Constellation Brands Inc (STZ)

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Constellation Brands, Inc. (STZ)

F2Q2011 Earnings Call Transcript

October 6, 2010 10:30 am ET


Patty Yahn-Urlaub – VP, IR

Rob Sands – President and CEO

Bob Ryder – EVP and CFO


Vivien Azer – Citigroup

Lauren Torres – HSBC

Judy Hong – Goldman Sachs

Tim Ramey – D.A. Davidson

Mark Swartzberg – Stifel Nicolaus

Christine Farkas – Bank of America

Kevin Dreyer – Gabelli & Company

Reza Vahabzadeh – Barclays Capital

Carla Casella – JP Morgan



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 second 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, Melissa. Good morning everyone, and welcome to Constellation's second 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 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 everyone. Our second-quarter results are particularly gratifying, as we are beginning to more consistently realize the benefits from the extensive work we have done to transform our business during the last 2 plus years. We are doing what we said we would do by executing a strategy that is based on leveraging our leadership in a growing industry, taking steps to reduce debt and improve free cash flow, and most importantly, strengthening the core foundation of our business model, while targeting profitable organic growth.

I’m especially pleased with our strong free cash flow results, which have essentially enabled us to fund our share repurchase efforts, while continuing to reduce debt. It also demonstrates the progress we have made from our ongoing focus in this area, and it was during the second quarter last year that we announced the initiation of one of our most strategic initiatives with the signing of multi-year agreements with select US distributors, giving them the right to sell Constellation’s portfolio of wine and spirits exclusively in their respective markets.

This is the second consecutive quarter that our US wine business benefited from increased sales volumes and depletion, as we continued to gain momentum from this initiative. However, distributor inventories also increased over last year’s second quarter, and I would like to take a minute to explain what is driving this increase. As I previously indicated, our contractual arrangements with our exclusive US distributors remain in effect for an average of 5.5 years.

Our contracts require the newly appointed distributors to purchase specified levels of products throughout this fiscal year to ensure minimal disruptions during the initial transition period. This has resulted in shipments exceeding depletions in the second quarter, although distributor inventories continue to remain at average levels of 2 to 3 months.

Now, to put things into perspective relative to how Constellation is performing versus the total US wine industry, I would like you to consider the following. According to the 3 month SymphonyIRI data, which corresponds to the end of our second quarter, the food and drug channel is growing approximately 4% on a volume basis. From a Constellation perspective, we are gaining market share and outperforming consumer takeaway trends in the IRI food and drug channel, posting 8% total wine growth in the second quarter.

Remember IRI only represents about one third of our business. However, it is the most accurate and up-to-date barometer of consumer takeaway. Collectively, consumer takeaway for the remaining two thirds of the market is lagging the IRI food and drug channel, driven by weakness in on-premise for both Constellation and the industry. The bottom line, Constellation’s distributor sales to retailer or what we call our depletions are growing at almost 4%, and we believe we are gaining share overall in the market.

Now I would like to take a minute to review the promotional and marketing activities that we have underway that are helping to drive this underlying growth in our business. During the second quarter, new product launches included the introduction of Rex Goliath Free Range red; Cadet d'Oc, a new line extension for Mouton Cadet, and the addition of Simi Sonoma County [ph] to the Simi portfolio.

We continue to drive our recently introduced product rollouts of (inaudible), Arbor Mist White Pear Pinot Grigio, and Black Box malbec, and Woodbridge sparkling wine. Blüfeld is already the number three in the super premium German Riesling category, and Black Box malbec is currently the number one premium box malbec brand. We also received recognition for several of our well-known brands, including the highly anticipated 2007 Robert Mondavi Cabernet Sauvignon reserve, which received 295 [ph] points for Wine Spectator. That is the Wine Spectator one for 2007 vintage and one for the To Kalon vineyard.

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