Constellation Brands Inc (STZ) 2011 Q3 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 third-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 conference over to Patty Yahn-Urlaub, Vice President of Investor Relations.

Please go ahead.

Thank you, Melissa.

Good morning everyone and welcome to Constellation's third 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 complements our news release which has also been furnished to the SEC.

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

However, discussions will generally focus on comparable financial results.

Reconciliations between the most 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 risk of risk factors that may impact the Company's estimates, please refer to the news release in Constellation's SEC filings.

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

Thanks, Patty, and good morning and happy new year, everyone.

I hope you all had a great holiday and certainly had the opportunity to enjoy some of our fine products during the festive season.

Before we get started with a review of our third-quarter results, I would like to spend a few moments discussing the strategic intent behind the recent announcement of our plan to sell our UK and Australian business to CHAMP Private Equity.

Since the time that we acquired Hardy's in Australia and Matthew Clark, we have adopted a new business strategy which has been focused on premiumizing our portfolio, generating strong free cash flow, and improving return on invested capital all in an effort to drive profitable organic growth.

And the sale of the UK and Australia is the next transformational step in the execution of this strategy as the business is no longer aligned with our strategic imperatives.

These international markets have been consistently challenged by foreign exchange volatility, grape over supply, retail pricing pressures and ongoing duty assessments which have collectively eroded profitability.

The majority of our sales volume in Australia has been dedicated to value priced bag in the box products.

However, we will continue to maintain a 20% interest in the business.

As a private equity firm, CHAMP will be operating the business very differently and our remaining interest will enable us to participate in the potential upside.

All employees currently dedicated to this business will transfer to the new entity.

Despite the sell of our two largest international businesses, Constellation remains the world's number one premium wine company and we remain committed to growing an international operation that is consistent with our overall strategy.

Remember, we currently sell and distribute our portfolio of brands in about 150 countries worldwide through Constellation Wines International which will continue to invest resources in new, emerging and established markets around the world.

Constellation Wines International represents growth potential for the Company going forward and will continue to drive our premium portfolio around the world.

Now I would like to focus our discussion on our financial and operational results for the third quarter.

This quarter marks the continuation of the strong momentum we have experienced this year in a number of areas which include the generation of record free cash flow levels that have been driven in part by our diligent focus particularly in the area of working capital.

The great news about this new level of free cash flow is that we believe it is sustainable longer term.

And it was during last year's third quarter that we began the official transition for our new US distributor network giving select distributors the right to sell Constellation's portfolio of wine and spirits exclusively in their respective US markets.

There seems to be some confusion related to the intricacies of the distributor contracts and their impact on our financial results since the inception of this initiative which commenced September 1, 2009.

So I will take a minute to describe how you should be thinking about the nuances of these contracts.

We initially negotiated long-term contracts with five US distributors currently representing about 60% of our wine and spirits volume in the US.

These contracts included shipment commitments that require distributors to purchase specified levels of product in fiscal 2010 and during this fiscal year 2011.

Last year depletions or distributor sales to retail lagged our shipments to distributors due to the challenging economic environment and the disruption caused by the distributor transition activity and our salesforce reorganization.

In fiscal 2011 while depletion trends for our products are healthy, they have not caught up to the contractual shipment levels.

As a result, our sales volume to distributors are exceeding distributor sales to retail and on-premise channels.

This has benefited sales and profits for our US wine business and will create an EBIT comparison challenge for fiscal 2012.

After the shipment commitments roll off at the end of fiscal 2011 under the distributor contract, we expect shipments to essentially equal depletions for the remainder of the contract term on an annual basis.

This was absolutely the best way to execute the distributor contracts as it ensured more stable sales, earnings and cash flow as well as complete distributor focus on the Constellation portfolio of products during the transition period.

So to put things into perspective relative to how Constellation is performing, it is best to consider the following.

For the three months ending November which coincides with the end of our fiscal third quarter, estimated depletions or distributor sales to retail for Constellation's total US wine and spirits business across all channels increased 3%.

Interestingly this includes the on-premise channel which has been slowly improving throughout the year and posted positive growth trends in the low single digit range during the third quarter for Constellation and for the industry as well.

More importantly, our focused brand group which represents the majority of our US wine profitability posted depletion trends of almost 10% in the third quarter.

We are managing for cash and margin our other more mature US wine brands many of which are in declining categories.

Overall, consumer take away transfer US wine portfolio are generally aligned with industry trends across all channels in the mid single digit range.

It is a combination of these (inaudible) depletion trends that are indicative of the underlying health of our business.

Additionally, although promotional spending on an industrywide basis appears to be abating slightly, it is a bit higher than last year and what we originally anticipated.

During the third quarter, Constellation Wines US also progressed in efforts to improve cost, cash and operational effectiveness with activities that included completion of the East Coast Winery Consolidation effort, further consolidation of the California Warehouse System, continued expansion of the solar energy initiative at several of our California facilities.

And in addition to these accomplishments, we recently received several accolades for our well-known portfolio of brands, the following of which are particularly noteworthy.

Robert Mondavi's Director of Winemaking, Genevieve Janssens, has received one of the industry's highest honors and was named 2010 Wine Star Winemaker of the Year by Wine Enthusiast Magazine.

