Constellation Brands Inc (STZ) 2011 Q4 法說會逐字稿

Good morning.

My name is Wes and I will be your conference operator today.

At this time I would like to welcome everyone to the Constellation Brands' fourth-quarter and fiscal year-end 2011 earnings conference call.

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

After the speaker's 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, ma'am.

Good morning everyone and welcome to Constellation fourth-quarter and fiscal year-end 2011 conference call.

I am here this morning with Bob Sands (sic -- see press release), our President and Chief Executive Officer, and Bob Ryder, our Chief Financial Officer.

This call complements our news release, which has 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 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 would like to turn the call over to Rob.

Thanks, Patty.

Good morning and welcome to our call.

We recently completed a year of significant accomplishments as we delivered against a number of key strategic goals and business initiatives.

I would like to take a minute to highlight some of these accomplishments.

We sold the majority of our UK and Australian business to the CHAMP Private Equity for approximately $220 million.

This transaction represented another transformational step in the execution of our strategy as this business was no longer aligned with our strategic imperatives.

We utilized the proceeds from this transaction, in combination with strong free cash flow, to reduce debt by almost $600 million.

This also enabled a decrease in our leverage ratio to the mid 3 times range, a level we have not achieved since May 2006.

We generated free cash flow of $530 million for the year, and we are targeting for fiscal 2012 free cash flow to be in the range of $600 million to $650 million.

We have obviously made significant progress from our ongoing focus in this area.

These strong free cash flow results essentially enabled us to fund an accelerated stock buyback transaction while continuing to reduce debt.

We are approaching the final leg of Project Fusion, which was designed to create an integrated technology platform and develop world-class systems to support our business.

Our Fusion initiatives have reached major milestones within the past year, and the work being done within this program is helping Constellation become more connected as one company, improving efficiencies and achieving cost savings across our business.

Lastly, we have strengthened the core foundation of our US business through the implementation of our US distributor initiative, which is also one of the primary catalysts driving profitable, organic growth.

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

As we previously discussed, our sales volume to distributors exceeded distributors' sales to retail and on-premise channel throughout fiscal 2011 due to the distributor transition.

This had the effect of benefiting sales and profits for our US business, and will create an EBIT comparison challenge for fiscal 2012, the impact of which has been factored into our guidance for this year.

During fiscal 2012 and for the remainder of the contract term we expect our shipments to essentially equal distributor depletion on an annual basis.

Meanwhile, in order to put things into perspective relative to how Constellation is performing in the US marketplace, it is best to review a combination of our shipment data, distributor depletions and consumer take-away trends, as they are indicative of the underlying health of our business.

In an effort to help you better understand this part of our business, we have added shipment and depletion information to the financial attachments section of our press release.

We expect to provide this information on a quarterly and year-to-date basis going forward so that you will be able to better understand the results of our efforts.

As you can see, for fiscal year ended in February depletion volumes, or distributor sales to retail, for Constellation's total US wine and spirits business across all channels increased approximately 3% for the year, which is in-line with industry trends.

According to recently released data from the Beverage Information Group for calendar 2010, we maintained US marketshare on a volume basis in total across all channels and, therefore, essentially grew in-line with the category, which has been our goal since the launch of the US distributor initiative.

However, more recently you may have noticed a bit of market weakness for our US wine business in the IRI or Nielsen data that you receive and analyze on a regular basis.

I would like to take a minute to describe what is driving these trends, and remind everybody that the IRI food and drug channels represent approximately 30% of our business, with the next two largest channels represented by the liquor and on-premise channels.

At any given point during the year we pulse our promo activities as appropriate based on a number of factors, including business seasonality, the competitive environment, and consumer take-away trends.

Our marketplace performance reflects this in the form of an increase or decrease in promotional activity that typically drives volume results during any given time period throughout the year.

You may remember that during the first half of fiscal 2011 our promotional spend exceeded that of the market as we worked to regain marketshare that we have lost during the distributor transition when we were focused on executing our consolidation strategy.

During the second half of fiscal 2011 we resumed more normalized levels of promotional activity, but also scaled back promotional support for the lower margin, nonpremium brands at the less than $5 retail price point.

This was done in an effort to improve margins on these products, but as expected, this action negatively impacted volume.

This activity will happen from time to time throughout the year as part of the normal course of operations, because we are focused on taking actions appropriate for the long-term health of the business.

As a matter of fact, during the first quarter we will take selected price increases on certain specialty and value products to continue to enhance margins, so you will continue to see this kind of volatility in IRI.

Keep in mind, however, that this IRI data represents only a portion of our entire business.

As we discussed, going forward our goal remains the same.

From a depletion and consumer take-away perspective we expect to grow in- line with the market across all channels for fiscal 2012 and beyond.

The promotional environment overall in the US market appears to have stabilized, yet remains competitive.

One of the most important things to keep in mind is that our focus brands, which represent the majority of our US wine profitability, posted positive depletion trends of almost 10% -- 10% for the year and we gained marketshare for this entire group of products.

As many of these focus brands have recently received recognition in the form and awards and accolades, the following which I think are particularly noteworthy.

Constellation recently received Impact 2010 Hot Brand awards for SVEDKA, Black Box, Kim Crawford, Rex Goliath, and Modelo Especial.

Seven of our US wine brands were included in IRI's list of 30 top momentum table wine brands.

We received the Beverage Information Group's 2011 Growth Brands Awards for blufeld, SVEDKA, Black Box, Kim Crawford, Cooks, and Woodbridge by Robert Mondavi.

And blufeld became one of the top 10 IRI new table wine brands.

In terms of new product development we have several initiatives underway.

With the recent launch of Toasted Head Untamed White, Arbor Mist Pomegranates Pinot Noir, and Simply Naked, which is a line of unoaked varietals.

Rex Goliath, one of the fastest growing major brands, introduced Sauvignon Blanc and Moscato brand extensions.

