Constellation Brands F1Q09 (Qtr End 5/31/08) Earnings Call Transcript

| About: Constellation Brands, (STZ)

Constellation Brands, Inc. (NYSE:STZ)

F1Q09 Earnings Call

July 1, 2008 10:00 am ET


Patty Yahn-Urlaub - Vice President of Investor Relations

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

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


Timothy Ramey - D. A. Davidson & Co.

Lauren Torres - HSBC

Brian Hunt - Wachovia

Mark Swartzberg - Stifel Nicolaus

Bryan Spillane - Banc of America


Good morning. My name is Ray and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands first quarter 2009 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Patty Yahn-Urlaub, Vice President of Investor Relations. Madam, you may begin your conference.

Patty Yahn-Urlaub

Thank you, Ray. Good morning, everyone and welcome to Constellation’s first quarter fiscal year 2009 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 had an opportunity to read our news 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, under the investor 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 acquisition-related 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 excludes the impact of year-over-year currency exchange rate fluctuations.

Please 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 and Constellation’s SEC filings.

Thank you, and now I would like to turn the call over to Rob.

Robert S. Sands

Thanks, Patty and good morning, everyone. First I would like to thank all of you who attended our recent New York City investors meeting. I hope that one of your takeaways from that meeting is that Constellation management team is intensely focused on executing a strategy that delivers value by enhancing operating margins and profitability, improving ROIC, and generating free cash flow, which enables debt reduction. I believe our first quarter results and fiscal 2009 financial goals demonstrate that commitment.

Another example of this strategic execution is the recently announced divestiture of certain U.S. wine brands and assets that were acquired with the Clos du Bois and Wild Horse transaction, as well as some of our northwest brands from Washington State and Idaho.

Collectively, these brands represented approximately 1 million cases of wine sold in calendar 2007. Despite the fact that these were premium brands, the rationale for divesting was straightforward. We simplified our portfolio, eliminated product redundancies, and better aligned the cost to produce our products with their corresponding price points at retail. We received $209 million in cash for these brands, which we utilized to reduce debt, and we have an opportunity to receive up to $25 million in an earn-out if certain business objectives are met by the buyer within the next five years.

So now I’d like to discuss our business and financial performance for our first quarter. We’re off to a great start in fiscal 2009. Our results for the first quarter were solid and in line with our expectations. We increased sales and enhanced profitability in our North American and international operations above and beyond the benefit we received from the cycling of our U.S. distributor wine inventory reduction initiative.

From an international perspective, we’ve been taking actions to improve profitability, operating efficiencies, and our competitive position in both the U.K. and Australian markets. These actions have started bearing fruit and we’ve improved our operating margins and profitability during the quarter.

We implemented planned price increases to retailers in the U.K., which has enabled us to realize an increase in our net sales prices. As a result, volumes have suffered somewhat but not as much as expected. Having said that, the wine market in the U.K. remains healthy, growing at a rate of mid-single-digits on a value basis in the multiple grocer channel per recent Nielsen data.

In Australia, the wine market is also healthy, growing mid-single-digits on a value basis. Similar to the U.K., we have recently increased prices in Australia to cover rising input costs and have seen a bit of volume reduction as we strive to improve profitability.

The 2008 Australian grape harvest is now essentially complete. Although final data is not yet available, it appears that the current harvest estimate is approximately 1.7 million tons versus a harvest of about 1.5 million tons last year. This outcome is a bit higher than anticipated due to the late season rainfall but it still appears that supply is in line with demand. Nevertheless, the cost of Australian grapes has increased significantly due to the fact that many growers paid for water supply during the growing season due to the drought conditions in this region. This has created the unusual situation of higher harvest volume in the face of higher prices, which indicates that it is unlikely that we will see an abundance of lower price bulk wine availability.

I would also like to once again remind everyone that the U.K. and Australian markets combined currently represent less than 10% of our total company EBIT. However, it is important to emphasize that despite the volume impact from price increases in our international business, we have increased profitability during the first quarter.

And moving to the U.S. wine business, as you know we completed our U.S. wine distributor inventory reduction initiative during the first two quarters of our fiscal year 2008. We have regained operating leverage as we’ve cycled this initiative, which negatively impacted last year’s first quarter results.

