Constellation Brands Inc (STZ) 2010 Q3 法說會逐字稿

Good morning.

My name is Julie Ann and I'll be your conference operator today.

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

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

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

(Operator Instructions).

Thank you.

I would now like to turn the conference over to Ms.

Patty Yahn-Urlaub, Vice President of investor relations.

Please go ahead.

Thanks, Julie Ann.

Good morning, everyone, and welcome to Constellation's third-quarter 2010 conference call.

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

This call compliments our news release, which has also 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 companies website 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 expectations, actual results could differ materially from our estimates and expectations.

For a detailed list of perspectives that may impact the Company's estimates, please refer to the news release and Constellation's SEC filings.

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

Thanks, Patty.

Good morning, everybody, and happy New Year.

I hope that everybody had a great holiday season.

Welcome to our discussion of the Constellation's third-quarter fiscal 2010 sales and earnings results.

Now before we get started I'd like to thank those of you who attended our recent New York City investor meeting.

I hope one of your key takeaways from that meeting is that Constellation is evolving as a fundamentally different Company that is better positioned than ever to deliver value.

We are focused on executing a strategy into the foreseeable future that delivers this value for organic growth, enhanced profitability, free cash flow, and ROIC.

The third quarter is evidence of the fact that we continue to make progress against our strategic goals of generating cash, paying down debt, and reducing costs.

During the quarter, we advanced our portfolio transformation with the announcement of our agreement to sell our UK Tiger business to CMT Group for approximately $70 million.

The Gaymer Cider company was originally acquired in 1998 with the Matthew Clark business.

This transaction is consistent with our strategic focus on premium, higher-growth, higher-margin wine, beer, and spirits brands.

The deal is on track to close by mid January and we expect to use the proceeds to further reduce our borrowings.

During the quarter we also progressed with transition activities associated with our US distributer consolidation effort, which now encompasses 22 states representing approximately 60% of our total US wine and spirits volume.

As you know, the initial distributer transition commenced September 1st with the second quarter benefiting from the implementation of this program.

At that time, actions were taken to insure maximum levels of customer service between distributors and their retail customers during the transition period.

Now these actions had the planned effect of moving a portion of third quarter sales into the second quarter and resulted in some inventory build at the distributors.

During the third quarter, consumer takeaway was softer than expected at the beginning of the quarter, but it is improving as our new selling model and promotional efforts take effect.

As a result, at the end of the third quarter, distributer inventories were higher than historically targeted levels.

However, as you can see from the latest IRI data from December, our US wine trends have improved from where they were early in the third quarter, as our promotional activities have returned to more normal levels.

From an overall marketplace perspective, in the IRI channels growth in the US wine market remains healthy at about 4% on a dollar basis according to recent 12-week data, with a greater than $8 price segment growing in the high single-digit range.

The on-premise channel remains challenging, although we believe it is stabilizing, and the mass merchandise club channel is outperforming the food and drug channels.

Despite the fact that many of our planned promotional activities were not implemented until late in the quarter, many of our leading well-known brands continue to perform well in the marketplace throughout the third quarter, including Robert Mondavi Private Selection and brands like Rex Goliath and Tim Crawford.

And we recently received some noteworthy portfolio awards.

Two of our wines were selected to be served at President Barack Obama's prestigious Nobel Prize banquet in Oslow, and included the 2003 Inniskillin Gold Oak Aged Vidal Icewine and the 2005 Robert Mondavi Napa Valley Cabernet Sauvignon.

In addition, Wine.com recently released their top brand list for 2009, showcasing the top wines sold through their website.

Five Constellation wines, five, made that list including Robert Mondavi, Kim Crawford, Simi, Hogue and Clos du Bois.

Our third quarter spirits net sales results are not representative of strong underlying performance because Svedka vodka shipments this quarter are being compared against last-year's third quarter, which was impacted by some unique circumstances.

Glass shortages related to new bottling changes for Svedka in last-year's second quarter drove strong shipments in last-year's third quarter, creating the difficult comparison.

Despite this issue, Svedka posted another strong quarter of double-digit depletion growth with our year-to-date net sales increasing more than 40%.

We continue to build Svedka's on-brand premise awareness by leveraging new distributer routes to market.

We are growing our national accounts in on and off-premise channels and are expanding in other core markets outside the US.

Now, moving to the Canadian wine business.

The overall business continues to be impacted by economically-driven negative mix trends; however, positive sales results were recorded by Naked Grape during the quarter, which is one of the leading premium brands in our wine portfolio.

As you know, Bin Core is a sponsor of the upcoming winter olympic games scheduled for mid February in Vancouver.

