentioned, to minimize operational disruption during the US distributer consolidation transition, Constellation and the newly appointed distributors decided to increase distributor inventories to insure adequate service levels with retail customers.

We estimate Q2 benefited from this timing shift of approximately $40 million to $50 million in net sales, in $0.05 to $0.07 in diluted EPS.

During the quarter we continue to see quite a bit of volatility in foreign exchange rates as the dollar strengthened dramatically versus our key currencies when compared to the prior year.

In dollar terms, this reduced the international businesses impact on our P&L, including sales, and SG&A expenses.

The problem market of our UK and Australia businesses on a combined basis also continues to be impacted by negative mix and higher grade costs for Australian wine.

Now, let's look at Q2 P&L performance in more detail where my comments will generally focus on comparable basis financial results.

Let's start with net sales.

As you can see from our news release on page 13, our consolidated reported net sales decreased 8% primarily due to the divestiture of our value spirits business and the impact of year-over-year currency exchange rate fluctuations.

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

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

Our world wide branded wine organic net sales increased 2%.

Organic branded wine net sales for North America which appears on page 12 of the release, increased 3% while Europe decreased 5%, and Australia New Zealand increased 5%.

Our global branded wine business continues to be impacted by a challenging economic environment.

North American sales benefited from timing impacts related to the US distributer transition that I mentioned earlier.

Our sales mix in North America was also positive as shipments to distributors were skewed toward higher margin premium products.

This is in line with the goals and incentives and new distributer agreements intended to drive more focus on our premium brands.

If you exclude the sales benefits that I just discussed, North American net sales would have decreased mid single digits.

We feel that the commercial activities planned by Constellation and our distributer for the balance of the year should begin to reinvigorate our sales trends.

Australia and New Zealand saw some sales improvement driven by ((inaudible)) wine in Australia, and the UK sales were impacted by timing as year-to-date sales are flat to the prior year.

Spirits organic net sales increased 49% led by strong double digit growth of SVEDKA Vodka.

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

For the quarter, our consolidated gross margin was 37.1%, down 0.5 percentage point.

This reflects the higher Australian cogs driven by the flow through of the expensive calendar 2008 harvest and negative sales mix in UK and Australia particularly offset by positive mix and lower promotion costs in the US and the sale of lower margin value spirits business.

The lower promotion costs in US was driven by our plan to shift more promotion dollars to the second half of the year after completing the US distributer transition activities.

Our consolidated SG&A for the quarter was 18% of net sales compared to 22.4% a year ago.

The cost reduction was primarily driven by the global initiatives, the overlap of prior year poor currency losses and the sale of the value spirits business.

Consolidated operating income increased 15% to $168 million and operating margin increased 3.8 percentage points to 19.1%.

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

As a reminder, with the sale of the value spirits business and the integration of the remaining spirits business into our North American wine organization, our segment reporting has changed accordingly and our spirits brands are now included in the wine segment.

Prior periods have been reclassified in our press release and our segment history schedule on our web site to reflect this change.

Wine segments operate income increased $16 million to $187.9 million.

The increase is primarily due to US shipment growth, savings from our SG&A reduction initiatives, and overlap of foreign currency losses for the prior year.

Partially offset by the divestiture of the value spirits business and decrease in international business profitability.

For the quarter corporate and other expenses totaled $20 million versus $26 million in the prior year.

This decrease was primarily driven by insurance cost favorability.

On page 14 you can see consolidated equity investment earnings totaled $73 million versus $74 million last year.

Equity earnings for Crown totaled $72 million versus $74 million.

For the second quarter, Crown generated net sales of $693 million a decrease of 5% and operating income of $145 million, a decrease of 3%.

Consumers continue gravitate towards lower priced beers and sales were impacted by soft performance in the convenience and on premise which continue to see more dramatic impact from the economy.

We do not expect these trends to improve in the balance of the year.

Operating income benefited from timing versus the prior year.

Interest expense was $67 million down 17% versus last year.

The decrease was primarily driven by significant debt reduction actions in the last 12 months.

Now let's look at our debt position.

At the end of August, our debt totaled $4.2 billion which represents a $270 million decrease from our debt level at the end of 2009.

