Constellation Brands Inc (STZ) 2011 Q2 法說會逐字稿

Good morning.

My name is Melissa and I will be your Conference Operator today.

At this time I would like to welcome everyone to the Constellation Brands second 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)

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

Please go ahead.

Thank you, Melissa.

Good morning, everyone and welcome to Constellation's second quarter fiscal 2011 conference call.

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

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

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

However, discussions will generally focus on comparable financial results.

Reconciliations between the most directly comparable GAAP measure and (inaudible) and other nonGAAP financial measures are included in the news release or otherwise available on the Company's website at www.cbrands.com under the investors section.

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

Although statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations.

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

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

Thanks, Patty, and good morning, everyone.

Our second quarter results are particularly gratifying, as we are beginning to more consistently realize the benefits from the extensive work we've done to transform our business during the last two plus years.

We are doing what we said we would do, by executing a strategy that is based on leveraging our leadership in a growing industry, taking steps to reduce debt and improve free cash flow, and most importantly, strengthening the core foundation of our business model while targeting profitable organic growth.

I'm especially pleased with our strong free cash flow results which have essentially enabled us to fund our share repurchase efforts while continuing to reduce debt.

It also demonstrates the progress we have made from our ongoing focus in this area.

And it was during the second quarter last year that we announced the initiation of one of our most strategic initiatives, with the signing of multi-year agreements with select US distributors giving them the rights to sell Constellation's portfolio of wine and spirits exclusively in their respective markets.

This is the second consecutive quarter that our US wine business benefited from increased sales volume and depletion as we continued to gain momentum from this initiative.

However, distributor inventories also increased over last year's second quarter, and I'd like to take a minute to explain what's driving this increase.

As I previously indicated, our contractual arrangements with our exclusive US distributors remain in effect for an average of 5.5 years.

Our contracts require the newly appointed distributors to purchase specified levels of product throughout this fiscal year to ensure minimal disruption during the initial transition period.

This has resulted in shipments exceeding depletions in the second quarter, although distributor inventories continue to remain at average levels of two to three months.

Now to put things into perspective relative to how Constellation is performing versus the total US wine industry, I'd like you to consider the following.

According to the three month Symphony IRI data, which corresponds to the end our second quarter, the food and drug channel is growing approximately 4% on a volume basis.

From a Constellation perspective, we are gaining market share and outperforming consumer take away trends in the IRI food and drug channel, posting 8% total wine growth in the second quarter.

Remember IRI only represents about one-third of our business, however, it is the most accurate and up to date barometer of consumer take away.

Collectively, consumer take away for the remaining two-thirds of the market is lagging the IRI food and drug channel driven by weakness in on-premise for both Constellation and the industry.

Bottom line, Constellation's distributor sales to retailer, or what we call our depletions, are growing at almost 4%, and we believe we are gaining share overall in the market.

Now I'd like to take a minute to review the promotional and marketing activities that we have underway that are helping to drive this underlying growth in our business.

During the second quarter new product launches included the introduction of Rex Goliath Free Range Red, Cadet d'Oc, a new line extension from Mouton Cadet, and the addition of Sonoma County Pinot Noir to the Simi portfolio.

We continue to drive our recently introduced product roll outs of blufeld German Riesling, Arbor Mist White Pear Pinot Grigio and Black Box Malbec and Woodbridge Sparkling Wine.

blufeld is already the number three in the super premium German Riesling category, and Black Box Malbec is currently the number one premium box Malbec brand.

We also received recognition for several of our well-known brands including the highly anticipated 2007 Robert Mondavi Cabernet Sauvignon Reserve, which received two 95 point scores from Wine Spector-- Spectator, that's the Wine Spectator, one for the 2007 vintage, and one for the To Kalon Vineyard.

Woodbridge 2008 Sauvignon Blanc and 2009 Pino Grigio were named best buys by Wine Enthusiast for the month of September.

And in the sneak preview of Wine Spectator's October 31 issue on Italy, Ruffino Modus 2007 received a 96 rating, while Ruffino Il Ducale 2007 received a 90 rating.

These are just a few of the numerous awards and accolades recently received.