Moving on to SVEDKA, our spirits business, our spirits sales results for the year are certainly not reflective of depletion trends or underlying consumer demand for SVEDKA Vodka, which posted double-digit sales depletion and IRI growth for 2011.

For 2012 we will continue to build SVEDKA's on-premise brand awareness.

We have plans in place to increase our digital and media investment.

And we will be innovative with our planned introduction of new packaging configurations and flavor profiles.

Bob will have more to say about factors driving the overall spirits numbers in a moment.

Moving to the Crown Imports joint venture.

For fiscal 2011 Crown benefited from the positive marketplace momentum that they built throughout the year.

During this timeframe Crown outperformed the total beer industry, the import category, and the other three major beer suppliers in both case and dollar sales trends in the SymphonyIRI food, drug, mass and convenience channels.

And among the four major beer suppliers Crown was the only one to gain dollar marketshare.

This is the result of product innovation, creative advertising campaigns, the ongoing support of wholesalers, and excellent market execution.

Throughout the year Crown implemented several new initiatives, increased marketing investments, and launched new brands and packaging configurations in a effort to continue building value and increasing brand recognition.

And it worked.

Corona Extra was included in the first time in the best global brands ranking published by Interbrand, and Modelo Especial was once again awarded hot brand designation from Impact Magazine.

Collectively these initiatives resulted in Crown posting depletion growth in the low- to mid-single digit range for fiscal 2011.

As we head into fiscal 2012, Crown has some exciting business initiatives underway.

Some examples include the expansion of the Corona Familiar 32 ounce bottle.

Victoria, which has already been extended beyond the initial Chicago test market into Colorado and Texas, and will enter its next phased launch in Arizona, California, Georgia and five other states.

The Corona Beach Getaway promotion, which was so successful during last year's summer selling season that it will be bigger and better this year.

Crown also plans to extend its successful Find Your Beach advertising campaign with several new executions which are set to debut throughout the spring and summer selling season.

Lastly, Crown is excited to announce that Corona partner, Kenny Chesney, will be back for a full 49-city Goin' Coastal Tour during calendar 2011.

As presenting sponsor, Corona will capitalize on this partnership via retail support and in-venue programming to promote the brand.

These initiatives are expected to result in fiscal 2012 depletion growth in the low- to mid-single digit range for the second consecutive year.

And finally, as I mentioned last quarter, the majority shareholder of Ruffino attempted to exercise an option to put their equity interest in Ruffino to Constellation.

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

Although negotiations continue, we now anticipate that we will complete the transaction on substantially revised terms.

In closing, I am certainly pleased with the outcome of fiscal 2011.

I firmly believe our results validate our strategic imperatives, emphasizing premiumizatin, financial strength and profitable organic growth.

We are very well-positioned for the year ahead.

And I look forward to sharing with you our vision for the future when we meet next month in New York City for our Investors Day.

Now I would like to turn the call over to Bob, our CFO, for our financial discussion of our year-end business results.

Thanks, Rob.

Good morning everyone.

From a historical perspective Constellation recorded in its highest-ever recorded incomparable basis EPS results and highest-ever free cash flow results.

We also exceeded the EPS and free cash flow guidance provided at the beginning of the year.

From an operational perspective our US depletion trends improved considerably from the previous year, and in fact, we were in-line with the overall US wine and spirits market.

Our focus brands, the brands against which we want our salesforce and the distributor salesforce to concentrate their efforts, grew depletions at three times the overall market.

On the beer side, Crown gained volume and dollar marketshare and grew EBIT for the first time since the JV formation.

We sold our Australian and UK business, which was the last major portfolio move to premiumize the business.

This follows the 2008 sale of our value wine business, the 2009 sale of our value spirits brands, and the 2010 sale of our UK cider business.

From a free cash flow perspective we delivered an all-time high by a large measure.

Inventory investments were reduced dramatically, payments for interest and restructuring were reduced, and capital spending was down.

We believe all these are sustainable within our current portfolio of businesses.

In addition, we significantly reduced taxes paid during the year.

This lower level of tax payments is expected to continue for the next couple of years.

We utilized our free cash flow and proceeds from asset sales to buy back shares in a highly accretive fashion.

And we reduced our comparable basis to EBITDA leverage ratio by 0.5 point to about 3.6 times.

Putting these items I just outlined aside, higher promotional spending and SG&A contributed to our fiscal 2011 comparable EBIT decreasing almost 3%.

The increase in promotional spending was in response to competitive activities and our efforts to regain momentum in our US wine business, following transition impacts related to our US distributor consolidation initiative.

The SG&A increase was due to a higher level of Project Fusion expenses, higher incentive compensation costs, and the translation of foreign denominated SG&A into US dollars.

Even with our planned EBIT reduction, our comparable basis EPS grew 13% to $1.91 and established a new foundation from which we can build in future years.

Now let's look at our fiscal 2011 P&L performance in more detail, where my comments will generally focus on comparable basis financial results.

As you can see from our news release, full-year consolidated reported net sales decreased 1%, primarily due to divestitures of our UK cider and Australian and UK wine businesses.

Excluding the impact of the divestitures and currency, net sales increased 3%.

Before drilling down further on sales, I want to highlight some changes intended to improve our reporting.

We have now combined wine and spirits sales in our North America segment reporting.

This reporting is more closely aligned with our management of the business.

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

In conjunction with that change, we have added information for North America, US and focus brands shipment volumes, as well as US depletion and focus brand depletion growth rates to the net sales page of the press release.

With that, my commentary for the following net sales comparisons will be on a constant currency basis.

Full-year North American organic net sales increased 4% as US volume growth, combined with favorable US product mix, was partially offset by higher promotional costs.

The US shipment volume increase reflects shipments running ahead of depletions as part of our distributor consolidation transition activities.

Australia, Europe organic net sales were level with the prior year.

While we are recording wine and spirits net sales on a combined basis going forward, we provided supplemental spirits sales information as part of this reporting transition.

