Constellation Brands Inc (STZ)

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Constellation Brands, Inc. (STZ)

F1Q10 Earnings Call

July 1, 2009 10:30 pm ET

Executives

Patty Yahn-Urlaub - Vice President of Investor Relations

Robert S. Sands - President, Chief Executive Officer, Director

Robert P. Ryder - Chief Financial Officer, Executive Vice President

Analysts

Analyst for Kaumil Gajrawala - UBS Warburg

Timothy Ramey - D.A. Davidson & Co.

Carla Casella - JP Morgan

Mark Swartzberg - Stifel Nicolaus

John Faucher - JP Morgan

Kevin Dryer - Cavelli & Company

James Watson - HSBC

Brian Hunt - Wachovia

Presentation

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands first quarter 2010 earnings conference call. (Operator Instructions) Thank you. I would now like to turn the call over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead.

Patty Yahn-Urlaub

Thank you, Brandy. Good morning, everyone and welcome to Constellation’s first quarter 2010 conference call. I am here this morning with Rob Sands, our President and Chief Executive Officer; and Bob Ryder, our Chief Financial Officer.

By now you should have an opportunity to read our new release which has also been furnished to the SEC. This conference call is intended to complement the release.

During the call, we will discuss financial information on a GAAP comparable organic and constant currency basis. 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.

These reconciliations include explanations as to why management uses the non-GAAP financial measures and why management believes they are useful to investors.

Discussions will generally focus on comparable financial results excluding [inaudible] costs, restructuring and related charges and unusual items.

We will also discuss organic net sales information which is defined in the news release and constant currency net sales information, which exclude the impact of year over year currency exchange rate fluctuations.

Please 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 would like to turn the call over to Rob.

Robert S. Sands

Well, thanks, Patty and good morning, everybody and welcome to our discussion of Constellation’s first quarter sales and earnings results. We are generally pleased with our quarterly results, which were in line with our expectations and demonstrate that we are on track to achieve our goals for fiscal 2010. Despite the ongoing challenges of a difficult operating environment worldwide, we continued to reduce our debt and improve our operating margins.

We completed the sale of our value spirits business, which is consistent with our strategic focus on premium high growth, higher margin brands and utilized the transaction proceeds to reduce debt.

In addition, we began to reap the benefits of our cost reduction initiative, which was implemented with the goal of mitigating the negative impacts from the turbulent global economy and creating efficiencies that will drive performance benefits over the long-term.

This cost focus helped us to offset the unfavorable product mix created by ongoing shifts in consumer buying patterns. However, a continuation of our planned SKU reduction activities worldwide has tempered our top-line growth.

Our focus on driving operational efficiencies, as well as portfolio pruning through divestitures and SKU reductions, is absolutely the right strategy to pursue as one of our top priorities is to manage for improved profitability in this challenging environment. This helps to ensure the long-term health of our business.

And now I’d like to discuss the operational aspects of the quarter, beginning with the North American wine business.

During the quarter, we completed the integration of our remaining spirits business into our North American wine organization and [begin resigning] the structure of our U.S. wine business into a single, integrated organization, especially in the areas of sales and marketing. These actions will simplify our organizational structure, provide synergy benefits, and are intended to improve efficiency and effectiveness with our trade partners.

We are also progressing with our efforts to consolidate our U.S. distributor network in key markets and implement a new go-to-market strategy. This has been made possible through the dramatic transformation of our portfolio which has occurred throughout the last 18 months and has resulted in a much more focused set of premium, consumer preferred brands that also have a desirable margin profile for distributors.

We are currently in the process of negotiating with our distributors. The initial transition will encompass up to 17 states representing approximately 50% of our total U.S. volume for wine and spirits. The goal of our new U.S. organizational structure and distributor consolidation initiative is to gain better alignment of dedicated selling resources working on a focused set of priorities and processes aimed at driving execution and accountability. We will implement an enhanced distributor incentive structure with the objective of driving organic growth.

We expect to begin transitioning by the end of this summer and will provide additional details when we are ready to officially launch the program. This new level of increased importance to our key distributor partners is designed to position us for future growth in a consolidating market.

From a marketplace perspective, growth in the U.S. wine market remains healthy at about 5% on a dollar basis, according to recent 12-week IRI data. The premium plus segment of the market where wine sales for greater than $5 a bottle at retail continues to grow in line with the total category. And as you know, we have a strong portfolio of U.S. wine brands throughout all price segments and we continue to see consumers turning to trusted brands that represent quality for good value.

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