In addition to our marketplace initiatives, CW US also progressed in efforts to improve cost and cash effectiveness during the second quarter with activities that included the completion of the sale of the Widmer Winery to the Hazlitt Family in upstate New York, continued consolidation of our California warehouse system, efforts to improve costs and cash payment terms related to great contracts in California.

As is typical at this point in the year, I'd like to provide an update regarding US grape harvest, which is about 40% to 50% complete at this point.

Although there are divergent estimates from varying sources relative to the expected size of this year's harvest, we are currently estimating that the 2010 US industry harvest will be down 5% to 10% versus last year's harvest.

The harvest is also expected to be late this year due to relatively cool summer growing season in California, although this year's harvest is expected to produce a very high-quality output.

Now moving to our Canadian business.

Throughout the second quarter Canada was focused on sales execution and leveraging successful brands in new markets throughout the country.

SVEDKA Vodka has now been officially launched in Canada primarily in off-premise channels.

However, on-premise promotions are currently underway in Canada's two largest cities, Toronto and Vancouver.

And all of Ontario's Liquor Control Boards have now added listings for SVEDKA.

Speaking of SVEDKA and our Spirits business, our second quarter Spirit sales results are certainly not reflective of depletion trends, or underlying consumer demand for SVEDKA Vodka, which posted double-digit depletion growth through the first half of the year and strong double-digit IRI growth in the food and drug channel.

We are experiencing a tough comparison versus last year when SVEDKA sales were positively affected by the US distributor transition.

Overall, prudent brand investments are helping SVEDKA gain market share and expanded distribution at retail.

Now moving to our international businesses.

Current marketplace dynamics in the UK and Australia remain unchanged.

Therefore, we continue to aggressively restructure our businesses 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.

Moving to the Crown Imports joint venture.

During the second quarter, Crown's sales and operating income were impacted by disruptions related to a brewery strike at Modelos plant in Tuxtepec, Mexico by hurricane -- and by Hurricane Alex which damaged transportation routes in Northern Mexico during the late June/early July time frame.

In addition, Crown experienced strong consumer demand during the busy summer selling season driven in part by the success of the Win the Beach and World Cup soccer promotions.

Collectively these issues caused inventory constraints for select package sizes and SKUs during the second quarter.

However, Crown was proactive in managing these challenges throughout the summer selling season in order to minimize disruption and ensure supply was available to support key promotions.

By the end of the second quarter, inventory shortages began to subside and Crown expects wholesaler inventories to return to more normal levels by the end of the third quarter.

Although you see the impact of these challenges in Crown's second quarter numbers, I am pleased to report that this is the second consecutive quarter of positive depletion trends for Crown, which reflects strong demand for their portfolio of products.

In fact, during the 4th of July holiday, Crown outperformed the top three US beer suppliers by delivering the highest absolute and percentage increase in case volumes sold to retailer-- to retail.

And according to Symphony IRI data coinciding with the end of our second quarter, Crown had the best performance of the top four US beer suppliers in both dollar sales and case percentage growth driven in part by the strong performance of Modelo Especial and Negro Modelo.

Crown's performance also improved in the convenience channel during the second quarter.

And earlier this week, Corona Extra was named one of the best global brands for 2010 by Interbrand.

Throughout the remainder of fiscal 2011, Crown is focused on market execution and optimizing promotional and media support.

For example, this is the second consecutive year that Crown will be advertising during the National Football League games using new creative for Corona Extra and Corona Light.

Watch for these commercials during Sunday afternoon games on CBS and Fox and Sunday night games on NBC.

Crown is also featuring Corona Light as the sponsors of this year's pregame show for Monday night football on ESPN.

Throughout the remainder of the year, you will also see the continued rollout of Negro Modelo and Modelo Especial draft to second and third tier cities.

And additional growth is also expected through the expansion within Tier 1 markets where Crown already has a presence in more than 25 states.

Crown will be expanding Pacifico draft outside California after a very successful initial launch there.

And during the first quarter, Crown launched Modelo's Victoria brand in Chicago as an initial test market.

The introduction was successful across all target markets with demand exceeding initial forecasts.

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

All aspects of this test market are being tracked and measured with plans being developed for expansion in calendar 2011.

In closing, I am pleased with our second quarter results as they reflect our diligent efforts toward and focused on profitable organic growth.