Constellation also won eight Impact Blue Chip brand awards, more than any wine company has ever won in a single year.

Our winning US brands include Estancia, Blackstone, Clos du Bois, Robert Mondavi Private Selection, Woodbridge, Corona Light, Modela Especial and SVEDKA.

Wine & Spirits Magazine named Ravenswood as one of the top 100 Wineries of the Year.

And Joel Peterson, founder of Ravenswood, is being inducted into the Culinary Institute of America's Vintner's Hall of Fame in February.

The accolades also continue for our Canadian business.

At the International Wine & Spirits competition in London, Vincor achieved gold and best in class wins for Inniskillin Wines Niagara, the 2007 Cabernet Franc ice wine and 2007 sparkling Vidal ice wine; Jackson-Triggs Okanogan Estates 2007 Proprietary Grand Reserve Riesling ice wine; and 2007 SunRock Vineyard Shiraz; and Jackson-Triggs Okanogan Estates was also awarded best Canadian producer.

Now moving onto SVEDKA and our spirits business.

SVEDKA delivered strong year-to-date performance posting double-digit sales and depletion growth.

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

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

Moving to Crown Imports, we previously reported during the third quarter we settled our legal dispute with Modelo relating to the calendar 2010 funding of marketing and promotional spending which was incremental to that original Crown joint venture agreement.

As part of this settlement, the partners decided on future funding levels for these same expenditures for calendar 2011 through the remainder of the term of the joint venture agreement which required that Crown pay for a percentage of the incremental funding going forward.

This investment by Crown will ensure that the joint venture continues to have the world-class marketing and promotional program that have made it the unrivaled leader in the US imported beer category.

I would now like to move on to a discussion of Crown's operational results for the third quarter.

During the third quarter, Crown worked closely with distributors to bring their inventories to more normal levels after experiencing supply-chain disruption this summer related to a combination of hurricane Alex and a Modelo brewery strike in Mexico.

This effort combined with the positive market workplace momentum that the Crown portfolio of products has experienced throughout the year resulted in improved performance through the third quarter.

During this timeframe, Crown outperformed the industry, the import category, and the other three major beer suppliers in the Symphony IRI food, drug, mass merchant, and convenience channels on a dollar sales basis.

Among the four major suppliers, Crown was the only one to gain dollar and case volume market share.

This is the third consecutive quarter that Crown posted positive depletion results which increased in the mid single digit range including positive depletion trends for Corona Extra.

Based on Crown's year-to-date results, we are revising their depletion estimate upward through fiscal 2011 to growth in the low to mid single digit range with profits increasing low single digits versus last year.

Originally Crown's estimated depletions were to be down slightly with operating income declines in the mid single digit range.

Throughout the remainder of our fiscal 2011, we expect Crown to be focused on strong market execution supported by new product introductions, package expansions and solid promotional activity which are planned for the balance of our fiscal year.

Some examples include, following the successful introduction of Modelo's Victoria beer brand in Chicago as an initial test market in June, Mexico's oldest beer was launched statewide in Texas and in key Colorado markets in December.

Victoria is one of Mexico's most prestigious beer brands and is being introduced at a price point premium to Corona Extra.

The brand is scheduled for rollout in additional markets in early calendar 2011.

Modelo Especial, one of the fastest-growing large beer brands eclipsed yet another major milestone by surpassing 30 million cases sold in a 12-month period through October.

Since its US introduction in the 1980s, Modela Especial has risen through the ranks to become the number three imported beer and the number 15 ranked beer on a dollar sales basis in the total US beer market.

The Corona Extra Find Your Beach campaign which kicked off in September, has been well received in the marketplace and includes a TV spot called moments that encourages consumers to find their beach wherever it may be.

And Corona Light's national multimedia campaign continues to carve out a distinct personality for this brand.

In fact, one measure of its success is the fact that the number of Facebook fans has increased from 3000 to more than 200,000 in just two months.

Before I turn the call over to Bob, I wanted to inform you that we have received notification by the majority shareholder of Ruffino of their exercise of its option to put its interest in Ruffino to Constellation.

Prior to this notification, we initiated proceedings against the majority shareholder questioning the validity of the put option.

This action should take some time to resolve.

In closing, we continue to execute and make great progress in a number of areas.

We have strong marketplace momentum for our US wine and beer business and the US distributor transition is working well.

I am especially pleased that we have found a suitable buyer for our UK and Australia operation who we believe is committed to growing the business and providing a home for our dedicated employees in these markets.

Collectively, these efforts reflect our diligent focus on achieving profitable organic growth.

I would now like to turn the call over to Bob for a financial discussion of our third quarter business results.

Thanks, Rob.

Good morning, everyone.

Q3 comparable basis diluted EPS came in at $0.66 versus $[0.54] last year as we saw improvement in interest expense and tax favorability versus the prior year quarter.

The third quarter also marks some pretty significant progress in our strategy to drive profitable organic growth, improve the flow through of EBITDA free cash flow, and enhance the financial profile of the Company.

Efforts to strengthen our organic business model under our new US business structure and consolidated US distributor network continue to progress.

These efforts have helped to drive continued positive depletion, retail and mix trends for our US wine business.

