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Operator
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 first quarter 2012 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 would now like to turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations.
Please go ahead.
- VP, IR
Thank you, Melissa.
Good morning, everyone, and welcome to Constellation's first quarter fiscal 2012 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 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 and financial history.
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 detail of the risk factors that may impact the Company's estimates, please refer to the news release and Constellation's SEC filings.
And now I'd like to turn the call over to Rob.
- President & CEO
Thanks, Patty, and good morning, everyone.
Welcome to our discussion of Constellation's first quarter fiscal 2012 sales and earnings results.
Before we get started, I'd like to thank those of you who attended our recent New York City investor meeting.
I hope one of your key takeaways from that meeting is that Constellation is evolving as a disciplined and tightly aligned Company.
We are executing on our strategic imperatives to premiumize our portfolio, build our brands, strengthen our financial profile, and unify the core foundation of our businesses.
All in an effort to achieve one common goal, profitable organic growth.
As part of our ongoing efforts to improve the business as outlined in this mornings press release, we are taking steps to further strengthen the core foundation of our business.
With the recent sale of our UK and Australian business, we have significantly improved our financial profile and simplified our business, which provides an opportunity for us to increase efficiencies and streamline our organization worldwide.
During the first quarter we began to implement organizational changes in an effort to align our cost structure with our simplified business model.
Bob will provide additional financial details in a few minutes.
And now I would like to focus on a discussion of our quarterly results.
We're off to a good start for the year with results that were generally in line with our expectations.
Highlights for the first quarter include our excellent free cash flow results, continued debt reduction activities, and significantly improved profit margins.
In addition, the Crown joint venture continues to outperform the US beer industry and the import category.
This is being driven by Crown's focused marketing efforts for Cinco De Mayo and the second annual Win the Beach Sweepstake, as well as incremental volume generated from the continuing launch of the Victoria Brand.
As expected, depletion trends for our US wine and spirits business in the first quarter were a bit muted.
This is the result of the following actions.
During the First Quarter, we took price increases on certain specialty and value products which negatively impacted volumes.
And it was during last year's first quarter that our promotional spend exceeded that of the market, as we worked to jump start the portfolio following the distributor transition when we were focused on executing our consolidation strategy.
Therefore, this year's first quarter represents a tough sales comparison versus last year, as we overlap higher than average promotional spend from last year.
Overall for fiscal 2012, we are targeting promotional spend that is in line with last year's, although the timing is different in that it is less skewed to the first quarter.
Therefore, our expectation is that you will see improving depletion trends as we move through the year.
As you know, at any given point in time during the year we do pulse our promo activity as appropriate based on any number of factors including business seasonality and the competitive environment, as well as consumer takeaway 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.
During fiscal 2012 and for the remainder of the contract term, we expect our US domestic shipments to essentially equal distributor depletions on an annual basis.
And on an absolute case volume basis we achieved this goal in the first quarter.
We are committed to maintaining market share and growing at least in line with category growth for the US wine and spirits industry.
During calendar 2010, we accomplished this objective and maintained US market share on a volume basis in total across all channels and we intend to replicate this performance again this year, while achieving our profitability goals.
As I mentioned earlier, our total portfolio including focus brands is facing a tough comparison issue versus last year due to the timing of promotional activity, which drove focus brands depletions in last year's first quarter to a growth rate of more than 11%.
If you average the depletion growth for last year's first quarter with this year's first quarter, you will see that an average depletion growth rate of more than 7% over the last two years.
And while we're on the topic of focused brands, I'd like to discuss a new initiative that was recently launched called Maximizing Velocity and Profit or we call it MVP.
This program is a result of our work in the area of pricing and promotional effectiveness, where we have developed a model to measure the success of different promotional techniques and identify the incremental return for key promotional activities.
Maximizing velocity and profit is dedicated to committing a higher share of promotional dollars against our highest velocity, highest margin, US wine SKUs of which are included within our focus brand groups.
We expect to see the benefit of this initiative as we progress throughout the year.
From an innovation and new product development perspective, we have already launched about 50% of our planned product introductions for the year.