We've made significant progress and we are gaining traction in many areas despite an unsettled consumer and competitive environment.

We are entering one of our strongest seasonal periods and we plan to effectively leverage the positive marketplace momentum we already have underway for our US wine and beer businesses which positions us well to achieve our goals for the year.

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

Thanks, Rob, good morning, everyone.

I'm generally pleased with our Q2 performance.

Q2 reflects good progress for two of our core initiatives, growing at a rate better than our IRI weighted market share and increasing the percentage of EBITDA that flows to free cash flow.

Although profits came in generally as expected, they were below prior year due to a number of reasons which we will discuss as comparable basis diluted EPS came in at $0.52 a share versus $0.54 last year.

We saw signs of improvement in many areas resulting from our efforts to strengthen our organic business model.

Efforts to leverage our streamlined portfolio and go to market model under our new US business structure and consolidated US distributor network continue to progress.

These efforts, combined with the increased brand investments and promotional activities, outlined by Rob, have contributed to improved sales volume and mix, performance at retail and depletion trends for our US wine business during the second quarter.

This is all very good news.

The positive volume and mix for the US wine business was somewhat offset by higher promotional activity which unfavorably impacted net sales and operating margins.

As previously discussed the total wine market has increased its promotional investment, especially in the more premium wines.

Our planned promotion spend increase was impacted by this trend and exacerbated by the year-over-year timing.

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

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

As a reminder, we previously indicated that we would be making additional investments in US marketing and promotional activities this year and the results are reflected in our net sales and marketplace growth trends.

I'm especially pleased with the results of our increased focus on improving free cash flow generation.

You can see evidence of this through our strong free cash flow performance during the first half of fiscal 2011.

As a result, we're increasing our full year free cash flow target range to $375 million to $425 million versus the previous range of $350 million to $400 million.

This would represent an all-time high for Constellation's free cash flow.

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

As you can see from the news release, consolidated reported net sales decreased 2% due to the divestiture of our UK cider business.

Excluding the cider sale and impact of currency, net sales increase 2%.

Our commentary for the following net sales comparisons will be in a constant currency basis.

Our consolidated wine organic net sales increased 4%.

This included a 4% increase for North America, which reflected favorable product mix and an increase in volumes, partially offset by higher promotional costs in the quarter.

Australia and Europe also increased 4% primarily due to higher volume of lower priced products.

Spirits organic net sales decreased 15% for the quarter.

Rob already highlighted for you the tough comparisons SVEDKA faced in the quarter and the fact that SVEDKA continues to maintain strong momentum in the marketplace.

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

For the quarter, our consolidated gross margin was 36.5% versus 37.1% in the prior year.

This reflects higher promotional spending in the US and higher US freight costs as the higher costs calendar 2008 red wine harvest is flowing through our fiscal 2011 income statement.

These impacts were partially offset by improved geographic mix and North American product mix.

Our consolidated SG&A for the quarter increased $8 million and came in at 19.1% of net sales compared with 17.8 % a year ago.

The percentage of sales increase reflects the absence of an insurance benefit that we received in last year's second quarter.

For the back half of the year, absolute SG&A spend will remain at higher levels due to incremental marketing investments and project fusion expenses.

Consolidated operating income decreased 11% to $151 million, and operating margin decreased 1.9 percentage points to 17.4%.

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

North America segment operating income decreased $3 million to $181 million.

Improved sales mix and volumes were more than offset by higher promotional spending and higher US freight costs, which I highlighted earlier.

The Australia and Europe Wine segment reported an operating loss of $3 million.

This is a $7 million decrease versus the prior year quarter.

The decrease was due in part to the divestiture of the UK cider business.

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 third quarter is the seasonally highest profit quarter for this segment, and we expect the segment to be profitable on a full year basis.

Corporate and other expenses totaled $28 million versus $19 million in the prior year.

As I mentioned earlier, the increase reflects the absence of an insurance benefit received in last year's second quarter.

Equity earnings for Crown totaled $65 million versus $72 million for the prior year quarter.

For the quarter, Crown generated net sales of $679 million, a decrease of 2%.

And operating income of $131 million, a decrease of 9%.