The decrease primarily reflects proceeds received from the sale of the value spirits business, and positive free cash flow.

Our average interest rate for the quarter was around 6.1%.

Our debt to comparable basis EBITDA ratio at the end of August was 4.1 times versus 4.3 times at the end of fiscal 2009.

Debt reduction was the primary driver of this decrease.

Our comparable basis tax rate came in at 31% compared to 29% last year.

The low rates in both periods reflect the completion of various income tax examinations.

The benefit in Q2 fiscal 2010 was already factored into our full year tax rate guidance as we continue to project our full year comparable basis tax rate to be around 38%.

As a result, we expect our tax rate in the second half of the year to be higher than the full year rate.

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 fiscal 2010, we generated free cash flow of $32 million versus are $125 million in the prior year.

The lower cash generation was due in part to higher taxes paid including approximately $65 million related to the sale of the Value Spirits business, higher CapEx spending, and the timing of sales in the quarter, which resulted in a higher US receivable balance.

Somewhat offsetting these cash uses were inventory reductions from lower FY 2010 grape harvest costs in Australia, New Zealand versus the prior year and less interest pay.

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

Moving our P&L outlook for the full year 2010 as mentioned by Rob, the fiscal 2010 beer performance is estimated be below our expectations as said at the beginning of the year.

However our interest expense is now estimated to be better than expected mostly offsetting the short fall on Crown.

As a result we still expect comparable basis EPS to be in the range of $1.60 to $1.70 per share.

Interest expense is now expected to be in the range of $260 million to $270 million versus our previous guidance of $265 million to $285 million.

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

Before we take your questions, I would like to note that our portfolio transformation, US distributer initiatives, global cost reduction initiatives and significant debt pay down demonstrate our focus on building brands, driving organic growth, leveraging our scale, and improving margins, free cash flow, and ROIC.

With that, we are happy to take your questions.

(Operator Instructions).

The first question is from Tim Ramey with D.

A.

Davidson.

Good morning guys, congratulations on a nice quarter.

Didn't hear a lot about what mechanically happens to inventory that existed at your previous distributer and I assume that's part of the kind of the borrowing from the third quarter, that you discussed.

In detail.

This is rob.

Here is what happens, okay.

We appointed the new distributors as of August 1st, dual with the old distributors and therefore there was no transfer of inventory that could occur on August 1st.

So we had the position inventory of the products that were going to move with the new distributors as of that date.

Then as we moved into September and the notice period for the old distributors expired, inventory then began to be transferred from the old distributors to the new distributors in September.

So mechanically that's how it works.

So, it doesn't necessarily back flow to you.

It just transfers over.

It just transfers over, that's correct.

So the net effect of that, Tim was normally we build inventory in the third quarter for the holiday season, okay.

We did that inventory build in the second quarter and therefore we do not expect to have the same inventory build in the third quarter that we had in the second quarter.

Even though at the end of the third quarter, our inventory will be about the same as they normally are at the end of the third quarter.

So, it was basically an advancement of the third quarter inventory build into the second quarter.

Got you.

If I may follow up, I am fairly familiar with the challenges of being a grape grower right now.

And I would say me assessment of the 2009 crop is a little bit more bearish than yours at least in terms of the supply demand balance.

Are you able, I mean it seems to me this would be a great opportunity for you to bolster production of mid tier brands with really high quality grapes out there looking for a home.

Are you able to be opportunistic in this environment and doing any of that.

We are able to be opportunistic, clearly Tim, the organ Pinot Noir crop is a lot different than take for instance the Central Valley or the North Central Valley or the coastal area.

So that would account for some of the differences between what your potentially seeing and otherwise.

In general, we are in a position we can take advantage of opportunistic buys, and we will if we need to.

But in general, our supply and demand situation for grapes for all the various US Appalachians is pretty well balanced.

And we are in pretty good shape in that regard.

Thank you.

Yes.

Your next question comes from the line of Mark Greenberg with Deutsche bank.

Thank, guys.

As I think about some of the efficiencies you gained by sales force integration, I am hoping you might offer insight into the annualized savings benefit for the businesses.