Our increased focus on improving free cash flow generation continues to drive benefits.

This is demonstrated by our very strong free cash flow performance during the first nine months of fiscal 2011 and our improved visibility to future cash flow generation.

As a result, we are increasing our full-year cash flow target by $100 million to a new range of $475 million to $525 million.

In addition to reducing interest cost, cash taxes and restructuring costs, we continue to make progress in reducing our networking capital investment and we believe this new level of free cash flow is sustainable on a longer-term basis.

This will be a new record of free cash flow generation at Constellation and we are pleased with our results.

Many dedicated people from great buyers to winemakers throughout the Company are thinking in new ways to generate better financial returns from our business.

We completed our accelerated stock buyback transaction during the quarter.

Under this transaction, we paid $300 million in April 2010, and received 17.2 million shares for an average cost of $17.42 a share.

13.8 million of the shares were received in the first quarter and the remaining 3.4 million shares came in on November 30.

We estimate the transaction will generate about $0.09 of diluted earnings per share accretion in fiscal 2011 and has been reflected in our guidance since the first quarter.

We also delisted from the Australia Securities Exchange during the quarter which helped us eliminate the cost and administrative burden associated with that listing.

As Rob noted, we reached an agreement to sell our Australian and UK business.

The transaction is valued at AUD290 million and should close by the end of January.

We will retain 20% of this business.

We expect proceeds of about $230 million which will be used to reduce borrowings.

With interest and cost savings, we expect the transaction to be neutral to slightly diluted to comparable basis EPS for fiscal 2012.

More importantly, this transaction is aligned with our strategy to premiumize the business and improve the financial profile of the Company.

Our consolidated comparable basis gross profit and operating margins should improve by about 400 to 500 basis points and our earnings should be less volatile and we will have much lower exposure to foreign currency swings.

Without this lower return business, our ROI key metrics will also be enhanced.

Now let's look at our fiscal Q3 P&L performance in more detail.

My comments will generally focus on comparable basis financial results.

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

Excluding the cider sale and impact of currency, net sales were level with the prior year quarter.

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

North America wine net sales were even with the prior year and reflected favorable product mix offset by a decrease in US shipment volume as the number of distributors under shipment commitments were less than a year ago.

Australia and Europe sales decreased 1%.

Spirits (inaudible) sales increased 8% for the quarter with SVEDKA leading the way with a 34% growth rate.

It continues to maintain strong momentum in the marketplace with sales and depletions growing double digits on a fiscal year-to-date basis.

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

For the quarter, our consolidated gross margin was 36.5% versus 35.4% for the prior year.

This primarily reflects product mix benefits.

US promotion expense on a dollar basis was roughly even with the prior year as we increased promotion spending in the back half of last year following the implementation of the new distributor contracts which commenced in September 2009.

An increase in US rate costs from the higher cost calendar 2008 red grape harvest were offset by grape cost benefits in Australia.

Our consolidated SG&A for the quarter increased $19 million and came in at 18.3% of net sales compared with 15.9% a year ago.

This reflects incremental investments in technology around Project Fusion activities, some year-over-year incentive compensation variances, and an increase in marketing and selling expenses.

Consolidated operating income decreased 8% to $176 million, and operating margin decreased 1.2 percentage points to 18.2%.

I would now like to turn to our segment operating income results with (inaudible) highlights of our third-quarter operating income change.

North America's segment operating income decreased $18 million to $193 million.

Improved sales mix in the current year's quarter was more than offset by higher grape costs, investments in technology, marketing and selling and higher incentive compensation costs.

The Australian and Europe wine segment reported operating income of $9 million, a $2 million increase versus the prior year quarter.

The increase was mostly due to grape cost benefits in Australia.

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

Consolidated equity earnings totaled $71 million versus $60 million last year.

Equity earnings for Crown totaled $58 million versus $46 million for the prior year quarter.

The remainder of equity earnings in Q3's fiscal 2011 and Q3 fiscal 2010 are primarily generated by Opus One.

For the quarter, Crown generated net sales of $612 million, an increase of 22% and operating income of $116 million, an increase of 27%.

As Rob mentioned, sales and operating income primarily benefited from volume growth as wholesaler inventories return to more optimal levels following very low Q2 inventories resulting from supply chain issues experienced during the summer.

Crown's operating results also benefited from lower promotional spending but were unfavorably impacted by a legal arbitration decision regarding a former distributor and the contractual cost increase for Modelo products.

As Rob mentioned, we now expect Crown to deliver growth in sales and depletions and a slight increase in operating income for fiscal 2011.

Interest expense for the quarter was $49 million, down 25% versus last year.

The decrease was primarily driven by a lower average interest rate and reduced debt levels during the quarter.

Our average interest rate for the quarter was a little above 5%.

Let's take a look at our debt position.

At the end of November, our debt totaled $3.7 billion which represents a $109 million decrease from our debt level at the end of fiscal 2010.

This decrease is impressive given the funding of our $300 million stock buyback earlier in the year.

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

With our increased free cash flow guidance and expected proceeds from the sale of the Australian and UK business, we are targeting to be around the high three times range by the end of fiscal 2011.