These brands include Rex Goliath Moscato, Arbor Mist, Pomegranate Berry, Pinot Noir, Ruffino Prosecco, Woodbridge Malbec, and the Simply Naked Unoaked line of varials just to name a few.
SVEDKA Vodka sales declined in the quarter due to an unfavorable comparison versus last year when there was significant buy-in in advance of a price increase for SVEDKA.
This is certainly not reflective of underlying consumer demand perspective, which posted double digit consumer takeaway growth in IRI channels during the first quarter.
SVEDKA continues to be the fastest growing major premium US spirits brand, approaching 4 million cases this year.
It is also the biggest climber on this year's Global Power 100 Wine & Spirits brand list, moving up 17 places to Number 29.
For 2012, we will continue to build SVEDKA's on premise brand awareness.
We have plans in place to increase our digital and median investment and we expect that you'll find our planned introduction of new packaging configurations and flavor profiles to be highly innovative.
Moving to the Crown Imports joint venture.
Crown posted a very positive first quarter, with wholesalers increasing their inventories to more optimal levels in advance of the key summer selling season and in support of the continued rollout of Victoria and the Corona Familiar.
Crown also realized positive depletion trends in the low single digit range during the quarter.
At retail, Crown outperformed the total US spirit industry, the import category, and the other 3 major beer suppliers in both case dollars and sales trends in the IRI, food, drug, mass, and convenience channels, posting positive trend in both case and dollar sales.
And among the 4 major beer suppliers, Crown was the only one to gain case and dollar market share.
During Cinco, once again Corona executed a full range of on and off premise retail promotions, outperforming all key competitors.
Crown was the only major supplier to gain market share in either case sales or dollar sales during that time frame, which is the second largest selling period during the year for Corona.
As we progress through 2012, Crown has some exciting business initiatives underway and some of the 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 was expanded into other top US imported beer markets in early calendar 2011, including Arizona, California, Georgia, and 5 other states.
The Corona Beach Getaway promotion, which was so successful during last year's summer selling season, will be bigger and better this year.
Now in its second year, the Corona Beach Getaway promotion will mark the biggest retail promotion in the history of Crown Imports and represents an evolution from last year's promotion, including more prizes, more packages, and a new promotional TV spot to drive consumers to retail to participate in the promo and drive display activity during the critical summer selling season.
Crown also plans to extend its successful Find Your Beach advertising campaign with several new executions, which are set to debut throughout the summer selling season.
Crown is excited to announce the Corona partner, Kenny Chesney, is back for a full 49 city Going Coastal Tour in calendar 2011, which is already underway.
As presenting sponsor, Corona will capitalize on this partnership via retail support and in-venue programming to promote the brand.
Lastly, the 2011 Modello Especial summer promotion will build on the 2010 momentum by partnering with Sports Illustrated to offer consumers the chance to win an exclusive international soccer trip to any match worldwide.
Collectively, these initiatives are expected to result in fiscal 2010 depletion growth in the low to mid single digit rate for the second consecutive year for Crown.
In closing, our first quarter results reflect progress against our strategic imperatives including brand building and the strengthening of our financial profile and core foundation.
Overall, I believe we are well positioned to deliver our financial and strategic goals for the year.
I would now like to turn the call over to Bob for a financial discussion of our first quarter business results.
- CFO
Thanks, Rob.
Good morning, everyone.
Q1 results were generally in line with our expectations.
Our comparable basis diluted EPS for the quarter came in at $0.39 versus $0.38 last year and we generated $220 million of free cash flow.
That's $185 million more than Q1 last year.
Let me provide some high level comments to frame in this result before I go into more details.
Throughout the year we expect to have quarterly comparison discussions due to the FY '11 US distributor inventory build, the overlap of the FY '11 supply chain disruption at Crown, increased marketing at Crown, the sale of our Australian and UK business, and the outcome of various tax items in both years.
Q1 happens to reflect favorable comparison items, which we'll discuss.
Comparable basis EBIT came in nearly $20 million or 12% higher than last year.