In addition, we also improved the margins of our branded wine business as a result of the favorable product mix generated by the addition of the Clos du Bois and Wild Horse brands and a divestiture of lower margin value brands, including Almaden and Inglenook. Plus the rationalization of more than 60 brands within our value portfolio, representing about 1,600 SKUs.

As a result of these portfolio changes, our value premium mix has changed dramatically in IRI channels. Our U.S. portfolio is now comprised of approximately 30% value wine and 70% premium wine on a volume basis and about 15% value versus 85% premium on a dollar basis.

From a marketplace perspective, growth in the U.S. premium wine market remains very healthy at about 7% on a dollar basis, according to recent 12-week IRI data through mid-May, and in particular the super premium plus segment where wine sells for $8 and above at retail continues to grow in the double-digit range. This segment includes brands in our portfolio such as Estancia and Kim Crawford and Robert Mondavi, all of which posted double-digit market growth during the 12-week IRI period ending May 18th.

Our Canadian wine business posted strong results for the first quarter, primarily reflecting sales growth from premium brands, including Jackson Triggs and Sawmill Creek and Naked Grape.

In the spirits segment, SVEDKA Vodka posted strong double-digit sales and market growth for the first quarter, driven by new distribution points and increased promotional activity. During the past year alone, SVEDKA has gained new distributions in more than 4,500 national on and off premise accounts. We are continuing to aggressively expand SVEDKA’s export sales to countries outside the U.S. SVEDKA is currently sold in over 25 export markets, including Germany, China, Australia, France, Brazil and Canada, for example.

Our spirits business also reflects strong sales growth in the quarter from key brands, including Black Velvet and Ridgemont Reserve Bourbon, Effen Vodka, Meukow Cognac, and the Caravella of liqueurs.

In an effort to streamline operations and improve efficiencies, we recently announced our intent to sell our Valley Field, Quebec facility, which was primarily a contract production facility for third parties. This will allow us to eliminate excess capacity, reduce costs, and enhance ROIC. This transaction is now expected to close during the second quarter as we work through the final details to ensure a smooth transition.

Moving to Crown imports joint venture, Crown generated low-single-digit net sales growth against a tough comparison last year. We saw strong performance in April offset by weaker performance in May due to challenging comparisons to prior year promotional period for Cinco de Mayo and Memorial Day, coupled with some impact from new competitive product introductions.

In addition, large markets like California and Florida continue to be challenged due to adverse economic factors in these areas. However, the joint venture continues to target mid-single-digit growth for the business as they head into the key summer selling season. We believe Crown is well-positioned for execution at retail accounts with solid promotional activity and market programs in place. They are maintaining appropriate price spreads versus competitors and have a strong, fully staffed organization.

As a reminder, the Crown joint venture will overlap some easier comparisons in the second half of the year.

Now, before I move on, I want to briefly comment on a recent beer industry speculation regarding InBev, Anheuser-Busch and others and how it might impact Constellation's investment in the Crown imports JV. Regardless of which scenario plays out, Constellation's contract with Modelo for the Crown JV remains intact, as is through the initial term 2016, ending 2016, that is. At that time, there are three potential outcomes as it relates to our contract with Modelo. They are as follows: Modelo can renew the contract, number one; number two, if Modelo decides that they would like to partner with another third party to import and market their portfolio in the U.S., they must pay Constellation our 50% share of eight times EBIT; number three, if Modelo elects to become a self-importer and is not prohibited from doing so by either federal or state regulatory authorities, then they would pay us our 50% share of tangible book value.

At this time, I would also like to reiterate our assessment regarding the impact of the economic downturn on our business and the overall beverage alcohol category, as I’m frequently asked this question. From an economic perspective, there have been some venue shift from on-premise consumption to off-premise consumption. Within the off-premise channel, we are also seeing a shift to discount retailers, including large mass merchants and wholesale club stores. We remain generally insulated from the impact of these venue shifts because we sell directly to the distributors here in the U.S. at the same margin, regardless of the end user consumption.

The total beverage alcohol category grew 4% for the latest 52-week IRI period, which is in line with the average industry growth rate for the past four years, and the growth trends for beer, wine, and spirits category, which comprise the total beverage alcohol segment has not varied significantly during the last 12 months, with the wine segment growing at a rate greater than that of beer and spirits.