We expect to fully capitalize on the brand-building opportunities that we have planned in connection with this event.

And now moving to our international businesses.

The challenges impacting the operating environment in Australia and the UK have not subsided; however, as you know, we continue to execute the previously-announced restructuring of our businesses in these geographies in order to align them with the reality of their respective markets.

This includes continuing to focus on cost reductions, decreasing networking capital investment and consolidating our overall footprint in these markets in order to increase efficiencies.

In the short term we are optimistic about our marketplace performance, especially in the UK, during the holiday selling season.

In early November, we announced that we are working towards the potential combination of portions of our UK and Australian operations with Australian Vintage Limited in an effort to improve the prospects of these businesses going forward.

I have nothing new to report at this time, as we continue working to bring this transaction to a successful conclusion.

Moving to the Crown Imports joint venture.

As you know, we recently received notice of legal action by Modello pertaining to the funding of the JV partners of an immaterial amount of incremental promotional and marketing dollars for the upcoming calendar year 2010.

Previously, Modello provided this incremental spending and had agreed to do so once again for the 2010 business plan year.

My point addressing this issue is to remind everyone that the Crown joint venture is not a party to this legal action.

Crown's 2010 business plan has already been agreed upon by Modello and Constellation and the JV will go forward, with a focus on growing the business through the entire term of this contract.

We intend to continue working closely with Crown to support the joint venture as it continues to operate its business and deliver products in a manner designed to meet or exceed the expectations of consumers, distributors and retail customers.

Now, moving to Crown's operational results for the third quarter.

During the quarter, sales and operating income for the Crown joint venture continued to be impacted by economically-driven challenges in the on-premise and convenience store channels.

Operating income, in particular, was unfavorably impacted, not only by the volume declines but by the timing of national media programming for Major League Baseball and the National Football League, which occurred in the third quarter.

However, depletion trends out paced shipments in the quarter due, in part to the favorable impact of these media programs and resulted in temporary wholesaler inventory reductions.

Crown is also realizing stabilizing trends and import category share gains in the grocery channel, where it is performing in line with the US beer industry and outperforming the imported beer category.

We believe this is the result of targeted Marketing efforts of programming against the key channel.

Recent IRI data coinciding with the end of our third quarter confirms improved performance across the Crown portfolio.

For fiscal 2010 we continue to estimate a decrease in Crown depletions in the mid single-digit range, with profits expected to decline in the high single-digit range.

What gives us confidence that we can achieve these goals?

Crown continues to execute well at retail with solid promotional activity, marketing programs and the rollout of new products and packaging.

Expanded distribution has helped with increased selection, retail impact and price point options for consumers.

These efforts that resulted in over 60,000 new points of distribution since August 1st, and we continue to expand the rollout of Modello Especial and Negro Modello draft in key Markets throughout the US.

Modello Especial, the number three import in the US, continues to be one of the few major super premium brands experiencing double-digit market growth.

Now before I turn the call over to Bob, many of you have seen the press release we issued earlier this week mentioning that Jose Fernandez, who was our CEO for Constellation Wines North America, has passed away after a courageous battle with cancer.

He was a great leader who will be missed by everyone across our organization.

As you know, Jay Wright, President of our North American Wine organization who many of you met at our recent New York investor meeting will continue to lead the business as we have cultivated strong management continuity in the face of Jose's passing.

In closing, despite the impact from the US distributer consolidation activities on this quarter results, we feel confident regarding our ability to harvest the ultimate benefit from the execution of this strategic initiative, a profitable organic growth.

As I've indicated, the transition may not be particularly smooth as you've seen from our performance in both second and third quarter.

However, we believe it's absolutely the right strategy to pursue for the long-term growth and profitability of our business,

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

Bob?

Thanks, Rob.

Good morning, everyone.

Our Q3 comparable EPS came in at $0.54 versus $0.60 in the previous year.

The quarter witnessed quite a few unfavorable timing impacts across most product categories.

US wine was impacted by the shift of sales from Q3 to Q2, spirit sales growth was impacted by a previous-year glass shortage for Svedka, and Crown's profits were impacted by unfavorable sales timing and marketing expense timing in the quarter.

In addition to these quarterly timing-related items, North American wine depletion did not begin to improve until late in the quarter, our international business continued to experience gross margin pressures and Crown's beer business continued to be impacted by the economy.

We believe the negative timing events will collect themselves this year and we also believe we have strategies in place to improve the more fundamental challenges facing the business.