Of this $20 million, the North American segment increased $6 million, the Crown JV earnings increased about $6 million, corporate expenses were down $5 million, and our Australian UK business lost $3 million in the prior year.
These upside in Q1 are timing related, as we continue to expect a flattish EBIT results for the full year of fiscal 2012.
This is the first full quarter we will report results without the Australian and UK business.
Consolidated gross margin and operating margin improved significantly in the quarter as a result of this divestiture.
Following the sale of the Australian UK business, we have initiated plans to refine the structure of our remaining business and gain efficiencies.
I will outline the financial details of this initiative in a few moments.
We continue to generate very strong free cash flow, delever the balance sheet and reduce interest expense during the quarter.
The EBIT growth and lower interest expense was essentially offset by some unfavorable timing related to our comparable basis effective tax rate, which came in at 37% versus 24% in Q1 last year.
Given that overview, let's look at our first quarter 2012 P&L performance in more detail, where my comments will generally focus on comparable basis financial results.
As you can see from our news release, consolidated reported net sales decreased 19%, primarily due to the divestiture of our Australian and UK business.
North America net sales on an organic constant currency basis increased 2%.
This reflects favorable mix and lower promotions in the US, partially offset by a decrease in volume.
Now, let's look at our profits on a comparable basis.
For the quarter, our consolidated gross margin was 39.5% versus 34.5% in the prior year.
This primarily reflects the benefit of divesting the lower gross margin Australian and UK business.
Favorable product mix and lower promotion costs in the US were offset by higher costs for imported products and transportation costs, mostly fuel.
Our consolidated SG&A margin for the quarter came in at 21.4% of net sales, which was even with Q1 last year.
Consolidated operating income increased 12% to $116 million and operating margin increased 5 percentage points to 18%.
I'd now like to highlight the segment operating income results to provide highlights to our operating income change.
North America segment operating income increased $4 million to $137 million.
Improvement in sales mix and lower promotions was partially offset by the higher cost of goods sold I mentioned earlier and increases in G&A and marketing expenses.
Corporate costs were down $5 million, primarily related to lower expenses for our project fusion initiatives.
As mentioned earlier, the Australia and Europe segment reported an operating loss of $3 million in Q1 last year.
Consolidated equity investment earnings totaled $62 million versus $55 million last year.
Equity earnings for Crown totaled $60 million versus $54 million for the prior year quarter.
For the quarter, Crown generated net sales of $678 million, an increase of 9%, and operating income of $120 million, an increase of 10%.
As Rob mentioned, Crown had positive depletion growth and gained share in measured channels.
The robust net sales and EBIT growth, however, were primarily driven by shipments which exceeded depletions for the quarter, as distributor inventories are better positioned going into the summer selling season versus last year.
Crown also saw improvement in net pricing and mix, but had higher marketing costs during the quarter.
Interest expense for the quarter was $44 million down 9% versus last year.
The decrease was driven by reduced debt levels during the quarter.
Let's take a look at debt.
At the end of May our debt totaled $3 billion.
This represents a $244 million decrease from our debt level at the end of fiscal 2011 and was driven by our strong free cash flow generation.
Given our near-term focus on debt reduction, we pre-paid $400 million of term loan debt through a combination of cash and revolver proceeds during Q1.
The net debt decrease drove our debt to comparable basis EBITDA ratio down to 3.2 times at the end of May, from a 3.6 times ratio at the end of February.
Our continuing deleveraging efforts drove credit rating upgrades during the quarter.
These ratings are now one notch below investment grade and represent the highest ever achieved by Constellation.
As mentioned earlier, our comparable basis effective tax rate came in at 37% versus 24% in Q1 last year, which reflected the favorable outcome of various tax items.
Now let's discuss free cash flow which we define as net cash provided by operating activities less CapEx.
For Q1, we generated free cash flow of $220 million versus $35 million in Q1 last year.
This improvement reflects a cash benefit for taxes and reduced use of cash to fund receivables.
In the quarter, we received a net refund of taxes, primarily related to the Q4 fiscal '11 sale of our UK business.
