Constellation Brands Inc (STZ) 2011 Q1 法說會逐字稿

Good morning.

My name is Melissa and I will be your conference operator.

At this time I would like to welcome everyone to the Constellation Brands first quarter 2011 earnings conference call.

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

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

(Operator Instructions) Thank you.

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

Please go ahead.

Thank you, Melissa.

Good morning, everyone, and welcome to Constellation's first quarter fiscal 2011 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 basis financial results.

Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial measures are included in the news release, or otherwise available on the Company's 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 and to check the Company's estimates, please refer to the news release and Constellation's SEC filings.

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

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

We're off to a good start for the year with results that were generally in line with our expectations.

I believe the highlight of the first quarter relates to the fact that we are beginning to realize the benefits from our consolidation of our US distribution network in key markets and implementation of our new go to market strategy.

Remember, it was during last year's first quarter that we began to scale back promotional activities for our US wine and spirits business in advance of the initiation of our US distributor consolidation program and sales force restructuring efforts.

And we did not increase promotions to more normalized levels until the end of last year's third quarter in advance of our holiday selling season.

Nonetheless, in the market, promotional activity has remained strong throughout this period, especially in the premium plus category.

Now having completed the most significant phase of our US distributor transition, during this year's first quarter we increased promotional activities and brand investments, launched new products and began to improve our in-store execution at retail.

Some examples of these activities include continuation of what we call the biggest holiday ever promotion during Easter, new product launches including the introduction of blufeld German Riesling, Arbor Mist's White Pear Pinot Grigio, Black Box Malbec and Woodbridge sparkling wines.

Brand investment in SVEDKA, relaunch of Ravenswood No More Wimpy Wines campaign using digital media, and collectively these efforts drove improved marketplace depletion growth in the mid single-digit range for our US wine business.

As I mentioned last quarter, we are refocusing our energies toward improving depletion and consumer take-away and we made measurable progress towards this goal.

We expect to grow our US wine business in line with total industry growth trends and are working diligently to achieve this target as we progress through fiscal 2011.

Current growth in the IRI channel remains healthy at about 5% on a dollar basis, according to recent 12-week IRI data.

In particular, the super premium plus segment where wine sells for greater than $8 a bottle at retail is currently growing at double-digit rates.

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

In fact, with our streamlined portfolio, our top 15 US wine brands represent the vast majority of our US wine profitability.

And it's these brands that are growing at a pace faster than the market due to our US distributor consolidation efforts and our renewed focus on building and promoting our brands.

During the quarter Constellation gained international recognition as having some of the best and most powerful brands in the industry.

The 2010 Power 100 list recognizes the world's most powerful wine and spirits brands.

This year's list includes several of our brands with SVEDKA as one of the most powerful vodka brands, and Black Velvet as one of the most powerful whiskey brands.

Robert Mondavi and Hardy as two of the most powerful wine brands, and Paul Masson Grande Amber Brandy as one of the most powerful brandy brands.

In addition, Beverage Information Group recently recognized Constellation with three fast track awards for our Black Box, Kim Crawford, and SVEDKA brands.

In early June Constellation participated in the inaugural Ultimate Wine Challenge in New York City, which is a professional tasting event of nearly 500 wines representing 15 countries and 43 Appalachians.

The Chairman's Trophy was awarded to the best wines in 23 different wine categories.

Constellation won trophies for Nobilo Sauvignon Blanc 2009, Hogue Cellars Genesis Riesling 2008, Simi Cabernet Sauvignon 2006, Clos du Bois Pinot Noir 2007, and Ravenswood Napa Valley Zinfandel 2007.

Moving to our Canadian business the accolades also continue.

In early June the Liquor Control Board of Ontario, which is the largest purchaser of beverage alcohol in the world, awarded Vincor supplier of the year across all beverage alcohol categories.

In addition, they received the best new product launch and best image program awards for their new Open wine brand.

These results indicate that our brand strength and reputation are continuing to grow in today's competitive marketplace, which validates our strategic imperatives emphasizing premiumization, brand building and organic sales growth.

From an operating perspective, our Canadian wine business posted positive net sales results for the quarter, primarily driven by the premium wine portfolio including Jackson Triggs and Inniskillin.

In our spirits business, during the first quarter, SVEDKA Vodka posted sales growth of 40% versus last year and continued to gain market share.

As I mentioned earlier, SVEDKA was recognized on the 2010 Power 100 list as one of the world's most powerful spirits brands, but was also honored as the highest rated single new category entrant and earned a 2010 Business Star performance award.

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

During the quarter we launched SVEDKA's first National TV advertising campaign which began airing March 1.

Black Velvet also posted strong results in the first quarter with sales increasing low double digits.

Moving to our international business, the 2010 grape harvest in Australia is now complete and it appears that the current harvest estimate is about 1.5 million tons, a 12% decrease from the 2009 harvest of approximately 1.7 million tons.

While this harvest did take is closer to current demand, a surplus remains from prior years oversupply.

Current marketplace dynamics in the UK and Australia remain unchanged.