Spirits organic net sales increased 4%, as strong SVEDKA performance was somewhat offset by lower Black Velvet sales and lower contract service revenue.

The lower contact service revenue was related to a service arrangement with the buyer of our value spirits business, which was in-place throughout fiscal '10, but for only about half of fiscal 2011.

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

For the year our consolidated gross margin was 35.9% versus 35% from the prior year.

This primarily reflects favorable product mix and grape cost benefits in Australia, partially offset by higher promotion expense and grape cost in the US.

Our consolidated SG&A margin for the year came in at 19.8% of net sales compared with 18.3% in the prior year.

This primarily reflects incremental investments in technology for Project Fusion activities, unfavorable foreign exchange translation, and increased incentive compensation.

Consolidated operating income decreased 5% to $534 million and operating margin decreased 60 basis points to 16%.

I would now like to turn to our segment operating income results to provide highlights of our full-year operating income change.

North America segment operating income decreased $7 million to $631 million.

Improvement in US sales volume and mix was more than offset by higher promotion costs, higher grape costs, investments in technology and selling functions and higher incentive compensation costs.

The Australia and Europe segment reported operating income of $9 million, an $8 million decrease versus the prior year.

The decrease was predominately due to the divestitures of the UK cider business in fiscal 2010.

Consolidated equity investment earnings totaled $244 million versus $239 million last year.

Equity earnings for Crown totaled $226 million versus $222 million for the prior year.

The remainder of equity earnings in fiscal 2011 included $13 million from North America, which was primarily generated by Opus One, and $6 million for the Australia and Europe segment.

For the year, Crown generated net sales of $2.4 billion, an increase of 6%, and operating income of $453 million, an increase of 2%.

Sales primarily benefited from volume growth, driven by an improvement in consumer demand, and from distributor inventories returning to more optimal levels as we head into the Cinco de Mayo and summer selling seasons.

Crown operating results benefited from the volume improvement and were unfavorable impacted by a contractual product cost increase, a legal arbitration decision regarding a former distributor as discussed in Q3, and an increase in marketing costs.

Interest expense for the year was $195 million, down 26% versus last year.

The decrease was driven by a lower average interest rate due in part to our refinancing activities at the end of fiscal 2010 and reduced debt levels during the year.

Our average interest rate for the year was around 5%.

Let's take a look at our debt position.

At the end of February our debt totaled $3.2 billion, which represents an approximate $600 million decrease from our debt level at the end of 2010.

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

Our comparable basis effective tax rate benefited from the favorable outcome of certain tax items and came in at 30%.

This rate was level with the prior-year rate.

During the fourth quarter we recorded a net pretax gain of $84 million on the sale of our Australian and UK business.

We also recognized a $198 million tax benefit in our reported income tax line related to our Australia and UK business.

These items were excluded from our comparable results.

From a cash perspective we anticipate receiving the full benefit of this $198 million.

We realized approximately $30 million of the total cash benefit in fiscal 2011.

We currently expect to realize the remaining $168 million cash benefit on a fairly equal basis over fiscal 2012 and fiscal 2013.

Now let's briefly discuss Q4.

For the fourth quarter organic constant currency net sales increased 10%.

This was driven by 14% organic constant currency growth for North America, due primarily to a combination of higher volume and positive mix in the US.

As you'll recall, net sales for Q4 of fiscal 2010 were impacted by inventory reductions at certain US distributors, which in turn drove unfavorable mix and reduced operating leverage at that time.

The higher sales volume and mix drove a $29 million increase in North America operating income for Q4 fiscal 2011.

The improved volume and mix helped drive a 360 basis point gross margin increase and improved operating leverage, as SG&A as a percentage of sales decreased 40 basis points.

Equity earnings for Crown totaled $49 million versus $41 million for the prior-year quarter.

For the quarter Crown's net sales increased 15%, while operating income increased 18%.

The strong results were driven by an improvement in consumer demand and from distributor inventories returning to more optimal levels heading into the key selling periods.

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

For fiscal 2011 we generated free cash flow of $530 million versus $295 million for the same period last year.

This improvement reflects lower payment for taxes, interest and restructuring.

In addition, 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.

CapEx came in at $89 million versus $108 million for the prior year.

We are targeting free cash flow for fiscal 2012 in the $600 million to $650 million range.

This includes CapEx in the range of $85 million to $95 million.

The primary drivers of the projected $70 million to $120 million increase from FY '11 to FY '12 are low interest and tax payments and a reduction in cash restructuring costs.

Interest is projected to be down, primarily due to anticipated lower debt balances.

Our lower tax payment estimate is due to the previously mentioned tax benefit related to the Australian and UK business.

Our fiscal 2011 free cash flow is a record for Constellation.

We have made a lot of progress in reducing our networking capital investment, improving our process around capital expenditures, and selling capital intensive businesses.

Our fiscal 2012 free cash flow guidance exceeds $600 million, which would be another record for Constellation.

While FY '11 and FY '12 looks like lower than normal tax payments, we do feel many of our initiatives will provide lasting benefits, and that our current business is capable of generating $500 million of annual free cash flow on average over the longer term.

Now let's move to our full-year fiscal 2012 P&L outlook.

We are forecasting comparable basis diluted EPS guidance to be in the range of $1.90 to $2 versus our $1.91 result for fiscal 2011.

Currently we do not anticipate restructuring charges or unusual items to impacted EPS, accordingly, reported basis diluted EPS is also targeted to be $1.90 to $2.

I would like to frame in a couple of items related to our flattish to up slightly comparable basis EPS guidance for fiscal 2012.

While we are pleased with the underlying US depletion trends, as mentioned earlier, shipments exceeded depletions during fiscal 2011.

For fiscal 2012 and thereafter shipments should generally align with depletion on an annual basis.

As we overlap FY '11 shipments, running ahead of depletions, we will face a difficult comparison in FY '12 as we currently anticipate flattish organic sales and modest EBIT growth for our US wine business.