Even after factoring in inventory build you talked about the SG&A performance was pretty good.

Just wondering how that might play out over the back half.

I know Bob, you talked about increase and promotion dollars.

So, maybe you could sequence that for us a little bit.

Sure.

Mark.

We are quite happy with our SG&A performance in the front half of the year.

We think a lot of that will continue for the balance of year.

But if we kind of break it down, in Q2 our SG&A was down about $56 million to the prior year.

OK.

Now, some of that say about 15% is just due to 4X transition.

If you remember in the first quarter we said that the SG&A upside was about 50% driven by 4X translation.

So more that is real savings versus just 4X in the second quarter versus the first quarter.

The other big thing we had happen in the second quarter as we did in the first was we're overlapping some of our 4X transaction losses that we incurred last year.

That's pretty much behind us.

We won't see that overlap balance of year.

So we won't see that benefit year-over-year due to 4X transactions, okay.

The biggest piece though over 50% of where we are getting our savings is both the sale of the Value Spirits business because as you remember we eliminated quite a bit of SG&A and dropped two highest margin largest volume brands into the US wine business.

And the impact of our global initiative which we started in the first quarter of last year where we saw our gross margin being impacted by consumer mix shift.

That will continue balance of year and actually that will probably step up balance of year because a decent amount of the savings we get out of the global initiative were due to our recent reduction in the CWS sales force which was commensurate with our distributer transition.

So, I would say it is probably a long answer but I would say that things are right on, if not even a little better than we anticipated from an SG&A perspective.

Thank you.

For the full year.

Great.

Bob just one quick follow up on your leverage ratios.

You said your turns are down to 4.1 times.

Have you given any indication of targets that of where you would like to take that the next 12 to 18 months and if I just look at your current debt pay down, is that kind of a useful metric to build up future debt levels or are there other factors to consider?

Hello.

Hello.

Please hold, the conference will resume momentarily.

This is the operator.

I apologize, there will be a slight delay in today's conference.

Please hold and the conference will resume momentarily.

Thank you for your patience.

Mr.

Greenburg, you are back on line.

I wish I could shut off my teenagers phone line.

Don't we all.

So, just Bob just on the leverage ratio, over the next 12 to 18 months you said you were down to 4.1 turns.

And I was just thinking about the amount of debt you paid down the last few quarters, if that's a useful metric or if there are any other factors to consider to get at future debt levels.

Yes, our guidance at the beginning of the year that we felt we would get down to the

This had is the operator.

I apologize but there will be a slight delay in today's conference.

Please hold and the conference will resume momentarily.

Thank you for your patience.

You may resume.

I think you just answered the question.

Thanks.

OK.

Thanks, Mark.

Your next question comes from Bill Leach with TIAA.

Good morning.

Good morning.

Well Bob, your tax guidance is about 42% rate in the back half with my calculations.

Why would it be so high?

What do you think a good rate is for fiscal 2011?

We are not really giving fiscal 2011 but essentially it is just, you are right, it is just the squeeze of the full year of the 38% rate would get some of the quarters in the balance of the year, north of 40%.

And it is just all around timing.

So, this quarter we have extraordinarily low tax rate because we have positive outcomes from some tax work that is being done by governmental agencies, we had already factored that into our full-year guidance.

And we pretty much knew that Q2 would be a low rate, but we are still sticking with the 38% rate for the full year.

And as you know, generally overseas locations have a lower tax rate than US locations.

So as more and more of our income comes from domestic sources, generally our tax rate will go up.

Another question is your option expensing for the $0.15 a share this year, does that level off here?

It has been rising for several years.

Yes.

So essentially that was the adoption of GAAP around options.

This is the fourth year of a four-year escalation of option expenses.

Generally over the last four years, year-over-year option expenses gone up say $12 million to $15 million.

Now, this year we think it won't go up as much mostly because of the global initiative.

We got rid of, some employees and some of them were relatively senior employees.

So that will cut back on our option expense, our income statement for the year.

Then as we go forward will it level off here.

Yes, very much level off, yes.

Thank you very much.

Our next question comes from the line of Judy Hong with Goldman Sachs.