In addition, our receivable balance increased less than the previous year due to timing of sales within the quarter and the sale of our Australian and UK business.
We continue to target 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 and cash restructuring costs of approximately $26 million.
Now let's move to our full year fiscal 2012 P&L outlook.
We continue to expect comparable basis diluted EPS to be in the range of $1.90 to $2.00 a share versus the $1.91 result for fiscal '11.
I would like to reiterate a couple of items related to our guidance for fiscal '12.
As a reminder, shipments exceeded depletions during fiscal 2011 for our US wine and spirits business.
For fiscal 2012 and thereafter, shipments should generally align with depletions on an annual basis.
Our fiscal '12 year-over-year EBIT growth will be impacted by the fiscal '11 shipment number exceeding the fiscal '11 depletion number.
In Q1 of both FY '11 and FY '12, shipments were generally aligned with depletions so there was no overlap issue.
In the second and third quarters of fiscal '11, shipments exceeded depletions.
Therefore, in the second and third quarters of fiscal '12, this will present overlap issues on reported sales growth, which will negatively impact EBIT growth.
For the full fiscal year we continue to anticipate depletion growth for the US wine and spirits business in the 3% range.
As Rob mentioned, we expect improving depletion trends as we move through the year given our promotional program, prior year overlaps, and new product launches.
The overlap of the prior year distributor inventory build should keep our North American wine business at flattish organic sales growth and modest EBIT growth for the full year.
Turning to the beer business, as noted earlier by Rob, Crown is still targeting low to mid single digit depletion growth for this year.
As we have previously outlined, the JV partners decided on incremental funding levels of 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 '12.
This marketing spend is more heavily weighted to our second and third quarters.
For Q2 fiscal '12, we expect EBIT to be $15 million to $20 million less than Q2 last year, essentially reversing the Q1 fiscal '12 EBIT growth.
This reflects the impact of the overlap of the prior year distributor inventory build in the US, higher promotion marketing expense in wine, and increased marketing at Crown.
This will be partially offset by continued positive mix shift in US wine.
I would also like to reiterate that interest expense is expected to be in the range of $180 million to $190 million and we are targeting a 29% effective tax rate for the full year of fiscal '12.
Given the 37% rate in Q1, we expect our quarterly tax rate to fluctuate over the remaining quarters, and due to the timing of various tax items, we currently expect the Q2 rate to be around 10%.
We expect weighted average diluted shares to approximate 216 million.
We did not repurchase any common stock during Q1 and our guidance excludes the impact of any potential repurchases of common stock.
As discussed earlier, we began to implement organizational changes to increase efficiencies.
As a result, we expect to generate cost savings of more than $10 million from centralizing certain administrative, operational, and commercial functions on a global basis.
This benefit should be minimal for fiscal '12 and most of it should be realized in fiscal '13.
In connection with this initiative, the Company expects to incur one-time cash charges of approximately $26 million, including $13 million of restructuring charges from employee reductions and $13 million of other related costs.
Nearly all of the charges are expected to be recognized during fiscal 2012 and will be excluded from our comparable basis results.
Before we take your questions I would like to reiterate the Q1 results were in line with expectations and we are on track to achieve our fiscal 2012 comparable basis diluted EPS goal.
We're also on track to achieve our $600 million to $650 million free cash flow goal, including funding for the restructuring program, as we continue to take steps to improve the organization and streamline the business.
Our strong free cash flow should move our comparable basis EBITDA leverage ratio to around 3 times by the end of fiscal 2012.
This provides us flexibility in our capital structure management.
With that, we're happy to take your questions.
Operator
(Operator Instructions) Judy Hong of Goldman Sachs.
- Analyst
Just on the wine depletion trends, obviously the comparisons were pretty tough on a promotional spending timing period, but if I just looked at your mix now, so your focus brands is roughly two-third of your total US domestic volume.
If the focus brand can sort of grow in that high single digit rate, it sounds like the non-focus brands really have to show much more moderation in terms of the decline or that the focus brands really have to accelerate at a faster pace.
