Constellation Brands Inc (STZ) 2012 Q4 法說會逐字稿

Good morning.

My name is Maria and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Constellation Brands fourth quarter and fiscal year 2012 full year earnings report.

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

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

(Operator Instructions) Thank you.

I will now turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations, for opening comments.

Please go ahead.

Thank you, Maria.

Good morning, everyone, and welcome to Constellation's fourth quarter and fiscal year end 2012 conference call.

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

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

During this call, we may discuss financial information on a GAAP comparable organic and constant currency basis, however, discussions will generally focus on comparable 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 and "Financial History."

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

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

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

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

Thanks, Patty, and good morning and welcome to our call.

This morning I plan to discuss Constellation's year-end results and provide a high level outline for our plans for fiscal 2013.

It is certainly worth noting that we have had a very productive year in 2012 delivering against a number of key strategic goals and business initiatives.

I would like to take a minute to highlight some of our achievements.

I am especially pleased with our record free cash flow results and our significantly improved consolidated margin structure resulting from last year's sale of our UK and Australian businesses.

We utilized our free cash flow to reduce debt and repurchased more than $400 million of our shares in fiscal 2012.

This follows a $300 million accelerated share buyback transaction which was completed in fiscal 2011.

And in fiscal 2013, we plan to continue to return value to our shareholders in the form of a new $1 billion share repurchase program that has been recently authorized by our Board of Directors.

We expect to execute approximately 50% of the new authorization this year after repurchasing the remaining shares available under our fiscal 2012 authorization.

We purchased the remaining portion of the Ruffino line business which is an iconic old world wine brand that builds a niche for Constellation in the growing Italian premium wine category.

Ruffino is one of our larger focus brands, posting depletion growth of almost 10% in fiscal 2012.

It is also the number three Italian super premium wine brand in SymphonyIRI channels.

We became more unified and integrated as one Company by advancing our Fusion technology initiative and we are currently implementing a shared service infrastructure.

Collectively, these initiatives are designed to create an integrated technology platform and enhance the processes that support our business.

We expanded our international presence by establishing an office in Hong Kong and we are currently in the process of exploring next steps for our emerging markets participation strategy.

Fiscal 2012 marked our highest level of brand building activity in recent history which is paying off in the marketplace.

A few examples include SVEDKA.

We introduced new packaging configurations and flavor profiles which helped the brand to surpass Gray Goose in volume sales making it the second largest imported vodka brand in the US today.

We launched more than 25 new products in fiscal 2012 including the introduction of four new wine brands in fast growing categories.

They include Simply Naked, Primal Roots, Rioja Vega and The Dreaming Tree.

In the US beer market, Crown continued its launch of Victoria which posted significant growth and was awarded the Leaders Choice Award as the best new product by Market Watch Magazine.

Victoria has also become the number one new beer in terms of dollar sales in the SymphonyIRI food, drug, mass, and convenience channels.

In response to the need of consumers looking for additional ways to enjoy products, Crown also expanded its draft beer offerings which resulted in depletion growth of almost 60% for this format and increased brand recognition for the Modelo Especial, Negra Modelo, Pacifico and Victoria brands.

We have recently launched the next phase of our US distributor consolidation efforts in markets where it makes sense.

The signing of multi-year agreements with additional US distributors covering almost 10% of our US wine and spirits volume will give them the right to sell Constellation's portfolio of wine and/or spirits exclusively in their respective markets.

In the first phase of our US distributor consolidation initiative, which occurred in the latter half of 2009, we gave exclusive appointments to four distributors to represent approximately 60% of our US wine and spirits business in 22 states.

As you know, the ultimate goal of this differentiated distributor model is to drive profitable organic growth through fully dedicated distributor teams more closely aligned with Constellation's sales force, investment of incremental marketing and promotional sport behind Constellation Brands, a distributor incentive structure designed to significantly increase distributor performance with a focus on higher margin, higher ROIC brands.

One of the key metrics we utilize to measure the success of our US distributor consolidation effort is depletion trends.

I am pleased to report that those states where our business has already transitioned to this model have outperformed the states where consolidation has not occurred.

And in terms of overall US depletion performance for fiscal 2012, our distributor sales to retail for Constellation's total US wine and spirits business across all channels increased approximately 2% for the year, with wine-only portion growing slightly less.

In comparison from an industry perspective, according to recently released data from the Beverage Information Group for calendar 2011, the US market grew about 2.5% in total across all channels.

As previously discussed, our depletion results somewhat lagged the industry in fiscal 2012.

This was primarily the result of price increases taken for some of our higher volume brands which negatively impacted their sales to a greater degree than we originally anticipated, as well as soft performance for our Blackstone and Ravenswood brands.

However, we relaunched, reformulated and repackaged Blackstone and Ravenswood, which experienced improved depletion performance later in the year, and overall depletion trends improved as we progressed through the year due to the gating of promotional spend for our US wine and spirits businesses.

In fact, during the fourth quarter, we posted depletion growth of more than 7% for our entire portfolio, exceeding the growth rate of the total US wine and spirits category.

Some of that fourth quarter performance was driven by channel fill for new products which may unfavorably impact our sales and depletion performance in the first quarter.

However, we expect consumer take away of our products at retail to continue to meet our expectations.

Overall, we remain committed to growing in line with US wine and spirits industry growth for fiscal 2013 and beyond.

For the year, SVEDKA posted double-digit depletion and consumer take away trends in addition to gaining volume share of the vodka category.

SVEDKA remains one of the fastest growing vodka brands and has become the number two imported vodka in the US.

It is also a Top 100 global spirits brand, reaching more than 3.7 million cases in depletions in fiscal 2012.

The new SVEDKA advertising campaign will debut this month, appearing on the top national cable TV stations and popular websites.

Be sure to look for the fembot on your favorite cable TV channel, perhaps while you're watching "Real Housewives" on the Bravo Channel or "Sports Center" on ESPN.

Now, I'd like to focus our discussion on where we're headed in fiscal 2013.

We will continue to focus on innovation and new product development activities as we plan to introduce more than 50 new items throughout fiscal 2013, some of which are new brands or packaging innovations such as Arbor Mist frozen wine cocktails.

I am particularly excited about a new brand introduction called Thorny Rose which is specifically targeted for the Millennial generation.