Therefore, we continue to aggressively restructure our business in these markets through cost reductions, minimization of working capital investments, and asset sales.

Our primary goal is to generate cash, increase efficiencies, and improve gross profits.

The UK and Australian business combined represents less than 5% of our total consolidated EBIT in 2010.

Moving to the Crown Imports joint venture, during the first quarter sales and operating income for the Crown joint venture continued to be impacted by economically driven challenges for the US beer industry in general.

These challenging trends that were pervasive throughout 2009 have continued into 2010 with major premium domestic brands losing volume and share to craft beers, sub premiums, and now imports.

And within the import category, Crown has recently fared better than most, but I will discuss this in greater detail in a moment.

Crown's first quarter operating income was unfavorably impacted not only by volume declines and unfavorable mix, but by the timing of marketing and promotional activities such as programming for the Cinco de Mayo holiday, distribution of value added coupons in select markets, World Cup soccer advertising, and the Win a Beach Getaway sweepstakes.

However, the good news is that we believe these promotional activities were successful in driving positive depletion trends during the quarter.

I would like to provide a few examples.

Crown outperformed key competitors in the US beer market during two important first quarter events.

Cinco de Mayo and the Memorial Day holiday.

During Cinco, Crown outperformed the total beer and import categories in case growth with Modelo Especial outperforming every major domestic and import brand per IRI data corresponding with this time frame.

During the Memorial Day holiday, Crown not only increased case sales, but grew market share in IRI channels including food, drug, and convenience and mass markets.

Crown's promotional activities and timing factors resulted in temporary inventory reductions at the wholesale level during the first quarter.

Having said that, Crown is closely managing inventories at wholesale and retail to ensure seamless execution during the summer selling season.

Throughout the remainder of 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 the activities that have been or will become visible in the marketplace include the continued rollout of Negro Modelo and Modelo Especial draft which now has a presence in 25 states, the launch of Pacifico draft throughout California, the continuation of the, Win a Beach Getaway summer sweepstakes program that began immediately following the Cinco de Mayo holiday and will run through the end of July.

Crown is partnering with Sports Illustrated and World Cup magazine through the duration of the World Cup soccer event, and Corona is also one of the three major beer sponsors of World Cup TV.

Recently Crown launched Modelo's Victoria brand in Chicago as an initial test market and rapidly sold out of its case allocation for this product.

Victoria is Mexico's number two volume and oldest beer brand and was introduced at a price point premium to Corona Extra.

All aspects of this test market will be tracked and measured with a recommendation for potential expansion in 2011.

Now closing, we are beginning to reap the rewards of our focus on profitable organic growth as we work diligently to harvest the ultimate benefits from the execution of our US distributor strategy, and our strong free cash flow enables us to create value in the form of an accelerated share buyback while continuing our debt reduction efforts.

With that said, I would now like to turn the call over to Bob Ryder, our CFO, for a financial discussion of our business results.

Bob.

Thanks, Rob.

Good morning, everyone.

Given the continuing challenging economic and competitive market conditions, I'm pleased with our Q1 results, which were generally in line with our expectations.

Our comparable basis diluted EPS for the quarter came in at $0.38 a share versus $0.33 last year.

Comparable EBIT came in below prior year as expected.

However, we saw some encouraging trends in the quarter.

We remain focused on leveraging our new US business structure, streamlined portfolio and consolidated US distributor network.

These efforts are progressing as our US distributor initiative gained traction in the marketplace.

This combined with the increased brand investments and promotional activities outlined by Rob has improved shipment volumes, performance at retail and depletion trends for our US wine business during the first quarter.

However, the higher promotional activity impacted net sales as promotions are reported as a reduction in the net sales line.

This reduced North American wine sales and our operating margin.

The promotion spend increase was due in part to timing.

In fiscal 2010, promotion spending was lighter in Q1 and Q2 as we shifted more promotion dollars to the second half of fiscal 2010 as part of our US distributor consolidation effort.

In Q1 fiscal 2011 we increased spending for more normal levels due to our Easter holiday volume improvement program.

Also, as Rob mentioned, wine industry promotion spending has increased in the premium and above price category and we are staying competitive with an eye on the bottom line.

Year over year promotion spending comparisons should improve in the second half of fiscal 2011.

The quarter also saw some positive timing related to our comparable basis effective tax rate, which should reverse in the balance of the year as our effective tax rate came in at 24% versus our targeted full-year rate of 35%.

Before we look at our Q1 P&L performance in more detail, I wanted to highlight that we have changed our segment reporting structure.

Our wine business is now structured in two segments.

The first segment is North America.

And the second segment is Australia and Europe, with most of Europe represented by the UK.

This reporting change was driven by our strategy shift in Australia and Europe where we have combined the infrastructures of these businesses, given the symbiotic nature of these markets to better align strategy, increase efficiencies, reduce SG&A costs and improve cash generation.

We have very different businesses in these two segments with divergent economic models and strategies.

We believe segregating the reporting of these businesses should help investors better understand our overall business.

The North American business represents the majority of our profitability and has strong financial profile.