As shipments align more closely to depletions, we expect to see some change in the year-over-year timing of sales and EBIT by quarter.

The most significant impact will be about $0.07 to $0.10 of EPS, which will move from Q3 to Q4.

Our EBIT will also be impacted by the sale of the Australian and UK business.

As mentioned earlier, this business produced $9 million of operating income and $6 million of equity earnings, or $15 million of EBIT, in fiscal 2011.

This EBIT was earned in the third and fourth quarters.

With interest and cost savings, we expect the transaction to be slightly dilutive for fiscal 2012.

This business recorded sales of $775 million in fiscal 2011.

We estimate approximately $90 million of those sales will become third-party sales for our North American segment going forward, which will be adjusted in our organic sales reporting.

While there is some minor near-term earnings impact, the sale of this business improves our financial profile as operating margins should improve by more than 400 basis points.

We also expect earnings to be less volatile and foreign currency exposure to be greatly reduced.

Turning to the beer business, Rob noted that Crown is targeting low- to mid-single-digit depletion growth for the next year.

As we outlined last quarter, the JV partners decided on incremental funding levels for marketing and promotion spending by Crown for calendar 2011 and thereafter.

This additional investment is expected to drive flat to slightly down operating earnings for Crown in fiscal 2012.

This marketing spend is weighted to the second and third quarters.

I would also like to note that interest expense is expected to be in the range of $180 million to $190 million.

We are targeting a 29% tax rate.

This rate will fluctuate quarter to quarter with the first quarter rate anticipated to be the highest.

We expect weighted average diluted shares to approximate 216 million.

Our Board of Directors has authorized a $500 million share repurchase program, which we expect to implement over a multi-year time horizon.

Currently our near-term focus is on debt reduction; however, we believe it is important to have a share repurchase authorization in place to provide flexibility, subject to market and other conditions, as part of our ongoing efforts to optimize the capital structure of the business.

Our guidance excludes the impact of any potential repurchases of common stock.

Before we take your questions, I would like to highlight that fiscal 2011 demonstrated significant progress in our efforts to enhance the financial profile of the Company.

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.

In the beer business we continue to see positive depletion and retailer results from Crown's marketplace execution.

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

Our free cash flow generation profile has stepped up significantly.

Our $600 million to $650 million free cash flow projection represents an approximate 14% yield on our current market capitalization.

With that level of free cash flow rough math would indicate a comparable basis EBITDA leverage ratio around 3 times by the end of fiscal 2012.

This provides us flexibility in our capital structure management.

With that, we are happy to take your questions.

(Operator Instructions).

Kaumil Gajrawala, UBS.

So as you guys -- as we think about the difference between shipments and depletions, or the guidance of flat revenue growth on flat to marginal EBIT growth, can you give us a read on where maybe the flex points would be in SG&A or somewhere else where there might be some leverage if trends are any better or any worse than expected?

Well, the guidance is really what the guidance is.

As far as the flattish EBIT growth in the guidance for next year, it is strictly a function of overlapping this year's shipment and depletion imbalance.

The underlying business is, as I think that we reported, remains pretty strong.

You look at the focus brands in particular, which constitute the majority of our profitability, are growing -- grew last year in the 10% range from a depletion point of view.

So as far as flex points go, we will be watching all lines of the P&L very carefully to ensure that we generate the results that we have guided to.

Maybe another way is there is probably some corporate expenses related to the divestitures that would get pulled out of SG&A.

Would any benefits from that just be offset by negative leverage or something?

It is all figured into the guidance.

We don't expect SG&A to go up much in fiscal 2012, Kaumil.

It should be relatively flattish.

Okay, got it.

Then as you think between debt reduction and buybacks, is there a target cap structure at which there is less benefit to reducing debt beyond that point?

To optimize our WACC we should probably have an EBITDA leverage ratio in between 3 and 4.

So we would probably be in that -- that will be the ideal range.

But that is not saying we wouldn't go lower than that if we felt that for a temporary period of time that made the most sense.

Okay, got it.

Then the last question on Crown, are there any particular regions of the country that are disproportionately benefiting -- or contributing to the improvements at Crown?

I am trying to get a little bit of a read on if there are regions of the country where the economy is improving at a different pace than what would be happening on average nationally.

I would say not really.

Texas has been a fairly strong market for us even through the recession, largely because of the oil interests in Texas the economy there has not been as badly hit as other places.

But in general it is a fairly across-the-board kind of thing.

We would expect better growth in the geographies where we are launching the Victoria brand, which we expect big things from.

It did quite well when we did the test market in Chicago.

So we would expect that to grow those geographies, one of which is Texas.

Other than that there is probably puts and takes.

Got it, thank you.

Judy Hong, Goldman Sachs.

First, on the US wine business, so in the fourth quarter can you give us the wine depletion number?

I know you give us the wine and spirits together, but just the total US wine depletion number and then also the focus brands that are just wine brands.

So depletions in the fourth quarter were low single-digit and below the total year.

So the total year was about 3% depletion growth.

So they were below that, but still within the low single-digit range.

And the focus brands were fairly consistent with what they had been for the year.

Okay, so high single digits level?

Yes, and the focus brands are much higher than that, obviously.

Then, Rob, if you think about the health of the wine business, and I think you have talked about generally being pleased with the health of the business, but it sounds like maybe the promotional activity remains intense.

You're taking select prices and increases in some of the markets in wine.

So I am just trying to understand how you think about your ability to really pace your wine sales growth in-line with the category growth.

Does it really hinge upon the competitive dynamics getting more rational?

Is there a risk that you really have to step up more spending to drive that improved depletion growth as you get into fiscal 2012?

So what I said was that we expect in 2012 to grow our depletions in-line with the market growth.

And we expect the market growth to be somewhat similar to what it was last year, so we, in other words, expect our depletion growth to be similar to what it was last year.

Now this is not premised on any significant or material change in the marketplace; meaning we are not premising our depletion growth this year on the fact that promotional activity will decrease or increase.

