Constellation Brands Inc (STZ) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Constellation Brands fiscal year 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.

You may begin your conference.

Thank you, Paula.

Good morning, everyone, and welcome to Constellation's fourth quarter and fiscal year end 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 complements our news release which has also 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 comparable GAAP measure and those in other non-GAAP financial measures are included in the news release or otherwise available on the Company's website at www.Cbrands.com under the investor section.

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

Now I'd like to turn the call over to Rob.

Thanks, Patty, and good morning everyone and welcome to our call.

We have several items to review this morning, including our fiscal 2010 results and our guidance for fiscal 2011.

In February, we reached the conclusion of a very dynamic year, one in which we executed against our strategic goals despite lingering economic challenges around the world that affected our key markets.

We accomplished a great deal through fiscal 2010, continuing the disciplined work of transforming our portfolio, our operations, and our financial model.

We continued our portfolio transformation efforts, as we began the fiscal year, with the sale of our Value Spirits business, which resulted in cash proceeds of $276 million, and then we successfully integrated the remaining spirits business into our North American wine business.

And we ended the fiscal year with the sale of our UK cider business, the Gaymer Cider Company, to CMC Group for approximately $70 million.

These transactions, combined with strong free cash flow generation helped drive a $600 million decrease in our debt levels.

We continued our efforts to improve our prospects for our UK and Australian businesses, by tightening the portfolio focus, increasing efficiencies, reducing costs, and improving cash flow generation.

We significantly improved our cost structure, not only through our global cost reduction initiative, but through supply chain initiatives and tightened controls on SG&A spending.

We improved productivity and created efficiencies through global SKU rationalization efforts and consolidation of our global footprint.

We progressed in our efforts to create an integrated technology platform, which has been designed to improve the accessibility and visibility of global data.

This initiative is already creating value by reducing costs and improving efficiencies, and it is designed to ultimately enhance performance in key areas such as supply chain, global procurement, Customer Service, and information management and analysis.

We implemented our new go-to-market sales and marketing structure in the US, which was successfully integrated into a single organization.

This resulted in synergy benefits and improved efficiency and effectiveness with our trade partners.

From a strategic perspective, we have undertaken one of our most important initiatives with the launch of our US consolidation effort.

Presently, this program gives five distributors the rights to sell Constellation's portfolio of wine and spirits exclusively in their respective markets in 22 states and currently represents approximately 60% of our total US wine and spirits volume.

Since the initial transition in September 2009, these distributors have allocated more than 1,000 dedicated distributor salespeople to focus exclusively on selling Constellation's product portfolio.

As you know, the initial distributor transition commenced September 1, 2009, with the second quarter of fiscal 2010 benefiting from the implementation of this program.

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

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 distributors.

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

However, at the end of the third quarter, distributor inventories were higher than targeted levels.

In the fourth quarter, we made a proactive tactical decision to work with our distributors in decreasing their higher than average inventory to more moderate levels.

How did we accomplish that?

We did not require distributors to purchase product at contracted levels.

In return, they agreed to invest in additional marketing and promotional programs behind our brands in the marketplace.

As expected, these actions unfavorably impacted our US wine business during the fourth quarter by approximately $60 million to $70 million in net sales, and about $0.07 to $0.09 in diluted EPS and created negative leverage on the remainer of the P&L.

However, we believe it was an appropriate tradeoff in order to better position the distributors for success in the future, as they worked with us to drive profitable organic growth.

Going forward, we are refocusing our energies from managing transition activities to improving completions and consumer takeaway.

Our ultimate goal is to grow our US wine business in line with the total industry growth trends and we expect to achieve this goal in 2011.

This translates to an estimated volume growth rate of approximately 1% for the US wine industry, inclusive of all channels, both on and off-premise.

As we discussed, the on-premise channel is tempering the overall growth rate for the wine category, while the grocery, mass merchant and club channels are growing at faster rates.

For instance, current growth in the [Symphony] IRI channel remains healthy at about 5% on a dollar basis, according to recent 12 week IRI data that corresponds to the end of our fiscal year.

In particular, the premium segment where wine sells for greater than $5 a bottle at retail continues to grow in IRI channels at a rate of mid to high single digits.

And within these price segments, many of our leading well-known brands continue to perform well in the marketplace, including for instance, Rex Goliath, Robert Mondavi Private Selection, Clos du Bois, Estancia, Toasted Head, Simi, Franciscan, and Kim Crawford.

Remember, about 40% of our US wine volume is currently sold in several states that are not included in the transition process.

It is in these states that our depletion trends are generally better than those undergoing transition.

From a marketing perspective we are currently in the process of launching several new products or line extensions as part of our strategy to fill portfolio gaps and drive profitable organic growth.

For instance, as we focus on gaining share in the rapidly growing Argentinian Malbec segment, we are preparing to roll out the new Black Box Malbec varietal.

We will also be relaunching our Diseno brand with a new package and marketing positioning.

We will soon begin shipping our new blue style Reisling wine.

This action will establish a presence for us in the rapidly growing German Riesling segment.