Sales were impacted by lower volumes, higher promotions and unfavorable mix.

Rob already highlighted for you why sales volume lagged the positive depletion results.

Operating income for Crown was impacted by increased promotional investments, a contractual product cost increase and lower volume.

Interest expense for the quarter was $50 million, down 26% versus last year.

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

Let's take a look at our debt position.

At the end of August, our debt totaled $3.8 billion, which represents a $52 million decrease from our debt level at the end fiscal 2010.

This decrease is impressive as our strong free cash flow generation for this first six months of fiscal 2011 combined with the $60 million in notes receivable proceeds from the sale of our value spirits business, have more than funded our $300 million stock buyback.

Our average interest rate for the quarter was about 5%.

Our debt to comparable basis EBITDA ratio at the end of May was 4.3 times.

With our increased free cash flow guidance, we are targeting to be around the four times range by the end of fiscal 2011.

Our comparable basis effective tax rate came in at 35% compared to a 31% rate for Q2 last year, which benefited from the favorable outcome of tax items.

We're still targeting a full year rate of 35%.

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

For the first of half fiscal 2011, we generated free cash flow of $263 million versus $32 million for the same period last year.

This improvement reflects timing benefits for Crown distributions and reduced interest payments.

We also saw lower tax and restructuring payments and an increased source of funds from the sell-through of inventory.

CapEx came in at $43 million versus $65 million for the first six months of last year, mostly due to timing.

As mentioned earlier, we're now targeting free cash flow for fiscal 2011 in the $375 million to $425 million range.

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

As previously discussed, we have redeployed a portion of our free cash flow to purchase $300 million of stock from an accelerated stock buyback transaction.

During 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.

We did not receive any additional shares during Q2.

The final number of shares to be received will be determined at the close of the transaction which is scheduled to end no later than November 24.

The total number of shares to be received is generally based on the volume weighted average of our stock price over the buyback period less a discount.

Based on the run rate of our stock price, we currently expect to receive about four million additional shares when the transaction is completed.

We still expect about $0.10 of accretion from the stock buyback transaction.

Now let's move to our full year fiscal 2011 P&L outlook.

We are maintaining our comparable basis EPS guidance of $1.63 to $1.78.

We're quite happy with our year-to-date depletion trends.

Our consolidated distributor base and focus on growing our core brands is paying dividends.

In the back half of this year, we expect sales growth to moderate in the US as we transition away from the distributor shipment arrangements discussed by Rob.

We also expect higher cost of goods sold due to the flow through of the higher cost (inaudible).

In addition, our SG&A will remain higher than the previous year.

We now expect interest expense to be in the range of $200 million to $210 million as rates remain below those anticipated at the beginning of the year plus the increase in our free cash flow guidance.

Weighted average diluted shares are expected to be about 213 million.

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

During Q2, we recorded $0.08 in charges primarily for restructuring activity related to our cost reduction initiatives.

Before we take your questions, I'd like to highlight that we are on track to meet our earnings guidance and exceed our regional cash flow guidance for the year.

Our increased brand investments on core brands and execution of our new US business structure and consolidated US distributor network have driven improved depletion volumes and generated market share gains.

Although Q2 Crown performance was below prior year, we are also seeing positive depletion and retail results from Crown branding and marketing initiatives.

Second half results for Crown, primarily the third quarter, should show improvement as distributor inventories are expected to build back to more normal levels.

Our free cash flow generation profile continues to improve and we're on track to produce a record free cash flow result for the year.

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

Thank you.

(Operator Instructions) Your first question comes from Dara Mohsenian of Morgan Stanley.

Hi, Dara.

Hey, Dara, are you there?

Hello?

Dara your line is open.

Must be on mute.

Your next question comes from Vivien Azer of Citigroup.

Hi, guys, good morning.

Good morning, Vivien.

So my first question has to do with your outlook for the category -- the wine -- US wine category for the full year.

It seems to me from the data that I'm seeing and the results that you guys are putting up that trends continue to be pretty healthy and potentially accelerating.

So are you still thinking kind of very low single-digits, plus one, plus two, or are you getting on the margin incrementally more positive on the category?

It's really hard to judge, Vivien, and of course we've got to get through the holiday season, but it could be somewhere between 1% and 3%.