We have continued taking steps to strengthen our organic business model and we're seeing good progress in a number of areas, as we continue to reduce costs, which has helped offset the impact of consumer shift to lower-margin products in this challenging economic environment, focus on generating free cash flow, as we are targeting to be in the high end of our full-year free cash flow guidance range, reduce debt and interest expense, and work with our consolidated distributer base in the US to drive improvement in our organic sales and mix trends.

We saw good promotions and displays for our brands during the holiday season and began to see some improving depletion in marketplace trends in US wine and beer as the quarter progressed.

Our comparable basis effective tax rate for the quarter was 35%.

We also project a full-year rate of approximately 35% versus our previous targeted full-year rate of 38%.

The Q3 rate drove about $0.03 to $0.04 of EPS favorability in the quarter when looked at in relation to the previous full-year tax rate projection of 38%.

Now let's look at our Q3 P&L performance in more detail, where my comments will generally focus on comparable-basis financial results.

Let's go to the net sales line.

As you can see from our news release on Page 13, our consolidated reported net sales decreased 4%, primarily due to the divestiture of our Value Spirits business, partially offset by the positive impact of year-over-year currency exchange rate fluctuations.

On an organic constant currency basis, which excludes the impact of acquisitions, divestiture and ForEx, net sales were even with the prior year.

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

Our worldwide branded wine organic net sales, which appear on Page 12 of the release, were even versus the last year.

This included a 3% decrease for North America offset by an increase of 12% in Europe and 2% in Australia and New Zealand.

North American sales were impacted by continuing economic challenges, higher levels of promotional spending, and the shift of sales to the second quarter from the third quarter as part of the US distributer transition activities.

We estimate this shift represented approximately $40 million to $50 million in net sales and about $0.05 to $0.07 of EPS.

For Europe, sales benefited from increased volumes for our value-priced product offerings in the UK and an easier comparison versus Q3 last year.

Spirits organic net sales decreased 2% for the quarter.

Rob has already discussed the difficult comparison item we faced in the quarter.

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

For Q3, our consolidated gross margin was 35.4% versus 40% in the prior-year quarter.

This reflects lower sales driven by the shift of US sales from Q3 to Q2, higher promotion costs in the US, higher Australian COGS due to the flow through of the more expensive calendar 2008 harvest, and negative sales mix in the UK and Australia.

On a year-to-date basis, gross margins are down 2.3 percentage points, much less than the Q3 figure, again reflecting the many unfavorable timing aspects of Q3.

The higher promotion costs in the US represented a proactive effort to shift more promotion dollars into the second half of the year as we transition to our new distributer partners.

Our consolidated SG&A for the quarter was 16.1% of net sales compared to 18.8% a year ago.

The reduction was primarily driven by our global initiative, lower marketing expense, and elimination of our spirits SG&A commensurate with the sale of the Value Spirits business.

Consolidated operating income decreased 13% to $190 million and operating margin decreased 1.9 percentage points to 19.3%.

Given some of the shifts between Q2 and Q3 that I've discussed, it's important to look at our Q3 year-to-date operating margin of 18.1%, which is up 1.1 percentage points versus Q3 year-to-date last year.

Our appropriate stewardship of SG&A spend more than offset the reduction in our gross profit margin on a year-to-date basis.

I'd like now to turn to our segment operating income results on Page 11 of the release to provide highlights of our Q3 operating income change.

Wine segment operating income decreased $22 million to $218 million.

The decrease is primarily due to the Q2 sales shift, higher promotion costs in the US, divestiture of the Value Spirits business, and a decrease in international business profit margins due to negative mix and higher costs for Australian wine.

These items were partially offset by savings from our SG&A reduction initiatives.

For the quarter, corporate and other expenses totaled $28 million versus $22 million for the prior year.

The increase was primarily driven by costs related to Project Fusion, our multi-year program designed to strengthen our global business systems and processes as well as our efforts to improve our UK and Australian businesses, including the possibility of combining portions of these businesses with Australian Vintage Limited.

On Page 14 you can see consolidated equity investment earnings totaled $60 million versus $76 million last year.

Equity earnings for Crown totaled $46 million versus $62 million.

The remainder of equity earnings in Q3 fiscal 2010 and Q3 fiscal '09 are primarily generated by Opus 1.

For the third quarter, Crown generated net sales of $499 million, a decrease of 10%, and operating income of $91 million, a decrease of 26%.

Economic challenges continue to drive soft performance in the convenience and on-premise channels and consumer movement to lower-priced beer.

Q3 witnessed an unfavorable sales timing, which we expect to reverse in Q4, as depletion trends improved and outpaced shipments during the quarter.

Crown continues to execute on targeted promotional marketing support and new package introductions to drive share improvement in the grocery channel import category.