So can you just help us understand how we think about what's going to drive the focus brands to really grow even beyond kind of that high single digit that you've mentioned sort of on a two year run rate basis?
- President & CEO
Yes, Judy.
First off, if you look at first quarter last year, the focus brands grew, as I mentioned in my talk, about 11% and of course first quarter this year they grew at a much faster pace than our overall growth rate.
And on a blended basis, as we said all along, as we move throughout the year we expect, taking into account how the non-focused brands will perform, the overall portfolio to maintain market share against the category.
- Analyst
So it sounds like you really have to then step up spending more meaningfully, so can you maybe just talk about the margin implications as that happens?
What's sort of embedded in that expectation?
- President & CEO
Right.
We will spend on promo the same amount this year on a per case basis, taking into account mix, as we spent last year.
Therefore, since we significantly under-spent what we spent last year in the first quarter, we will step up promo spend in the latter part of this year versus last year.
So basically we just simply have the reverse pattern of what we did last year with promo last year more geared towards the beginning of the year and promo this year more geared towards the middle and latter part of the year.
So the answer is yes, it's going to increase significantly as we go through the year, but that's all baked into our guidance and is expected, was expected and this is what we've been discussing with you for some time now.
- Analyst
And then, Bob, just in terms of the comparison items that you cited, for the full year fiscal 2012 we have unfavorable comparison because of the shipments and depletions like last year, but in Q1 you've talked about actually benefiting from some of the favorable comparison items.
So on the Crown, it sounds like it's really shipments exceeding depletions, which reverses in the back half.
You talked about the Australia UK business which lost money in Q1, so you've got sort of the positive comparison there, but on the North American wine and on the corporate side where you saw favorability there, is there any timing issue that benefited your Q1 as well?
- CFO
Not really.
Judy, every quarter there's some timing issues about when marketing is spent or when SG&A happens versus when it happened in the prior year, but we would expect that to kind of smooth out in the balance of the year.
So I would say there wasn't a tremendous amount of timing aspects in the North American business.
- Analyst
And then just on your balance sheet side, just obviously you continue to take leverage down, you're not below your sort of 3.5 times leverage, the target leverage ratio.
How are you thinking about share buyback at this point?
- CFO
Yes, I mean, we're constantly assessing the capital structure and constantly weighing debt paydown versus stock buybacks.
So it's a constant thing.
In the first quarter, as we said, we decided not to buy any stock back, but we'll continue to look at it as the year progresses.
- Analyst
Got it.
Thanks.
- President & CEO
Thank you.
Operator
Lauren Torres of HSBC.
- Analyst
Bob, just go back to your guidance with respect to the reduction in your reported EPS range.
Now that we're thinking about these restructuring charges flowing through, any guidance just how you think about that over the course of the year as far as quarterly flow.
And then also as you think about cost savings and maybe also the one-time charges hitting over the course of the year, is that number, the guidance that you have on that cost savings number pretty clear now?
It seems like maybe there's more opportunity for that and I guess on the other side if there's the potential for that charge number to go up, too, and then once again impacting your reported EPS guidance, just any guidance out how to think about that?
- CFO
Yes, I mean, so the numbers that we disclosed in the press release should -- that's our plan for the restructuring charge.
Of course, the costs are not included in comparable results.
We don't expect the savings to have much of an impact in fiscal '12, but they should be full impact in fiscal '13.
Now, obviously, we're not issuing fiscal '13 guidance.
There's a lot of innings between now and when we will issue guidance, so certainly that will be taken into account when we come out with what our EBIT will be for fiscal,13.
- Analyst
But is the clarity good, particularly I guess on the charge side for fiscal '12, what the impact will be and, like I said, any guidance about how to flow through that impact over the course of this year?
- CFO
Yes, I mean, we're not giving guidance by quarter, but it's going to be the --it will all be in there for the full year, probably mostly back -end loaded and it's the $26 million that we had in the press release, if I recall that number correctly.
- Analyst
And if I could also ask on Crown, you mentioned that you did see some improvement in that pricing.
Just curious about the import pricing environment in the US at this point, where is your portfolio versus your competitors.