Our comparable basis effective tax rate benefited from the favorable outcome of certain tax items and came in at 29%.

This compares to a 35% rate for Q3 last year.

Given the favorable run rate for the first nine months of the year, we are now targeting a full-year tax rate of 31%.

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

For the nine months of fiscal 2011, we generated free cash flow of $299 million versus $100 million for the same period last year.

This improvement reflects lower interest, tax and restructuring payments.

We saw a sizable source of cash resulting from a reduction in inventory.

There was also an increased use of cash from accounts receivable due to the timing of sales in the quarter.

CapEx came in at $70 million versus $89 million for the first nine months of last year.

As mentioned earlier, are now targeting free cash flow for fiscal 2011 in the $475 million to $525 million range.

This includes CapEx in the range of $100 million to $120 million, a $10 million reduction from our previous projection.

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

We are tightening our range and increasing our comparable basis EPS guidance to $1.80 to $1.85 from our previous range of $1.63 to $1.78 per share.

This increase is primarily driven by the improvement of our targeted tax rate which I discussed earlier.

The tax rate improvement represents about $0.10 of benefit per share.

Please remember that in Q4 of last year we reduced distributor inventories so our FY '11 Q4 EBIT should look very positive to the previous year.

Our full-year EBIT is essentially on our guidance as the beer upsides being reinvested in US wine promotion spending.

We now expect interest expense to be in the range of $195 million to $200 million and weighted average diluted shares to be about $214 million.

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

Consistent with the past few years, we intend to provide next year's detailed financial guidance after we finalize our plan and in connection with our fourth-quarter press release and conference call which is scheduled for early April.

However.

given our earlier discussion, I would like to frame in a couple of potential impacts to FY '12 for you.

As highlighted by Rob, while we are pleased with our underlying US depletion trends, our contracts with newly appointed distributors required specified product purchased levels.

This will result in shipments exceeding depletions during fiscal 2011.

All product purchase requirements will have expired as of the end of fiscal 2011.

Going forward, shipments should align with depletions through the balance of the contracts on an annual basis.

As we overlap the FY '11 shipment commitments in FY '12, we will face a difficult comparison and as a result, we currently anticipate nominal EBIT growth for our US wine business in fiscal 2012.

Rob outlined the incremental marketing and promotional funding by the Crown going forward.

This is expected to inhibit operating earnings growth in FY '12.

However, we expect slightly lower interest expense and a continued low comparable tax rate due to additional anticipated tax outcomes.

Given the factors just mentioned, directionally we currently anticipate comparable basis diluted EPS for FY '12 to be slightly above FY '11 guidance.

As mentioned earlier, we feel the improvements we have made in generating free cash flow are sustainable and we currently estimate that free cash flow in FY '12 will be at least in line with that in FY '11.

With that level of free cash flow, rough math would indicate a comparable basis EBITDA leverage ratio in the low three times range by the end of fiscal 2012.

That will be towards the lower end of our targeted leverage ratio and we have not ruled out future stock buybacks.

Before we take your questions, I would like to note that our simplified US organizational structure, streamlined brand portfolio and consolidated US distributor network have contributed to improved depletion volumes and marketplace performance versus last year.

Promotion spending has not yet abated in the US wine category and we will need to keep an eye on market spending rates.

In the beer business, we continue seeing positive depletion in retail results from Crown's branding and marketing initiatives.

The sale of our Australian and UK business will result in a dramatic improvement for most financial metrics.

Although the business constituted roughly a quarter of our net sales, it contributed very little to profits.

Our free cash flow generation profile has improved dramatically and we are on track to produce an all-time high free cash flow result for the year and we anticipate that level of free cash flow in future years.

This will provide opportunities for further deleveraging or stock buybacks.

With that, we are happy to take your questions.

(Operator Instructions) Kaumil Gajrawala, UBS.

On these non-core brands, they are small pieces in terms of your profit but a big piece of your volume.

Can you talk about what you are doing there to see if you can get trends to stabilize on some of those non-core wine assets?

We are really -- you are talking about our non-core brands?

Yes, outside of those 15 or 17 focus brands.

There's about 17 focus brands and then we have other categories which you know -- which we describe as either tactical or protected, defend.

The object is not really to stabilize those particular brands.

And as I said in my talk, our focus is really to operate those brands with a focus on margins and cash flow and that will continue to be our focus for those brands.

Okay, and then --

They are in like roving categories but they have very good financial profile.

So you can't really turn them around on growth but we are trying to sell as much as we can because they have very good financial metrics.

Got it.

Then in talking about your fiscal 2012, it sounds like depletion should be ahead of shipments.

Are you willing to give some sort of estimate on what you are expecting for depletions in fiscal 2012?

In our next fiscal year, we expect depletions and shipments to be essentially equal.

(inaudible), this gets a little confusing.

So the absolute shipments and depletions will be relatively aligned but because of FY '11, the base, okay -- when you do a growth calculation, depletions will grow faster than shipments but will ship in absolute numbers about the same number of cases as will be depleted, if that makes sense.

Okay, got it.

That is all.

Thank you.

Judy Hong, Goldman Sachs.

Thanks.

Good morning.

First, from a big picture perspective obviously you guys have been focusing on at least pacing your volume in line with the category growth in the US wine business.