Now, to further demonstrate my point, let’s look at the 12 and 52-week IRI industry trends. In the wine segment, 12-week IRI value trends for the period ending May 18th are as follows: total wine up 5%; premium wine, up 7%; and super premium wine, which is greater than $8 at retail, is up 12%. The 52-week IRI trends almost exactly mirror the 12-week trends for the total wine, premium, and super premium wine categories. As you can see, the super premium plus wine segment, where Constellation has the leading market share, has experienced double-digit growth, exceeding the trends of the total U.S. wine segment. We are well-positioned in this category due to our continued premiumization efforts.

The results are similar in the spirits category, with premium spirits growing 4% on a value basis for both the 12- and 52-week IRI periods. And imported beer continued to grow at an industry growth rate of 2% to 3% for both timeframes.

While we are all aware of the economic challenges impacting many industries, beverage alcohol products are not expected to be as significantly impacted as other consumer discretionary goods.

In closing, our momentum continues for many of the strategic actions we have undertaken during the last 12 months. We are off to a great start in fiscal 2009 and we are on track to achieve our goals and objectives for the year.

And now, I’d like to turn the call over to our CFO, Bob Ryder, for a financial discussion of our first quarter business results. Bob.

Robert P. Ryder

Thanks, Rob. Good morning, everyone. Overall, I am pleased with our start to the year and our results for the quarter, with comparable basis diluted EPS coming in at $0.34 versus $0.21 last year. This was in line with our expectations and puts us on a path to achieving our full-year goal of $1.68 to $1.76. We used $55 million of free cash flow in Q1 versus a use of $104 million for the prior year, and we are still on track to reach our $310 million to $340 million free cash flow goal for fiscal 2009. As a reminder, historically we are a net user of cash in the first quarter.

We believe our Q1 results demonstrate that the many significant steps we have taken over the past 12 to 15 months have increased our profit generation profile to drive improved financial results in fiscal 2009 and beyond.

Now let’s look at our Q1 fiscal 2009 P&L performance, where my comments will generally focus on comparable basis financial results. Let’s look at net sales. As you can see from our news release on page 13, our consolidated reported net sales increased 3%, primarily reflecting branded wine growth, including the net benefit of adding brands like Clos du Bois and Wild Horse, and divesting Almaden and Inglenook. We also saw favorable foreign currency translation, partially offset by the impact of moving the U.K. wholesale business to the Matthew Clarke joint venture.

The growth rate was 16% after excluding the impact of acquisitions, divestitures, and joint ventures, and 13% on an organic constant currency basis. This strong growth rate includes the benefits of overlapping our initiative to reduce distributor wine inventories in the U.S., which negatively impacted net sales in the first and second quarters of fiscal ’08.

Commentary for the following net sales comparisons will be on a constant currency basis. Worldwide branded wine organic net sales increased 15%. Organic branded wine geographic net sales for North America, which appears on page 12 of the release, increased 28%, reflecting the overlap of reducing U.S. distributor wine inventory levels last year and solid underlying growth in both the U.S. and Canada this year.

Branded wine organic net sales for Europe and Australia/New Zealand decreased 6% and 3% respectively. For our international business, we have implemented price increases that have impacted volume growth in the near-term but have enhanced overall margins and profitability. Volumes in these geographies were also impacted by SKU reductions of certain lower margin brands.

Turning our attention to spirit, net sales increased 9%, driven by strong double-digit growth of the SVEDKA Vodka brand. As discussed in our fiscal ’08 year-end conference call, we estimated that last year’s distributor inventory reduction initiatives had a one-time impact of $110 million to net sales and comparable EPS impact of about $0.15, with approximately 75% of that impact, or $80 million of net sales and $0.11 of EPS coming in the first quarter and the remainder hitting in Q2.

Adjusting for this estimated $80 million net sales impact for the distributor inventory initiative in Q1 last year, we estimate consolidated organic net sales on a constant-currency basis grew in the low single digits. This is a little below our mid-single-digit target due to the lower U.K. and Australia/New Zealand sales performance for the reasons I just discussed. However, North American organic branded wine on a constant currency basis grew in the mid-single-digits, after adjusting for the distributor inventory impacts.