Operating income for Crown was impacted by lower net sales, marketing expense timing related to national media for Corona Extra and Corona Light and a contractual cost increase.

Interest expense for the quarter was $64 million, down 18% versus last year.

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

Let's take a look at our debt position.

At the end of November, our debt totaled $4.1 billion, which represents a $336 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 6.2%.

Our debt to comparable basis EBITDA ratio at the end of November was 4.2 times versus 4.3 times at the end of fiscal 2009.

Proceeds from the pending sale of our UK cider business, combined with targeted free cash flow generation in Q4, should reduce this ratio to the high three times range by the end of fiscal 2010.

We feel that our strong cash flow, reduced leverage, improved credit profile and much improved credit markets make this quarter an appropriate time to offer to extend our revolving credit facility.

We will most likely initiate this process in the very near term.

Our comparable basis effective tax rate came in at 35%, which reflects the favorable outcome of various tax items.

The rate for Q3 fiscal 2009 was 39%.

As mentioned earlier, we now project our full-year comparable basis tax rate to approximate 35%, which is much improved versus the previous guidance of 38%.

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 nine months of fiscal 2010, we generated free cash flow of $100 million versus $235 million in the prior year.

The lower cash generation is due primarily to higher taxes paid, including approximately $65 million related to the sale of the Value Spirits business.

In addition, timing of sales in the quarter resulted in higher US receivable balances.

This higher receivable balance was more than offset by inventory reductions of lower fiscal 2010 grape harvest costs in Australia, New Zealand and the US versus the prior year, and less interest paid.

As a reminder, free cash flow for the first nine months of fiscal 2009 reflected a benefit of approximately $85 million in pre-tax proceeds related to the favorable settlement of certain foreign currency hedges.

For fiscal 2010 we now expect CapEx to be in the range of $130 million to $150 million versus our previous $150 million to $170 million projection.

The reduction in planned CapEx spending is contributing to free cash flow targeted at the upper end of our $230 million to $270 million guidance range.

Moving to our P&L outlook for full-year fiscal 2010.

We still expect comparable basis EPS to be in the range of $1.60 to $1.70, with reduced full-year expected tax rate of approximately 35%.

Our comparable basis guidance excludes acquisition-related integration costs, restructuring charges and unusual items, which are detailed on Page 17.

During Q3, we recognize approximately $60 million of impairment and other charges related to Ruffino, an Italian wine company in which we have a 40% ownership interest.

This includes a $25 million non-cash impairment for this equity method investment, as financial performance of this business continues to decline due, in part to the strengthening of the Euro versus the US dollar.

In addition, a $35 million charge was recorded, as a 10% shareholder of Ruffino gave notice of its intent to exercise a put option to Constellation at a contracted option price determined at the 2004 acquisition date.

This put essentially represents the deferred purchase price from the 2004 investment that we expect to pay in the first quarter of fiscal 2011.

Before we take your questions, I would like to note we are working to leverage the benefits of our distributer consolidation initiative and leverage our P&L through expense management and increased operational efficiency.

We plan to use free cash flow to further delever and reduce interest expense.

All of this activity should drive improvement in our organic business model and ROIC.

With that, we're happy to take your questions.

Thank you.

(Operator Instructions).

Your first question is from the line of Kaumil Gajrawala with UBS.

Hey, good morning, everyone.

Good morning, Kaumil.

So you brought the tax rate down quite a bit, but no change to guidance even though there's only eight weeks left or so in this quarter.

Can you help give us a read on where the -- why the range is as wide as it is?

Yes, so we kept the EPS range at $0.10 when normally in the third quarter we might tighten it a little bit like $0.02 or so to make it an $0.08 range but I think it was because of the continued vibrations in the economy and perhaps, if it follows through, the potential cost of the refinancing of the revolver.

Those were the two big reasons.

Okay, so it's not related to spending or marketing or anything like that.

It's just more in terms of lack of visibility on what some core trends are versus maybe where they would have been six months ago?

No, I think that's fair, Kaumil.

So we just feel we'd like to keep the range -- keep it at the $0.10 given all of the uncertainty as our depletions continue to improve in both beer and in wine but we're not sure what's going to happen in the economy and we're still fine tuning our distributor transition.

Got it, and then the second thing.

At Crown, how do you feel about where the inventories -- inventory levels are currently at distributors?

There's obviously a big spread between your trends and depletions.

What should we expect to be the relationship between the two over the next quarter or so?

Yes, generally, in the beer business, shipments and depletions are pretty aligned.