Constellation will begin its participation in the emerging organic wine niche with the Mendocino Vineyards brand, which is made using organic grapes.

And we are in the process of a national roll-out of a sparkling wine under the Woodbridge by Robert Mondavi umbrella.

I just returned from the Wine and Spirits Wholesaler Conference where Constellation was awarded nine Impact 2009 Hot Brand awards for several of our well-known brands including SVEDKA, Black Box, Kim Crawford, Rex Goliath, Corona Light and Modelo Especial, just to name a few.

Our Canadian wine business posted positive net sales results for the year, primarily driven by the premium wine portfolio including Jackson Triggs, Naked Grape, and the Quebec import business.

As you know, Vincor Canada was the official wine supplier for the 2010 Winter Olympic Games.

This sponsorship provided unprecedented exposure for our Canadian brands, and showcased the Canadian wine industry to the world.

Although the full business impact of this sponsorship is yet to be realized, I'm pleased to report at this time that an incremental 20,000 cases of our Canadian brands were sold at Olympic venues and surrounding areas during the games.

In addition, our participating Canadian brands were showcased through Canadian and international media including the Today Show, A Taste of Canada with Kathie Lee Gifford, and Wine Spectator.

In the spirit segment, SVEDKA vodka had another great year and generated phenomenal sales growth of almost 40% versus last year, which translates to more than 3 million cases sold in fiscal 2010.

SVEDKA is the fastest growing major US spirits brand and now has become the fourth largest vodka brand in the entire United States.

And we just launched Svedka's first national TV advertising campaign, which began airing March 1.

Black Velvet is the second largest Canadian Whiskey brand in the US and grew to more than 2 million cases in fiscal year 2010.

It also posted solid results for the year, with sales increasing in the low to mid-single digits range.

From an international perspective, earlier this week, we announced that we have ended our discussion with Australia Vintage Limited pertaining to a potential combination of our businesses.

Despite our mutual best efforts, we were unable to accomplish our goals and we have decided to focus individually on our respective businesses.

As a result, we will continue to restructure our businesses in Australia and the UK in order to align them with the realities of the respective markets.

We will be more aggressive in taking out costs, minimizing our net working capital investment, increasing efficiencies and selling assets.

Our primary goal is to generate cash and improve gross profit.

Moving to the Crown Imports joint venture, during the Company's fiscal year 2010, the Crown joint venture generated $2.3 billion in net sales, and $444 million of operating income.

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

Corona remains the number one import beer and Modelo Especial is currently the third largest import brand in the United States today.

Speaking of Modelo Especial, it is one of the few major super premium brands in calendar 2009 that experienced double-digit market growth.

This is a major accomplishment, considering that 2009 was a particularly challenging year for the US beer industry in general, with growth trends softening as the year progressed.

Many major domestic brands lost volume and share to craft beers and subpremiums.

As we previously indicated, volumes for Crown's businesses have been impacted by the economy, particularly in the convenience and on-premise channels.

However, the Crown portfolio outperformed the import category and grew share throughout the year.

These results were driven in part in the grocery channel as Crown introduced new packaging, executed targeted promotions and supported the business with enhanced strategic media activity.

For fiscal 2011, Crown is focused on further enhancing the integration of sales and marketing efforts by optimizing promotional activity and media support during peak seasonal periods when consumers buy the most.

Some of these activities will be visible in the market place including the following.

A summer consumer sweepstakes program that will begin immediately following the Cinco De Mayo holiday and run through the 4th of July.

This program will be supported with television advertising.

Crown will partner with Sports Illustrated during soccer's upcoming World Cup event which will begin in June in South Africa.

World Cup magazine issues will be promoting Modelo Especial, specifically for the convenience and on-premise channels.

Corona will also be one of the three major beer sponsors of World Cup TV.

Crown has expanded the roll-out of Modelo Especial with Negro Modelo draft to nearly 50% of the US with positive results, and will continue expanding distribution throughout the remainder of the year.

Crown is also seeing success with new SKUs recently introduced into the convenience channel including Corona and Corona Light 24-ounce cans.

and going into Cinco De Mayo holiday and the key summer season, we believe Crown is well positioned to maximize execution at retail.

Before I turn the call over to Bob, I want to discuss our guidance for fiscal 2011.

As you can see, our comparable EPS estimate for fiscal 2011 is projected to be in the range of $1.53 to $1.68 and reflects our belief that challenges from persistent and uncertain economic conditions will continue to impact our results, especially with regard to the Crown Imports business.

However, we expect to begin to realize benefits of our US distribution distributor consolidation efforts as the year progresses.

Meanwhile, our strong free cash flow enables us to create value in the form of an accelerated share buyback, while continuing our debt reduction efforts.

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

Thanks, Rob.

Good morning, everyone.

Fiscal 2010 was a year of dramatic change.

Operationally, culturally, and financially.

From an operational perspective, we took positive steps during the year to strengthen our organic business model.

We sold the Value Spirits business and moved our two scaled spirits brands into our US wine business and eliminated our spirits SG&A.