Results from New Zealand are included in North America segment as the vast majority of our wine produced in New Zealand is consumed in the US and Canada, and has always been reflected within North America.

New Zealand sales not consumed in North America represent about 2% of the North American segment sales.

Prior period results in our press release and our segment history schedule on our website have been restated to conform with the new segment presentation.

Now let's look at our fiscal Q1 P&L performance in more detail where my comments will generally focus on comparable basis financial results.

As you can see from our news release, consolidated net sales decreased 1%, primarily due to the divestiture of our UK cider and value spirits businesses, partially offset by the favorable impact of year over year currency rate fluctuations.

On an organic constant currency basis, which excludes the impact of acquisitions, divestitures and foreign exchange rate changes, net sales were even with the prior quarter.

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

Our consolidated wine organic net sales decreased 1%.

This included a 2% decrease for North America, slight increase in volume was more than offset by the higher promotion activities in the quarter.

Australia and Europe increased 1% as marketplace conditions have generally remained unchanged.

Spirits organic net sales increased an impressive 28% for the quarter.

Now let's look at our profits on a comparable basis.

For the quarter, our consolidated gross margin was 34.5% versus 34.9% for the prior year.

This reflects higher promotion spending in the US and unfavorable foreign currency impacts related to shipments of Australian product in the UK, partially offset by favorable Australian grade costs as the lower cost calendar 2009 harvest starts to flow through our fiscal 2011 income statement.

Our consolidated SG&A for the quarter increased $18 million and came in at 21.4% of net sales, compared with 19.1% a year ago.

The percentage of sales increase reflects lower net sales as a result of the increased promotional spend combined with higher professional service costs for projects aimed at improving our systems and business operations.

Much of the increased costs will remain throughout the year.

Consolidated operating income decreased 17% to $103 million and operating margin decreased 2.7 percentage points to 13.1%.

I would now like to turn to our segment operating results to provide highlights of our first quarter operating income change.

North American segment operating income decreased $15 million to $133 million.

The decrease is primarily due to the higher promotion spending.

The Australia and Europe wine segment reported an operating loss of $3 million, versus a break even result in the prior year quarter.

The grape cost benefits in Australia were offset by the strengthening of the Australian dollar and gross profit margins in the UK continue to be challenged.

Please note that the first quarter is the seasonally lowest profit quarter for this segment and we do expect the segment to be profitable on a full year basis.

Corporate and other expenses totaled $26 million versus $27 million in the prior year quarter.

The increase was primarily driven by higher professional services, including costs related to Project Fusion, our multi-year program designed to strengthen our global business systems and processes.

Equity earnings for Crown totaled $54 million versus $63 million in the prior year.

For the quarter, Crown generated net sales of $622 million, a decrease of 3%, and operating income of $109 million, a decrease of 14%.

Sales were impacted primarily by higher promotions and unfavorable mix.

Operating income for Crown was impacted by the timing of promotional and marketing investments, a contractual product cost increase and unfavorable mix.

Interest expense for the quarter was $49 million, down 29% versus last year.

The decrease was primarily driven by a lower average interest rate during the quarter and our significant debt reduction actions during fiscal 2010.

Let's take a look at debt.

At the end of May our debt totaled $4 billion, which represents $182 million increase from our debt level at the end of fiscal 2010.

The increase primarily reflects funding our $300 million accelerated stock buyback, partially offset by $60 million in note receivable proceeds from the sale of our value spirits business and our free cash flow generation.

I will talk more about the stock buyback in a few moments.

Our average interest rates for the quarter was approximately 5%.

Our debt to comparable basis EBITDA ratio at the end of May was 4.4 times.

Our comparable basis effective tax rate came in at 24%, which reflects the favorable outcome of tax items and compares to a 39% rate for Q1 last year.

As mentioned earlier, we are still targeting a full-year tax rate of 35%.

Now let's discuss free cash flow, which we define as net cash provided by operating activities less CapEx.

For Q1, we generated free cash flow of $34 million versus a use of cash of $102 million in the prior year.

The improvement reflects anticipated timing benefits for Crown distributions and interest earnings.

We also saw lower restructuring payments and an inventory benefit primarily related to the US and Australia.

CapEx came in at $26 million versus $47 million in Q1 last year due to project timing.

We continue targeting free cash flow to be in the range of $350 million to $400 million for fiscal 2011.

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

While we expect to pay down debt in fiscal 2011, we have redeployed a portion of free cash flow to repurchase stock as we believe our shares represent good value.

In April we entered into a $300 million accelerated stock buyback transaction.

We funded this through our low-cost revolver.

During the first quarter we received 13.8 million shares of Class A Common Stock, which represented the minimum number of shares that will be received under the transaction.

The final number of shares to be received under the transaction will be determined at the close of the transaction period.

That provides a good point to move to our full year fiscal 2011 P&L outlook.

We're increasing our comparable basis EPS guidance by $0.10 to a range of $1.63 to $1.78 per share to reflect the estimated accretion benefit of the stock buyback.

We still expect interest expense to be in the range of $210 million to $220 million as rates remain below those anticipated at the beginning of the year.