As we've discussed today, today's wine market is growing by the legal drinking age Millennials, a group which numbers more than 55 million and is expected to grow by an additional 12 million within the next three years.

We also have a national TV launch planned for our Black Box and new Simply Naked wine brands which currently have great marketplace momentum.

Similar to last year, many of our new products are included in the hot categories that are experiencing significant growth and we expect to have an increasing percentage of our overall sales growth this year coming from the contribution of new products.

One of the most important things to keep in mind is that many of our new products will be line extensions to our existing portfolio of focus brands which represent the majority of our US wine profitability and posted depletion trends of more than 6% last year.

It's many of these focus brands that have recently received recognition in the form of awards and accolades, the following of which are particularly noteworthy.

Constellation recently received Impact 2011 Hot Brand awards for SVEDKA, Franciscan, Kim Crawford, Rex Goliath and Black Box.

Three of our newly launched US wine brands were included in IRI's list of the Top 10 new table wine brands.

We recently received Beverage Information Group's 2012 Growth Brand Awards for SVEDKA, Kim Crawford, Simply Naked, Primal Roots, The Dreaming Tree, Rioja Vega, Black Box, blufeld, and Woodbridge by Robert Mondavi.

Our US business was recognized with the 2012 Cheers Supplier Excellence award and Supplier of the Year, for best large wine company, and the VIBE Supplier Excellence Award as Supplier of the Year.

As you can infer from our fiscal 2013 guidance, our EBITDA growth this year will be somewhat impacted by our brand building initiatives, as well as additional sales investments.

Bob will provide additional details on this in a moment.

Now moving to our Crown Imports joint venture, Crown had an exceptional year in the marketplace.

Overall, calendar 2011 was the largest sales volume year for the collection of Modelo brands in the US marketplace.

And although you've heard this many times throughout fiscal 2012, I believe it's worth repeating.

Crown outperformed the total US beer industry and the import category across both on- and off-premise channels and gained market share for the year.

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

Crown implemented several new initiatives, increased marketing investments, and launched new items in packaging configurations in an effort to continue building value and increasing brand recognition.

This is the 15th consecutive year that Corona Extra remains the leader in the premium imported beer category.

Corona Familiar, a new SKU introduced in 2010, depleted more than 3.5 million cases in fiscal 2012.

Modelo Especial remains the number three imported beer in the US.

This brand grew double digits and achieved a new milestone of 35 million cases sold last year.

Corona Light holds the top spot among imported light beers and Negra Modelo and Pacifico remain among the Top 25 import brands with Victoria already breaking through and becoming a Top 25 brand, as well.

Throughout fiscal 2012, Crown achieved several milestones and received recognition from some of the most notable beer and marketing channels in the industry, including IMPACT "Hot Brand" and "Blue Chip" awards for Modelo Especial and Corona Light.

These awards highlight the continuing success of the brand portfolio and underscore Crown's unique approach to marketing.

As we head into fiscal 2013, Crown has some exciting marketing initiatives underway.

Some examples include the Corona "Win Your Beach" retail promotion, which was so successful during last year's summer selling season, will be bigger and better this year offering consumers more ways to enter and more chances to win prizes of their choice to fit their preferred beach experience.

This promotion will be accompanied by a new "Win your Beach" TV spot.

Crown will be dedicating additional resources to its continuing sponsorship of John Gruden's ESP Monday Night Football Countdown.

And beginning in the second quarter, Crown will launch new advertising for Corona Light which will be supplemented by a combined TV, digital and social media campaign.

For Modelo Especial, the first ever English language TV campaign will highlight the quality of Modelo Especial and engage the general market consumer.

Separate advertising will continue for the Hispanic consumer, as well.

Crown will once again partner with Kenny Chesney for his US tour with Corona Light as the sponsor.

This initiative allows for greater awareness opportunity for Corona Light and fits with the current Chesney consumer profile.

TV commercials promoting Corona Light and Kenny will run in tour markets in the weeks leading up to the shows.

The successful "Find Your Beach" advertising campaign will be extended with new creative in fiscal 2013.

Crown also plans to expand its draft offerings and will introduce new packaging configurations to the Modelo Especial lineup during the year.

These initiatives are expected to result in fiscal 2013 depletion and operating income growth in the low-single-digit range for Crown.

Now in closing, as you can see, fiscal 2013 is shaping up to be another year of strong progress towards our strategic goals.

With the achievements we made in fiscal 2012, our focus this year will remain largely unchanged.

We will continue to drive growth in our base business through brand building and innovation, expand our international business in new and emerging markets and further strengthen the core of the Company.

And our strong free cash flow target enables us to create value in the form of significant share buyback program.

I would now like to turn the call over to Bob for a financial discussion of our year-end business results and forecasted guidance for 2013.

Thanks, Rob.

Good morning, everyone.

Our comparable basis EPS for fiscal 2012 came in at $2.34.

This result included tax rate benefits recognized in Q4 which drove the full year tax rate of 17% versus our previous 27% rate expectation.

Exclusive of the reduced tax rate, our results were generally in line with our expectations.

From an operational perspective, our comparable basis operating margin improved more than 400 basis points, reflecting benefits from the sale of our Australian and UK business at the end of fiscal 2011.

While our US wine and spirits sales and depletions came in below target for the year, we saw improving trends in the fourth quarter with good energy around new products and our focus brands.

On the beer side, marketing investments and solid execution drove strong marketplace performance for the year.

Our EBIT came in a bit lower than originally expected.

This was due to the North American wine sales results just discussed and realizing less sales mix benefit at Crown versus our initial expectations.

SG&A austerity measures and some positive non-recurring benefits mollified the impact of the sales shortfall on EBIT.

From a free cash flow perspective, we generated $716 million for the year.

This was a record by a large measure and included significant tax related cash benefits.

This strong result enabled us to repurchase a significant amount of stock, acquire the remaining interest in Ruffino business and reduce debt.

I will outline more details on these activities in a moment.

Given these brief highlights, let's look at fiscal 2012 P&L performance in more detail.

My comments will generally focus on comparable basis financial results.

As you can see from our news release, consolidated reported net sales decreased 20% primarily due to the divestiture of our Australian and UK business.

North American net sales on an organic constant currency basis decreased 1%.