It looks like the category I think you said is growing at a mid-single-digit rate.

Your depletions are up about 2%.

I know there is some drag in terms of these non-core brands.

But can you just give us some big picture comment about how you think you are performing in terms of the market performance especially in light of the heightened promotional environment that continues to -- that you continue to see in the market place as well as your stepped-up spending to gain some of that share in the market?

I think that our performance is actually pretty good.

You quoted the 2% depletion in the third quarter and that is only for the quarter.

For the whole year, our depletion growth has been in excess of that and very much in line with the market place.

As you also mentioned, yes, there is some drag on that depletion growth as a result of how we operate our non-core brands.

But when we really look at our core brands which is the vast majority, vast, vast majority of our profitability, only 17 brands, as I said, we had about 10% depletion growth in the third quarter.

And I think that that is really indicative of the strength of the business.

And I think is really the critical thing in looking at how we are performing relative to the market place and that performance is well in excess of industry growth rates.

So we are pretty pleased about that.

Okay.

And then just a little bit more color in terms of the promotional environment.

Are you looking at certain price segments or certain channels or certain brands that are being a little bit more aggressive here?

And kind of what is your strategy to tackle that situation going forward as you relate to more price discounts or new product innovation marketing and so forth?

Yes, we are looking at that very carefully.

I would characterize the current environment as promotional activity in general being actually slightly higher than it has been in the past or let me say versus last year.

Our promotional activity similarly has been at the higher level but we are balancing that out in fact by I will say being judicious in the way that we promote our non-core brand versus how we promote our core brands meaning we are investing more in promoting our core brands than in our non-core brands to balance out our overall promotional identity.

That is part of our strategy of how we are dealing with this to make sure that it stays within our own expectation.

In the future, our total strategy around driving profitable organic growth is all about brand building and brand building is really all about having brands that are strong enough to not have the degree of price sensitivity that more commoditized brands have so that they don't have to be promoted to an extent greater than we think that is necessary.

So that is how we are thinking about all of this and a lot of our activities around how we are marketing our brand and advertising our brand and the new products and line extensions that we are developing is all about our brand-building efforts.

Okay.

Then, Bob, just in terms of that mismatch between shipments and depletions, a few questions there.

One, is how does that play out in the fourth quarter because last year you had a pretty significant de-stocking?

So I'm wondering if you are going to now benefit from a shipment perspective in the fourth quarter?

Two, the 40% of the distributors that are not I guess under the new distribution agreement, how is their inventory level right now?

And then finally, I guess the understanding in terms of fiscal '12 shipments and depletions now matching going forward, does that suggest basically the distributors that are under the new agreement will carry higher inventories than they have had previously?

Okay, this will be a mouthful.

Let me see if I remember all of those.

So you're comment on Q4 is correct, Judy.

I try to indicate that a little bit in my script and your recollection is correct.

We did reduce distributor inventories last year in the fourth quarter in return for some distributor investments in our brands.

We thought that was a pretty good trade-off.

So in the fourth quarter, you should see pretty healthy sales and EBIT growth in the North American wine and spirits category.

So that will be correct.

For the full year, our EBIT should be pretty well aligned with the guidance we provided at the beginning of the year and actually might be slightly higher than what you guys think on average.

So that is the Q4 comment.

On the other distributors, meaning the distributors that were not converted to a consolidated distributor system, that has been business as usual.

So ships have pretty much equaled depletes all along.

There has not been a lot of action there.

And as far as FY '12 again, you are correct.

The way the distributor contracts were agreed to was that there was -- this initial period of shipments guarantees and the day those shipment guarantees end, the inventory on that day stays with the distributors through the end of the contract.

It does get a bit confusing.

So as of the end of this year, those shipment guarantees end so next year we expect in general shipments to equal depletions.

However, as you do a growth calculation, the sales growth will be less than the depletion growth simply because of the respective denominators.

Okay, got it.

Thanks.

Vivian Azer, Citi.

Good morning.

I am just wondering with respect to your --

Vivian, you are breaking up.

We can't hear you.

Can you hear me?

Hello.

We can now.

Sorry about that, apologies.

Good morning.

I was just wondering with respect to your distributors, is there a difference in the product mix that they are selling, i.e., like the five distributors that have 60% of your volume, do they skew more to your focus brands or is it pretty much even across your distribution system?

No, there is not really a difference in -- I mean there's differences in mix and markets and in --

-- around geographies --

-- and distributors in general but as a general proposition, there is no difference in mix in the distributors that have contracts versus those that don't.

We as a Company are very focused on mix and driving the mix towards our core brands which are higher margin higher gross profit as a general proposition and that gives us the opportunity not only toward depletion growth but also for a positive mixed effect.

So that is what we try to do in general across all our markets but there isn't a huge difference or there is nothing peculiar about mix and distributors that have contracts versus those that don't have contracts.

Okay, fair enough.

The reason I ask is while I understand that there is -- the difference between depletions and the shipments from a growth perspective and how that is going to impact FY '12.

I guess I am still kind of surprised because you are putting such good depletion growth for your higher-margin brands that that is not going to show up anymore in EBIT than what you indicated for FY '12.