So on the more optimistic side, maybe 2% to 3%.

On the more pessimistic side, maybe 1% to 2%.

Right now I'd be slightly more optimistic about the category and might suggest that it's growing more in the 2% to 3% range and maybe at the higher end of that, but we'll see what happens.

Fabulous.

And how much of that is coming from kind of resumption of consumer trade-up?

Last quarter you guys talked about double-digit growth in super premium and ultra premium, is that continuing to be a trend that you're seeing?

Well, first of all, the numbers that we were just talking the about were volume numbers, right?

So consumer trade-up wouldn't really affect that very much.

But I would say that there is extremely healthy consumer trade-up going on in the marketplace right now in wine in particular with the more premium categories growing double digits as compared to the everyday wines which are pretty much flat right now.

So everyday wines are wines below $5, the premium plus category is $5 and above, and then when you get into the more premium categories like super premium and luxury, we're seeing pretty strong double-digit growth.

So Vivien, maybe I'll just add on that.

So in the wine category, as Rob said, we are seeing trade-up.

So consumers are buying a higher grade of wine.

But as you move up the price ladder, you are seeing a reasonable amount of discounting.

So -- and that's been going on in the recent future.

So promotion spending is up, but it is working.

The consumers are buying the higher end wines.

You actually see a similar thing in beer as well where crafts and actually imports are doing better than the domestic brands.

Fair enough.

And just to parallel what Bob is saying, I think that the promotional activity certainly on the more premium wines above $10 and even in the $15 to $25 segment is really fueling quite a bit of growth.

Fair enough.

And then just my last quick follow up to that, are you guys continuing to post outsized market share gains in those more premium wines relative to the total -- your market share gains to the total category?

Yes, we believe we are gaining market share versus the total category pretty much across the board.

Great.

Thanks, guys.

Thank you.

Your next question comes from Lauren Torres of HSBC.

Good morning.

Hi, Lauren.

Hi, my question is on the Crown business.

Actually first, Rob, I just wanted to ask if that guidance you've given us earlier this year for depletions down low single-digits, EBIT down mid single-digits, is still a good projection for this year?

So, Lauren, I'd say that the EBIT is still fair, that estimate for Crown.

Sales might be a little bit better than that because depletions have been doing better than we originally expected in Crown, some of the effective marketing campaigns we're putting on.

But the EBIT will be pretty much where we originally guided to.

Okay so with that said, it does seem like you are getting potentially more positive on these trends.

I'm sure you're seeing ABI taking pricing up, starting last month, I guess across its' portfolio.

Curious how that kind of transfers over to the Modelo brand.

How do you see the environment for pricing, what opportunities may that give you going forward this year, maybe even as we start to think about next year?

Yes, as we look at it, we track this pretty closely, the Crown business tracks it pretty closely.

We have a desired premium per case to the domestic premium brands and we track that.

So if the domestic players do price, we'll keep our eye on that and if there's any opportunities where we think it's the right bottom line and top line decision, we would price up in lock step with them.

But we -- right now we don't have any plans to do any kind of universal price increases at all in Crown.

Okay.

And if I could just ask lastly to -- we're seeing good performance on the wine side in the IRI tracked channels.

Just curious if you could give us any more detail on that other two-thirds that you reference that's still somewhat tough?

I mean is it tougher than last quarter or are we seeing any signs of improvement in those channels?

This is Rob, Lauren.

On the other two-thirds, I would say as a general rule they are performing not as robustly as the IRI channel primarily driven by the on-premise, which is what's driving down the other two-thirds in particular.

And I would say that the on-premise channel isn't changing very much right now.

It continues to be weak, not as weak as it was, but weak in general and that would be true for us, and that would be true for the marketplace.

The market is a general proposition.

So not much change there.

And the IRI channel still remains very strong.

The mass merchandise channel also, by the way, remains strong.

But on-premise remains weak.

Okay.

Thank you.

Your next question comes from Judy Hong of Goldman Sachs.

Thanks, good morning.

Good morning, Judy.

Rob, you talked about the second half in terms of the promotional levels moderating, particularly as you lapped the -- last year's where you thought it [too] step up the spending level.