This was primarily due to a decrease in volume driven by the overlap of a distributor inventory build last year, partially offset by positive mix.

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

For the year, our consolidated gross margin was 40.1% versus 35.9% for the prior year.

This primarily reflects the benefit of divesting the lower gross margin Australian and UK business, partially offset by the overlap of the prior year build in distributor inventory.

I'd now like to discuss the segment operating income results to provide highlights of our operating income change.

North America segment operating income decreased $9 million to $622 million, primarily due to lower volume partially offset by favorable mix.

Corporate costs were down $25 million, primarily related to overlapping a higher compensation expense result in fiscal '11, lower professional services costs, and the early redemption of notes receivable from Accolade, our former Australian and UK business.

As a reminder, the Australian/Europe segment reported EBIT of $15 million last year.

Consolidated equity earnings totaled $229 million versus $244 million last year.

The reduction is primarily due to the sale of our interest in Matthew Clark and other joint ventures as part of our Australian and UK business divestiture and from reduced earnings at Crown.

For the year, Crown generated net sales of $2.5 billion, an increase of 3% and operating income of $431 million, a decrease of 5%.

The net sales increase was primarily driven by volume growth of Modelo Especial and from the expansion of Corona Familiar and Victoria.

Higher marketing costs drove the operating income decrease.

Interest expense for the year was $181 million, down 7% versus the prior year.

The decrease was primarily due to lower average borrowings.

Let's take a look at our debt position.

At the end of February, our total debt totaled $3.1 billion.

This represents a $107 million decrease from our debt level at the end of the previous year.

Our continued strong free cash flow generation and deleveraging efforts over the past several years have enabled us to redeploy a portion of free cash flow to repurchase stock.

During fiscal 2012, we repurchased 21.2 million shares at a cost of $414 million.

That's an average cost of $19.48 a share.

This follows a repurchase of 17.2 million shares at a cost of $300 million in fiscal '11.

As a reminder, during the third quarter we funded the purchase of the remaining 50% of the Ruffino business for EUR50 million or $69 million US.

We also assumed debt, net of cash acquired, of EUR54 million or $73 million US.

As mentioned earlier, our comparable basis effective tax rate came in at 17% which reflected a favorable outcome of various federal items in the second quarter and state tax items in the fourth quarter.

This compares to a 30% rate for the prior year.

This was a very favorable outcome that we highlighted as a possibility in our Q3 call.

Now let's briefly discuss Q4 results.

The recognition of tax rate benefits in the fourth quarter helped drive a comparable basis EPS result of $0.69 versus $0.35 in Q4 last year.

Organic constant currency net sales increased 5% primarily due to volume growth and some favorable mix.

The higher sales and lower SG&A helped to increase consolidated operating income by $19 million during Q4.

Equity earnings for Crown in the quarter increased 2% to $49 million.

For Q4, Crown's net sales increased 9% and operating income increased 2% as volume growth was mostly offset by higher marketing expense.

Corporate expenses decreased $4 million primarily due to lower compensation expense.

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

For fiscal 2012, we generated free cash flow of $716 million versus $531 million for the same period in the previous year.

This improvement reflects a cash benefit for taxes primarily driven by the sale of our UK business.

In addition, our receivable balance increased less than the previous year due to the timing of sales while interest payments and CapEx spending were lower.

We're targeting free cash flow for fiscal 2013 in the $425 million to $475 million range.

This includes CapEx in the range of $70 million to $80 million.

The projected decrease in free cash flow from fiscal 2012 is primarily due to the absence of approximately $170 million in cash tax benefits recognized in fiscal 2012 related to the sale of our UK business.

We are also expecting a higher inventory investment as we overlap the lower calendar 2011 harvest and higher interest costs which I will discuss further in a few minutes.

We still feel confident that we can generate $500 million plus a year in free cash flow over the longer term.

Now let's move to our free cash flow fiscal 2013 P&L outlook.

We're forecasting comparable basis diluted EPS guidance to be in the range of $1.93 to $2.03 versus our $2.34 result for fiscal '12.

There are many moving parts in this comparison including share repurchases, debt refinancing, and the most significant driver, an increase in the full year tax rate.

For fiscal '13, we anticipate getting closer to a statutory rate as we're targeting a tax rate of 34% versus the abnormal 17% rate in fiscal '12.

As outlined by Rob, we expect to grow US depletions in line with the US category growth, and we expect shipment growth to align with depletion growth.

This, combined with an anticipated mix benefit, is expect to result in sales growth in the low- to mid-single-digit range.

However, the overlap of our low fiscal 2012 SG&A, along with some additional brand building and selling investment in fiscal '13 is expected to keep operating income in the low-single-digit growth range.

For Crown, we're targeting low-single-digit depletion and operating income growth for the year.

(Inaudible) depletion expectation versus fiscal 2012 is due to the overlap of the Victoria and Corona Familiar rollouts.

A contractual COGS increase will keep operating income growth slightly less than net sales growth.

We look forward to celebrating Cinco de Mayo again this year by ringing the closing bell at the New York Stock Exchange on Friday, May 4.

As discussed earlier, the Company repurchased 21.2 million shares of Common Stock at a cost of $414 million during fiscal '12.

Since the end of fiscal '12, through March 31, the Company repurchased an additional 2.1 million shares at a cost of $46 million.

Through March 31, the Company has purchased a total of 23.3 million shares at a cost of $460 million under its current $500 million authorization.

Our Board of Directors has authorized the repurchase of up to $1 billion of Common Stock.

This is in addition to the remaining $40 million under the fiscal 2012 authorization.

The Company currently expects to execute the new $1 billion authorization over a two-year period.

As a result of the various activities just outlined, we're targeting $550 million to $600 million of total share repurchases in our fiscal 2013 guidance.

In the near term, we plan to take advantage of the favorable credit and public debt market environment.

This should further enhance financial flexibility while executing our new repurchase authorization.

The anticipated share repurchases and debt refinancing activities have been factored into our guidance.

As a result, we're targeting interest expense in the range of $210 million to $220 million and weighted average shares in the range of 185 million to 190 million for fiscal 2013.

The forecasted increase in interest is being driven by an assumption that we can issue fixed rate public debt quite early in our fiscal year at an interest rate more favorable than our current fixed rate notes, but at a rate higher than current bank debt.