This is actually a good news story in that we feel that we are able to get some pretty good media buys because the prices came down in the advertising market over peak sporting events, and actually the sporting event had pretty high ratings.

They're actually pretty good games if you remember back to that.

So we think they are good buys and we do think that drove some increased depletions in the quarter and the level of increased depletion surprised us a little bit so we had a slight destocking in the beer channel, which I think will be replenished in the fourth quarter.

Got it, thank you.

Sure.

Your next question is from the line of Lauren Torres with HSBC.

Good morning.

Hi, Lauren.

Hi.

Just a question.

In your prepared remarks you mentioned that you're seeing trends improve, both in beer and wine in the US, particularly late in the quarter.

I guess I'm just trying to get a better sense of -- with the holiday selling season obviously being more promotional maybe there's some discounting in there if that's really just driving momentum, or do you think it's coming from somewhere else?

So with on-premise still being weak and the convenience stores still being weak if it's just consumers buying in here at lower prices and your lower price brands doing bette,r or you feel you're really seeing some difference here versus last quarter?

Yes, Lauren, first of all that comment was relative to our business, not the industry in general.

The industry in general, although it is performing well, I would say it's been fairly consistent as opposed to there being an uptick.

Now on our business in the wine side, yes, we're seeing some improved performance and I think that's generally as a result of the fact that a lot of our efforts, for instance, our distributor consolidation, the increase in our promotional activities in the third quarter, these things are now kicking in and we really started to see some of the positive impact on that in late third quarter and we've seen some of the positive impact of that into December and the holiday season.

So we're pretty optimistic that things are working pretty well at this stage on the wine side

And then the beer side it's much as Bob said.

We had some very good media.

The media, I think, drove some pretty strong sales, particularly in grocery.

We're seeing some stabilization on the on-premise side.

I'd say the convenience sector still remains highly challenged.

So on beer, I would say that while we're generally pleased and optimistic with the performance, we're nevertheless still believing that we'll be down from a depletion perspective mid single digits for the year, because in general that segment, the import segment, although we're way outperforming the competitors, that segment still remains pretty challenged in the beer business.

So would you say for beer and wine, both on-premise and convenience, that generally it's just stable, not really getting worse?

Well, it's not really much of a -- convenience isn't a big factor for wine.

For beer, it's the largest channel, so two completely different things.

In terms of -- no, I don't think it's getting worse but it's -- as I said it remains a pretty challenged segment.

But let me just reiterate, for wine it's not a factor, for beer it's a significant factor.

Right.

And I guess lastly, from a price sensitivity standpoint I know you've talked about trading down and certain price points doing better than others, any real changes there to from your comments last quarter?

No, not really.

By the way, in general there's, I would say, trading up has picked up and fundamentally there isn't trading down in that the higher-priced segments are now growing much faster than the lower-price segments with the super premium plus category growing high single digits again.

Now, that said, I still would say that within categories there's some trading down going on, so -- and I say categories meaning price segments so if you look at the $10 to $15 segment, within that there'd be some trading down towards the lower end of that segment versus the higher end, or if you look at even the higher-end segments you'll see some trading down.

But fundamentally there's trading up, although within segments there's trading down and therefore there can be some negative mix shift, which is the case.

There is some negative mix shift in the business and even within categories some of the lower-price products are selling better than the higher-price products and, of course, margin tends to go with the price points.

Okay, great.

Thank you.

Sure.

Your next question is from the line of Bill Leach with TIAA-CREF.

Good morning, everyone.

I just wanted to --

Hi, Bill.

I wanted to follow up on Kaumil's question about the implied fourth-quarter guidance.

You only made $0.21 for the fourth quarter last year so to have a $0.10 range is a 50% variability and you're basically guiding to anywhere from a 10% decline to almost a 40% gain, which is essentially meaningless, so can't you flush that out a little bit?

And also, if you do expect Crown to be down in earnings high single digits and since it's down 12% in nine months does that mean you actually expect it to be up in profits in the fourth quarter?

Yes, so -- and part of that, Bill, for the quarter we did have the tax rate -- for the quarter and for the full year we did have the tax rate up side, so offsetting that might be some slightly weaker EBITs throughout the businesses, and we're still a bit tentative on what sales are going to do, so we just thought it was prudent to keep the full $0.10 range.

And remember, if we are successful in refinancing our debt there will be costs associated with that, as well, which would hit the fourth quarter.

But wouldn't those be viewed as non-recurring charges?

Pardon?

But wouldn't that be viewed as a non-recurring charge?

Some would and some wouldn't.

But you have to admit that's an unusually wide range for --?

Well, I don't know.