We then consolidated the majority of our US distributor network while also reducing the infrastructure of our US wine business from three selling units down to one.

This also resulted in reduced SG&A.

We now have a single scale US business focused on a streamlined premium wine and spirits portfolio going to a consolidated, focused and aligned distributor network.

Culturally, we're focused on profitable organic growth of our premium scale brands, primarily wine.

This means increased focus on brand building and sales execution, especially in North America.

This also represents our next logical business phase as we move beyond our previously decentralized organization which had been very focused on acquisitions, toward a more centralized organization more focused on profitable organic sales growth.

In our UK Australia business, we have a renewed focus on profits, driving synergies and generating cash flow.

Financially, we reduced costs to help offset the negative impact of the current economy and generated strong free cash flow to help drive another year of debt reduction and reduced interest expense.

Our full year fiscal 2010 comparable basis diluted EPS came in at $1.69 versus $1.60 in the previous year.

Our results included the impact of challenging economic conditions especially on Crown's performance.

US wine sales force restructuring, US distributor consolidation, and continuing difficult operating environment for our UK, Australia business.

On the more positive side, we reduced costs, which helped offset some unfavorable mix impacts driven by the challenging economy.

We extended our revolving credit facility and a portion of our term debt.

We generated strong free cash flow as we exceeded the upper end of our guidance range.

We significantly reduced debt and interest expense and we realized tax benefits for the year.

Now, let's look at our fiscal 2010 P&L performance in more detail.

Where my comments will generally focus on comparable basis financial results.

Let's go to our net sales line.

As you can see from our news release on page 15, our consolidated net sales decreased 8% for the year, primarily due to the divestiture of our Value Spirits business and the unfavorable impact of our year-over-year currency rate fluctuations.

On an organic constant currency basis, which excludes the impact of acquisitions, divestitures and ForEx rate changes, net sales increased 1%.

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 14 of the release decreased 1%.

This included a 3% decrease for North America, partially offset by increases of 7% in Europe and 4% in Australia and New Zealand.

North American sales were impacted by continuing economic challenges and US distributor and sales force transitions.

In connection with our recently implemented distributor contracts, sales to newly contracted distributors for an initial period are based on a predetermined plan.

Our sales force and distributor transitions resulted in a fall-off of depletions and consumer takeaway during fiscal 2010.

As a result, distributors have generally been taking in more inventory than they have been depleting.

While we were proactive during the fourth quarter in working with distributors to help reduce their inventory levels as outlined by Rob, the distributors ended fiscal 2010 with higher inventory levels than they ended fiscal 2009.

For Europe, sales benefited from the growth of our value priced product offerings in the UK.

Sales for Australia and New Zealand increased due to New Zealand product growth in the region.

Spirits organic net sales increased by an impressive 19% for the year.

Now let's look at our profit on a comparable basis using information on page 17 of the release.

For the year, our consolidated gross margin was 35% versus 37.1% for the prior year.

This reflects the higher Australian COGS due to the flow-through of the more expensive calendar 2008 harvest and growth of the lower margin UK Australian businesses.

Although they remain profitable, our UK Australia businesses experienced another year of reduced profits.

Our consolidated SG&A for the year decreased $136 million, and came in at 18.3% of net sales compared to 20.6% a year ago.

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

Consolidated operating income decreased 7% to $560 million, and operating margin remained essentially flat at 16.6%.

From a margin perspective, our stewardship of SG&A spend effectively offset the reduction in our gross profit margin for the year.

I'd now like to turn to our segment operating income results on page 13 of the release to provide highlights of our full year operating income change.

Wine segment operating income decreased $37 million to $655 million.

The decrease is primarily due to the divestiture of the Value Spirits business, decrease in US branded wine sales, and a decrease in UK Australia gross margin due to negative mix and higher grade cost for Australian wine, partially offset by savings from our global cost reduction initiatives.

For the year, corporate and other expenses totaled $95 million versus $87 million in the prior year.

The increase was primarily driven by higher stock-based compensation expense and costs related to Project Fusion, our multi-year program designed to strengthen our global business systems and processes.

Consolidated equity investment earnings totaled $239 million versus $270 million last year.

Equity earnings include $222 million from Crown.

For the year, Crown generated net sales of $2.3 billion, a decrease of 6%, and operating income of $444 million, a decrease of 12%.

Economic challenges have impacted the entire beer industry, driving lower volumes and consumer movement to lower priced beer.

Operating income for Crown was impacted by the lower volume, negative mix, and a contractual cost increase.

Interest expense for the year was $265 million, down 18% versus last year.

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

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

At the end of February, our debt totalled $3.8 billion, which represented $600 million decrease from our debt level at the end of fiscal 2009.

The decrease primarily reflects proceeds received from the sale of Value Spirits and cider businesses, combined with our strong free cash flow generation.

Our average interest rate for the year was a little bit above 6%.

Our debt to comparable basis EBITDA ratio at the end of fiscal 2010 was 4.0 versus a 4.3 ratio at the end of '09.