Is there room for more pricing?
How are you thinking about that?
- President & CEO
This is Rob.
Basically, the import pricing situation is very stable in the US at the current time and as far as our portfolio goes, we really don't have any plan to take pricing in our portfolio this fiscal year.
We have talked about some reductions in promo from time to time and some shifts from promo to marketing, but fundamentally we don't have any pricing plans on an across-the-board basis.
Now we do look at every market on a case-by-case basis and if things have happened in the market relative to competition that warrants pricing, then of course Crown will consider that on a case-by-case basis, but we're not taking and have no plans to take across-the-board price increases.
- Analyst
The last question on the launch and the continued rollout of Victoria, I'm not sure if you mentioned how far through that process are you and how much more of that we'll see benefit the Crown business for the remainder of the year?
- President & CEO
Yes, well, what I said was that we've now intro'd beyond the Chicago market Victoria in quite a few other markets in the United States and some big markets like California and Arizona and Texas, Colorado to name a few and to roll out we'll continue, but this was the next stage and we're working on plans for further rollout in the future.
- CFO
The Victoria volumes were positive and incremental for the quarter and obviously we're not in the prime beer selling season, so it won't have an insignificant impact on our growth.
It's going to be a nice add, but it's all included in our guidance.
- Analyst
And that is priced at a premium or compared to the Corona and the other primary brands in the portfolio?
- CFO
Correct.
It is priced at a premium to Corona Extra.
- Analyst
All right, thank you.
Operator
Tim Ramey of D.A.
Davidson.
- Analyst
I wonder if you could give us anymore visibility on the volatility or just the components of the tax rate volatility, because it was a much higher rate this quarter, obviously a much lower rate in the 2Q.
Can you help us understand that a little bit?
- CFO
Yes, I'll try, but it won't be easy.
So there's a lot of different things going on in the tax rate, in various tax jurisdictions and essentially what happens under current accounting, when a Company and a tax regulator come to a conclusion on a particular matter, that's when it hits your P&L.
So as these things come to a conclusion, when the auditors come in and they sit down with our tax guys and they say, okay, this is the deal, that's when we book the upside.
So by its nature, it will be choppy throughout the year.
- Analyst
And just one more for Rob, maybe.
The wine industry, I think, has shown some incremental sales lift recently.
I don't know how that's factored into your view of the overall sales of the category and how it would affect your focus brands versus your total portfolio.
- President & CEO
Yes, the wine industry is pretty healthy right now and I'd say that in general we anticipated it tend to be about where it is and we geared a lot of activity relative to MPV and line extensions and things to this effect in the areas that are experiencing some of that incremental volume, Moscato, Sweet Red, Prosecco are examples, and we have new products, new SKUs in all of those areas and therefore, we should benefit from that.
- Analyst
Okay, thanks.
- President & CEO
But nevertheless, anticipated.
Operator
Mark Swartzberg of Stifel Nicolaus.
- Analyst
I guess a couple of questions.
Firstly, just to better understand the second quarter commentary, you said Crown down $15 million to $20 million.
Is that right year on year?
- CFO
No.
No, total, from second quarter we said total EBIT will be down $15 million to $20 million, Mark.
- Analyst
Got it, got it.
And how much do you think Crown will be down?
- CFO
We're not really giving specific guidance on Crown, but do remember that last year we did have kind of a shortage of inventory at Crown.
So you might see an okay sales number, but remember our increased marketing expense will really start kicking in in Q2, Q3, because that's when the media is launched in the beer season.
So you will -- if we say for the full year Crown's EBIT is going to be flattish to slightly down and you saw first quarter was way up, you can expect that to start to happen in the balance of the year of course.
- Analyst
And if we look at the wine business, it sounds like you still expect operating income there to be up, but sales you're saying -- what are you saying about sales given the difficult compares?
Like the sales get worse before they get better in terms of rate of decline or -- ?
- CFO
Mark, are you talking second quarter or balance of year?
- Analyst
Second quarter, sorry.