I guess, but is $0.08 versus $0.10 -- I don't know -- something to get real passionate about, I don't know.

And the other question is do you expect Crown to be up in profits in the fourth quarter?

I wouldn't expect that, no.

We've had -- profits have been negative for Crown and you can back into it.

Our stated guidance for Crown is profits will be down high single digits.

It might be high single digits to maybe very low double digits.

Okay.

And lastly, can you give us some guidance about the tax rate for next fiscal year?

Should it go back up to 38%?

We try, Bill.

(LAUGHTER) No, we'll be giving full-year guidance at the year-end call, so it's interesting you would say that because actually all our planning minutes -- meetings with our business units happen very shortly and after that the tax guys start racking up where we think -- what geographies the profits are going to come through so it's a whole process so we'll be talking about that on the April call.

Right.

But for those of us that have to make an earnings estimate for next year, which starts shortly, what would you suggest we plug in with a normalized tax rate?

Your previous guidance was 38% for this year, would that be a good number to run forward?

That would be your choice, but right now, I can't anticipate any significant changes, but remember there are some pretty big swingers in the air like if our transaction goes ahead with Australia Vintage Limited that can have a pretty dramatic impact on tax rates.

So there are a lot of moving parts and I don't envy you because you're right, you have to make a call and you don't have all of the information, so sorry about that.

Okay, I tried.

Thanks.

Your next question is from the line of Tim Ramey with D.A.

Davidson.

Good morning.

Just thinking ahead to try and get a handle on the growth in the branded wine business.

It's awfully difficult to parse through it given -- [first you give]reported numbers on the IRI stuff but we know that that's the best performing segment and on-premise declining.

What do you think the outlook is for the wine segment for calendar 2010 for getting your fiscal year?

We're going to have growth in calendar ;10?

Yes, Tim, this is Rob.

I would say somewhere between -- really we can only talk volumetrically because you don't have a lot of insight into dollars beyond the IRI channel, which is only about 30%, but volumetrically I would say that around 1% would be a good guess.

It could be a bit higher than that, it could be a bit lower than that depending on the state of the economy, and that's for the total wine industry in the US.

Okay, and given your more premium mix --?

Now, we'll see IRI grow faster than that, we'll see mass merchandise grow faster than that, we'll see probably on-premise grow slower than that, so there's going to be puts and takes, but volumetrically about 1% and then dollars will be higher than that because of the general trend towards trading up, which continues.

I know you're not going to give us guidance today but given your more premium mix, is there no reason -- is there any reason why you shouldn't exceed the industry growth in 2010 versus 2009?

Our goal is to equal or exceed industry growth on a weighted basis so you've got to take into account what categories we play in and so on and so fourth, but that is our goal.

Terrific, thanks.

Equal or greater.

Your next question is from the line of Lindsay Drucker-Mann with Goldman Sachs.

Hey, good morning.

Hi, Lindsay.

Hey.

So I was hoping you could clarify the underlying wine trends in the US.

In the third quarter you reported $40 million, $50 million of inventory shift that boosted the second quarter and hurt the third quarter, you reported up 3% in the second quarter and down 3% in the third quarter so it implies that underlying in the second quarter, excluding the inventory shift, you were down low to mid single digits and in this quarter you were up low to mid single digits, which is a nice actually sequential uptick but -- so is that a fair way to read that?

So here's how -- this is Bob, it's a little confusing, but probably the easiest way to look at it is probably to look at the year-to-date numbers and if you look at year to date in the press release for North America I think sales were essentially flat, right, and that's pretty much in line with where our more recent depletion data has been, so that's probably the best way to look at it.

So is it fair to say at all that you have -- that you saw a sequential improvement on an underlying basis in the third quarter versus the second quarter?

From a depletion standpoint, maybe a little bit, yes.

I mean --

[From the summer sales, for example, though], because we are seeing more promos and discounting?

I think sales were -- if you look at -- if you iron out the movement Q2, Q3 again sales were sort of flat in North America, similar to the year-to-date trend, okay?

But depletions have gotten better since just before Thanksgiving, I'd say, versus what they were from the second quarter through the first part of the third quarter.

Okay.

Next on the gross margin performance in the third quarter, you mentioned promotional spending, the inventory shift in Australia as some of the drivers.

You also mentioned the promo spending, though, didn't really hit until -- didn't impact your sales until the end of the quarter.

Is it something that you booked for the entirety of the third quarter?

Yes, I guess we talked about this a bit at the second quarter so because of the distributor strategy we held back promo spending in Q1 and Q2 so that we could do it with the new distributors in Q3 and Q4, so that did flow through our Income statement in Q3.