Now let’s look at our profits on a comparable basis using information on page 14 of the release. For the quarter, our consolidated gross margin was 36.4%, up 6.1 percentage points. This reflects the benefits of implementing price increases on our North American and international markets, and product mix shift from adding high margin brands like Clos du Bois and Wild Horse and divesting lower margin Almaden and Inglenook brands. The overlap of the distributor inventory initiative also provided operating leverage versus the first quarter last year. We also experienced favorability from shifting the lower margin U.K. wholesale business to a joint venture structure last April.

Our consolidated SG&A for the quarter was 22.3% of net sales compared to 21.2% a year ago. This increase reflects moving below our SG&A U.K. wholesale business to a joint venture structure and increase marketing investment behind our premium spirits brands. This was partially offset by the impact of lapping the distributor inventory initiative. Consolidated operating income increased to $131 million from $82 million for the prior year.

I would now like to turn to our segment operating income results on page 11 of the release to provide highlights of this change. Wine segment operating income increased $58 million to $145 million. This was primarily due to higher net sales as we overlapped the reduction of the U.S. distributor wine inventories, contributions from the Clos du Bois and Wild Horse brands, and profitability improvement in the international businesses.

For the spirits segment, operating income decreased $5 million primarily due to the higher investment behind our premium brands discussed earlier and higher raw material costs. For the quarter, corporate and other expenses totaled $24 million, compared to $20 million for the prior year. The increase primarily includes higher consulting service fees associated with our review of our Australian business and other process improvement opportunities, as well as additional costs to support the growth of the company.

Equity investment earnings totaled $72 million versus $76 million last year, with $70 million coming from our Crown import investment, compared to $73 million in the prior year. For the first quarter, Crown generated net sales of $673 million, an increase of 2%, and operating income of $139 million, a decrease of 5%. The operating income decrease was driven by the year-over-year timing of marketing activities and an increase in product costs.

As a reminder, the joint venture agreement calls for a limited annual inflationary increase for the cost of products acquired from the Grupo Modelo company through calendar 2011.

Interest expense for the quarter was $87 million, up 9% over last year. The increase primarily reflects the incremental interest from funding the Beam Wine brand acquisition.

Now let’s take a look at our debt. At the end of May, our debt totaled $5.3 billion, which was fairly consistent with our debt at the end of fiscal ’08. At the end of the quarter, we had approximately $2.6 billion of bank debt under our senior credit facility and $2.7 billion of fixed term and other debt. Our average interest rate for the first quarter was around 6.5%. We had $580 million of revolving credit available under our senior facility at the end of May. Our debt to comparable basis EBITDA ratio at the end of May was 5.1 times. This ratio improved from the 5.3 times level at the end of February, reflecting our earnings improvement.

In early June, we received $209 million in proceeds from the sale of certain winery assets, which renew [inaudible] borrowings. If these asset sales had occurred before the end of Q1, our debt to comparable basis EBITDA ratio would have been around 4.9 times.

With the strong free cash flow and earnings improvement planned for fiscal 2009, combined with the asset sale proceeds just mentioned, we now believe we can reduce this ratio to below four times range by the end of fiscal 2009. Our previous guidance was in the low to mid four times range.

Our comparable basis tax rate came in at 37%, in line with our targeted full year tax rate, and compared to a 38.3% rate last year. Our weighted averaged diluted shares outstanding for the quarter totaled $219 million, compared to $233 million last year, reflecting the benefit from the share repurchase during the first quarter of last year.

Due to the many factors just mentioned, diluted EPS was $0.34 a share versus $0.21 a share last year.

Now let’s turn to cash flow on page 10. For purposes of this discussion, free cash flow is defined as net cash provided by operating activity less CapEx. For the first quarter, we used free cash flow of $55 million, versus a use of $104 million in the prior year. The lower use reflects improved earnings and increased distributions from the Crown imports JV versus the prior year first quarter.

We saw higher inventory in the first quarter due to an increase in our Australian harvest intake. Accounts payable was also higher as some of the payments from the harvest will occur in Q2 versus last year when the payments incurred in Q1 as a result of an earlier harvest. Accounts receivable was also higher as we lapped the distributor inventory reduction.

As mentioned earlier, for fiscal 2009 we are targeting free cash flow to be in the range of $310 million to $340 million. This includes CapEx in the range of $150 million to $170 million.