We're now assuming weighted average diluted shares to approximate 212 million, versus our previous guidance of 224 million to reflect the estimated stock buyback benefit.

As a reminder, Q2 fiscal 2011 will have a tough comparison versus Q2 fiscal 2010.

As previously discussed in Q2 of last year, Constellation and the newly appointed distributors decided to increase distributor inventories and minimize operational disruption to ensure adequate service levels with retail customers during the transition.

We estimated Q2 fiscal 2010 benefited from the timing shift by approximately $40 million to $50 million in net sales and $0.05 to $0.07 of diluted EPS.

As discussed earlier, Q2 fiscal 2010 also reflected lower promotion costs.

Our comparable basis guidance excludes restructuring charges and unusual items which are detailed in our news release.

During Q1 we recorded a $0.02 charge for restructuring activity related to our global cost reduction initiative and a $0.13 tax charge associated with the valuation allowance established against deferred tax assets in the UK.

Before we take your questions, I would like to reiterate that we're on track to meet our financial goals for the year, and we continue to improve our organic business model.

We're pleased with the top-line results of our marketplace initiatives.

Our increased brand investment in core brands, our new product launches, and our progress with our distributor initiative have resulted in improved shipment and depletion volumes and market share gains on our core brands.

Although Q1 Crown performance was below prior year, we're also seeing some positive top-line results from Crown's branding and marketing initiatives.

Cash flow is starting the year out on a strong note, which in conjunction with continued low interest rates is helping reduce the incremental interest expense of our share buyback.

Our UK Australia business continues to be challenged, and we continue to look for ways to improve the financial returns of this business.

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

(Operator Instructions) Your first question comes from Vivien Azer of Citigroup.

Hi, good morning.

My first question has to do with the US wine category.

I don't think I heard you guys say it, but can you talk about what your outlook is?

Is it still kind of a flat to plus one?

And secondly, can you talk about the category trends intra quarter?

Did you see things improve month to month both in terms of top line, but also in terms of the level of promotional spending for you guys and the category?

Yes, Vivien.

In general, our estimates have been that the total category in the US should be up very low single digits for the entire year, in perhaps the 1% to 2% range.

And in general, that's a result of the fact that although we continue to see pretty strong growth in the IRI segment, which represents about 30% of the business, the on-premise continues to be negatively impacted by the economic downturn, and therefore when we look at the category on an overall basis, we expect it to be, as I said, up low single digits.

And then in terms of kind of the trends intra quarter, have things started to look better, kind of the same?

You're asking about the trends in the first quarter?

Yes, kind of on a month-to-month basis.

For the industry?

And for you guys.

Yes, I would say that for the industry for the first quarter, the trends are probably better than what we have -- what we believe will be the case for the total year with industry -- as best as we can determine it, there is not very perfect data for that, up about 3% for the quarter, and our trends are strong.

We've taken share in the first quarter.

In the premium plus category, which is what we really concentrate on, because the bulk of our portfolio, we've taken about 1% share, or 100 basis points, and then overall, about a half a percent share.

So I don't want to over hype things, but the first quarter was pretty good in terms of our organic growth strategy.

Doesn't necessarily make a trend, but, as I said, we've taken share and outperformed the industry as a general proposition.

Vivien this is Bob.

The other thing I would add to what Rob said is, in the wine category in total, you do see premiumization coming back in in that wines above $5 are growing faster than wines below $5.

You also see increased promotion spending in wines above $5 and especially in the price point to which Rob referred, like the $8 to $11.

So we're having to be competitive in that area.

We look at this as good news in that the consumer is coming back to premiumization.

However, they are demanding more of a discount than they maybe have in the past.

But the wine category, as Rob said, especially if you look at all of beverage alcohol, wine is doing quite well.

So we're -- I guess cautiously optimistic.

However, we are keeping our eye on category and on our own promotion spending.

Terrific, thanks very much.

Your next question comes from Tim Ramey of DA Davidson.

Good morning.

Just a little follow-on, on domestic wine.

And by the way the restatements are really helpful.

Thanks so much for putting that up.

But curious how you would index your own portfolio with that $8 and above, or $6 and above, or wherever you want to break it point.

How much of your sales would fall into that category now?

I know most, but there's still a few, Arbor Mist and others that fall below.

The vast majority of our business is in what we would call the premium plus category, which is above $5.

And in terms of the category where we have the largest market share, it would be the super premium category where we have approximately a 30% market share, and then ultra premium, we have more like a 20-some-odd percent, then above that, about a 20%.

In terms of how we index versus wine in general, we are skewed significantly towards premium plus, and even really super premium plus than the general industry, because we do not have the percentage that the industry has in the $5 and below segments, which still represents a pretty significant piece of the wine industry in general.

So to the extent that the premium plus, the super premium categories and above are growing faster than the industry, we are growing faster than the industry as well.

Not only due to our individual brand performance, but mix as well.