Thanks, the question about the North American branded line business.

Rob, if we think about the sales down mid single digit if you strip off the inventory stockings with the transition, is that a good representation of what's going on at the consumer level.

And if so, I mean if the market is growing 4% and you're down kind of in that mid single just implies pretty sizable market share erosion.

So I was wondering if you can check in terms of is it all just promotional activities pulled back in the quarter or is there anything going on from a competitive perspective?

Yes, it is I think largely as we said related to the pull backs of promotional activity over the summer season and the impact that I distributor transition activities had leading up to the appointment of the intrusive distributors in the 19 markets.

As you can imagine, and it was expected, I don't think that sales results are reflective of the market.

The market is actually, is fairly strong with the IRI channels for wine being up mid single digits.

In fact, if you look at the more premium categories, they're up even more.

Now, as you can imagine, as you are in process of distributors and they're aware of if fact they might be terminated, they're going to have less focus on our brands.

We cut back on promotions.

So clearly sales growth was effected during that period.

Now, we now have our new network of or reconfigured network in place.

Our people are focused, the distributor people are focused.

We have got exclusive distributor sales people.

We have got more resources being applied to benefit the holiday season.

So, we are quite hopeful that you will see some of the sales trends start turning around.

Okay.

And then as you look out over the holiday season, can you give us some assessment of how you think this promotional environment will look like not just from your perspective but just for the bottom line industry.

It sound like on the spirits side, they're expecting a bit more intense price competition.

Do you envision similar trend happening on the wine side?

How we should think about the promotional environment around the holiday season for wine?

Yes.

You will see some intense around spirits and you will see that around the super ultra premium brand, the $30, 750 type product.

And I think you are going to see very heavy promotional activity by the large companies in that regard.

Wine of course is a lot different than spirits.

It is a highly fragmented category.

There aren't a lot of big player.

The bulk of the wine industry is centered and sort of below the $10 range.

And therefore, you're not going to see the sort of same concentrated promotional activity that you're likely to see in spirits.

That said, yes, I think there will be some promotional acceleration of the activity, acceleration of promotional activity on wine over the holiday season.

But, I think that we are very well positioned without having drop prices to promote on a very competitive basis over the holiday season.

So, we are in a much better position than most companies to execute with change, promotional activities, make sure that we are getting floors (inaudible), feature ads, merchandising.

This is all a kind of stuff that we're in a strong position to execute against whereas many of our competitors who are small companies really don't have the manpower and the clout with distributors to execute in that regard.

So they might promote, you might see some discounting but it doesn't mean they're going to get the floor, benefit in essence of their activity.

So wine being more fragmented is a lot different.

Beer, the beer companies, the major beer companies, with the exclusion of Crown, are all taking price.

I think that you can expect that they took price with the expectation meaning the two major domestic brewers, you could expect they took price with some expectation of dealing that back, but with a view of improving their net pricing position, year-over-year.

So I think you will see some of that dealing back, and as you know Crown took its price increases a couple of years ago, and is in a good position to hold on prices.

It continues to promote over the holiday season.

So there continues to be catching up with Crown on the pricing front and closing of the gaps.

You will see positive results on Crown on food and drug.

You might see that's the leading indicator, convenience and on premise which continues to be highly affected by the economic downturn, are offsetting a lot of improvement in food and drug.

But you know as I continue to say, as the economy continues to turn around, if it continues to turn around, I think we will see positive cyclicality in Crown with the on premise and convenience sectors coming back as construction, as convenience sector starts to build and as people start going out again which you know as I also said I think that's going to be a lagging effect.

Okay.

Hopefully that answered your question.

That's helpful.

Just a quick follow up on (inaudible) Crown.

Rob, if sale's down 5% in the quarter, what was on premise and convenience down?

On premise and convenience is, on premise is down double digit.

There's less data on that.

Convenience is down high single digits,.

Okay.

I'm not saying for us, I'm not saying for us per se but in general.

As convenience is measured by IRI be it down mid to high single digits.

Okay.

Whereas food and drug -- yes.

Great.

Thanks a lot.

Your next question comes from the line of Kaumil Gajrawala with UBS.