Moving to our P&L outlook for the full year 2009, we are forecasting comparable basis diluted EPS in the range of 168 to 176. As reflected in the outlook section of the press release, we expect reported net sales to increase in mid-single-digits. Interest expense is expected to be in the range of $335 million to $345 million, and we are assuming weighted average diluted shares of approximately $222 million.

Our comparable basis guidance excludes acquisition related integration costs, restructuring charges, and unusual items, which are detailed on page 16 of the news release.

I believe our results for Q1 and our full year goals demonstrate our overall focus on improving our sales mix, increasing operating efficiencies, and implementing pricing to offset input cost inflation and to enhance overall margins and profitability, generating strong free cash flow and paying down debt.

With that, we are happy to take your questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Tim Ramey of D. A. Davidson.

Timothy Ramey - D. A. Davidson & Co.

Good morning. Congratulations on a great quarter. I’m sorry, I think you said this and I missed it, but the comparable line sales excluding the impact to the inventory draw-down was what in the quarter?

Robert P. Ryder

It was around mid-single-digits in North America.

Timothy Ramey - D. A. Davidson & Co.

Okay, and there’s still some of the impact of the draw-down that will fall into the 2Q. Can you help us for our modeling purposes?

Robert P. Ryder

It will be about $30 million in Q2, because about three quarters of last year’s $110 million occurred in the first quarter, so what’s left is around $30 million of sales and about $0.04 of EPS for Q2.

Timothy Ramey - D. A. Davidson & Co.

Great. Appreciate it. And you know, there’s -- I was on CNBC this morning getting asked whether you guys would buy pieces of Foster or [Derringer]. I think you made a strong case here and on the road with me that your focus is on hunkering down. Can I get you to repeat that one more time, hunker down and pay down debt?

Robert S. Sands

Well, Tim, clearly our focus is on hunkering down and paying down debt, so it is as we have said, which is we are focused on generating internal efficiencies, improving free cash flow, improving ROIC and paying down debt. So these are key initiatives for our management team.

Robert P. Ryder

And I think you saw that in the first quarter. That’s what we did.

Timothy Ramey - D. A. Davidson & Co.

That’s terrific. Thank you.


Thank you. Our next question comes from Lauren Torres with HSBC.

Lauren Torres - HSBC

Good morning. I was hoping you could be a bit more specific with respect to the price increases that you took in the quarter -- any sense of the magnitude or give us a sense of how much of an increase you took, where you took it, and also just going forward, is there more to come or you pretty much took as much as you can, or as I said, take more going into the second quarter?

Robert P. Ryder

It varied a little bit by geography but I’d say in the U.S. in the wine business, it was probably around 3% kind of pricing, and expected at -- it had a bit of a volume hit and it will take a while to build out of that. I don’t think we’re looking at significant pricing in the balance of the year in North America for wine. Spirits also took pricing in the first quarter and I think they are looking, because they have a little bit more input cost inflation, they are looking to take some additional pricing [down into the year]. And as we talked internationally, the U.K. originally had their pricing increase. It was around again 3% to 4% but then when the duty came in, they actually increased it to match the duty, so I think they are pretty much done with their pricing for the year. And Australia also took some pretty significant pricing in the first quarter, like 5% to 7%, and I think they are looking at maybe taking some additional pricing balance of the year because as Rob had said, they had to pay a bit more for grapes this year because of farmers had to buy a lot of water, which is reflected in our cost of goods sold.

And again, we’re trying to balance improving our margins and using pricing to do that [with] the volume impact of that, because when we price we certainly see some volume reductions, but on a worldwide basis certainly in the wine business, the supply of grapes is pretty much matched up with the demand for them, so we do think there’s -- this is the right time to do what we are doing.

Lauren Torres - HSBC

And you said there was a volume hit with respect to U.S. wine. How much of a hit was that?

Robert P. Ryder

Well, I think we -- for volumes, we were a little bit light on the prices on the products that we price, and I think the two brands specifically, if you look at IRI, where share probably is keeping pace is a brand called Vendange and Clos du Bois. And Vendange is sort of a lower end brand, so it tends to be more price sensitive, and we’re managing it more for profitability versus share of market. And in the Clos du Bois, and I think we mentioned on previous calls, we took -- actually, the previous owner took about 6% to 7% pricing at the end of the calendar year. That’s a pretty significant price increase for a wine brand, so the volume on that have actually taken a hit commensurate with that. But as we get further past that price increase, and we’re like in month six, we see the volumes beginning to recover there and our market share beginning to recover as well.