Our strong free cash flow, reduced leverage and improved credit profile positioned us to take advantage of improved credit markets and complete certain refinancing activity during the fourth quarter.

Let me summarize these actions.

These activities included the amendment of our Senior Credit Facility to extend $650 million of our revolver from June 2011 to June 2013.

In addition, $192 million of pre-existing revolver remains in place at historical pricing through June 2011.

We also extended the maturity of our $300 million of our $1.2 billion term loan from June 2013, to June 2015.

The margin applicable to the extended revolving facility and term loan increased by 125 basis points.

In addition, we redeemed our $250 million, 8.125% subnotes that were due in January 2012 without any penalty.

I'm quite pleased with the result.

We were able to maintain a low cost of capital, extend the term of our facilities, obtain appropriate financial flexibility, improve our covenants and reduce overall interest expense.

Our comparable basis effective tax rate came in at 30%, which reflects the favorable outcome of tax items from various jurisdictions.

Favorable tax outcomes during the fourth quarter helped drive a negative 11% tax rate for Q4.

Looking a little closer at Q4 results, the favorable tax rate helped offset the financial impact of soft Q4 net sales performance.

For the fourth quarter, organic constant currency net sales decreased 2%.

Branded wine organic constant currency net sales decreased 6% versus the prior year quarter.

This included a 12% decrease in North America, a 23% increase in Europe, and flat performance in Australia new New Zealand.

The increase in Europe was primarily due to volume growth and favorable comparisons versus the disappointing fourth quarter last year.

The decrease in North America reflects the impact of working with US distributors to lower their inventory levels in Q4, as discussed by Rob earlier.

Lower sales in North America drove a $22 million decrease in wine segment operating income.

Lower sales in North America coupled with high growth in the UK drove negative mix and 140 basis point gross margin decrease and reduced operating leverage as SG&A as a percentage of net sales increased 220 basis points.

During the fourth quarter, and in conjunction with our annual impairment testing, the Company recorded $103 million non-cash impairment charges, primarily related to trademark assets for The Australian business.

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

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

For fiscal 2010, we generated free cash flow of $295 million.

Exceeding the high end of our most recent guidance range, but less than the $378 million produced in the prior year.

While there were various year-over-year fluctuations in the cash flow details, the lower FY '10 cash generation was due in part to a $65 million tax payment related to the sale of the Value Spirits business.

Working capital benefited from inventory reductions from lower grape harvest cost in Australia and New Zealand, and CapEx came in at $108 million, versus $129 million in the prior year.

As a reminder, free cash flow for fiscal 2009 reflected a benefit of approximately $55 million in after tax proceeds related to the favorable settlement of certain foreign currency hedges.

For fiscal 2011, we're targeting free cash flow to be in the range of $350 million to $400 million.

This includes CapEx in the range of $110 million to $130 million.

The targeted improvement of free cash flow versus 2010 is expected to be driven in part by anticipated lower tax payments, lower interest, and lower restructuring activities, versus the prior year.

In March 2010, we received $60 million from Sazerac, as they paid off a note receivable related to their purchase of our Value Spirits business.

This cash benefit will be included in the investing section of the FY '11 cash statement and therefore is not included in our free cash flow estimate.

Due to our continued strong free cash flow generation and successful deleveraging and refinancing efforts, we believe we can redeploy a portion of free cash flow to repurchase stock while we continue to reduce debt.

In connection with this strategy, the Board of Directors has authorized repurchase of up to $300 million of the Company's stock.

Our intent is to implement an accelerated share buyback transaction when appropriate.

Now let's move to our P&L outlook for the full year.

Given the uncertain global economic conditions, we're forecasting comparable basis diluted EPS to be in the range of $1.53 to $1.68 for fiscal '11.

Our reported sales will be unfavorably impacted by the divestiture of our UK cider business which contributed about $100 million in net sales for fiscal 2010.

On an organic constant currency basis we are targeting flattish net sales for fiscal '11.

On a consolidated basis, we expect operating income to be down slightly due to the impact of divested business and continuing profit pressures for Australian and UK operations.

Crown's volumes are expected to be flat to down low single digits, due to continued impacts from the economy.

Negative mix and a planned small contractual cost increase are also expected to impact Crown profits.

As a result, we're targeting equity earnings for Crown to be down mid single digits for fiscal 2010.

Interest expense is expected to be in the range of $210 million to $220 million.

The healthy improvement is being driven by our significant debt reduction, the prepayment of 8.125% subnotes with the lower cost revolver fund and the rolloff of unfavorable interest rate hedges at the end of fiscal 2010.

The comparable basis tax rate is expected to increase to 35%.

We're assuming weighted average diluted shares to increase to approximately 224 million.

These items will essentially offset the benefit of lower interest expense.

Looking at Q1 fiscal 2011, we expect results to be impacted by higher marketing expense at Crown Imports versus the prior year first quarter, as it ramps up on the marketing activities that Rob highlighted in his comments.

Our comparable basis guidance excludes acquisition related integration costs, restructuring charges, and unusual items which are detailed on page 19 of the news release.