That also emanates from the fact that the shipment guarantees that were in place this year also took into account mix and therefore your shipments next year will be at a similar mix level as this year because we are comparing shipments not depletions.

Whereas as to what we're doing in the market place, it is all about driving depletions for future growth and for future mix benefits.

So I am sorry that this is as confusing as it is but it is shipments versus shipments from a financial point of view but from an underlying growth perspective, it is depletions versus depletions -- year-over-year.

Yes, and we have seen the market in IRI, we have seen positive mix shift.

The whole market has seen positive mix shift.

We don't anticipate that changing dramatically next year but the gravity is basically just overlapping the fact that shipments exceeded depletions in fiscal '11.

Okay, fair enough.

Thank you very much.

Lauren Torres, HSBC.

Morning, everyone.

My question is on the beer business.

You are benefiting and we are seeing some upside here as a result of easy comps, also coming back from some of these supply chain challenges.

But with that said, I was just curious about the actual health of the beer business, whether it be on-premise trends.

Also maybe with your competitors taking some pricing, how the narrowing of that price gap is helping your numbers?

And once again, just an overall sense of how these trends are improving X the comps and X some of these supply chain challenges?

Yes, our beer business, Crown, is I would say particularly healthy at the moment.

As you know, we increase our guidance on what we expected on depletions this year for the total year to low to mid single-digit levels.

In the third quarter we actually experienced very solid mid-single depletion growth at up approximately 5%.

And year-to-date, depletions are running also in the mid single digits.

So I think that that is indicative of a very healthy beer business.

Imports in general are outperforming the total beer business and the domestic beer business.

Crown is outperforming the other three major suppliers.

As it relates to our specific brands, we probably have -- in terms of scale brand, we have the hottest brand in the market place with Modela Especial, which is now the third largest import.

As I said, it is now the 15th largest beer overall.

On a dollar sales basis it is the third-largest import.

It's excess of 30 million cases, and it has got very strong growth.

Corona Extra has returned back to growth.

So as I have said in the past, the beer business has proved to be one of the most cyclical parts of our business.

And the silver lining in that cloud is as the economy continues to recover, I think that the Crown business is going to continue to improve as well.

So, in general, we are really pleased with how Crown is performing and how that business is doing from an underlying depletion trend point of view.

Can I also ask just with respect to the relationship, obviously now that the litigation is out of the way, does that open more avenues to kind of grow your brands and open up discussions between the two?

Has that changed at all?

Well, you know, the relationship is good, and the consequence of how we resolved that matter was an agreement relative to incremental spending against the brand for marketing and promotion.

And I think that that is playing out well.

We have got great programs in place, and I think that those programs are driving some of our results, our very positive results, really because I think that our marketing programs and advertising is truly a cut above really anything else in the industry in a lot of ways.

I think that our execution is fantastic and I think that more importantly our brand, we have delivered a very consistent message relative to Corona Extra and our brand which has resonated with the consumer as opposed to I think sort of some of the herky-jerky marketing programs and activities of some of the competitors which I don't think has worked to their benefit.

And it is hard to repair because the consistency hasn't been there for the number of years that it has been for Corona Extra in particular.

Lastly, can I ask Bob, the CapEx guidance for this year now is 100 to 120, is that what you said?

Correct.

So that would imply 30 to 50 in the fourth quarter.

Just wondering why that seems a bit high relative to the last couple of quarters?

You know, if you have spent as much time with engineers as I have, they like to kind of wait until the fourth quarter to spend all their CapEx.

Every company I have been at -- it is all like year-over-year timing stuff.

Okay, thank you.

Dara Mohsenian, Morgan Stanley.

Good morning, guys.

So, Bob, what tax rate are you assuming in the 2012 earnings guidance range you gave us?

(multiple speakers) Comparable tax rate.

So a good question and I expect a lot of tax questions.

We are not giving a specific rate right now.

We will on the April call but what we are stating is the rate will not be above the rate guidance for this year which is about 31%.

So you shouldn't expect any tax rate in FY '12 above 31%.

Okay and is that -- I assume that is not an ongoing tax rate.

I mean, what kind of range do you think your ongoing long-term tax rate is?

Does that include some one-time benefit next year?

We are no giving -- generally don't give longer-term guidance but we have -- and it kind of sorted out a little bit last year, more this year and we expect some of it in future years some relatively positive outcomes with some tax jurisdictions we have around the world.

So we are seeing that flow through a lower effective tax rate and you also see some lower cash tax payments as well.

So we are very happy with our tax rates.

We think that is why we can say this year will be a low rate and next year will be a low rate.

But when the dust settles and this could be a number of years out, if we are just a North American business, generally in the US tax rates are higher than anywhere else in the world.

So I wouldn't assume that we are going to have the 31% tax rate for like a 12-year duration but I think we will have some positive tax outcomes for the relative near future.

Okay.

Then, Rob, you commented promotional levels in wine were worse than you expected.

Can you give us more detail there?

Is it a significant gap?

It sounds like you will be matching that with higher than expected promotional levels on your part than you originally expected?

Yes, I said that they are a little higher than perhaps we expected.

I wouldn't say that it is anything particularly outstanding.

Our promotional levels have been higher throughout the year but we have also had the benefit of that in our depletion trend.

