Constellation Brands, Inc. (STZ) Q4 2011 Earnings Report, Transcript and Summary

Good morning. My name is Wes, and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands Fourth Quarter and Fiscal Year End 2011 Earnings Conference Call. [Operator Instructions] I will turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Wes. Good morning, everyone, and welcome to Constellation's Fourth Quarter and Fiscal Year End 2011 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 been furnished to the SEC. During this call, we may discuss financial estimation 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 Investor section. 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.

Thanks, Patty. Good morning, and welcome to our call. We recently completed a year of significant accomplishments as we delivered against a number of key strategic goals and business initiatives. I would like to take a minute to highlight some of these accomplishments. We sold the majority of our U.K. and Australian business to the CHAMP Private Equity for approximately $220 million. This transaction represented another transformational step in the execution of our strategy as this business was no longer aligned with our strategic imperatives. We utilized the proceeds from this transaction in combination with strong free cash flow to reduce debt by almost $600 million. This also enabled a decrease in our leverage ratio to the mid-3x range, a level we have not achieved since May 2006. We generated free cash flow of $530 million for the year, and we are targeting, for fiscal 2012, free cash flow to be in the range of $600 million to $650 million. We have obviously made significant progress from our ongoing focus in this area. These strong free cash flow results essentially enabled us to fund an accelerated stock buyback transaction while continuing to reduce debt. We are approaching the final leg of Project Fusion, which was designed to create an integrated technology platform and develop world-class systems to support our business. Our Fusion initiatives have reached major milestones within the past year, and the work being done within this program is helping Constellation become more connected as one company, improving efficiencies and achieving cost savings across our business. Lastly, we have strengthened the core foundation of our U.S. business to the implementation of our U.S. distributor initiative, which is also one of the primary catalysts driving profitable, organic growth. Presently, this program gives five distributors the rights to sell Constellation's portfolio of wine and spirits exclusively in their respective markets in 22 states and currently represents approximately 60% of our total U.S. wine and spirit volume. As we previously discussed, our sales volume to distributors exceeded distributor sales to retail and on-premise channel throughout fiscal 2011 due to the distributor transition. This had the effect of benefiting sales and profits for our U.S. business and will create an EBIT comparison challenge for fiscal 2012, the impact of which has been factored into our guidance for this year. During fiscal 2012 and for the remainder of the contract term, we expect our shipments to essentially equal distributor depletions on an annual basis. Meanwhile, in order to put things into perspective relative to how Constellation is performing in the U.S. marketplace, it is best to review a combination of our shipment data, distributor depletions and consumer takeaway trend as they are indicative of the underlying health of our business. In an effort to help you better understand this part of our business, we have added shipment and depletion information to the Financial Attachments section of our press release. We expect to provide this information on a quarterly and year-to-date basis going forward so that you will be able to better understand the results of our efforts. As you can see, for our fiscal year ended in February, depletion volumes or distributor sales to retail for Constellation's total U.S. total Wine and Spirits business across all channels increased approximately 3% for the year, which is in line with industry trends. And according to recently released data from the Beverage Information Group for calendar 2010, we maintained U.S. market share on a volume basis in total across all channels and therefore, essentially grew in line with the category, which has been our goal since the launch of the U.S. distributor initiative. However, more recently, you may have noticed a bit of market weakness for our U.S. Wine business in the IRI or Nielsen data that you receive and analyze on a regular basis. I'd like to take a minute to describe what's driving these trends and remind everybody that the IRI food and drug channels represent approximately 30% of our business with the next two largest channels represented by the liquor and on-premise channels. At any given point during the year, we post our promo activities as appropriate based on a number of factors including business seasonality, the competitive environment and consumer takeaway trends. Our marketplace performance reflects this in the form of an increase or decrease in promotional activity that typically drives volume results during any given time period throughout the year. You may remember that during the first half of fiscal 2011, our promotional spend exceeded that of the market as we worked to regain market share that we had lost during the distributor transition, when we were focused on executing our consolidation strategy. During the second half of fiscal 2011, we resumed more normalized levels of promotional activity but also scaled back promotional support for the lower margin, non-premium brand at the less than $5 retail price point. This was done in an effort to improve margins on these products. But