Now, all that said, as Bob pointed out, although some of these categories, like super premium above eight are now growing in the double-digit range, and there's definitely -- we're back to trading up in premiumization, all that has to be qualified by the fact that some of this is being driven by some fairly high promotional activity and promotional levels in the marketplace, which is not necessarily a bad thing, because it is stimulating the whole category.

Wine is taking share from everything, beer and spirits, and it's pretty robust.

That sounds great.

Did that answer your question, Tim?

Yes, Rob.

Just one follow-on, if I could.

The news that we've heard out of the restaurant sector is probably more bullish than what we're hearing out of you on premise.

And yet you have some brands that really -- like the Clos du Bois where there's significant presence there.

What's going on with the on-premise for you?

Yes, we think that for the first quarter, the on-premise was probably down a couple of percent, and our business in the on-premise was down just about the same, where as for the 12-month, the on-premise was down probably close to 10%, but we fared considerably better than that.

So over the 12-month period we gained share in the on-premise, although we were down probably in the mid single-digit range for the 12 months.

I think we're seeing the on-premise begin to flatten out is the answer to how that category or that segment is performing.

So I don't know if that's either more negative than what you believe or not, but if you ask me, I would say throughout the year, we'll see it go from negative to flat, then hopefully we'll see it start up ticking sometime before the end of calendar year 2010.

Perfect, thanks.

Your next question comes from Reza Vahabzadeh of Barclays Capital.

Good morning.

You talked about the promotional spending.

I'm just wondering, will overall promotional and marketing spending for the whole fiscal year be comparable with the prior year or are we going to track materially higher?

I think you'll see our delta to prior year greater in the first half of this year, and then it will smooth out in the back half.

So I think the full year promotion spending will be higher than last year, but not by a big number.

But most of the increase will happen in the first half of the year.

Okay.

And as far as the returns on the higher promotional spending in beer or wine, how do you think about that?

Are you getting adequate returns, or is that getting diluted by the fact that everyone else is diluting as well -- is promoting as well?

It's a combination of everything, so I would say on some brands we are getting adequate returns.

On others we'd probably be happier with higher returns, but we're in a constant balance of maintaining our presence in the market and keeping our eye on market share and making sure that the promotion spending that we do is efficient and that we're getting a positive bottom line.

But I think in general, we are having to respond to what's going on in the marketplace, and we are pleased with the turnaround in our top line, because in both wine and spirits we saw positive depletions in the quarter, which we're taking as a pretty good trend.

But we're making sure that the finance and sales guys are kind of holding hands throughout all this promotion spending period to make sure that we're being as efficient as possible.

Got it.

As far as the use of free cash flow, obviously this year a portion of that will go to share repurchases, and so deleveraging will be probably modest, but what about for FY 2012?

I know it's early days, but do you anticipate focusing more on deleveraging or being more focused on share buybacks or acquisitions?

We really haven't started talking about FY 2012 to the outside world yet.

So we're thinking about it as you speak, but we're not really talking about it quite yet.

We have said we want to keep our leverage ratio in the three times to four times range, and we did say that we got above that in the first quarter, because we thought it was an opportune time to buy our stock price given the low cost of our revolver, given where the stock price was from an EBITDA ratio and a PE ratio, and given the traction that we could gain.

So we'll be looking at those same kind of things next year.

Got it.

Thank you.

Your next question comes from Lauren Torres of HSBC.

Good morning.

My questions, first actually wanted to touch upon guidance.

You raised comparable guidance, but reported guidance to come down.

I'm not sure, Bob, if you touched upon that why that was so and what that reduction is coming from.

Also, two, last quarter you gave us some guidelines with respect to sales profit, Crown Imports guidance and CapEx guidance.

Wondering if there's any changes there also.

Sure.

So Lauren the comparable guidance is up a dime a share versus our previous range that's exclusively driven by our estimate of what accretion will be on the buyback.

We reported guidance -- there's a delta there from comparable, all due to the charges, the non-comparable charges we took in the first quarter, and the big piece of that was a charge to eliminate a deferred tax asset in the UK, and because we are kind of stressed on profitability in the UK, it's just a probability of ever getting any value out of that asset, and with all those structuring charges we've taken, the rules are kind of -- we haven't shown positive GAAP earnings for the past three years.

The accountants get [odged] and they tend to say that we won't be able to utilize that deferred tax asset.

So we took that charge in the first quarter.

So that's the biggest piece.

Regarding the other guidance factors, we really haven't changed anything.

And again, you guys do this all the time, but it's the first quarter, so a trend does not a quarter make.

So we're waiting to see how the balance of the year and, of course, beer is a summer season so the second quarter is very important to us, and in wine it's mostly a third quarter business because of the high level of Christmas sales, but I think we're pretty much on plan where we thought we'd be in the first quarter, which is a good place to be.

And that's an EBITDA goal of three to four times, you said working it down from that 4.4 that you are now, we shouldn't expect to see that in fiscal 2011 when you say next year?

We wouldn't expect that.

Again, that was a full-year number, so we would expect to get back down to that range for the full year.

If I could just lastly ask, also a follow-up on the promotional activity, it seems that you're responding to some of your competitors' actions.