We expect it to remain fairly constant and very similar to last year.

So is the softening trends that we are seeing in the food store data, is that more limited to that channel, and other channel, the depletion trends are actually a little bit better than -- and your share performance is better than what you see in the food store channel?

In some cases, yes, and in some cases, no.

Clearly the mass merchandise channel is probably our strongest channel, where we are -- I would say significantly outperforming the market.

When I save mass merchandise I am talking about club and mass merchandise, the Targets, the Costcos, the Walmarts.

We are doing extremely well in that particular channel.

The on-premise remains a tough channel and we are not planning on getting much better.

It is probably flattish at this stage.

IRI is about 30% of the market and you see how that channel performs.

We probably outperform in liquor stores, states, the IRI channel.

But all that said, what is really going on here is last year we promoted extremely heavily in the first half of the year and then pulled back fairly dramatically on our promotional activity in the second half of the year.

You can see that in the IRI.

It is plain and simple.

As we move into this year we are moving our promotional activity quite considerably versus what we did last year.

So you're probably going to see that because we were overlapping the very strong promotional activity in the first half of the year, last year, and we are not going to do it the same way this year, we are actually smoothing it out more, you'll see IRI weakness during the first half as we overlap that strong promotional activity.

And then as we choose to promote more heavily during the year, eventually you'll see that reflected in IRI type data.

Okay, (multiple speakers).

I expect the IRI to be fairly volatile.

Okay, and then on the Crown JV it looks like your guidance implies margin compression as you step up spending.

So I guess it also implies that you're not planning to really look at pricing as a lever to get more margins.

Is that correct?

Yes, and we talked about this in the third quarter, Crown Topline is moving quite well.

They are actually in quite a good position pricing-wise.

Crown really doesn't anticipate taking a lot of, I will call it, frontline pricing, meaning just flat out price increases.

What they do anticipate doing is reducing promotion spending, which will end up -- you will see it in IRI -- you will end up with a higher net sales per case.

The wide majority of that promotion savings will be reinvested in media and marketing.

So you won't see much of that reduced promotion spending flow to the bottom line.

However, the increase -- the net increase in promotion and marketing in '12 over '11 is due to the JV partners' agreement to ramp up that spending.

And so Crown will be spending in absolute dollars more in FY '12 than they did in FY '11.

You will see that flowing through their P&L.

Okay, and is that a one-time incremental spending or is there some year-over-year increase obligation that Crown needs to take every year from a spending perspective?

Well, essentially, it is an increase in fiscal 2012 over fiscal 2011.

That increase will remain through the eternity of the JV agreement.

Got it, okay, thank you very much.

Lauren Torres, HSBC.

I am just actually trying to understand also your earnings growth guidance for this year.

I'm just thinking about the pieces here.

And obviously, I do understand the impact of the distributor inventory levels being high, but knowing that you're taking some pricing, maybe promotional activity won't be that high generally for the industry this year, and depletions may still grow but at this low single-digit rate, I am just thinking about all that combined why can't we see some better earnings growth?

I don't know if your guidance here is just conservative at this point or there is other issues that we are not really thinking about in that mix.

There is one factor that you left out, which is you will see higher promotional expense this year versus last year.

The reason for that is you've got to remember we promote against depletions.

And while shipments are fairly flat because of the overlap of the inventory build during the distributor transition, depletions are growing, and therefore, you'll see promotion growing.

Now on a depletion basis promotional expense per case won't really change very significantly, but if you're looking at the P&L, which is really based on shipments and not depletions, you're going to see you promo grow as depletions grow.

So that is what is going to offset what would apparently generate more eBay growth this year if you were only looking at the factors that you mentioned.

So that is really what is going on here.

So let me augment that a little bit.

Rob explained the big piece, which is, basically, sales are going to be flattish.

GAAP sales are going to be flattish and EBIT will be slightly up for the North American wine business, and it is due to the overlap of the inventory increase in fiscal 2011.

The other two pieces, remember, are Crown EBIT, we are forecasting to be down year-over-year because of the incremental marketing spend that I just described.

And the Australia and Europe business, those profits are no longer there.

So they had an EBIT of about $15 million in fiscal 2011.

They aren't there in fiscal 2012.

They are the big three pieces.

That's helpful.

If I can ask also just (multiple speakers).

That is about $0.03, $0.04 on the TWA Australia and Europe EBIT loss, by the way.

Also, too, with respect to US consumer trends, Rob, I know you mentioned on-premise still being tough and not really expecting an improvement this year.

With that said, though, are you seeing as far as just take home consumption, increased frequency of purchases, maybe trading up?

Is US consumer you are seeing firming up a bit, or we really not seeing that yet?

I think that we have already seen the US consumer firm up.

I do think that we are anticipating a big change in consumer behavior during our FY '12, so the calendar year '11 and the beginning of calendar year '12.

What we have seen is the consumer is definitely back, is definitely purchasing.

We see strong -- very good growth in the wine business, in particular.

The only negative -- there is really two negatives that we see, which is the consumer still remains extremely price sensitive, and is looking for a deal, and therefore, promotional activity remains robust.

So the consumer is there and the consumer is purchasing, but the consumer really wants a deal.

Number two, interestingly enough, the consumer is really take advantage of the fact that there are deals out there, and we see a lot of trading up going on in the business because we see a lot of good promotional activity at some of the higher price points.

So a good example is wines between $15 and $25, where the consumer is definitely take advantage of the fact that you're seeing a lot of wines that were selling about $20 pre-recession now selling below $20, and therefore, they are trading up to those wines from either the super premium or ultra premium category, or they are trading from super to ultra or ultra to luxury.

So you may recall super premium, when we talk about that (inaudible).

When we talk about ultra premium it is $12 to $15.

When we talk about luxury it is over $15.

So we are seeing a lot of trade up of activity driven by promotional activity in that regard.

So on-premise remains flattish.

I don't see that changing that much either.

It could move to slightly up.