as expected, this action negatively impacted volumes. This activity will happen from time to time throughout the year as part of the normal course of operations, because we are focused on taking actions appropriate for the long-term health of the business. As a matter of fact, during the first quarter, we will take selected price increases on certain specialty and value product to continue to enhance margins. So you will continue to see this kind of volatility in IRI. Keep in mind, however, that this IRI data represents only a portion of our entire business. As we discussed, going forward, our goal remains the same. From a depletion and consumer takeaway perspective, we expect to grow in line with the market across all channels for fiscal '12 and beyond. The promotional environment overall in the U.S. market appears to have stabilized yet remains competitive. One of the most important things to keep in mind is that our focus brands, which represent the majority of our U.S. wine profitability, posted positive depletion trends of almost 10%, 10% for the year, and we gained market share for this entire group of products. It's many of these focus brands that have recently received recognition in the form of awards and accolades. The following, which I think are particularly noteworthy: Constellation recently received Impact 2010 Hot Brand Awards for SVEDKA, Black Box, Kim Crawford, Rex Goliath and Modelo Especial. Seven of our U.S. wine brands were included in IRI's list of 30 Top Momentum Table Wine Brands. We received the Beverage Information Group's 2011 Growth Brands Awards for blüfeld, SVEDKA, Black Box, Kim Crawford, Cook's and Woodbridge by Robert Mondavi. And blüfeld became one of the Top 10 IRI New Table Wine Brands. And in terms of new product development, we have several initiatives underway with the recent launch of Toasted Head Untamed White, Arbor Mist Pomegranate Pinot Noir and Simply Naked, which is a line of unoaked varietals. Rex Goliath, one of the fastest-growing major brand, introduced Sauvignon Blanc and Moscato brand extensions. Moving on to SVEDKA, our Spirits business. Our Spirits sales results for the year are certainly not reflective of depletion trends or underlying consumer demand for SVEDKA vodka, which posted double-digit sales depletion and IRI growth for 2011. For 2012, we will continue to build SVEDKA's on-premise brand awareness. We have plans in place to increase our digital and media investment, and we will be innovative with our planned introduction of new packaging configuration and flavor profiles. Bob will have more to say about factors driving the overall Spirits numbers in a moment. Moving to the Crown Imports joint venture. For fiscal 2011, Crown benefited from the positive marketplace momentum that they built throughout the year. During this time frame, Crown outperformed the total beer industry, the import category and the other three major beer suppliers in both case and dollar sales trends in the SymphonyIRI food, drug mass and convenience channels. And among the four major beer suppliers, Crown was the only one to gain dollar market share. This is the result of product innovation, creative advertising campaigns, the ongoing support of wholesalers and excellent market execution. Throughout the year, Crown implemented several new initiatives, increased marketing investments and launched new brand and packaging configurations in an effort to continue building value and increasing brand recognition, and it worked. Corona Extra was included in the first time in the Best Global Brands ranking published by Interbrand. And Modelo Especial was once again awarded Hot Brand designation from Impact magazine. Collectively, these initiatives resulted in Crown posting depletion growth in the low- to mid-single digit range for fiscal 2011. As we head into fiscal 2012, Crown has some exciting business initiatives underway. Some examples include the expansion of the Corona Familiar 32-ounce bottle. Victoria, which has already been extended beyond the initial Chicago test market into Colorado and Texas and will enter it's next phase launch in Arizona, California, Georgia and five other states. The Corona Beach Getaway promotion, which was so successful during last year's summer selling season, it will be bigger and better this year. Crown also plans to extend its successful 'Find Your Beach' advertising campaign with several new executions, which are set to debut throughout the spring and summer selling season. Lastly, Crown is excited to announce that Corona partner, Kenny Chesney, will be back for a full, 49-city Goin' Coastal Tour during calendar 2011. As presenting sponsor, Corona will capitalize on this partnership via retail support and in-venue programming to promote the brand. These initiatives are expected to result in fiscal 2012 depletion growth in the low- to mid-single digit range for the second consecutive year. And finally, as I mentioned last quarter, the majority shareholder of Ruffino attempted to exercise an option to put their equity interest in Ruffino to Constellation. Prior to this notification, we initiated proceedings against the majority shareholder, questioning the validity of the put option. Although negotiations continue, we now anticipate that we will complete the transaction on substantially revised terms. In closing, I am certainly pleased with the outcome of fiscal 2011. I firmly believe our results validate our strategic imperatives, emphasizing premiumization, financial strength and profitable organic growth. We are very well positioned for the year ahead, and I look forward to sharing with you our vision for the future when we meet next month in New York City for our Investors Day. Now I'd like to turn the call over to Bob, our CFO, for a financial discussion of our year-end business results.