Now you guys don't see that, it's in the net sales number, okay?

So Q3 of this year we did spend in the US more promotion money than we did in the previous year, so that did impact the P&L.

Is it -- can you quantify how much the distributor -- the presell for holiday hurt your margin in the third quarter?

I'm sorry can you repeat that?

If you had -- your year-over-year gross margin decline -- or compression, how much of that was a function of loading -- or preselling for holiday in the second quarter for your distributor transition?

Yes, again --

The other elements presumably would continue Australia cost of goods will flow through in February, you're still promoting through the February quarter so I'm just wondering how much of that year-over-year compression is one-off?

Yes.

Well, I don't know if I'd call any of it one-off.

Again, I think because of the noise between Q2 and Q3 and it's both in wine and remember the comment we had around Svedka, it's probably better to look at the year-to-date P&L where you will see a gross margin reduction but that's more than offset by our SG&A initiatives and on a year-to-date basis operating profits are up about 180-basis points, right, which is -- but gross profit margin was down about 230-basis points, something like that, so the SG&A saved it.

So we think that -- and we sort of took these actions in the fourth quarter of last year, we think we've been relatively diligent by bringing SG&A down to offset the gross margin compression.

And then lastly, with respect to your (inaudible) with the Crown JV, the current lawsuit aside, can you comment on whether there's anything in your contract whereby if you -- the direc -- the Constellation's directors sets on Crown's board will be found to be acting -- not acting in good faith for the entity where you -- it would damage your participation in that JV?

No -- this is Rob, the answer is no.

There's nothing to that effect.

Okay.

All right, thanks very much.

Thank you.

Your next question is from the line of Marc Greenberg with Deutsche Bank.

Good morning, Happy New Year.

Happy New Year to you.

My question relates to Crown.

As you know, Rob, the litigation surrounds relatively small dollar amount and I'm wondering if this doesn't suggest that the broader partnership agreement may not be on steady footing.

Maybe you can offer some perspective on how investors should consider the potential risk to Constellation based on any deterioration here and is there a point at which you might say, look, it's not working, let's move on and how we might think about what that could mean to shareholders?

Yes, and I think Lindsay asked the question and my answer was a definitive "no." The litigation has no impact whatsoever on the contract, it has no impact on the term, it is a dispute over money, which we've said is an immaterial amount.

Clearly -- and, again, in answer to your question, my answer is "no." There's no -- I'm not even clear about what you mean by calling it quits.

No, we won't -- we can't do that.

It's -- as you know the contract initial term runs through the end of 2016 and and we have certainly no reason to believe or expect that anything different will occur other than the business will continue to be operated and generate the type of results that it has historically.

As to results, of course, historically it's been a very strong performer.

With the Dow turning the economy, the import business has been negatively impacted.

I would say that as the economy improves there's upside in that business, in particular being a bit more cyclical than some of our businesses.

So there is no impact on the business that is Crown and there is no impact really on the JV agreement or the term related to this lawsuit, which, as I said, is over what we've stated as an immaterial amount of dollars.

Rob, just to follow up, is it fair to characterize the current relationship with Modello and Constellation as maybe not seeing eye to eye on certain things and I guess that's why I beg the question.

I know it's -- the business risk is the business being run separate and distinct from this, I wouldn't contest that at all, but trying to think about the value of this asset and in the past you've talked about the fact that you don't feel that at times the value of the Crown JV is reflected in the value of the share price and I guess with this lawsuit maybe it puts a bit of a cloud on that?

,Yes.

Well, first of all, nothing about the lawsuit would impact my previous statements with regard to the value of the JV not being appropriately reflected in Constellation's valuation for all of the reasons that I've stated in the past because nothing's changed in that regard.

With respect to what happens at the end of the contract and the issues around recognizing the value nothing's changed at all.

Obviously, there is a disagreement between us and Modello on the point that is being litigated in the lawsuit, but I would say that as a general proposition that both partners recognize that we have to get along and we have to work together as it relates to the overall operations of Crown to maximize its success.

So no, we can't ignore the fact that there is a dispute over something very specific which is being litigated, but we're all reasonable people and we all understand that we have to get along and operate with respect to ensuring that the operations that the business are maximized, so that's basically where things stand.

Thank you.

Your next question is from the line of Kevin Dreyer with Gabelli & Co.

Hi, good morning.

Hi, Kevin.

First, on the increase in accounts receivable, I think you said something about that being related to some of the timing issues.

Is that related to the change in distributors?