Interest will also be unfavorably impacted by the full year effect of an interest rate swap that became effective on September 2011 and from the full year impact of the funding of the Ruffino purchase.

From a leverage perspective, our debt to comparable basis EBITDA ratio came in at 3.6 times at the end of fiscal 2012.

Even with the share repurchase and refinancing activity that I just outlined, our goal for fiscal '13 is to continue to maintain a leverage ratio in our targeted 3 to 4 times range.

I would like to note that from a gating perspective, we expect fiscal 2013 Q1 EBIT performance to come in approximately 5% to 10% below Q1 of fiscal 2012, and we expect higher interest expense throughout the year.

The EBIT reduction is due to lower sales growth in Q1 due to timing and overlaps.

This is due in part to timing of promotional spending reflecting support of new products and from a more even distribution of promotional expense throughout fiscal 2013.

As a reminder, fiscal 2012 promotional spending was weighted to the second half of the year.

In addition, we expect Q1 to be impacted by timing of US marketing expense as we launch new SVEDKA advertising and support several other new products.

Our comparable basis guidance excludes restructuring charges and unusual items which are detailed on the last page of the press release.

For fiscal 2013, we expect to incur diluted EPS charges of $0.04 for these items.

This primarily relates to our cost reduction and efficiency initiative focused on centralizing certain administrative, operational and commercial functions on a global basis that we previously outlined at Q1 of fiscal '12.

This is timing related and represents charges that were originally targeted to occur in fiscal '12 but have shifted into fiscal '13.

As we exit fiscal 2012, we're a very different Company from just a few years ago.

We've greatly increased our focus on profitable organic growth and we are beginning to see results.

In Q4, our sales growth accelerated as our new products began to have a greater impact on our top line.

The efficiencies from our ongoing COGS reduction activities have helped offset some of the inflationary pressures around grapes and transportation and should benefit us as we move forward.

We've also focused on improving our balance sheet.

We've greatly improved our free cash flow generation, reduced leverage and returned significant cash to shareholders in the form of share repurchases.

Since the end of fiscal 2010, we've reduced debt by over $700 million and reduced our EBITDA leverage ratio from 4.1 times to 3.6 times, while buying back over $700 million of stock and acquiring the remainder of Ruffino.

For fiscal 2012, free cash flow hit an all-time high and EPS greatly exceeded guidance provided at the beginning of the year primarily due to tax benefits and share repurchases.

Although we did not hit our top line targets, we were able to offset most of the shortfall with lower SG&A.

For fiscal '13, we're expecting to utilize our commercial product initiatives to grow in line with the US wine market.

We plan to return cash to shareholders through stock repurchases while continuing to focus on maintaining a healthy balance sheet.

We plan to take advantage of the current favorable debt markets to refinance our debt.

While these actions will result in higher net debt and interest expense, they lengthen the tenure of our debt.

We remain focused on maintaining our three to four times leverage ratio target.

With that, we'll open up the line for questions.

Thank you.

(Operator Instructions) Our first question comes from the line of Kaumil Gajrawala of UBS.

Please go ahead.

Hi, everybody.

Good afternoon.

Hi, Kaumil.

I guess, first question on the step-up in spending, is this a fiscal '13 one-time step-up?

Should we be thinking of it as part of the base or something that you're going to be stepping up spending in fiscal '13 and then as we look forward from that point it starts to come down?

Yes, Kaumil, it really depends.

All I can say is that certainly we're putting more investment behind brand building in 2013.

As to what we'll do in the future, a lot will depend upon the competitiveness in the marketplace, what happens with grape supply and pricing, so it's hard to say what we'll do past 2013, but obviously, our intention is to translate our sales growth into good earnings growth in the future.

Got it.

Maybe if I could ask it a slightly different way.

Given the success of some of the new products in the wine industry over the last couple of years and how much they've contributed to growth in the wine industry, do you feel that maybe structurally it's changed, the cost of growth is perhaps higher than it used to be?

Well, I think that sort of post the recession, the market has been very competitive.

Promotional expense, in wine in particular, has been higher and has remained higher over the last several years.

The consumer is definitely looking for a bargain when it comes to the buying of product.

On the other hand, I'd say that growth has been pretty robust and there's a lot of good activity in terms of consumers and new consumers in the wine market, so I think that bodes well for the future.

Okay, got it and then also in the same context of marketing, there was a step-up in marketing at Crown.

We know what the numbers are for the year.

Can you talk about your need or desire to spend on Crown for fiscal 2013?

And then also, I may have missed it, I don't know in your commentary, did you provide us with what current depletions were at Crown, as well?

For which year, Kaumil?

So I don't know if you gave us a quarter to date after giving us what your current reported quarter was on Crown trends?

In fiscal '12, depletions were like up mid-single-digits.

For fiscal '13, they're going to be low-single-digits.

And for the fourth quarter, both shipments and depletions were up quite a bit, that's in the press release.

And really, as you know, the beer industry really had a good fourth quarter.

It kind of surprised everyone in the industry, I think, but we're all happy about it, maybe the warmer weather, maybe some economic recovery helped the beer industry come back a little bit.

And as far as marketing spend in Crown, I think the big increase in marketing spend is behind us.

That would have been fully realized in fiscal '12.

In fiscal '13, the marketing spend will be more business as usual, so we don't expect a big increase in marketing spend in fiscal '13.

We continue to expect some great advertising and some great new media behind our products but it won't be an absolute increase in spend.

Okay, got it.

And then, Bob, also for you, and this is kind of a little bit back of the envelope math, but based on your commentary on taking advantage of the current state of the debt markets, at least to me sounds like you could be raising up to a billion dollars.

Looking at your leverage, looking at the buyback, the amount of free cash flow that you're guiding towards, there will be quite a bit of cash, I think, sitting there.

What would be, could you maybe talk about what the uses of that cash would be?

Yes, I think depending on when we go in the market and how rates move, I think we might be sitting on a little bit of cash for a short period of time, but I think right now, the use of the cash will be to reinvest in the business and outside of reinvesting in the business, the primary use will be to buy back shares.

Got it.

Thank you, everybody.

Our next question comes from the line of Judy Hong of Goldman Sachs.

Please go ahead.