I'm just curious as you think about the market environment, are you just kind of chasing what your competitors are doing, or in order to kind of get people into the category in the softer environment that's what you feel you need to do and that's something that may continue for the next couple quarters, or have to continue for the next couple quarters?

Well, the good news is here with our new business model in the US, and we'll be talking more about this in future quarters, we're really focusing our promotion spending and our marketing spending around our top 15 brands, which comprises about 75% of our EBIT, and that kind of makes it easier to track, and that's where we have higher brand equity.

So you generally get better results with that brand spending.

So as you know, the wine category is pretty fractious, so we're not going to chase share just because a lot of people are spending money.

We have our eye on our key competitors.

Frankly, as we look at the market, I don't think there's anything irrational going on.

So it's balance.

We're not going to stick our head in the sand and ignore market share, it's important, but we're very much focused on the bottom line and trying to improve profit margins and generate cash flow.

We're not going to spend a lot of promotion money that doesn't have a good chance of paying off.

Okay, great, thanks.

Your next question comes from Lindsey Zuckerman of Goldman Sachs.

Hey guys, good morning.

I was just wondering if you could elaborate a bit on the distributor push that you got in the quarter following fourth quarter not shipping any product in, in exchange for a bit more focus from them in the first quarter.

Can you just talk a little bit about what -- if that paid dividends and whether that's something that would help you as you progress through the year?

Sure.

So what you are referring to is the fact that when we reduced distributor inventories in the fourth quarter last year, there was an agreement with our distributors to put more resources behind the brands this year and I think the simple answer to your question is, yes.

They've put more resources behind the brands, and I think that you are seeing the impact of that, certainly in the IRI data, and as a general proposition in our depletions, which have strengthened quite considerably.

So, it's definitely having a positive impact on our business and on our organic growth.

Okay.

I guess just sort of wondering when we'll see you guys start to at least maintain dollar share of the wine category, especially now with a bit more trade up taking place to higher end.

Even though your share trends did improve in the measure channel data that we saw, still losing against the broader market.

So maybe just think about when you actually see those results really pan out in terms of holding dollar share.

We have gained share, Lindsey.

Definitively, in the four-week period, and against the broad market, we have -- we haven't gained share in the 12-week period on a dollar basis, but we have on a volume basis, and you will actually see that start turning around now.

So basically we are gaining share as a general proposition against the markets.

Interestingly enough, that's with respect to our total portfolio.

Now, as I mentioned in my script, our top 15 brands represent the vast majority of our profitability, and those are where we really focus, and those brands, which is really what matters, have, in fact, gained share in dollar and volume and every period against the broad market, meaning the 12 and the four-week period.

And those brands represent over 75% of our profitability in the United States.

So I would say in general, we're fairly pleased with our organic growth, and I would say certainly in the first quarter, from a growth perspective, we're significantly on the portion of the portfolio that really matters, we're significantly outperforming the market and our competitors.

Okay.

And then the degree of profit erosion that we saw the period in your North American business, which was a function, it seemed to be, of the step up in promotional spend that caused some deleverage, how should we think about that in terms of when you kind of annualize when we're at a run rate of the type of investment you put in, in the quarter?

Obviously we are sticking to our guidance that we've given for the annual -- for the year, and so that is basically how you should think about it, is we are, at the current time, believing that we will certainly perform within our guidance range.

Okay.

All right, thanks.

Your next question comes from Mark Swartzberg of Stifel Nicolaus.

Hi, Mark.

Hi, Rob, hi, everyone.

I guess a handful of questions here on kind of the cost of improving share, not only near, but longer term.

But starting with the comments you made about promotional spending sort of moderating as this fiscal year progresses, what about at the distributor level?

I guess the distributors are putting in more for the fiscal year than had originally been indicated because of how last holiday played out.

Should we think that their level of investment behind your brands is roughly kind of on trend with your level of investment behind the brands over the next few quarters?

Well, it's hard to comment on their level versus our level.

No, we -- our level of investment is significantly higher than our distributors level of investment on a relative basis, but part of the distributor consolidation program was, as a general proposition, to get more investment behind our business by our distributors throughout the term of the arrangement, which was a five and a half -- five and a half year term.

So they have, as was agreed, increased their level of investment, and that increased level of investment will continue throughout the period of the arrangement, which was a five and a half year deal, basically.

And, yes that has been contributing to our growth profile.

And basically working as we wanted it to the work, and it's basically working as we expected it to work.

And as Bob said, we're going to closely monitor the trade-off between promotional spend and volume and sales increases and make sure that we're striking the right balance.

I think that as we have made fairly clear, first quarter's promotional spend was, on a relative basis, higher than we expect for the year, primarily due to a number of factors, which is in first quarter last year, we had disproportionately low promotion because we had pulled back as we went into the distributor consolidation activity.

That's impacting the comparison, number one.

And then there's also some timing matters relating to the following of holidays and how we -- and when we've chosen to promote that will make the first quarter promotional rate higher than we anticipate for the whole year, although I will say on a total year basis, we would generally expect promotional expense to be higher than last year because in general, we were not promoting in the first three-quarters at normalized levels as we implemented the distributor consolidation efforts.