Can you give a sense of how you're factoring in kind of the competitive environment and especially as you look out the holiday period whether you're looking for the environment to be a little bit more heated or stable, or how are you factoring that into kind of the second half promotional outlook?

Yes, this is Rob, and, yes, you did pick up exactly what we said, in that we expect versus last year our promotional spending to moderate, although with that said, we greatly stepped up our promotional spending last year in the second half as we had completed the distributor transition in the first half and then we really, I'll say, shifted our promotional spending from the first half to the second half.

So it's more or less a comparison issue in that we had pretty strong promotional spending in the second half and we're going to have pretty strong promotional spending in the second half this year, albeit not necessarily a significant increase.

Now as to what's going on in the marketplace, I would say that we generally expect the promotional activity to be fairly high during the holiday season, but that has been factored in, in that as I said, our levels are equivalent to our last year's levels and our last year levels were higher than I would say normal, and therefore we think that our promotional activity will be consistent with what's required in the marketplace this year to continue to drive the momentum that we've had.

So that's basically where we're at.

Okay.

And then just to clarify on the distributor inventory level, even though some of the distributors have ended the quarter or two days or a few days higher than what they would sort of consider normal, they're basically contractually obligated to keep that inventory level so that you really don't see the negative impact in terms of your shipments number in the next quarter.

Is that the way I'm reading it?

So just to correct something that you said, it's -- yes, our inventories with distributors probably increased a couple of days.

Okay.

Our inventories with distributors run on average two to three months.

Those are normal distributor inventory levels in the industry.

And as far as what's going to happen in the remainder of the year, is that your question?

Yes, yes.

We don't expect any significant changes to that.

Okay.

And then just finally on the on-premise channel, you've kind of went through the wine trends and it's still pretty sluggish there.

Any difference in terms of the beer business in on-premise?

No, not really.

I think that on-premise just remains weak in general.

It's pretty cyclical, pretty tied to the economy.

And obviously the economic recovery has not been particularly robust.

Unemployment still remains high.

As long as that remains the case, I think the on-premise is going to be weak.

Okay.

For beer, wine and spirits.

Okay.

Got it, got it.

Thanks.

Your next question comes from Tim Ramey of D.A.

Davidson.

Good morning, wondering if you can give us any sort of color on the performance benefits, if any, from the distributor realignment?

We've talked a lot about the dislocations of the timing and so on.

But are you getting what you hoped to see from the distributor realignment?

Yes, I think that -- we're getting what we hoped to see.

It actually may be a bit more robust than we anticipated.

It's working extremely well.

As we look at the markets where we made the moves, they're definitely growing at a faster rate at this point than the markets where we didn't make the move.

And so I would say that what we've done with the distributors is working particularly well.

And it's a number of things.

As you may recall, we put in place in the consolidated markets, which represents about 60% of our business, we put in place largely exclusive sales organizations focused entirely on our brands.

And I think that where we've done this, it's working particularly well.

So we are very pleased with the results.

And I think you're seeing it in some of the underlying trends that we have visibility to.

And, Bob, you set a pretty tight reign on the checkbook here, which has probably been a good thing, but this seems like an interesting environment for opportunistic buys in wine.

We saw a liquidation announced yesterday on Cosentino and there's been some properties come available here.

Are you still pretty firm in your view that the best use of capital is paying down debt or might there be some opportunistic?

No, I don't think our strategy has changed.

And we are delevering even though we bought some stock back.

So I don't think we're looking at any changes in the relative near future.

The other thing on the acquisition, Tim, is and you'll see the results of that right, is focusing on organic growth also is focusing more on the brands that we've already bought, focusing on trying to leverage the P&L, get our organizations in line.

All of that, as Rob said, is really working quite well as is the improved relationships and partnerships between us and the US distributors.

So in addition to the financials of doing an acquisition, we're also cognizant that it can be quite disruptive to -- focusing on the organic business model.

Thanks.

Your next question comes from Mark Swartzberg of Stifel Nicolaus.

Thanks, good morning, everyone.

Rob, on the Modelo dispute, any update there?

No, no update there.

There's a motion to dismiss that we're waiting for a ruling on, and that's where things stand.

So no change.

Okay.