Thanks.

Hi, everyone.

Rob, and, Bob, I guess, you've talked about how the Company is now in a better position to grow profitably on an organic basis.

I sort of look at your P&Ls in the last two or three years, your EBIT has been essentially flat and you have another year where EBIT is barely going to grow.

So I guess conceptually and structurally speaking when you look at your business, is this a business where you think you can at best grow in line with the category growth and pretty much get no leverage in terms of growing EBIT above your sales growth?

Or do you think that this is still a business where you can still potentially get pretty healthy sales growth and that potentially translates to healthy EBIT growth and how do we get confident that that will be the case over time?

Yes, Judy.

I think what's going on is, first of all this year or last year, I should say, 2012 was a little disappointing in terms of our overall growth and we felt that the healthiest thing to do for the business was to increase our investment behind brand building to really keep the momentum that we developed in the fourth quarter going throughout 2013.

And that is what is resulting in, I'll say, the muted EBIT growth, although we are growing EBIT.

Now to your specific question, we definitely think that we can leverage the P&L, so to speak.

It's not going to occur overall in 2013 but as we introduce new products, take advantage of some of the new trends in the marketplace, continue the kind of underlying sales growth momentum that we've achieved relative to consumer take away, we definitely think that we can leverage the P&L and grow EBIT, therefore, faster than sales.

Yes, Judy, this is Bob.

Just to follow up on that.

There's a bit of timing involved here, so, remember, we did fall short of our sales expectations in fiscal '12.

At the beginning of the year, we said we expected to grow with the US wine market.

We did not do that, yet we pretty much, we actually blew our EPS estimate away but most of that was due to taxes, but we pretty much hit the EBIT number.

Now that was due to some fortuitous SG&A outcomes, which I talked about, I think, in the third quarter call, some positives there that hit the SG&A line item and some belt tightening.

So I think the Company said, hey, we're not hitting the sales numbers, let's really try to go after the EBIT.

In fiscal '13, we do expect to grow with the market and we are making some increased brand investments, but, remember, we got those SG&A overlaps which is holding back our EBIT growth.

So I wouldn't say, if you're just saying Constellation or the wine industry in general, I would hope that in a normal year with a lot of strange overlaps that you could grow EBIT at least very close to what you're growing your net sales number, and, as you know, the net sales growth in the wine category is pretty healthy.

Just maybe two follow-ups on that, Bob.

So can you quantify the SG&A overlap and then the brand investment step-up?

Yes, for '13 over '12, I think we told the SG&A overlaps were $7 million to $10 million, were positives in '12 that were non-recurring.

And I don't have a number on the top of my head for the brand building initiatives because it's in a lot of different areas.

It's increased sales cost, increased marketing cost and some increased promotion costs.

Some of the increased brand building costs kind of go with the mix shift in the business because the higher priced wine tends to carry with it higher brand building costs.

So some of that's natural and some of it is a little bit of a ramp up in the stuff because we're playing a little bit of catch up after fiscal '12, but I think the fourth quarter showed we are very close to being caught up and we're pretty confident about the top line estimates for fiscal '13.

Okay, and, Bob, the 7% depletion growth in Q4, you said that there was some channel fill that helped that number.

Can you quantify how much that is and when you said the sales growth in fiscal '13, I think you said low- to mid-single-digit.

Is that incorporating, I guess, the negative impact as the channel fill is reversed?

Yes.

So the guidance would incorporate kind of the reversal of those, the channel fill for the new product because you just have to make sure everything is loaded before the commercial activities kick in.

So in general, I'd say the channel fill might have added to the top line growth, maybe 2% or 3% in the fourth quarter.

Okay, and then just in terms of ongoing tax rate, so obviously the 2012 was a good year.

It steps up to 34%.

I was under the impression that over time you also had the opportunity to lower your effective tax rate.

Is that not the case anymore?

How should we think about your long-term tax rate?

Yes, so really, the last few years from a tax rate perspective have been anomalous because we've been able to take advantage of some opportunities from some international tax planning.

Now going forward, as we're primarily a North American business and really most of our sales and most of our people are in pretty high tax states, mostly California and New York.

Probably the statutory rate for us would be around 38%, so a 34% rate next year also has some positive tax planning in it, and we have a very good tax department so I presume we will always have some positive tax planning.

But I would say on an ongoing basis, we should assume a statutory tax rate probably 34% to 37%.

Okay, got it.

Thank you.

And the cash tax rates might be below that because of some timing benefits.

Okay, thank you.

Our next question comes from the line of Lauren Torres of HSBC.

Please go ahead.

Good morning.

My question has to do with pricing, particularly at Crown.

As we know, we haven't seen pricing there for quite some time.

Just curious, when or where do you think there's opportunity to do that?

I mean, are you just reacting to your competitors?

Do you think the environment is just not ready for it?

And then, I guess, just thinking about your guidance as you talk about, I think it's low-single-digit income growth this year at Crown, how do you get there if you're increasing your spend, not taking pricing?

Is this all volume or is there something else in that number that we should understand?

Yes, hi, Lauren.

I would say in beer pricing, Crown did take pricing in the fall of calendar '11, not quite as much as the domestic players took, but it took some pricing which you can see in IRI.

And, remember, Crown, although it's the third largest beer Company in the US, it's a very distant number three.

So I would say that for fiscal '13, our beer business is closely watching what the large domestic players do, and should they move up, and generally they do after the peak summer season, we might follow.

Over the last few years because of the economy and some other reasons we have -- the import beer price gap to the domestic premium has gotten less, so we're closer priced to the domestic premium.

But I would hope, I think that that reduction has stopped.

So we're not anticipating in our guidance a lot of pricing in beer but if the domestic guys move and we feel that we can move we'll probably look at it in certain regions.

I would say for the Crown earnings guidance, essentially the EBIT growth is coming from increased volumes.

The operating earnings guidance growth is slightly less than the net sales growth because of the contractual cost of goods sold increase from Modelo, the brand owner.

Okay, and when we think about that cost increase you just mentioned and the spend, the marketing spend this year versus last, is this significant as far as what's going into the business in fiscal '13 versus last year?

No.

I'd say the cost of goods sold increase on a percentage basis is less than CPI, so it's, say, a 1% to 2% kind of rate and marketing spend in fiscal '13 will not be much more than the marketing spend in fiscal '12.

