Constellation Brands Inc (STZ)

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Constellation Brands (STZ)

Q4 2011 Earnings Call

April 07, 2011 10:30 am ET


Robert Sands - Chief Executive Officer, President and Director

Robert Ryder - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Patty Yahn-Urlaub - Vice President of Investor Relations


Dara Mohsenian - Morgan Stanley

Judy Hong - Goldman Sachs Group Inc.

Kaumil Gajrawala - UBS Investment Bank

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Neal Rudowitz - JP Morgan Chase & Co

Christine Farkas - BofA Merrill Lynch

Vivien Azer - Citigroup Inc

Carlos LaBoy - Crédit Suisse AG

Lauren Torres - HSBC

Reza Vahabzadeh - Lehman Brothers



Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands Fourth Quarter and Fiscal Year End 2011 Earnings Conference Call. [Operator Instructions] I will turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead, ma'am.

Patty Yahn-Urlaub

Thank you, Wes. Good morning, everyone, and welcome to Constellation's Fourth Quarter and Fiscal Year End 2011 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 been furnished to the SEC. During this call, we may discuss financial estimation 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 under the Investor section.

Please also be aware that we may make forward-looking statements during this call. While those statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations. For a detailed list of risk factors that may impact the company's estimates, please refer to the news release in Constellation's SEC filing.

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

Robert Sands

Thanks, Patty. Good morning, and welcome to our call. We recently completed a year of significant accomplishments as we delivered against a number of key strategic goals and business initiatives. I would like to take a minute to highlight some of these accomplishments.

We sold the majority of our U.K. and Australian business to the CHAMP Private Equity for approximately $220 million. This transaction represented another transformational step in the execution of our strategy as this business was no longer aligned with our strategic imperatives.

We utilized the proceeds from this transaction in combination with strong free cash flow to reduce debt by almost $600 million. This also enabled a decrease in our leverage ratio to the mid-3x range, a level we have not achieved since May 2006. We generated free cash flow of $530 million for the year, and we are targeting, for fiscal 2012, free cash flow to be in the range of $600 million to $650 million. We have obviously made significant progress from our ongoing focus in this area.

These strong free cash flow results essentially enabled us to fund an accelerated stock buyback transaction while continuing to reduce debt. We are approaching the final leg of Project Fusion, which was designed to create an integrated technology platform and develop world-class systems to support our business. Our Fusion initiatives have reached major milestones within the past year, and the work being done within this program is helping Constellation become more connected as one company, improving efficiencies and achieving cost savings across our business.

Lastly, we have strengthened the core foundation of our U.S. business to the implementation of our U.S. distributor initiative, which is also one of the primary catalysts driving profitable, organic growth. Presently, this program gives five distributors the rights to sell Constellation's portfolio of wine and spirits exclusively in their respective markets in 22 states and currently represents approximately 60% of our total U.S. wine and spirit volume.

As we previously discussed, our sales volume to distributors exceeded distributor sales to retail and on-premise channel throughout fiscal 2011 due to the distributor transition. This had the effect of benefiting sales and profits for our U.S. business and will create an EBIT comparison challenge for fiscal 2012, the impact of which has been factored into our guidance for this year. During fiscal 2012 and for the remainder of the contract term, we expect our shipments to essentially equal distributor depletions on an annual basis.

Meanwhile, in order to put things into perspective relative to how Constellation is performing in the U.S. marketplace, it is best to review a combination of our shipment data, distributor depletions and consumer takeaway trend as they are indicative of the underlying health of our business. In an effort to help you better understand this part of our business, we have added shipment and depletion information to the Financial Attachments section of our press release. We expect to provide this information on a quarterly and year-to-date basis going forward so that you will be able to better understand the results of our efforts.

As you can see, for our fiscal year ended in February, depletion volumes or distributor sales to retail for Constellation's total U.S. total Wine and Spirits business across all channels increased approximately 3% for the year, which is in line with industry trends. And according to recently released data from the Beverage Information Group for calendar 2010, we maintained U.S. market share on a volume basis in total across all channels and therefore, essentially grew in line with the category, which has been our goal since the launch of the U.S. distributor initiative. However, more recently, you may have noticed a bit of market weakness for our U.S. Wine business in the IRI or Nielsen data that you receive and analyze on a regular basis.

I'd like to take a minute to describe what's driving these trends and remind everybody that the IRI food and drug channels represent approximately 30% of our business with the next two largest channels represented by the liquor and on-premise channels. At any given point during the year, we post our promo activities as appropriate based on a number of factors including business seasonality, the competitive environment and consumer takeaway trends.

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