Thanks, Rob. Good morning, everyone. From a historical perspective, Constellation recorded highest-ever reported in comparable basis EPS results and highest-ever free cash flow result. We also exceeded the EPS and free cash flow guidance provided at the beginning of the year. From an operational perspective, our U.S. depletion trends improved considerably from the previous year, and in fact, grew in line with the overall U.S. wine and spirits market. Our focus brands, the brand against which we want our sales force and the distributors sales force to concentrate their efforts, grew depletion depth 3x the overall market. On the beer side, Crown gained volume and dollar market share and grew EBIT for the first time since the JV formation. We sold our Australian and U.K. business, which was the last major portfolio move to premiumize the business. This follows the 2008 sale of our Value Wine business, the 2009 sale of our Value Spirits brands and the 2010 sale of our U.K. Cider business. From a free cash flow perspective, we delivered an all-time high by a large measure. Inventory investments were reduced dramatically. Payments for interest and restructuring were reduced, and capital spending was down. We believe all these are sustainable within our current portfolio of businesses. In addition, we significantly reduced taxes paid during the year. This lower level of tax payment is expected to continue for the next couple of years. We utilized our free cash flow and proceeds from asset sales to buy back shares in a highly accretive fashion, and we reduced our comparable basis EBITDA leverage ratio by a half a point to about 3.6x. Putting these items I just outlined aside, higher promotional spending and SG&A contributed to our fiscal 2011 comparable EBIT decreasing almost 3%. The increase in promotional spending was in response to competitive activities and our efforts to regain momentum in our U.S. Wine business, following transition impacts related to our U.S. distributor consolidation initiative. The SG&A increase was due to a higher level of Project Fusion expenses, higher incentive compensation cost and the translation of foreign-denominated SG&A into U.S. dollars. Even with our planned EBIT reduction, our comparable basis EPS grew 13% to $1.91 and established a new foundation from which we can build in future years. Now let's look at our fiscal 2011 P&L performance in more detail, where my comments will generally focus on comparable basis financial results. As you can see from our news release, full year consolidated reported net sales decreased 1%, primarily due to the divestitures of our U.K. Cider and Australian and U.K. Wine businesses. Excluding the impact of the divestitures and currency, net sales increased 3%. Before drilling down further on sales, I want to highlight some changes intended to improve our reporting. We've now combined wine and spirits sales in our North America segment reporting. This reporting is more closely aligned with our management of the business. Prior period results in our press release and our segment history schedule on our website have been restated to conform to this new presentation. In conjunction with that change, we've added information for North America, U.S. and focus brands shipment volumes, as well as U.S. depletion and focused brand depletion growth rates to the Net Sales page of the press release. With that, my commentary for the following net sales comparisons will be on a constant currency basis. Full year North American organic net sales increased 4% as U.S. volume growth combined with favorable U.S. product mix was partially offset by higher promotional cost. The U.S. shipment volume increase reflects shipments running ahead of depletions as part of our distributor consolidation transition activities. Australia, Europe organic net sales were level with the prior year. While we're reporting wine and spirits net sales on a combined basis going forward, we provided supplemental spirits sales information as part of this reporting transition. Spirits organic net sales increased 4% as strong SVEDKA performance was somewhat offset by lower Black Velvet sales and lower contract service revenue. The lower contract service revenue was related to a service arrangement with the buyer of our Value Spirits business, which was in place throughout fiscal '10 but for only about half of fiscal 2011. Now let's look at our profits on a comparable basis. For the year, our consolidated gross margin was 35.9% versus 35% for the prior year. This primarily reflects favorable product mix and grape cost benefits in Australia partially offset by higher promotion expense and grape costs in the U.S. Our consolidated SG&A margin for the year came in at 19.8% of net sales compared with 18.3% in the prior year. This