Constellation Brands Inc (STZ)

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Constellation Brands (STZ)

F3Q11 Earnings Call

January 6, 2011 10:30 a.m. ET

Executives

Patty Yahn-Urlaub – VP, IR

Rob Sands – President and CEO

Bob Ryder – EVP and CFO

Analysts

Kaumil Gajrawala - UBS

Judy Hong – Goldman Sachs

Vivien Azer – Citigroup

Lauren Torres – HSBC

Dara Mohsenian - Morgan Stanley

Mark Swartzberg – Stifel Nicolaus

Tim Ramey – D.A. Davidson

Christine Farkas – Bank of America Merrill Lynch

Carlos Laboy - Credit Suisse

Presentation

Operator

At this time, I would like to welcome everyone to the Constellation Brands third quarter 2011 earnings conference call. [Operator Instructions.] I would now turn the call over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead.

Patty Yahn-Urlaub

Thank you operator. Good morning everyone, and welcome to Constellation's third quarter fiscal 2011 conference call. I am here this morning with Rob Sands, our President and Chief Executive Officer, and Bob Ryder, our Chief Financial Officer. This call complements our news release which has also been furnished to the SEC.

During this call, we may discuss financial information on a GAAP comparable organic and constant currency basis. However, discussions will generally focus on comparable financial results. Reconciliations between the most directly comparable GAAP measure, and these and other non-GAAP financial measures are included in the news release or otherwise available on the company's website at www.cbrands.com under the Investor section.

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

Rob Sands

Thanks Patty, and good morning and happy New Year everyone. I hope you all had a great holiday and certainly had the opportunity to enjoy some of our fine products during the festive season. Now before we get started with a review of our third quarter results, I'd like to spend a few moments discussing the strategic intent behind the recent announcement of our plans to sell our U.K. and Australian business to CHAMP Private Equity.

Since the time that we acquired Hardys in Australia and Matthew Clark, we have adopted a new business strategy which has been focused on premiumizing our portfolio, generating strong free cash flow, and improving return on invested capital, all in an effort to drive profitable organic growth. And the sale of the U.K. and Australia is the next transformational step in the execution of this strategy, as the business is no longer aligned with our strategic imperatives.

These international markets have been consistently challenged by foreign exchange volatility, grape oversupply, retail pricing pressures, and ongoing duty assessments which have collectively eroded profitability. And the majority of our sales volume in Australia has been dedicated to value-priced bag in the box products. However, we will continue to maintain a 20% interest in the business.

As a private equity firm, CHAMP will be operating the business very differently, and our remaining interest will enable us to participate in the potential upside. All employees currently dedicated to this business will transfer to the new entity. Despite the sale of our two largest international businesses, Constellation remains the world's number one premium wine company, and we remain committed to growing an international operation that is consistent with our overall strategy.

Remember we currently sell and distribute our portfolio of brands in about 150 countries worldwide through Constellation Wines International, which will continue to invest resources in new, emerging, and established markets around the world. Constellation Wines International represents growth potential for the company going forward, and will continue to drive our premium portfolio around the world.

And now I would like to focus our discussion on our financial and operational results for the third quarter. This quarter marks the continuation of the strong momentum we've experienced this year in a number of areas which include the generation of record free cash flow levels that has been driven in part by our diligent focus, particularly in the area of working capital.

The great news about this new level of free cash flow is that we believe it is sustainable longer term. And, it was during last year's third quarter that we began the official transition for our new U.S. distributor network, giving select distributors the right to sell Constellation's portfolio of wine and spirits exclusively in their respective U.S. markets.

There seems to be some confusion related to the intricacies of the distributor contracts and their impact on our financial results since the inception of this initiative, which commenced September 1, 2009, so I will take a minute to describe how you should be thinking about the nuances of these contracts.

We initially negotiated long-term contracts with five U.S. distributors currently representing about 60% of our wine and spirits volume in the U.S. These contracts included shipment commitments that required distributors to purchase specified levels of product in fiscal 2010 and during this fiscal year, 2011.

Last year, depletions or distributor sales to retail lagged our shipments to distributors due to the challenging economic environment and the disruption caused by the distributor transition activity and our sales force reorganization. In fiscal 2011, while depletion trends for our products are healthy, they have not caught up to the contractual shipment levels.

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