So the volume growth that you're expecting, I don't know, you mentioned is it similar to low- to mid-single-digit or mid-single-digit for this year at Crown?

Like you said, that's coming from volume growth, so in your sense is that being supported just by more investment, new brand introductions, more draft introductions, what's driving that growth?

If we saw such a good year last year, why should we expect the same this year?

Well, I think we've got some good momentum in the marketplace from some pretty good media spend.

Our weight in media has increased because of our big marketing increases in both fiscal '11 and fiscal '12.

Specifically, Modelo Especial has some great momentum if you look at IRI.

It's growing double digits.

The import beer business in general is quite robust, so we feel that that growth will continue into next year and that's why we have given guidance of, say, low-single-digit net sales growth for next year.

I think that it's just less than fiscal '12 because we're overlapping the very successful introduction and rollout of Victoria and Corona Familiar, which is a 32-ounce Corona Extra mostly targeted at the convenience store channel where that brand has helped us gain a lot of share in the convenience channel.

Okay, great.

Thanks.

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

Davidson.

Please go ahead.

Good morning, thanks.

Just following up on the commentary on the higher depletion growth in the fourth quarter being somewhat related to the channel, normally we think about depletions as being a fairly sanitized number.

So what was going on at the retailer level to build inventory there?

Were you offering promotions through your distribution system that caused inventory build at the retail level or can you characterize that?

Sure, Tim.

What we said was that the channel sell was related primarily to the distribution of new products, so when you put new products in, right, the first step is getting the new product from the distributor to the retailer which doesn't necessarily, or in fact doesn't at all, reflect consumer take away, right?

Right.

So when you've got a big new product pipeline, you're going to have some channel sales from the distributor to the retailer and that's what we were talking about.

Got you.

Okay.

And then just relating back to an earlier question, can you be more specific about what you plan to do with terming out a portion of your debt?

It would be helpful for modeling because I think that, of course, was the big variance for most folks in terms of their outlook versus what you just said today.

Yes, I think essentially what we'll be doing, Tim, is, and you see this with a lot of your other companies, is the debt markets are quite robust.

There's a lot of demand for less than investment grade paper, and we would be included in that, so we're going to take advantage of the rate environment and refinance our bank debt and also access the senior note market.

So we think with senior notes we can get very good rates on, say, 8- to 10-year paper, which we will be very happy to have, I think, as the interest rates go up going into the future.

This gives us quite a bit off liquidity and gives us a good staggered tenure on our debt portfolio.

I get all of that, but do you have a way of kind of telling us the size of that, Bob?

No, we have to wait until we go into the marketplace.

Okay, what size were you thinking of when you issued $210 million to $220 million in interest expense guidance?

Yes, again, Tim, you just have to wait until we issue our papers around that.

Now remember there's also stuff that is out there is, and I mentioned it in my comments, that we'll have a full year of our interest rate swap next year versus only a partial year in fiscal '12.

So that will increase interest expense, and we also financed much of the Ruffino purchase with the euro denominated debt, so we'll have a full year of that debt year-over-year, as well.

Perfect, thank you.

Our next question comes from the line of Brett Cooper of Consumer Edge Research.

Please go ahead.

Good morning, guys.

Just a quick question.

If you guys are reinvesting in the business in '13 and you're accelerating innovation, why is it that we shouldn't expect a step-up in the growth rate versus your long-term targets?

Well, I think that in general, there's a lot of things going on in the portfolio.

Yes, there will be a step-up in growth rates related to innovation.

There's also the tactical end of our portfolio which we manage on a different basis, so we're generally planning on growing in line with the market.

Now when we say that, innovation is very robust in the market, so if you look at what percentage of the growth in the market is related to innovation, it's very high.

So basically, we're going to be matching that, and in general, we expect being the largest premium plus wine player that we'll grow in line with the premium plus category.

Great, thanks, and then just one follow-up.

The US industry is more likely to be in shortage in the coming years.

Can you just talk about your, I guess, confidence and ability to offset rising input costs basically to get back to the question of being able to go EBIT at or above sales growth?

Yes, so if you've been reading the industry newspapers, you're right.

The US wine harvest was less than it was the previous year, and, as you know, the US wine growth is still robust.

Consumers want more growth.

So there's more people chasing fewer grapes.

We are obviating some of those issues because of some of the initiatives we undertook two or three years ago to consolidate our wineries, consolidate our bottling lines and our wine makers have done a lot of fantastic work in reducing the cost of our wines without impacting the quality.

So I think the benefits of those initiatives will be offsetting most of the increase in the cost per ton of grapes that did actually happen in this year's harvest and will most likely happen again in next year's harvest.

Great, thanks.

Our next question comes from the line of Reza Vahabzadeh of Barclays.

Please go ahead.

Hi, good morning.

Hi, Reza.

Just on the leverage target you mentioned 3 to 4 times in FY '13.

Is that the same leverage target from thereon, as well?

Yes, on a longer-term basis, we expect to stay within 3 to 4 times EBITDA leverage ratio.

Got it, and then did you two comment on on-premise sales for Crown, as well as your wine and spirits portfolio?

Yes, we did.

We said that we gained share in both on- and off-premise for Crown.

And is that channel improving, strengthening from where you sit?

Yes, we think that the on-premise channel is definitely strengthening with the improvement in the economy.

Right now, I'd say that as we moved into 2012, on-premise channel is growing low-single-digits from flat to down in previous years.

Flat last year, down prior to that.

Got it, and then you talked about productivity savings in the base business last couple of years.

Is there more to go here in FY '13 and '14?

Yes, we're constantly looking at productivity measures.

I think in some of the comments we talked about some shared service activities that we'll be looking at; that will be getting productivity.

And we're constantly looking, certainly, as I mentioned, in the cost of goods sold area.

Most of our operations guys wake up in the morning thinking of productivity measures.

So that's an ongoing initiative that we have.

But the rate of realization of the productivity savings, is that going to moderate from the last couple of years?

Yes, I would say it will moderate because we've had some pretty dramatic reductions over the last two or three years.

All right.

And then on the cost of goods inflation, you mentioned low-single-digits, a couple percent on the Crown side.