That is just going to take time and is going to be a much -- very closely tied to unemployment.

And we all have our own opinion on where that is going to go, but I think everybody largely predicts that as a trailing indicator that unemployment will continue to be slow to rebound.

There are other factors in the marketplace that I think are going to keep consumer behavior the same.

I think that everybody has concerns about inflationary pressures as we go into this year.

We don't expect it to really affect our business the way that it might affect others, because it is very linked to gas and oil prices, and that isn't really a big, big factor in our cost of goods sold or that kind of thing.

But I think it is going to be a negative -- continue to be a negative headwind relative to the consumer.

So you get some positive headwinds with the consumer -- or some positive winds with the consumer on the one hand, offset by some headwinds related to inflationary pressures.

So this all reads to me that we are going to see a similar consumer environment to what we saw last year.

If I could just ask Leslie on Crown, you mentioned that incremental marketing investment.

Is that really behind Victoria and the Modelo Especial or are you putting any more money behind the Corona brand?

Yes, we are putting more money behind the Corona brand.

Crown is the strongest major beer company in the United States today probably by a wide margin.

The brands are performing very well as we have come out of the recession.

Corona has rebounded.

Modelo Especial is probably the strongest major beer brand of -- or significant beer brand of any beer brand in the country.

Crown is going to put more spending behind brand building and maintaining the strength of what are already very, very strong brands.

And we are completely behind that and anticipate that for the long-term is going to be very, very solid investment.

Okay, thank you.

Vivien Azer, Citigroup.

My first question has to do with the pricing that you guys are going to be taking.

It seems like maybe we are already seeing a little bit in the standard data.

I was wondering if you could comment on whether the price increases you are taking are in-line with what you're seeing from your competitors?

Are you taking more or less pricing relative to the categories?

Our pricing that we take, we have got systems and processes in place to make sure that it is in-line with our competitors and that we are not getting out of wack with competitors.

But, remember, almost all of our pricing is in our non-focus and nonstrategic brands, which you also have to remember constitute a very large percentage of our business, not from a profit perspective, but from a volume perspective.

So we may take some pricing on things like dessert wines, sparkling wines, value products that are relatively large from a volume perspective, but relatively small from a margin perspective.

So it impacts our overall numbers quite considerably.

That is why we have now added information about our focus brands and how those focus brands are doing from a depletion perspective, so that it is easier to separate what is going on with the nonstrategic part of our portfolio versus the more strategic part of our portfolio -- or the strategic part from our portfolio.

Really those 17 brands which we highlighted.

Got it.

And (multiple speakers).

Hopefully that is going to be helpful to you.

It definitely it is.

In terms of the nonstrategic brands in the portfolio, is there room to cut -- to kind of clean it up, help you guys maybe better execute against the focus brands strategy?

That is what we are doing in a sense.

But they make -- they are profitable, and so we are very carefully balancing with those brands margin and volume.

What we are not particularly concerned with is marketshare or volume per se, because they're nonstrategic.

So we have to balance volume and margin on those brands very carefully.

On the focus brands we are very concerned with brand building and the strength of those brands, both from a marketshare and volume metric point of view.

On the other hand, even on those brands, like in any business, we want to make sure that we maintain their integrity from a margin perspective as well, so it is always a balance.

Got it.

My last question has to do with ad spending.

I know you guys will disclose it when you put out your K, but can you give us a sense of what your ad spending was end of the year?

When you say ad, you mean specifically on the targeted media or what we call marketing?

Advertising.

The (multiple speakers) you guys break out as part of SG&A.

Outside of the beer business, no, we don't do a ton of advertising in the wine business.

Most of what we call marketing is on-premise.

The Crown guys do do quite a bit, but that is not in our P&L.

Okay, thank you.

Dara Mohsenian, Morgan Stanley.

Maybe you can discuss since your beer depletion results in the quarter came in relatively in-line with your expectations prior to the quarter if there was any upside?

So far in March and April post this quarter have you seen any deceleration in the convenience channel with the higher gas prices or is momentum continuing?

It is a little early and that is a pretty specific question, Dara, but I think in general the beer depletions are pretty much going in-line with what our expectations are for the year.

As you know, we are approaching, for at least the Mexican beer business, on the piece which is Cinco de Mayo, we are kind of lucky that we kind of own that holiday.

And that kicks off the key beer selling season.

And we are focused, and we will be doing a lot of our marketing spend in the second and third quarters.

As we mentioned, you'll see a lot of our stuff on major league baseball.

You will see some new commercials, which have already started.

We are anticipating having relatively heavy marketing spend for the NFL season as well.

So that is where you'll see our focus, and that is where most of the beer sales occur.

Okay, and have you seen any slowdown in convenience with the higher gas prices?

Is that a big concern?

The convenience channel has actually come back a bit, but it could be affected by gas prices.

It could be.

In our convenience channel we do have -- well, this year will be for full year the 24 ounce Modelo Especial can.

So that might be helping our results year-over-year as well.

Okay, that's helpful.

Then, Rob, can you just give us an update on where acquisitions fit into your cash flow priorities?

Obviously, you have outlined that paydown in repurchases, but I'm just wondering where acquisitions fit in at this point.

Well, it is not terribly different than it has been in the past.

Acquisitions are hard to predict because the opportunities have to be there, and they need to be very strategic and they need to meet our financial criterion, so we can't really predict when those types of acquisitions will present themselves.

Clearly, our debt is down to levels and will dip down to even lower levels where it shouldn't be a concern relative to our making selective acquisitions.

But those acquisitions have to be available and have to make sense for us.

And [absent], until there are any debt paydowns, we will continue to be a priority for us.

And, obviously, with respect to the multi-year stock buyback that we announced, we will be evaluating the market and evaluating whether it makes sense to buy back stock as we move forward.

So we've got a good mix of things that we can use cash for at this stage.