And then, Bob, on corporate expense, can you give us some idea over the balance of the year, are we talking $26 million or so per quarter?

Can you give us some idea where you think that number might be?

Yes, I'd say it'd be -- if you extrapolated our year-to-date results over the back end of the year you'd be pretty close.

Okay, great.

That's all I've got.

Thanks, guys.

Thanks, Mark.

Your next question comes from Christine Farkas of BofA Merrill Lynch.

Good morning.

I had a clarification question, if I could.

Looking back to your organic wine sales a year ago, we saw a big pickup in inventories and that boosted your quarter by about 8 points, or the organic growth by about 8 points, and yet this year the underlying growth is still solid, granted there's some inventory build as well.

So I'm trying to understand or reconcile with your guidance with some slower sales in the second half, how do we not see that shipment trend reverse pretty meaningfully in the third quarter?

Yes, this is Bob, Christine.

So essentially in the third quarter and the way the contracts work is both last year's second quarter, where we had an inventory build at distributors, we had a similar thing happen this year, and actually the contracts called for some growth in the shipments as we anticipated that the wine category would grow.

So actually you had inventory builds in the second quarter last year and this year, but you actually had a slightly larger one this year than you did last year.

Okay.

And they're required to hold a certain amount of days of inventory, or are they free to deplete that inventory in the ensuing quarters?

No, they'll deplete as much as they can, we're both aligned to that.

So essentially they had to take in a predetermined amount of inventory through this initial contract period, which is depending on the distributor 18 to 24 months.

A lot of that is behind us now.

So that's why we say in the balance of year, we don't expect the same kind of shipment growth that we had in the front half, right?

Sure.

But all that aside, we still anticipate continual healthy depletion growth, which we're all very happy about.

But, yes, they are required to carry a certain inventory, if that wasn't clear.

They cannot take inventories down.

No, after the original -- after the initial period, pretty much they have to stay with the inventory on the day that the initial transition period ends and they would keep that inventory level through the balance of the contract.

Which is slightly lower than current levels but not meaningfully lower?

No, it's whatever it is at the end.

So they--.

Okay.

They're -- they have to maintain that inventory level for the remainder of the contracts.

The contracts were roughly five and a half years and therefore we've got three, we'll have three years left at the end of this year.

Okay.

And just related to that your spirits volumes or spirits sales fell year-over-year because as you indicated a year ago, the category or your segment got a lift from this distributor change.

There's no contractual agreement similarly on the spirit side for volumes and inventory?

So the same distributors move wine as they do spirits and it's the exact same contract for spirits versus wine, but there are a lot of -- there's a decent amount of volatility, depending on which brands they want to load up.

And SVEDKA, which tends to move very fast, right, because it's growing very fast, and at a per bottle price point, it's relatively low so there's a lot of volume there.

The distributors tend to load more of that up versus more of the high-priced wines.

So essentially that's what happened in the second quarter last year.

And also in the second quarter last year there was an excise tax change in one of the states, so there was a reasonable load-in before that tax increase occurred overall--.

Okay.

But SVEDKA, if you look at our IRI, if you look at our depletion, well if you look at IRI, it's still incredibly healthy and we couldn't be happier with it.

Sure.

Okay last question just briefly on channels, you talked about on-premise.

I'm wondering if you have any commentary about C-stores I guess particularly for beer, if there was any incremental change at all during the quarter?

Thank you.

The C-store channel has definitely improved.

I don't think there's really much of an incremental change.

It continues to be on the weaker side than on the stronger side.

So it's better than it was, but -- and I'm talking beer, it's not very relevant to wine.

Sure.

It's single digits in terms of share in wine, and beer, it's the largest channel.

So weak, but improved.

Whether it'll improve more, I don't know.

I think that again, a lot like the on-premise, very cyclical, very driven by the economy and unemployment.

So in any event, it's up in terms of dollars.

Very low single digits, where if you look at the 52-week period, it's been down.

If you look at the shorter periods, the quarter, it's up low single digits about 1%.

And so, as I said, improving but not sequentially.

It's improving year-over-year, though.

Okay, thanks for that Rob.

Your next question comes from Kevin Dreyer of Gabelli & Co.

Hi, good morning.

Just a question on SVEDKA, you're saying that depletions were up double digits for the first half, can you comment on the second quarter?