It also excludes any impacts from the share repurchase program.

We expect the share buyback to be accretive to EPS, and we will update our full year guidance when the transaction is completed.

For fiscal 2011, we expect to incur diluted EPS charges of about $0.17 for restructuring and other one-time charges related to the previously announced cost reduction initiative as we continue efforts to increase efficiencies and improve ROIC.

Before we take your questions, I'd like to reiterate that over the long term, we're focused on working to leverage the benefits of our new US business structure, and distributor consolidation initiatives in increasing operational and cost efficiencies to drive improvement in our organic business model and ROIC.

In addition, we plan to use free cash flow to further reduce debt and interest expense, and at the same time, return cash to shareholders in the form of a share repurchase.

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

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Lauren Torres of HSBC.

Good morning.

Good morning.

Good morning.

Question on the branded wine performance in the quarter.

Then I guess expectations as we think about this year in North America.

You know, with respect to the US distributor inventory level reduction, just quickly, I don't know if you said this, Rob, in your comments, what phase are we, how much more if there is to go on that?

With trends, seems like you seem rather optimistic about how the US consumer is behaving, I guess I am referring to wine here once again.

I don't know other data you have with respect to different price points, how things have changed since the last quarter and really how do you see this category developing as we start to think about the year?

Sure.

As to your first question, Lauren, the inventory reduction that occurred in fourth quarter is complete.

That was not something that we expected to carry over, so it was pretty much a one-time activity that we finished up as I said, both started and finished it in the fourth quarter.

As to your second question on the wine industry in the United States, you know, I would say that calendar year 2010, we're actually looking for about similar growth rates overall in all channels to calendar year 2009.

So in 2009, the business, the wine business was probably flat to up slightly, and in 2010 we're not projecting anything much different than that.

Again, probably flat to up maybe 1%, and I'd like to emphasize that that is in all channels, all channels meaning on-premise and off-premise and within off-premise, the grocery channel, the mass merchandise channel, the club channel.

So in general, as I said, pretty similar trends this year versus last year.

You're not seeing anything or hearing from companies with respect to the consumer getting a bit stronger in certain channels improving, be it in beer or wine, you're not really kind of getting there yet or thinking about those type of growth rates again?

I'd say that we're actually fairly cautious on projecting big improvement in calendar year 2010.

I would just say that until we really start seeing some significant improvement in unemployment, we don't really expect trends to change significantly.

I would say that the industry is fundamentally healthy, you know, given the economic trends I think being flat to up slightly is pretty good.

But we do see a continuation of the negative trends in the on-premise channel in particular, which is offsetting gains in the off-premise.

We see pretty good and healthy trends in the IRI channel of grocery, and we probably see the strongest trends in the mass merchandise and club channel which are not reflected in IR.

Great.

That's helpful.

Thank you.

Thank you.

Your next question comes from the line of Tim Ramey of DA Davidson.

Good morning.

Rob, kind of continuing on the outlook for the categories, a number of restaurants have made comments about sort of return traffic and you just pretty clearly reasserted a negative trend in on-premise.

Do you think that's the price points that you're occupying on-premise or how would we think about that, if in fact there is some reacceleration in traffic?

First of all, I was talking about the industry in general, not our on-premise business.

And yeah, some restaurant chains have been reporting some improved traffic, but I think that overall we don't really see huge improvement from an industry perspective in on-premise at the current time.

I think that to the extent that some restaurant chains are reporting more positive trends, it may be that they're going to be down a little bit less, but there's still a lot of restaurant closures occurring that are offsetting any positive trends.

There's definitely -- if you look at who is projecting anything that you could call positive, it's really sort of the -- I'm going to call it value end of the restaurant chain business, so obviously some restaurant chains may be reporting that they're more optimistic going into this year, but overall we don't see a big change in the on-premise as we move into 2010.

If the economy improves and unemployment abates, that may change, but at the moment I would say that there's been some pretty significant trends of people staying at home, eating at home, not going out as much, and we don't see that consumer behavior changing dramatically right now.

Just taking it from a macro perspective, you're talking about the sort of mirroring a flat to slightly up wine industry, you're talking about cost reductions that have come through, we're not factoring in share repurchase but lower interest expense.

Why are you actually looking at a down EPS forecast for your guidance, if in fact those other three factors are true?

This is Bob.

If we just do the rough math, I think what we said was we expect Crown to be down mid single digits.

We expect some pressures to continue on our international business, so we probably expect EBIT to be down there.

I think although interest expense is coming down dramatically, it's pretty much offset by an increase in tax rate and an increase in share count.

So kind of rough math is if you work through the numbers we gave you, EBIT is down a little bit and everything else kind of offsets.

So that's why we're down $0.09 if you just use the midpoint for FY 2011, $1.60 versus $1.69 this year in FY 2010.

Thanks.

Sure.

Next question comes from Reza Vahabzadeh of Barclays Capital.

Thank you much.

Question for you, Rob.

How do you anticipate being able to complete the share buyback on an accelerated basis and still reduce debt or leverage for that matter?

I'll answer that one.

