Constellation Brands Inc (STZ)

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Constellation Brands (STZ)

Q1 2012 Earnings Call

June 30, 2011 10:30 am ET

Executives

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

Analysts

Judy Hong - Goldman Sachs Group Inc.

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

Carlos LaBoy - Crédit Suisse AG

Timothy Ramey - D.A. Davidson & Co.

Lauren Torres - HSBC

Kevin Dreyer - Gabelli

Presentation

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. [Operator Instructions] I would now like to turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead.

Patty Yahn-Urlaub

Thank you, Melissa. Good morning, everyone, and welcome to Constellation's first quarter fiscal 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 Investors 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 details of the risk factors that may affect 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, 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 morning's press release, we are taking steps to further strengthen the core foundation of our business. With the recent sale of our U.K. and our 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 U.S. 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 sweepstakes, as well as incremental volume generated from the continuing launch of the Victoria brand.

As expected, depletion churns for our U.S. Wine & 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 jumpstart the portfolio following the distributor transitions when we were focused on executing on 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 post 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 activities 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 U.S. domestic shipment 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 U.S. Wine & Spirits industry. During calendar 2010, we accomplished this objective and maintained U.S. 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.

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