And cash utilization strategy clearly is something that we are thinking about given our very strong cash flow performance last year, and our even stronger predicted cash flow performance this year, and the fact that we expect a fairly strong level of cash flow generation going forward.

Reza Vahabzadeh.

So on the issue of the balance sheet, given your share repurchase program, would you anticipate continuing to reduce net leverage after FY '12 and getting below 3 turns, or would you anticipate basically staying at those leverage levels?

I'm just trying to find out what the ultimate ledge net leverage goal is.

The answer to your question is, it depends.

If we don't find it appropriate to utilize cash in any other way, we'll continue to reduce debt levels beyond FY '12.

On the other hand, if opportunities present themselves that we think make sense or we are determined to take advantage of our stock repurchase program, that will impede the rate at which we will continue to pay down debt.

But absent a significant transaction, regardless of other activities, debt will continue to be paid down.

I can't -- I'm not going to make predictions beyond FY '12, but it is conceivable that debt will continue to be paid down beyond 2012.

This is like our favorite business issue, I guess, what to do with our cash.

A good place to be.

Right, right.

Well, it is a fair amount of free cash flow, so it is a big question, I guess.

Sure.

As far as operating results for the fourth quarter, were they in-line with your expectations for North America wines, as well as Crown Imports at the beginning of the quarter?

Yes, I would say they're probably in-line to slightly better than we anticipated.

I would say that the better mostly came from the beer business and, actually, from the Australia and UK business.

They both performed a little better than we anticipated at the end of the third quarter.

The US wine business was pretty much in-line with what we thought.

Got it, thank you.

Mark Swartzberg, Stifel Nicolaus.

Rob, also, talking a bit here about the US wine outlook, could you talk a little bit more about the focus on the focus brands, the 9.6% we saw for the year, how was that in the quarter?

And as you think about fiscal 2012, what kind of assumption are you making about how those -- how that trend performance versus the overall portfolio trend?

So fourth quarter, the performance of the focus brands was very similar to the whole year, so high single digits on the depletion trends.

On the focus brands for the fourth quarter we expect that the focus brands will continue to grow at a similar rate for next year as well.

Okay, great.

As we try to think about the mass merchants having seemingly particularly strong growth in the quarter, how does that affect your product mix?

Is that a good thing, a bad thing, an indifferent thing?

I presume that the focus there is with your focus brands, but if that is the right assumption, if you will, taking out for the balance of the year that that channel does better than your overall channel mix, how does that affect your mix -- your product mix?

I think it is not an enormous impact.

Look, the on-premise channel generally has a better mix of product, meaning a higher price, higher margin product.

So that is not a huge part of the business.

So the big thing we focus on from a mix perspective is the focus brands, because these are our largest scale products with the best gross margin and ROIC profile.

So from a mix perspective, we really try to focus on that.

From a channel perspective, outside of that on-premise, that little nichey comment on on-premise we are agnostic as to -- we make the same money generally by channel.

Okay, fair enough.

Then on the pricing commentary from the prepared remarks and here in the Q&A, can you flesh that out a little bit more for us?

Is it fair to think you're taking pricing really across the portfolio of percentage levels or what is the detail that I have might missed there?

I specifically said we are taking pricing on value and specialty products.

Got it, value and specialty.

Specialty products are products like dessert wines, kosher wines, sparkling wines, things like that.

None of them -- I don't think any of them are -- well, one of them may be in our focused wine (multiple speakers).

But marginally on nonstrategic specialty and value products.

Is the thought there that it helps encourage folks to trade up, while also improving profitability in those particular products or is it more cost driven?

No, we are just balancing margin and volume, and being strategic as to where we think we can take some pricing or reduce promotion and where we don't.

That is basically it.

it is a little -- it is dissimilar -- I think I know where you're going -- what the beer guys are doing with the subpremium pricing versus the premium pricing.

Just because of the sheer SKU count in wine versus beer, I don't think we approach the wine business, let's price this and they are going to move up to this category, there are kind of too many SKUs to do that.

Okay, great.

Then finally here, as we think about GM for US wine as for North America wide as we look out, I guess two final questions.

What is your view about the cost per case outlook you will be facing over the next two months versus the last 12, and grapes, obviously, being affected there?

Then, B., how are you thinking about GM overall?

Obviously, the quarter was strong under GM.

Some of that was just the sheer scale of the volume versus the cost base.

But how are you thinking about the GM trend for North America wine over the next 12 months?

So I guess a couple of things.

The fourth-quarter gross margin trend I wouldn't get overly ingratiated with because of the year-over-year overlap and the fact that inventories were taken down in last year's fourth quarter.

But that being said, in fiscal 2011 the expensive harvest 2008 red vintage flowed through the P&L, so that increased our grape costs in fiscal 2011, which tended to reduce our gross profit margin.

That vintage is now behind us.

So we don't anticipate increased grape costs per ton.

Gross margin, we are focused on improving our gross margin in a number of ways.

We have quite a few initiatives that we will bring you through at the investor conference of how we are adducing our operating costs and how we are approaching that quite differently.

Plus the focus brands, which you saw growing faster than the rest of the category, tends to have a better gross margin profile, that will help us.

And the US consumer is trading up.

You can see that in IRI, and that also helps our gross margin profile.

So trading up, our focus on reducing operating costs should all -- and reducing grape costs should all benefit our North American gross profit margin going forward.

That's great.

Thank you.

If I could just change topics for you.

Bob, it is nice to see this tax rate having the benefits it is, and you're saying is a multiyear phenomenon.

If we try to zero in on one of the things driving that improvement, which is simply these capital losses on the international wine sales, can you put some parameters over the cumulative loss you think is deductible -- does it exceed $1 billion -- and how deductible is it?

What pace of deductibility might you get versus that capital?

So I addressed a lot of this in my script, but I think what we said was -- and this gets a little confusing -- from an effective tax rate perspective, meaning just the P&L tax rate, okay, all of that hits in the fourth quarter of 2011, and we called it noncomparable.