- CFO
Yes, so second quarter, remember reported sales last year included shipments ahead of depletion, so we will be overlapping that shipment in excess of depletions for the US wine business in mostly Q2, Q3.
So that will hurt our reported sales growth number and our reported EBIT growth number.
So I would expect in the second quarter both wine and beer EBIT to be down to prior year, because of these overlap issues.
- Analyst
And is it fair to think of this 3.5% US shipment decline in the quarter in light of what you just said, you'll see a little bit greater rate of decline in the second quarter?
- CFO
Mark, I don't want to get into [throwing] out the economic models.
- Analyst
Okay, fair enough.
And then interest expense guide of $180 million to $190 million seems high when you look at what the rate, what the interest expense was in the quarter and you're delevered, so why the $180 million to $190 million?
- CFO
So what's going on in that line item.
Remember we pre-paid $400 million in Q1, so our rates have become more fixed, because we're paying back variable and we also have a swap kicking in in September of this year, also at a fixed rate, so you can't just take, I guess, current variable LIBOR and extrapolate it forward.
So I think if you did the math on that you'd see that our interest expense will probably come out maybe at the lower end of our guidance, but remember that assumes we do no stock buybacks.
- Analyst
Right, okay.
Is it fair to say that swap is materially above kind of what your blended cost is right now, your blended coupon is right now?
- CFO
Yes, I think the all in swap rate would probably be just below 5%.
- Analyst
And then this comment, this next logical step comment you've called out the $10 million in savings and the $26 million to get it, but should we think about the $10 million as the next logical step, so to speak, or is the $10 million one of a series of next logical steps?
- CFO
It's the next logical step.
We have no other steps planned in that regard beyond the $26 million charge and the $10 million and associated savings.
Don't anticipate any further charges of that nature at this time.
- Analyst
And then finally, you're seeing healthy growth in your non-US business.
I think it was up something like 300,000 cases year on year in the quarter.
Can you talk a little bit about, and you talked about this at your Analyst day, but can you talk a little bit about what countries are driving that growth and in terms of cases, how much incremental opportunity you think is out there over the next year or two?
- CFO
Yes.
So on that market, I haven't done the math, but I can think of how you do the analysis to get to your 300,000 cases.
The difficult thing on the math is, and I'll try to explain this as kind of technical, in last year's first quarter and actually for all of last year, as the North American segment sold products to say our international segments, right?
They were of course eliminated in consolidation and the ultimate sale appeared in the international segment.
Now this year, we continue to sell those same products to what used to be our international segment, but is now a third party.
So now in this year, we report those as third party sales, right?
So that's why in the press release we kind of highlight that and it gets you from this 8% kind of GAAP growth to more like a 3% comparable growth, right?
Now we did not do that comparable adjustment down in the supplemental shipment depletion data, where I assume you did your calculations to get that international volume growth.
- Analyst
Got it.
So in a sense, in that particular table, its just been reclassified in a sense?
- CFO
Right.
- Analyst
In North America.
- CFO
And you can't really do the analysis you're trying to do.
- Analyst
Got it.
Well then that's helpful.
And then finally on that, can you just talk about the case opportunity you think is out there for your non-US businesses over the next year or two?
- CFO
Yes, I mean, I'll do the organic thing and then let Rob talk about other stuff, but right now, this is the existing business we have of course is New Zealand and Canada.
The New Zealand domestic market is quite small.
It's not really worth talking about a lot.
The Canadian market is, like the US, it is pretty healthy and there's a positive mix shift going on.
In our first quarter we actually had negative volumes up there, mostly because the lower end of the Canadian market is shrinking and we have a heavy participation in that.
But we did have, like the US, very positive mix shift, because we are selling a lot of what the Canadians call VQA wine, which is the upper end wine.
So we had negative volumes, much better sales and positive EBIT growth in Canada for the quarter and we would expect that to pretty much stay for the balance of year.
Now, I'll call it kind of the non-organic international growth, which is kind of our new international segment, I'll let Rob speak to that.
