Constellation Brands Inc (STZ)

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Constellation Brands (STZ)

Q2 2012 Earnings Call

October 06, 2011 10:30 am ET

Executives

Robert Sands - Chief Executive Officer, President and Director

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

Patty Yahn-Urlaub - Vice President of Investor Relations

Analysts

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Vivien Azer - Citigroup Inc, Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Reza Vahabzadeh - Barclays Capital Inc.

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

Gary Albanese - Auriga USA LLC, Research Division

Presentation

Operator

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands Second Quarter 2012 Earnings Conference Call. [Operator Instructions] 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, Jackie. Good morning, everyone, and welcome to Constellation's Second 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 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 P. Ryder

Thanks, Patty, and good morning, everyone. Welcome to our discussion of Constellation's Second Quarter Fiscal 2012 Sales and Earnings Results. Now before we get started, I would like to take a few moments to discuss this morning's announcement of Constellation's purchase of the remaining portion of the Ruffino Wine business. Ruffino is an iconic Old World Wine brand, that filled a vital niche for Constellation in the Italian imported premium wine category. Our relationship with Ruffino began in 2004, when we purchased a 40% stake in the company and became the U.S. importer of the brand. In May 2010, we increased our ownership interest to almost 50%. And since that time, the Ruffino brand has become one of Constellation U.S. focus brands.

Working together with Ruffino during the past several years, we've accomplished a great deal, driving the Ruffino brand to become the #3 Italian Super Premium wine brand in SymphonyIRI channels and the #2 U.S. Chianti brand with a 50% market share of the Chianti market in the greater than $20 per bottle price point at retail.

And according to SymphonyIRI industry data for the last 52 weeks, Ruffino is experiencing 8% growth in U.S. dollar sales with Ruffino's year-to-date global sales growing 9%. Ruffino annually produces about 1.4 [indiscernible] cases of wine, more than half of which were sold by Constellation in the U.S. last year, with the next most important markets including Canada and Italy. In fiscal 2013, we expect to realize incremental sales and slightly accretive earnings, resulting from Constellation's 100% ownership of the Ruffino portfolio.

And now, I'd like to turn our discussion to a review of our quarterly results. We've reached the halfway point in the year, and I'm pleased with our progress to date despite growing market concerns related to subdued consumer confidence in the U.S. economy. I am especially pleased with our significantly improved consolidated margin structure and our strong free cash flow results, which have essentially enabled us to fund our share repurchase efforts, while continuing to reduce debt.

While we plan to continue to pay down debt in fiscal 2012, we have redeployed a portion of our free cash flow to repurchase our stock. We currently believe that Constellation's shares represent good value, especially as our market momentum builds in the second half of this year, and as we continue to reap the benefits of our ongoing transformation initiatives.

In addition, the Crown joint venture continues to outperform the U.S. beer industry and the import category. As expected, depletion trends for our U.S. Wine & Spirits business lagged the market somewhat in the second quarter. This is primarily the result of the following actions. Earlier this year, we took price increases on certain specialty and value products, which negatively impacted volumes. And as I mentioned last quarter, we have changed the gating of our promotional activities in fiscal 2012 versus fiscal 2011 to better align with the upcoming holiday selling season, which will be upon us shortly.

Overall, for fiscal 2012, we are targeting promotional dollar spend that is in line with last year, although the timing is different and that it is skewed more towards the second half of the year. It is through a combination of promotional spend and new product development initiatives that we expect to achieve our goal of category growth that is in line with the U.S. Wine & Spirits market for the year. As such, we expect to see improving depletion and market trends as we move through the balance of the year. The good news is that you can already see evidence of this improving market trends for Constellation. At the end of the second quarter, we began to ramp up our promotional spend in advance of the key holiday selling season, and this has manifested itself in the market trends you see in recent IRI data.

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