Please go ahead.

Hey guys.

Hi Kaumil.

A couple of questions I guess, First, will the $40 million to $50 million of sales roughly that was reported in the second quarter, will 100% of that come out in the third quarter?

This is Bob.

I think the majority will come out in the third quarter.

There might be some bleedover in Q4.

Ok.

Got it.

And will there be a (inaudible) guidance was brought down a little bit but there was no change in your overall guidance.

Is that because of a change in the Crown side or something else in there as to why all of the moving parts didn't change with the overall number would be.

No, it is just a flip out between Crown EBIT and interest expense.

So Crown, our expectations of Crown EBIT came down, but it was pretty much offset by reduced interest expense versus that which we anticipate at the beginning of the year.

Okay, got it.

And last question.

Now that you have been through the divestitures, the restructuring, the distributing part is happening now, which do we thinking about as a goal for long term operating margin will be on a more consistent run rate?

On a go forward basis, we hope to be improving our margins, on an on going basis because we hope to grow operating profits ahead of sales, by focusing on the organic business, and just leveraging our scale throughout our P&L and actually throughout the cash flow as well.

So as we move to a more centralized operating company mentality, I think there's a reasonable amount of opportunities to improve pretty much all financial metrics.

We will be updating everybody a little bit on, I believe a little more detail after November investors conference in New York.

Got it.

So there's a measurable goal of 50 basis points a year, 100 basis points a year, that type of thing.

Right now we are not being that specific.

Okay.

Thank you.

Thanks, everyone.

Thanks.

Your next question comes from the line of Resa Bajada with Barclays capital.

Good morning.

Good morning.

You have been talking, Rob, about unfavorable price mix last couple of quarters, and I know that price mix is still unfavorable year-over-year.

But sequentially, are you seeing any change in that dynamic?

Is it about the same, getting, improving or weakening?

Yes, we are seeing sequentially any change in that, our higher end portfolios been impacted by the economic downturn to a greater extent than our premium, super premium brands which has caused negative mix shift within our own portfolio.

The only thing I would say is in the IRI data relative to the industry we are beginning to see an acceleration of growth on the super premium category, ie: the luxury, super luxury categories are now at least in food and drug, they have accelerated from a growth perspective maybe reflecting more people buying more premium products for home consumption.

So, the on (inaudible) is pretty negatively impacted to affect the above $10 business to the greatest extent and we have been impacted by that as well.

Got it.

So I mean if that said, if you are suggesting to me and correct me if I am wrong that price mix is the grocery channel or IRI track channel has bottomed out maybe has rebound, but on the on premise channel it is still pretty down.

Yes That's a fair statement.

Got it.

Then on cash restructuring and expenses, Bob, is that going to abate next year from the levels this year directionally.

Yes, we would hope so.

So that customer this year is around $80 million.

We would hope the cash restructuring cost, we would hope that next year's would be reasonable amount below that.

It would be how much below that?

Pardon?

How much below?

I didn't give a number.

We haven't done our FY 11 guidance obviously.

We haven't done our internal plans.

But I would expect off the top of my head that we would have less cash restructuring charges next year.

Got it.

Thank you.

Your next question comes from the line of Christine Farkas with Bank of America/Merrill Lynch.

Thank you very much.

Good morning, just a couple of brief questions for you.

On SVEDKA given the very strong organic growth in the segment, was there any benefit from inventory shipments or timing to distributors as well this quarter?

Yes there was, Christine.

It was and again SVEDKA is obviously very desired by consumers and distributors.

So it is one of the last things they want to run out of.

So yes there was a (inaudible) this quarter, but consumer take away still continues at a pretty rapid pace.

So a portion of that $40 million to $50 million impact did actually come from spirits not just wine.

Yes.

Yes.

Okay.

Again spirits is pretty small on the total scheme of folio.

Sure.

Okay.

And then, moving to international your press release talked about profit declines.

I just wanted to clarify.

Are you actually seeing profit declines in the UK and Australia.

And can you be more clear if that is really pricing driven or competitive pricing driven, cost driven, and how how long or how many quarters have you seen profit decline overseas?

Yes.