primarily reflects incremental investments in technology for Project Fusion activities, unfavorable foreign exchange translation and increased incentive compensation. Consolidated operating income decreased 5% to $534 million and operating margin decreased 60 basis points to 16%. I'd now like to turn to our segment operating income results to provide highlights of our full year operating income change. North American segment operating income decreased $7 million to $631 million. Improvement in U.S. sales volume and mix was more than offset by higher promotion costs, higher grape cost, investments in technology and selling functions and higher incentive compensation cost. The Australia and Europe segment reported operating income of $9 million, an $8 million decrease versus the prior year. The decrease was predominantly due to the divestiture of the U.K. Cider business in fiscal 2010. Consolidated equity investment earnings totaled $244 million versus $239 million last year. Equity earnings for Crown totaled $226 million versus $222 million for the prior year. The remainder of equity earnings in fiscal 2011 included $13 million from North America, which was primarily generated by Opus One and $6 million for the Australia Europe segment. For the year, Crown generated net sales of $2.4 billion, an increase of 6%, and operating income of $453 million, an increase of 2%. Sales primarily benefited from volume growth driven by an improvement in consumer demand and from distributor inventories returning to more optimal levels as we head into the Cinco de Mayo and summer selling seasons. Crown operating results benefited from the volume improvement but were unfavorably impacted by a contractual product cost increase, a legal arbitration decision regarding a former distributor as discussed in Q3 and an increase in marketing cost. Interest expense for the year was $195 million, down 26% versus last year. The decrease was driven by a lower average interest rate due in part to our refinancing activities at the end of fiscal 2010 and reduced debt levels during the year. Our average interest rate for the year was around 5%. Let's take a look at our debt position. At the end of February, our debt totaled $3.2 billion, which represents an approximate $600 million decrease from our debt level at the end of 2010. This decrease is impressive given the funding of our $300 million stock buyback earlier in the year. Our comparable basis effective tax rate benefited from the favorable outcome of certain tax items and came in at 30%. This rate was level with the prior-year rate. During the fourth quarter, we reported a net pretax gain of $84 million on the sale of our Australian and U.K. business. We also recognized a $198 million tax benefit in our reported income tax line related to our Australia and U.K. business. These items were excluded from our comparable results. From a cash perspective, we anticipate receiving the full benefit of this $198 million. We realized approximately $30 million of the total cash benefit in fiscal 2011. We currently expect to realize the remaining $168 million cash benefit on a fairly equal basis over fiscal '12 and fiscal '13. Now let's briefly discuss Q4. For the fourth quarter, organic constant currency net sales increased 10%. This was driven by 14% organic constant currency growth for North America, due primarily to a combination of higher volume and positive mix in the U.S. As you will recall, net sales for Q4 of fiscal 2010 were impacted by inventory reductions at certain U.S. distributors, which in turn drove unfavorable mix and reduced operating leverage at that time. The higher sales volume and mix drove a $29 million increase in North America operating income for Q4 fiscal 2011. The improved volume and mix helped drive a 360-basis point gross margin increase and improved operating leverage as SG&A as a percentage of sales decreased 40 basis points. Equity earnings for Crown totaled $49 million versus $41 million for the prior year quarter. For the quarter, Crown's net sales increased 15% while operating income increased 18%. The strong results were driven by an improvement in consumer demand and from distributor inventories returning to more optimal levels heading into the key selling periods. Now let's discuss free cash flow, which we define as net cash provided by operating activities less CapEx. For fiscal 2011, we generated free cash flow of $530 million versus $295 million for the same period last year. This improvement reflects lower payment for taxes, interest and restructuring. In addition, we saw a sizable source of cash resulting from a reduction in inventory. There was also an increased use of cash from accounts receivable due to the timing of sales. CapEx came in at $89 million versus $108 million for