And I'm not even sure if the competitive product is out in the marketplace yet, but if it is, if that's having any impact?

Yes, the second quarter I think in the press release we're down 15% in our spirits segment.

Right, but depletions versus shipments?

Depletions would have been down a little because, again we have the -- I'm sorry, down versus the normal run rate, because we had the tax, the excise tax increase in the second quarter last year, and we had a higher depletion rate last year than this year.

Okay.

And in terms of the (inaudible) product that looks very similar to SVEDKA, is that out there yet?

Is that having any impact?

Yes, it's out there, and no I don't think it's having any impact.

Okay.

And then just housekeeping, for your full year share counts, does that include the anticipated 4 million additional shares?

Yes.

So we moved our guidance range by $0.10 a share.

Couldn't get that at the end of the first quarter.

Great.

Yes, just wanted to clarify.

Thank you.

Sure.

Your next question comes from Reza Vahabzadeh of Barclays Capital.

Good morning.

Bob?

Yes.

On the free cash flow used to pay down debt and reduce leverage, obviously you've reduced some leverage, even though you've had some share repurchases.

What's the target on leverage in the next year or two?

Yes, I'd say in the next year or two, if we had a wide range, we'd want the EBITDA leverage ratio to be between 3 to 4, and I think we'd probably tend towards the middle of that range, right?

So if we got around 3.5, we'd probably look to redeploy some of our cash, maybe buy back or something like that.

Got it.

And then I don't know if you've answered this question already or not, but have you seen any moderation in sort of the down trade in the wine category in the off-premise channel by any chance?

There's not down-trade, there's up-trade.

There is an up trade?

There's big up trade.

Okay.

I mean is that strengthening or is that stable?

Yes, no it's accelerating.

The trading up in wine on the off -- are you asking on-premise or off-premise?

Off-premise.

Yes, off-premise the trading up is accelerating in wine.

Got it.

And do you anticipate the promotional spend that you've incurred so far in beer to continue at this rate or is there any prospect of that moderating?

So I mean the balance of year we're not expecting any changes in beer promotional or pricing trends.

Got it.

Thank you.

Your final question comes from Carla Casella of JPMorgan.

Hi.

I had a couple housekeeping.

One was on, you say you're targeting CapEx $110 million to $130 million, it seems to be back half weighted.

Can you just comment are there any major projects going on in the back half, or could you come in light of your CapEx target?

Yes, the big major project we have going on is project fusion, which is our ERP system that we're putting in, so that's a pretty big use of our capital spending this year, and a decent amount of that happens in the back half.

Okay.

And then did you give your revolver availability, and whether you made any term loan payments above and beyond the scheduled amortization that was required?

Did not make any term loan payments above and beyond the amortization.

I think we've paid off about $50 million in the second quarter.

And our revolver availability, I think we have about $300 million that we've utilized on the revolver.

Okay.

And the Widmer, what were the Widmer sales in the back half of last year, did you give that number?

I'm sorry, the Widmer -- it's a pretty small transaction.

The Widmer sale just occurred.

Right.

So I'm wondering what we pull out for the back half of this year that would have been in the back half of last year.

It's a small, it was just a small winery.

Right, okay.

We just sold a small winery.

It has no impact -- it's not a P&L item.

Okay.

We closed a winery and moved production to a larger lower cost winery.

Right.

Okay, great.

That's all I had, thank you.

Okay.

Thank you.

I will now turn the call back over to Rob Sands for closing remarks.

Well, thanks, everyone, for joining our call today.

And as I mentioned, I am very pleased with our second quarter results and our continued execution towards meeting our strategic imperatives.

To reiterate, during the quarter we generated strong free cash flow, which not only funded our share repurchase transaction but enabled us to further reduce debt.

We progressed with our efforts to drive profitable organic growth, and we drove strong marketplace momentum for our portfolio of well-known brands.

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

We will be participating in investor conferences through year end, so of course, we look forward to seeing many of you while we're out on the road.

Our next quarterly call is scheduled after New Year, so please be sure to enjoy some of our excellent products during the upcoming holiday season.

And thanks again for your participation.

Thank you for participating in today's conference call.

You may now disconnect.