What's the rate of cost inflation in FY '13 for the wine and spirits portfolio?

Yes, our operating costs in the wine business because of our productivity initiatives, we expect cost per case to be just up slightly.

Got it.

So that's net of savings?

Pardon?

That's net of your savings?

Yes.

That's net of everything.

That's all-in.

Got it.

Thank you.

Our next question comes from the line of Mark Swartzberg of Stifel Nicolaus.

Please go ahead.

Thanks, good morning, guys.

Hey, Mark.

I guess a few topics.

Firstly, with SVEDKA, can you give us some numbers there, where we are in terms of portion of mix that is SVEDKA, and how that brand did in the latest quarter?

Yes, SVEDKA for fiscal '12 grew, you see in IRI, grew quite robustly, depletions were still up double digits and total volumes are just short of 4 million cases.

Got it.

And how did it do in the latest quarter?

The fourth quarter was similar to that.

Actually, like the other products in the fourth quarter, it actually did better than its full year number.

Got it, great.

Okay, and then just changing topics, Bob.

As we think about this free cash flow delta, the $425 million to $475 million and the long-term objective being $500 million-plus, how much -- obviously there's a lot of moving parts here in the coming fiscal year, but you mentioned inventory drag in your prepared remarks, kind of higher level of inventory.

Can you give us a number there, how, are we talking $10 million, $20 million, $30 million?

Can you just give us --

I'd say, Mark, we've gotten, with all of the initiatives in our operations function, we've gotten quite a bit of inventory, which you can see in our free cash flow, out of the business over the last two years.

I'd say what happened in fiscal '12 is the harvest came in a little bit light, okay, and our volumes came in lighter than we expected, so we didn't have to buy as much bulk wine in fiscal '12 and we were able to sell-through pre-existing products.

I'd say we had better inventory results in '12 than we probably should have.

Certainly better than we anticipated.

But now what's happened is since in '13, we expect to grow with the category.

The wine that we didn't take in in '12 we have to take in in '13, okay, to fuel the growth, and we expect absolute growth to be higher in '13 than it was in '12.

So all that being said, if it were more normalized, I think our '13 guidance would have been in the $500 million range.

So I'd say that inventory switch from year-to-year was probably worth $30 million to $50 million.

Got it, okay, that makes sense.

And staying on this topic of free cash flow and trying to think about the underlying business versus what's happening in fiscal '13, the borrowing costs are going up this year.

You've talked about why, and that's helpful stuff, but as we think about getting beyond the effects of this swap, getting beyond the effects of the refinancing, and just assume for a moment maybe just the constant level of absolute net debt, can you speak generally to -- again, are we talking $5 million, $10 million, $15 million, how much higher than kind of the underlying new, if you will, cap structure do you think this interest expense guidance of $210 million to $220 million?

Is it above the underlying number or do you think the underlying number is representative of the underlying number?

I think the number that we're giving for next year will reflect the average borrowings for the year and the average rates for the year.

Now it will depend, if we buy a lot of stock back I would expect our principal balance to go up.

If we do an acquisition, I would expect our principal balance to go up, but the plan now is to issue senior notes which will be fixed rate and to refinance the bank debt, but because of the swap, actually most of our bank debt is also fixed.

So the rates, when we come out with the loan paper, should be pretty well known and it will depend how much we tap into the revolver, the new revolver that we will be issuing in fiscal '13.

Got it, okay.

And then I don't know if it's you, Bob, or Rob, but just thinking about the business itself and this question Judy raised -- kind of the issue of when do we get to kind of a sweeter spot, so to speak?

What in your opinion -- is it a moment in time?

Is it a change in the way you run your business?

Is something happening out there in the marketplace because this cycle of growth, but it's going to cost you, has been going on for quite a while.

So is there something you're seeing either out in the marketplace or in the way you run your business that makes you think, okay, you get to the end of fiscal '13 and we're really going to be in a sweeter spot.

Yes, I think that you could say that we will be in a sweeter spot but first and foremost, the important thing is to ensure that our business is healthy, our brands are strong, that we've got the right products within our brands to take advantage of the trends in the marketplace.

That's the first thing that we need to make sure is the case and we've been working on that, and actually, quite successfully throughout last year and we'll continue to work on that this year.

As I said to Judy, I do expect that we will be able to leverage that into EBIT growth.

So, no, it's not a point in time and we have to continue to keep our eye on the market and make sure that we're successful in our brand building activities, but I would say that we should be able to see a pretty positive result relative to that in the relatively short term, talking beyond FY '13.

Now, obviously, there's been a lot of improvement in the business.

We've streamlined our portfolio.

We've functionalized the business.

We've improved our go-to-market strategy.

Our free cash flow results have been, I think, quite stellar, and we've significantly reduced debt.

So you're already seeing a lot of the benefits of our activities, as well as our return of value to our shareholders was over $700 million of stock repurchases over the last two years and another $1 billion announced with this release.

So I think that there's been a huge amount of positive progress.

Okay, and then finally, as we think about where this incremental spending is going, you've called out some specific activities, China, new products, some national TV, I believe, a new campaign for SVEDKA.

Is there any way to just sort of give us a sense of relative emphasis?

China, for example, obviously, a market that's growing and has a lot of potential, but as we think about you're looking at your total spend budget this coming fiscal year versus the past, how do we rank or how do you rank where those new dollars are going?

Well, I think they're going into the things that you mentioned.

Those are exactly the items that are driving increased expense.

So it's SVEDKA advertising, it's television advertising campaigns on Black Box, on Simply Naked, SVEDKA, as you mentioned, it's more investment to build the business in China, so those are the major items.

And is there any one that stands out larger in terms of year-on-year increase versus the other or is it evenly spread?

Yes, it's evenly spread, it's a bit here a bit there.

Okay, fair enough.

All right, thank you.

Our next question comes from the line of Gary Albanese of Auriga.

Please go ahead.

Hi guys.

Hi, Gary.

Just going back to the taxes.

I know you mentioned the 34% expected rate, but are there any more potential tax benefits that are being negotiated or is that all resolved now?

Look, we're always working on new stuff and they all have different levels of probabilities.

The 34% rate for next year, I think, has our highest level of probability, but we're already planning for things in '14 and '15, so hopefully, they will come to fruition.