The Board authorized $300 million of share buyback and I think if you look at the midpoint of the free cash flow guidance we gave which was 350 to 400, that midpoint is above the $300 million.

We used the cash flow above the approved share buyback to pay down debt.

Would you anticipate actual leverage to stay the same or improve as well for FY 2011?

The leverage -- if you're talking about EBITDA leverage ratio, it will essentially be a flat.

Remember, we received $60 million for our Sazerac note which although it doesn't hit free cash flow, it does reduce debt, in fiscal 2011, because we received it in the first month of the new fiscal year.

Leverage ratio will essentially be flattish.

Got it.

So you anticipate basically completing a share buyback in FY 2011?

Yes.

Okay.

Thank you.

The next question comes from Lindsay Drucker-Mann of Goldman Sachs.

Good morning, everyone.

I was hoping just to dig down a little bit on the inventory reduction issue.

If I take the sales impact that you disclosed, it looks like it was 10% plus of a drag on your North America branded wine sales, and considering that it was only in 60% of your territories, looks like a pretty sizable missed forecasting I guess in those markets of distributors buying too much in the third quarter.

So I guess maybe could you talk through first of all is that rational the right way to think about it and where did you -- where was the kind of forecasting misstep?

What fell short of your expectations to drive that?

You know, first of all, I wouldn't characterize it quite that way.

It's pretty much as we said all throughout the year.

We put inventory in in the second quarter, in anticipation of our consolidation efforts when we normally put it into the third quarter.

Third quarter I would say due to economic conditions, consumer takeaway was a bit less than we anticipated and, therefore, inventory levels ended up a bit higher than we anticipated.

And then of course in the fourth quarter we felt that we had the room to adjust and we did take advantage of that and we reduced significantly distributor inventories during that period in a number of markets, but primarily in that 60%, as you indicated.

I wouldn't call it a forecasting issue, as you suggested.

In fact, we decided that as long as we were going to get some benefit out of taking inventory levels down in the fourth quarter, that it was in our best interest, and we did get some benefit in that we negotiated some additional investment from the distributors behind our brands, in exchange for the inventory reduction level.

In exchange for the inventory reduction.

In general, I would also point out that our inventories at distributors are not particularly high from an industry perspective.

They run somewhere even currently in the 60 to 90 day range, which I would say is consistent with distributor inventory as a general proposition across the United States, and significantly below many suppliers.

So it was really all about the fact that in the fourth quarter we thought that there was an opportunity to do something that we thought would benefit our distributors in exchange for more investment behind our brands to drive results in the future.

So that's really what went on, Lindsay.

Okay.

And that's helpful.

And then also, could you just comment on the large California grape harvest in 2009 and what the implications might be for your business as we go through the year?

Sure.

Number one, it was a large harvest in 2009.

I think it was the second largest harvest in history.

That said, okay, the California -- the supply situation in California is pretty well balanced at the current time.

As we went into this harvest, from the previous harvest, I would say that the industry was tipped on the side of undersupply, and as we went into this harvest, although it was a big harvest, it was primarily large in what we call the north central valley, and that's where most of the -- let me put it this way.

Other than the north central valley, the crop was pretty average in size and in some cases even smaller.

Now, that said, bulk wine supplies even in north central valley type product were pretty low as we went into this harvest, and, therefore, when all is said and done and given the fact that we were probably tipping towards undersupply, and, therefore, shortages, especially in some of the key varieties like chardonnay, which continues to grow pretty heavily, I would say even though the crop was big, we still end up in a fairly balanced state as we go forward.

And I definitely wouldn't characterize it as oversupply.

If anything, it was at undersupply and moved more towards balance.

Okay.

Great.

And then just lastly, Bob, if you could help us out, given all the lumpiness and the noise in the wine business quarter to quarter last year, just in understanding the timing of our quarterly results as you lapped the distributor transition.

For which year was this, FY 2010 or FY 2011.

This year as we forecast 2011.

We don't really talk about quarterly guidance.

The one thing we did say is a as some of you may have noticed if you're watching Major League Baseball, you'll see some new Corona commercials and the way the accounting works on that, you'll see some front-loaded expense because the commercial happened.

We wanted to give you a little bit of a heads-up so there wouldn't be a surprise for Q1 and it's just marketing expense timing but beyond that we really don't get involved in giving quarterly guidance.

Okay.

But just to clarify, from the shipment timing, Q2 is a tough comp for wine, Q3 is an easy comp and then Q4 is an easy comp?

I guess from a shipment perspective.

There was kind of a -- this year it would kind of combine Q2 and Q3 because it would be kind of a movement from Q3 to Q2 as you said and Q4, because we kind of hold back a little bit on shipments as we spoke of, there should have been a lower sales than next year.

Okay.

Thanks.

You got it pretty right.

Your next question comes from Carla Casella of JPMorgan.

Hi.

I want to hear your comments on the spirits.

Are you seeing any pickup in competition with the launch of its comfortably priced vodka to Svedka?

Yes.