And we don't expect anything outside of our communicative expectations for the remainder of the year.

So we expect them to continue to remain moderately higher than they have in the past.

But at this stage, not beyond our expectations and it is baked into all of our thinking in our guidance for the year so that is where we are at.

Okay, thank you.

Mark Swartzberg, Stifel Nicholas.

Good morning.

I guess a few questions staying here on wine.

The promotional spending being a little bit higher in the quarter than expected, a little higher in the coming quarter than expected.

I wonder if we could kind of step back a little bit here and the game plan here circa summer of 2009 I guess was to do things that are going to allow you to improve share.

And we are yet to see that happening.

And the spending is going to be greater than what you had anticipated.

So sometimes these things take longer than anticipated but can you just kind of give us a State of the Union in terms of what you think from a one-year, two-year, three-year timeframe from here you think is going to be the things that are going to allow you to actually deliver on that hope of indeed being a share taker without dollars being the only driver of that?

You are looking at the longer-range, a thing that we're trying to accomplish as I said is all about the underlying depletion growth.

And we have established some pretty good trends in our underlying depletion growth that relates to both actual percentage growth and mix meaning that if you look at our depletion mix in terms of dollar sales of depletions, if it would be significantly ahead of our actual physical case growth.

Therefore as we move into periods next year and the year after and so on and so forth where depletions equal shipments and we don't have this overlap and the imbalance issue and we won't, that is going to bode very well for our underlying growth.

And it will be -- let me put it this way -- as that starts to flow through to sales, we ought to be able to leverage that throughout the P&L to a positive net income result.

Okay so you feel like it is early innings.

I guess I'm still struggling.

But okay, fair enough.

Then as we look at the contracts you have with these larger distributors and that 60% of volume, can you remind us what the duration on them is, how much time is left on them?

And then if we think -- and I realize there is confidentiality here -- if we think from their perspective in terms of early termination rights, are there share objectives that have to be achieved?

Are there certain absolute rates of depletion growth?

Can you talk a little bit about what rights they have if there comes a point where they are not happy with the relationship?

(inaudible) generally run for about 5.5 years from our fiscal 2010 and the (inaudible) includes fiscal 2010.

So through 2014 -- or actually partially through 2015, fiscal year 2015.

Any thoughts on early termination or performance provisions that would make it earlier?

No.

There is no early -- there is generally related to performance no early termination.

In fact, it is the opposite in that there are incentives and dis-incentives in the contract for distributor performance meaning if distributors overperform, there is incentive for them.

If they underperform, there are dis-incentives for them.

But there is not early termination so to speak.

Okay, fair enough.

And then just shifting over to the Ruffino comment, can you just -- I realize it is a dispute.

But from Ruffino's perspective, what kind of number are we talking about in terms of the put they are trying to implement here?

Yes, Mark, this is Bob.

It was in the last year's Q and there will be a little bit more verbiage in this year's -- in this quarter's Qs than last quarter's Q.

The maximum amount of the put is EUR55 million.

We are disputing the put in total.

Okay, fair enough.

But under SEC regulations, we have to disclose the maximum amount of the put.

So that is EUR55 million.

Great.

Bob, also on the tax rate, can you talk a little bit more kind of flesh it out a little bit more in terms of what is driving this improvement?

It seems like you think it will be multiyear in nature.

But could you talk a little bit more detail about what is the source of these improvements?

In the tax law, Mark, it gets so complicated.

And the other thing is there are these big time lags between when the original tax return was filed and when the ultimate settlement happens that we would rather not talk about specifics.

Okay, fair enough.

Last one.

Over on beer, can you give is some sense about how December was?

Obviously weather was an issue but the industry or at least your business picked up nicely in the quarter, your quarter.

Can you talk about December?

I don't know if we talk about December specifically but right now both us and the Crown business are very happy with the momentum that our beer business has.

In the third quarter, Corona Extra, as Rob had mentioned, actually registered positive growth which is the first time since the JV was formed.

So we are very happy about that.

We think that is some of our nice marketing and we have done some restructuring in our sales organization which we think our execution is getting a little bit better there.

And we remain quite bullish on Modelo Especial, which as Rob said, grew -- did that 30 million cases and is still growing at 15% to 20%.

It is pretty amazing.

We are very bullish although it is very early days on the launch of Victoria.

And we're bringing it into new states next year so we expect pretty good things from that brand which also has a high deal of brand equity and resonates pretty immediately with especially the Hispanic community but we think it even has legs beyond that.

Okay, thank you, guys.

Timothy Ramey, D.A.

Davidson.

Good morning.

Just as we think about the target inventory levels for the end of the fourth quarter or the idea of freezing them there, are there levers that the distributors can pull in terms of incremental promotion to kind of work those down since there I assume would be a multi-year incentive for them to do extra well this quarter?

To work what down?

Their distributor inventories or their inventories?

Yes, there is some mechanisms in the contract that the distributor -- that they can utilize the pull down inventory through over performance, yes.

Does any of that require sort of copayment along with you or coinvestment or how does that work?

That is up to them how they generate the performance other then they can't generate performance in a manner that is not to the benefit of the brands.