But, remember, we are primarily a North American business, so actually a 34% effective tax rate for a strictly North American business, especially heavily weighted towards high tax states, is actually a pretty good rate.

Okay, okay.

And just going back to the working capital; the expectations for uses for this year.

Are you able to quantify what the expected use is going to be?

Well, when you say uses, I mean,--

In terms of the amount.

Yes, I won't give numbers, but the big swing is going to be in the inventory line item, okay, because we've seen some pretty good performance in inventories, actually over the last two or three years and I think next year there's a bit of catch up because we probably had a bit too much of positives in fiscal '12 because, remember, in fiscal '12 we generated over $700 million of free cash flow.

That's quite a number for a business our size, so there's a bit of catch up on inventories in '13.

I think also cash interest will be higher in '13 because of the refinancing.

So outside of taxes, it will be in inventories and interest.

Okay, and just regarding Victoria, can you talk about the rollout and how far, how much has it, how far has it been rolled out in terms of the coverage domestically and how much you expect it to be rolled out this year?

Yes, I'd say we've geographically, I think right now we're going to take a pause.

Its been rolled out to all of the large states that we anticipate, and really the strategy was Victoria's a very well known and one of the oldest beer brands in Mexico, so the strategy was to roll it out in cities where the Mexican consumer would recognize the brand and it would have very good sell-through.

I think on a go-forward basis, we're taking a little bit more pause as far as what geographies we would roll it out to because I think so far, it was P&L positive right off the bat because the consumer knew what it was.

To roll it out additional cities where the brand is not as well known will take a lot more investment, so we're thinking of that more carefully.

Okay, great.

And just one last thing.

When do you expect to file your K?

The 10-K?

I believe it's the end of April.

Okay, great.

Thank you.

Our next question comes from the line of Kevin Dreyer of Gabelli Asset Management.

Please go ahead.

Hi, good morning.

Just curious about Crown.

Is there any update, or what's your thinking or expectation regarding that business going forward?

Are you going to be trying to negotiate over the next year or so for [an extension of] the agreement?

I think, correct me if I'm wrong, but they would have to notify you by the end of 2013 if they were planning to do something different with that business?

Yes, they have to notify us at the end of 2013, which is three years in advance of the end of the contract, of what their intention is relative to the end of the contract.

So that's still one and three quarters year off and then there's three years left on the contract which means that there's almost five years left on the contract.

So I think it's premature to really know what any of the parties' intentions are in that regard.

Okay, and just about the wine industry generally.

I'm curious, with the repurchase announcement, do you expect further consolidation in the industry over the next year or two, and if so, would you plan to participate in that?

Yes, I'd say we would expect to see some further consolidation in the industry.

There's been some deals that have been done.

Our primary use of free cash flow, as we have indicated, is now really to focus on our stock buyback program, but we also have capacity if a strategic acquisition comes along that we think that fits well into the portfolio and meets our financial criteria.

We have the capacity to continue to buy back stock and do that as well, so it really depends on what opportunities are out there.

So maybe is the answer to that question.

But in the interim, our primary focus is going to be on the stock buyback program and returning cash, therefore, to shareholders in that form.

Great, thank you.

Our final question comes from the line of Bryan Spillane of Bank of America.

Please go ahead.

Hi, Brian.

Hi, good morning.

I wanted to ask your view on -- relative to, I guess, where you're expecting the industry to grow this year.

Is there a pricing expectation built into your growth assumptions for the industry and then is there any pricing embedded in your own revenue assumptions for fiscal '13?

Yes, Bryan, this is Bob.

We did not bake any pricing into our guidance.

The wine category continues to be relatively promotional versus the other beverage alcohol.

In as far as the growth for the industry, we're assuming it's low- to mid-single-digits.

So your base case is that the industry will kind of remain the same in terms of the trade-off or the balance between volume and pricing?

Well, yes, but remember the industry always tends to experience positive mix shift.

So we would still expect net sales to grow higher than volumes, but right now we're not anticipating any increase in pricing.

Okay.

And then based on the comments that you'd made earlier with regard to, I guess, your net inflation, your inflation being offset to some degree by, or almost fully offset by productivity, there's not a real need from your end, at least, over the next 12 months to raise prices to cover your cost of goods inflation, is that correct?

Well, again, I wish it were that formulaic, right, because there's a lot of competitors out there with different motivations, so we're assuming that we won't be able to price and we've got to offset our own inflation because we are focused on growing EBIT.

Right.

I guess where I'm driving is that just given you're seeing some tightness in supply, not just on grapes, but even in bulk wine, there's some tightness in supply in California right now, and we're beginning to see or hear that some of your competitors, especially at the value end, you're starting to see some price increases get pushed through.

To the extent that the industry -- there's pricing in the industry is it right to think about your plan is you've got flexibility with regards to whether or not you'd follow if there is some benefit to be derived from pricing, that's sort of upside to your base case.

Is that the right way to think about it?

Yes, obviously, we're -- like all of the other wine competitors we're keeping a close eye on what each other is doing, and it's a constant balance between pricing and volumes, right, and market share, so we'll keep a close eye on it.

We're not anticipating price increases because, remember, depending on the product and the price point, the bulk wine that's bought, how long is it before it hits the cost of goods sold line, and that depends on the aging and the price point of the wine.

But we have a lot of people keeping a close eye on what's going on in the market and we're constantly balancing those priorities.

Okay, all right, thank you.

Thanks, Bryan.

And that concludes our Q&A session for today.

I'll now turn the call back over to Rob Sands for any closing remarks.

Well, thanks for joining our call today, and as I've indicated, I am very pleased with the progress that we've made throughout the past year in terms of improving our financial profile and the areas of free cash flow generation, debt reduction, and margin improvement.

In addition, we have strong marketplace momentum for our Crown beer business, as well as our US wine and spirits business which positions us well for fiscal 2013.

Our new products are being well received in the marketplace and we are planning several new initiatives in this area throughout the coming year.

Our plan for fiscal 2013 is to continue to execute on our strategic initiatives and driving profitable organic growth.

We will be on the road frequently throughout the months of April and May and Bob and I look forward to seeing many of you.

Thanks again for your participation in our call.

This concludes today's Constellation Brands fourth quarter and fiscal year 2012 full year earnings report.

You may now disconnect.