So that's basically what's going on with promotion.

There's really nothing particularly strange going on there.

Okay, that's helpful.

And, of course, you are not in a unique situation.

It's a pretty tough consumer environment.

As we think about the extent to which you moderate the promotions, as you head into the balance of this calendar year, can you share with us kind of some of the metrics you think are most important for you all to be watching?

A, from an external standpoint, some of the consumer metrics you are looking for in the broader wine business, and then B, some of the metrics you are looking at inside your business, either because -- either metrics at the distributor level, maybe amount of space they get or display activity, obviously there's a lot of things to look at.

But when you are trying to rank them and say, okay, we can really moderate promotions, whatever the number is, 10%, 15%, 5%, whatever it is, we can really moderate it and not expect it to the adversely affect depletions.

What are some of those metrics that you think are key to determining the appropriate amount of actual moderation versus what you are planning to -- the level of planned moderation right now?

Well, moderation, as I said, promotion won't be at the same levels as it will be in first quarters.

So I guess your term moderation is correct, but as a general proposition, we pulse promotion at times when we think that we will get the most out of the promotional activity and we come back when we think that we wouldn't otherwise get it.

So it will fluctuate throughout the year, but yet it won't be at the same rate as first quarter as we sit here now.

That's our belief and our intention at the moment.

As to the metrics that we're looking at, certainly from the consumer point of view, we are keeping a close eye on consumer take away from a volume perspective and we measure that by looking at things like IRI, like other data that we get, and certainly depletions are representative of consumer take-away.

Sales to retail in that we generally don't expect retailers and don't see retailers stocking up, or we don't see big fluctuations in their inventory levels.

Certainly the mix of our business is a very important measure for us to be looking at, ensuring that we have a healthy mix towards our higher profit items and our higher ROIC items.

We've had a big focus on driving return on invested capital.

We've taken that down to a certain degree to the brand level, and therefore we're cognizant of mix as it relates both to profitability and ROIC.

And then internally, needless to say, profits, operating profit, continues to be a very important measure of our success and that goes to what we said earlier about making sure that we're appropriately calibrating our promotional activities against our volume growth to optimize the profit picture for the Company and the ROIC picture.

So not a lot of -- it's not rocket science, but those are the things that we're looking at.

If could I just add one more here, Rob, we've heard a fair bit over the last nine months or so about the distributor consolidation.

If you think about it from the Constellation perspective, obviously you are selling to many -- a lot fewer customers today than you were a year ago.

What remains, in your opinion, to be done with the incentive structure of your sales force selling into these distributors, how kind of set is that, in your mind?

Is that where it needs to be, or do you need to make some important changes there now that the customer base has changed the way it has?

And any thoughts there would be helpful.

Yes, we simultaneously reorganized our sales organization as we implemented the distributor consolidation activities, and actually went through a customer based organization, meaning that our sales organization is now organized around our customers, as opposed to just purely geographically.

And we have one sales organization as opposed to many sales organizations, et cetera.

When we did that, we, of course, adjusted our incentive compensation systems to be aligned with what we were trying to accomplish with our wholesale customers and retail customers.

And so the simple answer to your question is, that's all done, and, no, there are no significant changes that need to be made at the current time, which is good, because it's all up and running, and in place, and I would say it's running pretty well right now, and everything is working well.

So we're pretty optimistic.

The key task now is to drive it to ultimate success over the midterm, which I'm fairly optimistic that we will get what we're looking for.

Great, thank you, Rob.

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

Hi, good morning.

First just a couple nitpicking questions.

One on your assumed share count for the full year, does that reflect just the shares that have already been delivered to you or an estimate of what the final shares are?

It's more of an estimate, Kevin, but it depends on -- well, you know all this right.

It depends on the share price, how many shares you get back.

It also depends when those shares get delivered.

So the last date -- this share repurchase program could go through mid-November, okay, which would mean we wouldn't get all that much accretion on the next tranche of shares that we received, or it could end in two weeks.

We don't know.

So that's our best guess right now.

But, your low to high is like a penny and a penny half off the $0.10 that we gave.

So there's not a ton of volatility left.

Okay.

And then can you help me understand a little bit your -- how your tax rate is going to play out by quarter this year, since it will obviously be higher than the 35% for the remaining three-quarters?

Wow.

Our phone bill would get too big for that one, Kevin.

That's a little too detailed.

We don't give quarterly guidance, and the last quarterly guidance we would give would be tax rate quarterly guidance.

So we expect the full year tax rate to be about 35%.

There's just some anomalies in Q1 because some tax rate items came to closure in the first quarter, and we're able to release those tax reserves, which is what drove the low tax rate in Q1.

For your model, I would just assume 35 for the full year.

Okay.

And then I guess finally, it's been quiet regarding the lawsuit with Modelo regarding Crown.

Anything new there, and any potential for any resolution or renegotiation of the Crown contract?

Yes, no resolution there at the current time.

We filed the motion to dismiss.