There, apparently, it hasn't occurred yet and it remains to be seen whether they do in fact launch it, but they claim they're launching a comparably priced product called Rock and I think that's really sort of indicative of the fact that our product is extremely successful.

It's growing very rapidly.

There's a lot of -- actually, a lot of imitators out there in the markets and a lot of vodkas that are priced in that category, so one more I would say really doesn't matter much.

Doesn't really particularly concern us.

We've always got our eye on competition.

And that is why we have initiated a new advertising campaign with regard to Svedka.

It's on TV this year and we're doing a lot of things to continue to build the strength of what already is a very, very strong brand.

So, you know, I would say that imitation is the strongest form of flattery.

That's about as much as I'm -- as much as I would say about it.

One more vodka priced at that price point as I said doesn't particularly concern us.

We see great momentum behind Svedka as we've ended our fiscal 2010, and we see great momentum behind it as we enter 2011.

We really are seeing no slowdown at all in the momentum behind the brand.

The consumer is deciding what they want and Svedka is clearly meeting all consumer needs in that particular category at the time.

So, you know, I'm sure that not only will there be -- will have a product but I think there will be other products and if anything it will grow that segment in the category overall as people pour more money into this mid-priced vodka category.

So it could actually be very favorable to us to have more entrants into the category.

But as I said, there's already a lot and always have been a lot of vodkas priced in that price range, so it's not something that concerns us.

Okay.

And then one other question on the inventory, and the distributors.

You mentioned that there was a $50 million to $70 million hit on the fourth quarter sales but the inventory to the distributor level remains somewhat high.

Could we see a similar hit to first quarter?

No, there's no -- we anticipate no inventory reduction in the first quarter.

In fact, we're not anticipating any further actions of this nature at this time.

It was exclusively related to the fourth quarter.

So then how long do you think it will take for the excess inventory that's in the trade now to work its way back down to normal levels?

Inventory levels in the trade now are at normalized levels in the general proposition so we don't anticipate it impacting us at all.

Okay.

Great.

Thanks a lot.

Thank you.

Your next question comes from Mark Swartzberg of Stifel Nicholas.

Hi, Mark.

Thanks.

Hey, guys.

Hey, Rob.

Couple housekeeping and then more business stuff.

I may have missed it, Bob, but on the -- did you give us a CapEx number, estimated CapEx for the fiscal year?

Yes, it was 110 to 130.

Okay.

And then on the share repo, the $300 million, as much as $300 million accelerated, what's a good estimate of borrowing cost on that?

Kind of a theoretical question and you have all the data but what we said was our average cost of borrowing last year was around 6%, okay, but our revolver is in two pieces.

It's LIBOR plus 125, or LIBOR plus 250.

So -- and as we said, we are not using all free cash flow to buy back stock.

We're also deleveraging.

So if you want to use the revolver -- the incremental revolver rate, the overall average interest rate, if you want to take your own shot at the forward curve for cost of debt, so between 3 and 7%.

Big rates.

Sounds like closer to the 3.

On an incremental basis, yes.

What's that?

On an incremental basis, you're calculating accretion or dilution in the short-term, I think you could assume the average revolver rate.

Okay.

Got it.

Got it.

Okay.

And then I guess, Rob, something you just said, not following why distributor inventory is being higher than fiscal 2009 levels at the end of fiscal 2010, why that's not something you would expect to go down in fiscal 2011.

Can you also give us some idea of just how significant that delta is versus end of fiscal 2009?

Well, we don't expect it to go down simply because we don't expect to deplete more than we ship.

So we expect inventory levels to be fairly stable in 2010 and to remain in this 60 to 90 day time, on average basis, amongst our distributors which as I also said isn't -- I'd say is equivalent to distributors' inventory in general for all suppliers.

So isn't particularly high.

And so what was the second part of your question, Mark?

How much higher end of fiscal 2010 are they versus end of fiscal 2009?

Oh, yes, maybe five to 10 days.

Five to 10 days.

Okay.

Correct.

And then -- sorry?

Yes, five to 10 days.

Okay.

And then continuing on this line of discussion, trends by channel, we've heard about, can you give us some more color on price point for your North America wine business, give us more color on how different levels of price point are performing at the depletion level?

Sure.

I think that looking at the industry, I think that we'll continue to see continued trading up in the industry with the higher price points growing at a faster rate than the lower price points.

Right now, we do see some acceleration in the everyday wines up to $5, and I would expect that to continue as well.

Last year they went from being in decline to some pretty significant growth.

That said, there was also some pretty big pricing taken in the under $5 category, and I would expect perhaps that to slow down that growth a bit as we go into this year.

Now, despite the fact that we also see sort of some continued positive mix shift and higher priced categories growing at a faster rate in general than lower priced categories, there's still within categories I would say seems to be some tendency to go to the lower end of those categories and there's still quite a bit of discounting going on, which is driving the fact that some of the categories, like call it the luxury categories, 15 to 20 bucks, why that category is growing continues to grow nicely because you've got some of the above 20s discounting into that category which is driving the category growth.

So it's kind of a good news, bad news kind of a thing.

Okay?