Lauren Torres - HSBC

And are you seeing your competitors take some more pricing?

Robert P. Ryder

We are seeing pricing across the marketplace and pretty much in all of the geographies. Everybody is under the same pressures we are and I think everybody else sees the same supply/demand dynamics that we see.

Lauren Torres - HSBC

Thank you.


(Operator Instructions) Our next question comes from Brian Hunt of Wachovia.

Brian Hunt - Wachovia

Thank you. In line with your focus to hunker down and generate free cash, looking at your target of 310 to 340, it appears that there’s a significant amount of opportunity in working capital. Could you talk about your working capital targets for the year and how much the 310 to 340 comes from working capital benefit?

Robert P. Ryder

Yeah, I’d say in general we are much more focused on generating cash flow as a company. I’ll say a couple of things around that. Number one, I think the results show that. If you look at fiscal ’08 and fiscal ’09 and sort of average it, we’d be generating about $350 million a year, which I think is much higher than we’ve generated historically. At the New York investors conference, I think I said that as a company we’re trying to increase the EBIT flow-through to free cash flow, which over the last three years has probably been in the mid 30% range. We are trying to get that to sort of the mid-40% range, meaning the amount of EBIT that as a percent of free cash flow. We’ve changed the incentive within the company, so that people -- part of their bonus metric is now based on free cash flow and we are seeing some -- a much increased opportunity, a much increased focus on generating free cash flow because you know, if you look at our balance sheet, we have a sizable investment in net working capital. The big investment is in inventory, of course, and I think we’ve -- you know, you’ve seen some activities to improve that, like reducing less profitable SKUs because when you look at it from a return on capital perspective, it’s difficult for those SKUs, because they are lower margin and they sort of tie up a lot of working capital, generate -- it’s difficult for them to return the cost of capital.

So we’re not giving specific working capital goals but I think you will see it as we proceed and I think you are seeing it in the bottom line as we speak.

Brian Hunt - Wachovia

Okay. Thank you very much.


Thank you. Our next question comes from Mark Swartzberg of Stifel Nicolaus.

Mark Swartzberg - Stifel Nicolaus

A question about Canada, which is doing very well, I think you said up double-digits in the quarter; can you give us a little more detail on what’s going on there? And of course, with an [inaudible] towards sustainability, give us an idea of growth you see in the market going forward.

Robert S. Sands

Yeah, Mark, you know, Canada is in general a great market for us. People are consuming more wine as the -- the consumers are very loyal to Canadian wines. There’s big trading up going on into the EQA segment, and in general it just remains a strong market. I would say that we don’t see that abating for any particular reason. I think that the trends are pretty firmly intact and I think we should continue to see, continue to enjoy favorable trends.

Our portfolio is really well-positioned in terms of the products that we have to take advantage of those trends, so we are pretty optimistic about the market.

Robert P. Ryder

Just the other thing on this, we are the market share leader up there. It’s a country which actually some countries in Europe are looking at, it has a minimum net pricing so it tends to help the brand owner and there’s a big opportunity there, big market shift towards imported new [world] lines, so from Australia, New Zealand, and the U.S. And we are very well situated to take advantage of that opportunity.

So we see, albeit it’s not a huge market, especially compared to the U.S., but we see some pretty good opportunities for Canada going forward.

Mark Swartzberg - Stifel Nicolaus

And when you say growth not abating, what’s really driving my question is it’s not normally low double-digit kind of growth there, so do you see low double-digit sustained? And is that distribution, is that new products -- I mean, what’s -- obviously it appears you are taking share. I’m just trying to understand what’s up-ticking there.

Robert P. Ryder

I think in general, Canada, you know, the market probably grows 5% to 7%, so I think you are right; this quarter, I don’t think we’d expect double-digit growth going forward. There’s some timing impacts there but it’s a strong top line in Canada and we expect to take advantage of that.