So, through the second quarter we actually saw some profit improvement in the UK mostly driven by SG&A reductions.

The gross profit margins actually continued to go down because of negative mix shift but as the gross profit margins come down we have to take out SG&A to make sure we stay as profitable as we can.

Australia did see profitability all because of cost of goods sold increases, and the SG&A reductions there, to offset the gross profit reduction from (inaudible) Did we understand your question?

That pretty much covered it.

I am wondering if you can quantify your SG&A savings plans for the year.

I know you are on track or a bit ahead.

Have you quantified the dollar figure?

Yes So we said that it was just around the global initiatives which was mostly (inaudible) in the fourth quarter.

We said that would save us $25 million this year and that only has about half a year run rate and next year will save us about $50 million.

Now, on top of that, we are saving costs elsewhere, just on TV, head count open, things like that.

So we hope that continues as well.

But everybody is really tightening their belt but we are being very careful that it doesn't cut into any bones.

The big thing we are focused on is growing organic sales.

Okay.

Thanks.

Final question just as a follow up to North America trends on a constant currency basis.

North American sales look to be like you said down mid single digits which was the slow down from the first quarter and talked about stronger pricing.

Would you say that is driven by the SKU rationalization and stronger pricing relative to peers and we should see a bit of an improvement in the second half.

Or is there something else going on with respect to share losses or trends in the second quarter versus the first?

I think we said the primary driver of that was some disruption in our distributor channel as we transition from one to the other.

And maybe some distributors had a feeling they weren't going to win the bid, maybe weren't focusing on our brands as much as they had historically.

So we think that was the big driver and we think that all of the additional head count and additional promotion money from Constellation and our distributors should help regain that consumer momentum in the back half of the year, and into the key Christmas selling season.

Okay.

Thank you very much.

Your next question comes from the line of Mark Swartzberg with Stifel Nicolaus.

Yes, thanks, everyone.

Bob, on the input cost trends you have seen here in North America, and the wine business and to the extent in the spirits business, we have seen a number of companies in the sector start the get some pretty healthy margin benefits as those pressures have abated.

As it relates to you all again purely in your North America wine and spirits businesses, where do you think you are in terms of that evolution and how beneficial going forward is cogs stay where they are might that evolution be to you?

So, I think we have gotten a lot of costs out of the P&L this year.

And we have focused more so on SG&A, but as you know we have a pretty big initiative to focus on cost of goods sold because as you know cost of goods sold for us is about 60% of sales.

That's where a lot of the money is.

We have gotten money out of there as well.

Of course we had to close wineries and we are looking at our footprint as we speak around the world.

We have a good initiative to look at grape costs which is our biggest component.

As Rob had said the US harvest in general looks like tonnage will be up a little bit but we think prices will be down.

So hopefully we can get some cogs benefit out of that.

But I think as we go forward, it really takes like a couple two or three years for this stuff to make it through the P&L because of the whole wine aging process and the whole harvest timing.

We are pretty confident we can improve our gross profit margin going forward.

We have a lot of smart dedicated people working on making sure that that happens.

Can you speak specifically to packaging costs, Bob?

What's going on, what's been going on there for you in North America and where that might go?

Yes.

So packaging costs in general one big initiative we were around the globe, it is something call canned like light weight glass.

And so essentially we are trying to reduce our glass costs, okay by basically putting less glass in the product.

And it depends on price points.

And again this is a pretty long term thing to do because as you do this you have to kind of retool all of our bottling lines so it can handle the thinner glass.

And this is a major initiative in a country like the UK or Australia, where our gross profit margins are really under a lot of stress.

We are also focusing on the US but less so because we are very conscious of our product quality, in the US and the type of bottle and the way that the glass is part of the product quality fully in the US.

So our marketing guys are trying to tackle this to the ground.

Elsewhere, we are trying to reduce labor costs, trying to reduce core costs.

And this all going to be sorted of encapsulated under our ROIC initiatives because as we look at our SKUs around the world, we have ideas pretty much on every SKU, as to how we can improve ROIC price SKU in the wine business, that basically boils down to the relationship of gross profit margin and inventory (inaudible) Everything else is kind of (inaudible) So, we will actually be giving some more detail on this as well in our November investor conference.