- President & CEO
And that is a relatively small part of the business at the current time, but as we've said or I've said recently, we're certainly looking at some of the emerging markets, China in particular, and contemplating how we might take advantage of what appears to be fairly explosive growth, long lines in that market in particular.
So I won't expect anything material relative to that in the very short-term and we'll tell you more about that as we develop our plans.
- Analyst
Thank you.
- CFO
Thanks, Mark.
Operator
Kevin Dreyer of GAMCO Asset Management.
- Analyst
I might have missed it in the release or on the call, but did you break out spirits versus wine sales and growth during the quarter?
- CFO
So Kevin, to simplify our press release, we stopped breaking that out, but we do comment on the spirits growth for the quarter and usually the activity is around SVEDKA and I think Rob spoke to the fact that SVEDKA growth in our financials was not good, but that was simply due to a price increase we took in a couple states last year and the load in prior to that price increase occurred in last year's first quarter.
So our spirits business had negative volume growth this year, but if you look at IRI, SVEDKA is still growing in say the 20% kind of range.
So it's more just a technical overlap thing, we continue to be very happy with our spirits business.
- Analyst
So from your shipment perspective, it is down slightly?
- CFO
It was down I'd say low double digits.
- Analyst
Low double digits.
And help me out, I'm sorry, I just don't understand how there can be such a big delta between up 20 to low double digits other than -- .
- CFO
Yes, essentially, Kevin, what happened last year in the first quarter it was like up 45%, 50%.
(multiple speakers) It's a typical thing when you have a price increase, everybody tries to load up at the old price.
- Analyst
Great, thank you.
Operator
Carlos Laboy of Credit Suisse.
- Analyst
We might take our line questions offline and focus on beer instead.
Rob, Corona Light seems to be getting a really nice pick up of facings out there.
Are you refocusing or reconsidering the long-term prospects of Corona Light?
And on a related basis, the second question is about Victoria, if you could share with us what you learned about the rollout in Chicago, who you're sourcing volumes from and what you might have learned about Victoria in Chicago that you can reapply elsewhere.
- President & CEO
Yes, I'd say first of all, as to Corona Light, we're pretty optimistic about Corona Light.
We think that there's more, a lot more upside in Corona Lite.
It's the largest lite import at this point.
We're doing a lot of work on differentiating it from Corona and giving it a life of its own.
We've got new adds for Corona Lite that are differentiating it, again, that are geared towards differentiating it from Corona.
And, as I said, I think that we're very optimistic about it.
As it relates to Victoria, its been a very, very strong rollout is the bottom-line and I would say that the volume that we've gained from it is actually kind of quite phenomenal for a new rollout given the amount of the country that we're in.
We're seeing good velocity on the brand in the markets where we've intro'd it and continued good velocity as some of those markets have become more mature, meaning you typically see when you introduce a new brand sort of accelerated velocity initially and then you look to see what it's going to settle down to and it's settling down very nicely to levels that should make it a very nice growing and sustainable business for us.
So we're really optimistic as to source.
It's pretty across-the-board in terms of source.
It's not cannibalizing our own business to a particular great extent, but it's premium priced anyway point number one.
But it's sourcing from pretty much across-the-board much like the imports, much like Corona in general.
It sources from the domestic premiums, it's sourcing from craft, it's sourcing pretty much evenly across-the-board.
So it's a great product.
I'd encourage everybody to try it.
It's got a lot of the characteristics of the craft segments, but its also got the advantage, I think, of drinkability.
Very drinkable.
- Analyst
Thank you very much.
Operator
At this time there are no further questions.
I'll now turn the call back to Mr.
Sands for any closing remarks.
- President & CEO
Well, I want to thank everybody for joining our call today and, as I mentioned, I think we're off to a good start this year in a number of areas and we are certainly on track to deliver our goals for the year.
Our plan is to continue execution on our strategic imperatives through the remainder of our fiscal year.
So thanks again for your participation and we hope you have the opportunity to enjoy some of those great beers, like Victoria, and our wine and spirits products during the upcoming 4th of July holiday.
We'll see you all soon, I'm sure.
Operator
Thank you for participating in today's conference.
You may disconnect.