Good news is, consumers are continuing to trade up as a general proposition in wine.

The bad news is that's being fueled by some fairly heavy discounting of more expensive wine.

So that negatively impacts margin at the higher price points.

So as I said, kind of a good news, bad news kind of a story.

Overall, things are pretty healthy.

Overall, there will be some growth, we anticipate, in the industry overall.

Overall, we do expect some positive mix shift for the industry.

And the negative side is that that mix shift could be offset by some continued heavy discounting in the marketplace.

So that's kind of where things shake out.

Great.

And then that price increase on the $5 under, sounds like that actually could benefit a large portion of your portfolio, making your $6 to $10 wines a little -- narrowing that gap.

Is that in fact proving to be beneficial?

Will you expect it to be a significant benefit for some of your wines in that price area?

Maybe.

That's a theory.

We'll see what happens this year.

You know, as far as our wines in sort of that price point, right about $5, we actually are seeing some pretty good results.

We see with Woodbridge, some positive trends.

That's good.

Rex Goliath, which is a brand that we repositioned and put some effort behind, we're seeing gigantic growth behind it, very high double digits.

So, in general, I'd say the just above $5 price point range is pretty healthy for us.

Great.

Thank you guys.

Your next question comes from Kevin Dreyer with Gabelli & Company.

Good morning.

Seems like there's a little bit of a disconnect, so basically you did 169 for the year, but the tax benefit, if you normalize the tax rate at 35%, I get about 157.

But then including the $0.07 to $0.09 hit from the reduction in distributor inventories which you say won't be recurring, so granted I know you said the Modelo or the Crown business will be down a little bit, but given modest growth in the wine business, and reduction of interest expense, why would you be down from that 157, with a normalized tax rate?

Yes, I think we're kind of -- we're kind of double counting some things and not others.

Just to keep I guess -- you're correct.

If you equalize the tax rate for this year, you're at $1.57.

Okay?

But then you wouldn't touch next year's tax rate because you're using 35% in both years.

So the way I look at it is EBIT is going to be down slightly because we said Crown, international wine, and remember, we sold the cider business, although didn't have very high margins, did have positive EBIT.

Okay.

Then we kind of said year-over-year if you -- you've already done it.

If you take taxes, interest and shares into account, they all sort of kind of offset each other.

So you can think about it, EBIT year-over-year is you're losing about $0.09 a share and that's $1.69 to $1.60.

Okay.

And then in terms of the accelerated share repurchase, what would be the trigger for you potentially actually implementing that?

You said whenever conditions are right or something like that.

Yes.

I mean, we're just -- we're working with our -- we've chosen a banker to help us execute this transaction, so between the two of us we'll decide when we go into the market and we kind of want to make sure that we're not hurting ourselves.

So I imagine, plus the window didn't open until this call was over, so I would expect it to be towards the early half of the year versus the later half of the year.

Great.

What's the reason for not including that in the -- that's going to be incremental then to the guidance, right?

Yeah.

So what we wanted to do was kind of keep -- because as you guys tell me often, we're a bit of a difficult stock to cover because we've kind of got a lot of things every quarter to talk about so we wanted to keep it as true and as organic as possible and we didn't want to seem disingenuous, kind of taking credit for the stock buyback in next year's guidance because I kind of look at it differently.

So what we decided to do is do as much apples-to-apples as possible, give you guys the data on the stock buyback.

When we complete the program, it will all be very visible to you so we will come out and update our guidance.

Okay.

And in terms of the share creep, that's just from old options or new issuances around the end of the year.

If the stock price goes up it drives additional dilution and as we grant new options in the new year, that also drives additional dilution.

And also just to be clear, so the $60 million from Sazerac, that's in the 350 to 400 number for free cash flow?

That is not correct.

So the --

Uncorrect?

That is correct.

I'm sorry.

It is below free cash flow.

It is a financing activity.

I tried to make that clear.

Okay.

I misunderstood.

It is not in the 350 to 400.

Final question.

Any update on the lawsuit with Modelo regarding Crown?

No, no, not really.

No update.

That's just proceeding as one would expect.

These things tend to move slow, but I would reiterate that it's really a generally immaterial thing.

We did file a motion to dismiss the lawsuit and, you know, we're ultimately awaiting the results of that motion to dismiss.

Clearly, we would be hopeful on that, but these things are somewhat unpredictable.

Okay.

Thanks.

Okay.

Well, thank you.

This concludes the question and answer portion.

Please continue with your closing remarks.

Well, thank you everyone for joining our call today, and as I indicated, I'm pleased with the progress that we've made throughout the past year, particularly with our strong free cash flow generation, our significant debt reduction and our operational improvements.

I certainly believe we're well positioned for success in the future and have initiatives under way in fiscal 2011 that will help us to achieve our longer term strategic objectives.

We will be participating in investor conferences and road shows throughout most of May, so we look forward to seeing many of you while we're on the road.

So again, thank you for your participation.

Thank you.

This concludes today's' Constellation Brands fiscal year 2010 earnings conference call.

You may now disconnect.