But, we have done quite a bit of work along those lines.

Very helpful.

Thanks, Bob.

And if I could, I don't know if it is you or Rob, obviously we have a month of the current quarter behind us, and we had a Labor Day shift in theory it should that benefited, in the absence of going on with your distribution, but can you share with us a little bit of what you're seeing particularly from a North America perspective in your wine and spirits business in the month of September.

And also if you can draw any distinctions in terms of performance you are seeing among these distributor who is have gotten larger and pick up in their trends in the markets in which they operate versus trends in those markets previously?

I will say we haven't gotten down to giving monthly guidance yet.

Fair enough.

And in your, keep trying.

[ LAUGHTER ]

Can't blame a guy for asking.

Can you tell us about what's going on in terms of (inaudible)

I think that what we have said is that we are pretty optimistic in everything which he put in place in the first half of the year, we should start seeing some of the benefits of that in the second half of the year.

We have got a lot of, we have got a lot of things they have done especially in North America, as well as around the world.

In general we expect to start kicking in now, we are way past, transitional states and we are well into implementation and execution, and I feel pretty strongly everybody is focused we should start seeing some of the benefits of all things that we talked about.

Great Thank you.

Our pleasure.

Your next question comes from the line of Kevin Dreyer from Gabelli and Company.

Good morning.

Just a question on spirits, 49% growth you said SVEDKA up double digits.

What is the driver of the balance there.

The only other spirits brands we have are Black Velvet, Canadian Whiskey, and Paul Masson Grande Amber Brandy There are our three spirits brand.

Pardon.

Are those growing faster than SVEDKA?

No.

SVEDKA is growing by far the fastest.

Okay.

Okay.

So you expect SVEDKA so be north of the 49% and the other two to be below that coming with your average of 49%.

But remember, SVEDKA participated in the distributor inventory increase.

So, don't expect SVEDKA to be growing higher than 49% for the balance of the year.

It was a timing thing.

Okay.

Also, you said that you continue to sell (inaudible) Can you expect anything additional over the next few quarters in terms of brands or assets that you would be looking to sale?

We won't talk about it specifically.

But obviously, we are constantly looking at our portfolio from a ROIC and a net present value perspective.

And like we did with Value Spirits, if we feel there's a buyer out there that will give us a sales price that is better than the net part of the value we feel we can get from the business by running it ourselves, we will take advantage of that.

So, we are always looking at those kind of things.

And as you know, hopefully we are looking to sale some hard assets, specifically in Australia.

So we are still looking to move on those.

So, we will keep everybody apprized of those activities as they sort of come to realization.

Then finally, we are half way through the fiscal year.

What do you see as the main (inaudible), top and bottom of your range?

A lot of it as you know, you probably have heard from a lot of other consumer companies, right, is what will consumer behavior be like and what's Christmas going to be like?

Christmas is obviously, it is our business, it is our largest season for US wine.

It is almost the entire season, the entire year in our UK wine business.

So, Christmas is really big period for us.

Beer is mostly the summer although Christmas is the second largest period for beer.

So, just like your major retailer, we are waiting to see what consumers will buy over the Christmas season.

What we are focused on is making sure that both our US wine sales force, and our distributor sales force are completely aligned so they can take full advantage and make sure that our products are in the right place, and on the right end aisle and at the right price for that Christmas season.

Okay.

Great.

Thank you.

We have reached our allotted time for questions.

I would now like to turn the call over to Rob Sands for closing remarks.

Well, thanks everybody for joining our call today.

I would like to say that we have a really, really strong team here at Constellation.

And I am very pleased with our continued execution toward meeting our strategic financial and operational goals for the year especially given the tough macro environment out there.

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

And I am especially optimistic about the implementation of our new distributor initiative and the go-to-market model which I believe really positions us well for the future.

I am looking forward to see many of you at our upcoming investor day scheduled for November 11th in New York where we will have more to say about the future prospects of our business.

So thanks again for your participation and we will see you in New York next month.

Thank you.

This concludes today's conference call.

You may now disconnect.