We are waiting for a decision on the motion to dismiss.

I would just remind you that we have said in the past that it's basically a dispute over financially immaterial items that the parties have certainly determined is best resolved by the courts, and it really has zero impact on the terms of our agreement, which certainly haven't changed since we entered into the agreement in beginning of 2007.

And we remain satisfied, as a general rule, with what we've negotiated, and it seems to be working well.

Both parties, Modelo and ourselves, continue to work closely together, and our primary focus despite this lawsuit, meaning ourselves and Modelo, our primary focus is on driving this business and making sure that we're doing the right thing for the brand and for the consumer, and I think that we're both pleased with some of what we're seeing right now.

In particular, both Modelo and ourselves are pleased with the turnaround we're seeing in imports, imports in general are back into growth.

Imports are taking share, and I would say our portfolio is now performing the best in the import category.

So imports are taking share and we're taking share.

So I would say both parties, ourselves and Modelo, are pretty pleased with what's going on in the marketplace, and despite this spat, we're working pretty well together, and we'll continue to work well together in the future.

Okay, thanks.

Your next question comes from Christine Farkas of Merrill Lynch.

Thank you very much.

Good morning.

Just a brief question.

Maybe just looking for a summary answer.

You talked about targeting your wine sales growth in North America to reach the industry average, which was mentioned about 5% in the first quarter, where as you guys are running down about 2%.

So is this coming from slowing promos, improvements at your distributors, or is there some other factor that depressed the first quarter relative to the industry?

So the numbers are in the first quarter the industry we think grew 3% and we grew 5%, Christine.

Does that answer your question?

Okay.

In IRI.

Do you expect then depletions and shipments to run a little bit more closely in line as we get through the end of the year?

Maybe I misunderstood your question.

We outperformed the industry in the first quarter.

Is that what you were asking me about?

I guess I'm looking, given your North American organic wine number, or currency neutral number was down 2%, unless I've misread that.

Okay, you're talking shipments now.

Right.

I'm trying to understand how far apart those are going to be or if there's some other factor that's keeping the gap so wide.

It can't go on forever because ultimately the depletions will pull your shipments.

Yes, but also remember, it also relates to the comparison of shipments last year, and there has been some disconnect, okay, in that regard, but general -- and I'm not going to sit here and say when, shipments and depletion growth should start mirroring each other at some point.

Okay.

And then just briefly on beer, you were quite helpful with your on premise comments in general, I think largely reflecting wine.

Are you seeing similar improvements on premise for beer, or have you seen trends in C stores change at all for your brands?

How does that look versus the broader category?

I would say that on premise trends are improving.

Similarly across the channels, meaning -- not the channels.

Across the categories, beer, wine, and spirits.

So it's improving similarly.

Our business -- our Crown business I think skews a bit higher to on-premise than the beer industry in general.

So on the one hand, to the extent that the on-premise is the most negatively affected trend that negatively affects our business, on the other hand, to the extent that that's improving we'll be disproportionately benefited by the improvements.

Does that answer your question?

Right.

Got it.

Thanks so much.

It is improving.

I think it's moving towards flat from down double digits last year.

It will move to up eventually.

Great, thank you.

We'll take one more question.

Your last question comes from Carla Casella of JPMorgan.

Have you said what level you are basing your forecast, what level of the euro you are basing your forecast on?

You are talking about our earnings forecast?

Your guidance.

I'll let Bob answer that.

We haven't come out with specific euro guidance, but in the grand scheme of things, it doesn't matter tremendously because we don't make a ton of money overseas.

So I guess -- and at this point, at the end of last year, due to the potential transaction with ABL, we did not have much of our foreign currency transactional exposure hedged.

During the first quarter we actually layered on a reasonable amount of hedges.

So we don't expect a lot of volatility to our bottom line due to Forex changes for fiscal 2011.

Okay.

The only thing I would add, euro exposure is not one of our biggest -- is not our biggest exposure as a general proposition.

Right, it's more Australian dollar and UK pound?

The big exposure really is the British pound to Aussie dollar, correct.

When is the end of the transaction period for the $300 million share buyback?

I'm sorry, I couldn't hear that.

When is the end?

The share buyback, when is the end period for that?

(multiple speakers)

We're doing an accelerated program.

So the end of it is really dependent on Goldman Sachs who is doing the transaction for us, but the maximum end is around mid-November.

But they can call it quits whenever they've bought $300 million of our stock.

Okay, great.

Okay, thank you.

Thanks everyone for joining our call today, and as I mentioned, I am pleased with our first quarter results which were in line with our expectations, and I believe we are well positioned to achieve our EPS and free cash flow goals for the year.

I'm especially pleased that we are beginning to realize a number of benefits from our newly consolidated US distributor network.

We are experiencing improved depletion trends in our US wine and beer business and our accelerated share repurchase transaction represents our commitment to returning value to our shareholders.

Overall, thanks again for your participation.

We hope you have the opportunity to enjoy some of our great beer, wine, and spirits products during the upcoming Fourth of July holiday.

Thank you for participating in today's conference call.

You may now disconnect.