Yes, essentially the shipments to distributors happened at a point in the quarter where we won't collect the receivables until the fourth quarter so that's why you have a very high receivable balance and you have an increased use of cash in the accounts receivable line item on the cash flow statement.

Okay, great.

And then in terms of the tax rate, while I understand you won't give 2010 guidance -- or fiscal 2011 guidance, can you explain again why the rate came down to 35% from 38% for this year?

Sure.

It was essentially some positive outcomes on some tax audits essentially, so the tax audits were cleared and when they're cleared we reflect either the positive or negative in the P&L and this quarter was positive.

But these weren't one-time reversals from prior years or something like that?

No, actually, yes, they were.

Oh, they were, okay.

Okay.

And then finally --

(inaudible) with the auditors right here and they're usually about three or four years in arrears, and when the audits get cleared up and (inaudible) related to previous years tax expense that was taken, that gets flushed through the P&L, so if they cleared positively that reduces this years tax rate, if they get -- if they don't get cleared then we should have that actually covered and then you'll see a change in the tax rate.

Okay, thanks.

And then finally, I want to know if you could comment --- again, another question on Crown, with Modello's lawsuit within that that's just not about money.

They seem to allege that you're trying to use this marketing budget in order to renegotiate the terms of the JV, can you comment on that at all?

And if you were looking to negotiate, what were you looking to do, extend the term, for instance?

Yes, and the answer was no, I really can't comment on that.

It's a matter that's being litigated, it's really not appropriate for me to comment on that point.

So I apologize for not being able to give you more information on that, but clearly, it's just not something that we can discuss at this time.

Okay, thanks.

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

Thanks, good morning, everyone.

Good morning, Mark.

Hey, there.

Bob, on CapEx, $130 million to $150 million is the guidance for the current fiscal year.

Is there any -- but the $150 million number seems rather large if you -- unless you have something large in the way of spending happening in the current quarter?

So that's part one of my CapEx question and then I had a follow up.

Yes, I'd say the -- we're a pretty big business and in every industry I've been in the wide majority of your capital spend occurs in the fourth quarter.

It's some kind of engineering school training that happens.

I've been in a couple different businesses so that is kind of happening and the other thing going on is the Fusion ERP Project that we have going on that certainly there'll be spending around that in the fourth quarter and there was very little, if any, in last-year's fourth quarter, so that's probably the answer.

And that's the low visibility item back on the line of questioning Bill had.

You would think that in January you would know what you're going to spend on that, but is that the item that's got uncertainty to it?

Well, there's a lot, again, as I said.

So the way you do a capital forecast there's thousands of projects that roll up and it's very difficult to get the -- the engineers always want to hang on to that capital forecast so we do the best we can to try to isolate the number and give the best guess we can, but you never know.

So it could be a lot of projects get spent against and also the Fusion Project is a new project so there's no history against which we can look, but we're relatively comfortable with bringing down that CapEx number.

And again, the range is like $20 million in a $250 million to $270 million number, so there's a lot of moving parts in the cash flow forecast.

Fair enough.

And then -- actually I think you answered my follow up.

Just as we think longer term it sounds like last year the number was just shy of $130 million.

There's some unusual items this year regardless of whether it's $130 million or $150 million for the fiscal year.

It sounds like long term you think the number is closer to $130 million than $150 million?

I'd say, again, that's a pretty narrow range for a long-term forecast, but I think if I was doing long term forecast it's probably a fair number, $130 million to $150 million.

And, again, because of where we are in the wine business we're pretty mature and we have all our facilities so our big use of capital is more around inventory than it is around capital spending because $130 million to $150 million is probably about 3.5% to 4% of sales for us, which isn't a real big number.

Fair enough.

Thank you, Bob.

Sure, Mark.

Okay.

There are no further questions at this time.

I'll now turn the floor back over to Mr.

Rob Sands for any closing remarks.

All right.

Well, thanks for joining our call today and let me summarize what I think are the highlights of the third quarter as follows: First, we continued to benefit from our global cost reduction initiative.

Our full-year free cash flow is targeted to be at the upper end of our guidance range.

We reduced debt by more than $335 million since the beginning of our fiscal year.

We continued our portfolio transformation efforts with the proposed sale of our cider business, the proceeds of which we expect to be used to further reduce our debt.

We are experiencing improving depletion trends in our US wine and spirits bus -- our US wine, spirits and beer business.

And lastly, we continued to progress with our distributor consolidation initiative.

Our plan is to continue execution of our strategic initiatives throughout the final quarter of the year.

And finally, we will be providing guidance for our fiscal year 2011 during our next quarterly conference call scheduled for early April.

So thank you again, everybody, for joining our call.

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

You may now disconnect.