But they can increase their investment against the brand to drive growth as long as it is done in a manner that is consistent with the brand health.

And they can't -- irrespective of what they do, they can't force us to do anything that we do not want to do.

So we are kind of independent.

So they can spend more promotion out of their pocket if they want but it has to be consistent with what we both agree is the brand equity.

No matter what they do, they cannot force us to follow them.

Got you, okay.

So in general the fourth-quarter performance could be both organically and optically a little better than --?

The fourth quarter again on a year-over-year basis we are overlapping the fact that we took inventories down last year.

So that will make both sales and EBIT growth look pretty robust in the fourth quarter but that is mostly a prior-year overlap issue.

Normally and you now why that is, but normally the third quarter is the Christmas build, so everybody builds inventory in the third quarter.

The normal cadence would be for the fourth quarter for depletions to actually exceed shipments as that Christmas inventory kind of gets -- depletes out.

Great, terrific.

Thanks.

Christine Farkas, Bank of America Merrill Lynch.

Thank you very much.

I had a question on Australia and grapes if I could.

One of the beautiful things about the structure, the global structure of Constellation was your inability to source globally and I'm just wondering if the sale of the Australian appellations will change that ability to access or source the juice from Australia to use in some of your operations?

No, it doesn't change that.

In fact, it gives us more flexibility over the longer range then less flexibility because we are not tied any further to the bricks and mortars of our own operations.

And therefore if there -- our supply and balances or oversupply around the world in various appellations whether it is Australia or otherwise we can take advantage of that and take it advantage of favorable pricing trends to buy bulk wine if that is what we decide to do from other operations.

Whereas obviously if you've got your own vineyard, plants, etc., your first instinct would be to utilize your own production regardless of how that matches up with other opportunities that are available in the marketplace, or advantageous situations.

Okay, thanks.

Then if the reverse were true if there was a shortage, that is where your scale would potentially come into advantage as well?

Yes, you could say that but there is no shortages anticipated in the near future on a worldwide basis.

We certainly have sufficient production capabilities in the rest of the business overall to meet any demand needs that we think could be foreseeable as well as the ability to move or switch appellations in brands, certain brands, where it is appropriate as we need to do.

So we don't anticipate any issue in that regard in any timeframe that would be of concern to any of us, you or us.

Okay.

Thanks.

Then just to round out on grapes, you did mention or highlight great costs as a source of pressure on gross margins.

I'm wondering if you could just highlight for us where we are in that inventory, is high cost inventory going to run through for the next few quarters, are we at the end of that?

Just kind of frame how that inventory situation is working out.

Thanks.

Sure.

So in the US, Christine, the harvest year 2008 was a relatively expensive harvest and that is flushing through cost of goods sold this year which is making the fiscal '11 COGS look higher than fiscal '10.

We expect most of that to flush through this year.

There might be a tiny amount in the next year but it probably won't be noticeable so that should be behind us.

The opposite is happening on the Australia COGS where last year they flushed through more higher -- more expensive grapes in fiscal '10 than we are seeing in fiscal '11.

But of course that won't be much more of a concern to us on a consolidated basis.

It will only be a concern for our 20% equity interest in the new entity.

Okay, got it.

Thank you for that.

Carlos Laboy, Credit Suisse.

Good morning, everyone.

Rob, how do you gauge or what is the danger that the distributors in this new -- these wine distributors build excessive inventories to meet these distribution commitments?

And if it does happen, what do you do about it?

How do you go about it?

First of all, the distributors don't have excessive inventories and the shipment guarantees are over.

And so on average, those distributors with shipment guarantees are running about two to three months of inventory which is pretty standard in the industry.

So if anything you might argue that inventory levels are where we want them, that is we, meaning us as a supplier.

Distributors would always like to have lower inventories than higher inventories.

And since the shipment guarantees are over, in one case half-way through this fiscal year and the rest of the cases at the end of the fiscal year.

And then under the agreement, shipments have to equal depletes, those inventory levels in terms of number of cases will remain where they are.

Now they will come down as the business grows or if the business grows let me say which of course we expect that it will.

But they will come down in number of days as the business grows thereafter.

To close out with a beer question.

Rob, would you buy back the other 50% of Crown if you could and what keeps you from asking for it?

Yes.

My answer to that is that I -- we really can't comment on that.

We have no intention at the current time of buying back the other 50% interest in Crown.

I did see what you wrote in Beer Business Daily today by the way or what was your quote in Beer Business Daily.

But obviously, Carlos, that is your own speculation and we, as I said, really have no plans that we can comment on.

Thanks.

That was your final question.

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

Thank you everybody for joining our call today.

And I am pleased with our third quarter and would like to summarize the highlights as follows.

Number one, we did generate very strong free cash flow which has enabled us to not only fund our share buyback but has allowed us to continue our debt reduction efforts.

We increased our free cash flow target for the year and believe it is sustainable for the longer term.

We are experiencing strong momentum in our imported beer business and marketplace trends for our US wine and spirits business are healthy.

And our US distributor initiative is working.

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

I would also like to mention that we are planning an investor day in New York City in the mid May timeframe so stay tuned for the details.

Thanks again for your participation.

Thank you for participating in today's conference call.

You may now disconnect.