Now from a cash perspective and that noncomparable P&L benefit in the fourth quarter was just shy of $200 million.

We said that $200 million number will be a positive cash in the bank in FY '11, FY '12 and FY '13.

$30 million of it hit in FY '11, the remainder is about 50% in FY '12, 50% in FY '13.

That is our current best guess.

Got it.

And you think that is the extent of the benefit from all the losses -- the accumulated capital losses, whether it was this latest sale or does that include the other sales that proceeded that?

Right now that is all we are anticipating.

It is about that $200 million cash benefit.

Got it.

(multiple speakers).

Remember that $200 million is an after-tax number, so the loss, you would have to tax effect that.

Yes, yes, okay.

If there is upside to that number just kind of -- is it a potential upside of 10%, 40%?

Are we pretty close knowing where you are with (multiple speakers)?

Right now we are really focused at putting the $200 million in the bank, so as new information comes forward on anything additional we will talk about it at that time.

Excellent, thank you guys.

Christine Farkas, Banc of America - Merrill Lynch.

Thanks for taking the question.

I will be brief.

Just quickly, in the fourth quarter you were hopeful with respect to the $29 million of incremental profits that came from the step-up in volume with [Euro] or the year-over-year timing.

Could you help us with what the impact was on the revenue?

And could you tell us what the shipment growth was in the quarter, not just for the year?

On the revenue side, we said this last year in the fourth quarter as well, $60 million or $70 million of reduced revenue in fiscal 2010 that we were overlapping.

And that equivalized to, I think, $0.05 to $0.07 of EPS -- $0.07 to $0.09 of EPS, sorry.

Would I then look at your incremental $29 million on top of the revenue lap to give us an implication of what the margins were on those products sold, because that seems pretty high?

I don't know, that is pretty detailed.

There is a lot of moving parts.

So what I think, Christine, maybe you should give Patty or Bob Czudak a call.

Okay, and then on the shipments, your press release was helpful and gave us some shipments for the year, about 3.5% in North America.

Given the overlap, would you have the shipments growth in the fourth quarter?

Again, that is relatively detailed.

But the shipment growth in the fourth quarter would have been impacted by that $60 million to $70 million of overlap from the prior year.

We have given these additional disclosures in the press release, but the one thing you have to be aware of when you look at shipments versus depletions, although the growth rate in both look similar, it is kind of a coincidence, because you have to think about what the underlying absolute number is.

And because in fiscal 2011 shipments exceeded depletions, they don't necessarily work in consort.

You have to really think through that.

Okay, thanks for that.

I will follow up.

Then, just finally, you already touched on your views about acquisitions, but I am just wondering, given the your last transaction in spirits was a net sale, how do you position yourself -- or how would you view yourself with respect to your spirits portfolio?

Is there room for acquisitions down the road?

Yes, I think that there is room for acquisitions down the road.

Again, they have to serve a purpose.

They have to be strategic.

They have to contribute to our overall profitable organic growth imperative.

There is room, but it is very hard to predict when acquisition opportunities will present themselves that make sense for us.

That makes sense.

Thank you so much.

Carlos Laboy, Credit Suisse.

Two questions.

The first one on wine promotional spending, can you expand on that?

I know you have spoken at length about it today, but if you can give us some more insight on the size, scope, timing, nature of this promotional spending for 2012?

And walk us through how this goes through the P&L.

Does it put pressure on pricing as we go forward?

Sure, so we are expecting promotional spending levels on a raise per case basis based on depletions to be roughly similar to 2011, is the basic answer to your question.

Just remember that promotion flows through our P&L as a reduction of gross sales and is therefore between the gross sales and the net sales line on the P&L.

So you don't see it as net sales, you see it -- it is reflected in net sales, but it reduces gross sales.

Okay, thank you.

Just to clarify, is it flat relative to 2011 or up relative to 2011?

I said that it is relatively flat to 2011 on a per case basis (multiple speakers).

Or an absolute dollars basis.

Okay, or absolute dollars for that matter, as Bob just pointed out.

On Crown, what is the EBIT growth scenario for Crown looking out beyond 2012, if this reinvestment rate and spending behind the brand stays high?

Do you expect it to remain high given the stage of development where these growth brands are or do you expect that we will see earnings growth out of Crown at least in-line with revenue growth beyond this year?

Rob Sands So the way the joint venture works -- a lot of things are contractual.

So the Crown EBIT growth this year was a bit anomalous.

Because of the increase in marketing spend we don't anticipate any more increases in marketing or promotion spend in the future.

But the EBIT growth generally will go in-line with what volume and pricing does.

So if they continue to perform as well in the marketplace as they are now, yes, I would anticipate EBIT growth.

Thank you very much.

Neal Rudowitz, JPMorgan.

I will just ask one question at this point.

Can you just give us an update on the level of inventory at your distributors?

It seems like the average inventory days would have to be higher relative to where they were when you started the transition.

So if that's the case, and if so, how much higher, and is that sustainable going forward?

Thanks.

Our distributors carry on average about 60 to 90 days of inventory, and through the distributor transmission we added about 5 to 10 days, but we are within the 60 to 90 days on average that I mentioned.

So you started out lower than or just at the lower end of that average, I guess, before the transition?

I am sorry?

So you started out at a lower than average level or at the low end of the range before the transition then, if you're still within the range now after a year and a half, is that correct?

Yes, it is a wide range though, so, I guess you could characterize it that way.

Okay, thank you.

That will be the end of our Q&A session for today's conference.

I will turn the conference back to Mr.

Rob Sands for any further remarks.

Well, thank you very ready for joining our call today.

As I indicated, I am very pleased with the progress that we made throughout the past year, particularly in the areas of free cash flow generation and debt reduction.

Our significantly enhanced financial profile, the momentum achieved from our US distributor initiative, and our operational improvements position as for success in the future.

As I mentioned, we will be hosting our investor conference in New York on May 18.

I look forward to seeing, hopefully, all of you there at that time.

So thanks again for your participation.