Mark Swartzberg - Stifel Nicolaus

And can you help us just connect the dots between the market and the growth you saw in the quarter? What besides what you have in the release in terms of the named brands really changed there?

Robert S. Sands

We can get back to Patty or Bob on some specifics on that, Mark. You know, it’s a combination of factors, new SKUs and product introductions, things to that effect. I think as much as Bob told you that we probably would expect growth in Canada to be in excess of U.S. growth, probably mid to high single digits but we’re not going to project sustained double-digit growth, so I’d be -- that’s what you should probably take away from now.

Mark Swartzberg - Stifel Nicolaus

Great. Thanks, guys.


(Operator Instructions) Our next question comes from Bryan Spillane of Banc of America.

Bryan Spillane - Banc of America

Good morning. Just a couple of questions, or a question, I guess, regarding some of your cost saving initiatives and efforts to improve return on capital. First I guess, you had mentioned at the analyst day a program to reduce SKUs, eliminate some lower margin or lower turn brands, so if you could talk a little bit about how that -- if that had any impact on your sales in the quarter.

And then second, if you guys could just talk a bit about where you stand now in terms of your project list -- you know, what’s currently being worked on and then what you have sort of in the pipeline with certain initiatives to continue to boost your turns and grow margin.

Robert S. Sands

Brian, first of all, as I mentioned in my talk, we discontinued in our value segment about 50 brands, about 1,600 SKUs. That’s only one of the factors that has impacted our sales growth. Even though our sales growth in North America, by the way, in general is well in line with targets, notwithstanding the fact that it’s been impacted by the couple of things Bob mentioned -- Clos du Bois pricing, the way that we are managing the Vendange brand, and the third item is the fact that we now don’t have those 50 brands flowing through as well. But nevertheless, on a purely organic basis, taking into account the distributor inventory reduction, even including these factors we’re growing the business in North America at about a 5% rate, which is exactly consistent with our mid-single-digit growth.

We’ve got lots of initiatives to reduce cost of goods sold. I think a good example of that is our recently announced disposition of our Valley Fields facility, primarily a contract production facility, although maybe about 20% of it in various ways was utilized for our products. We’ve got a brand new modern facility in Lethbridge, Canada in Alberta that we can consolidate production into, so these are the kind of moves that we continue to make to boost margins, to improve ROIC.

The disposition of the brands that we recently announced that we are selling, there again -- you know, we’ve developed what I’ll call a disposition discipline, okay? If we’ve got brands that we don’t see are strategic, that we believe can be sold in excess of the net present value of our forecasted cash flows of those brands at our [inaudible], you know, those are the kinds of ROIC improvement initiatives that we are undertaking.

Bob, do you have anything to add?

Robert P. Ryder

No, I think the other thing we talked about, Brian, is -- and it relates back to the, you know, some of the projects in which we are working, is we are looking pretty intently at our Australian business and looking at sort of the return on capital and profitability by brand and actually by SKU, and that will most likely result in some reductions to the SKU count on brands that can’t return their cost of capital. And that should improve our margins down there and should improve our working capital, as we have just fewer things hanging around the warehouse. And I think that, coupled with the pricing we have already taken and maybe some additional pricing we’ll be looking at balance of year, should improve our profitability in both Australia and the U.K.

So I think, you know, there’s some of the things that we are looking at.

Bryan Spillane - Banc of America

Great. Thanks, guys.


Thank you. There are no further questions at this time. I would like to turn the floor back to Rob Sands for any closing comments.

Robert S. Sands

Okay, well thank you, everybody, for joining our call today. We’re very pleased with our results for the quarter. As I mentioned, I think that we are off to a great start for fiscal 2009 and I believe we are well-positioned to achieve our free cash flow and EPS goals for the year. Our recent actions demonstrate that we continue to execute our strategies. A few examples include the divestiture of the California northwest assets that I just talked about. Of course, we used those proceeds to pay down debt. We have realized pricing and thus increased profitability in our international markets where we have a strong presence. And overall, we planned continued margin expansion and ROIC enhancement as we drive internal efficiencies and further premiumize our portfolio.

Thanks again, everybody, for your participation and we hope you enjoy some of our excellent products during the Fourth of July holiday.


Thank you. This concludes today’s Constellation Brands first quarter 2009 earnings conference call. You may now disconnect and have a great day.

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