the prior year. We're targeting free cash flow for fiscal 2012 in the $600 million to $650 million range. This includes CapEx in the range of $85 million to $95 million. The primary drivers of the projected $70 million to $120 million increase from FY '11 to FY '12 are lower interest and tax payments and a reduction in cash restructuring cost. Interest is projected to be down primarily due to anticipated lower debt balances. Our lower tax payment estimate is due to the previously mentioned tax benefit related to the Australian and U.K. business. Our fiscal 2011 free cash flow is a record for Constellation. We've made a lot of progress in reducing our net working capital investment, improving our process around capital expenditures and selling capital-intensive businesses. Our fiscal 2012 free cash flow guidance exceeds $600 million, which will be another record for Constellation. While FY '11 and FY '12 reflect lower-than-normal tax payments, we do feel many of our initiatives will provide lasting benefits and that our current business is capable of generating $500 million of annual free cash flow on average over the longer term. Now let's move to our full year fiscal 2012 P&L outlook. We’re forecasting comparable basis diluted EPS guidance to be in the range of $1.90 to $2 versus our $1.91 result for fiscal '11. Currently, we do not anticipate restructuring charges or unusual items to impact EPS. Accordingly, reported basis diluted EPS is also targeted to be $1.90 to $2. I would like to frame in a couple of items related to our flattish to up-slightly comparable basis EPS guidance for fiscal '12. While we're pleased with the underlying U.S. depletion trends, as mentioned earlier, shipments exceeded depletions during fiscal 2011. For fiscal 2012 and thereafter, shipments should generally align with depletion on an annual basis. As we overlap FY '11 shipments running ahead of depletions, we will face a difficult comparison in FY '12 as we currently anticipate flattish organic sales and modest EBIT growth for our U.S. Wine business. As shipments align more closely to depletions, we expect to see some change in the year-over-year timing of sales and EBIT by quarter. The most significant impact will be about $0.07 to $0.10 of EPS, which will move from Q3 to Q4. Our EBIT will also be impacted by the sale of the Australian and U.K. business. As mentioned earlier, this business produced $9 million of operating income and $6 million of equity earnings or $15 million of EBIT in fiscal 2011. This EBIT was earned in the third and fourth quarters. With interest and cost savings, we expect the transaction to be slightly dilutive for fiscal 2012. This business recorded sales of $775 million in fiscal 2011. We estimate approximately $90 million of those sales will become third-party sales for our North American segment going forward, which will be adjusted in our organic sales reporting. While there's some minor near-term earnings impact, the sale of this business improves our financial profile, as operating margin should improve by more than 400 basis points. We also expect earnings to be less volatile and foreign currency exposure to be greatly reduced. Turning to the Beer business. Rob noted that Crown is targeting low- to mid-single digit depletion growth for the next year. As we outlined last quarter, the JV partners decided on incremental funding levels for marketing and promotion spending by Crown for calendar 2011 and thereafter. This additional investment is expected to drive flat to slightly down operating earnings for Crown in fiscal '12. This marketing spend is weighted to the second and third quarters. I would also like to note that interest expense is expected to be in the range of $180 million to $190 million. We are targeting a 29% tax rate. This rate will fluctuate quarter-to-quarter, with the first quarter rate anticipated to be the highest. We expect weighted average diluted shares to approximate 216 million. Our board of directors has authorized a $500 million share repurchase program, which we expect to implement over multi-year time horizon. Currently, our near-term focus is on debt reduction. However, we believe it is important to have a share repurchase authorization in place to provide flexibility subject to market and other conditions, as part of our ongoing efforts to optimize the capital structure of the business. Our guidance excludes the impact of any potential repurchases of common stock. Before we take your questions, I'd like to highlight that fiscal 2011 demonstrated significant progress in our efforts to enhance the financial profile of the company. Our simplified U.S. organizational structure, streamlined brand portfolio and consolidated U.S. distributor network have contributed to improved depletion volumes and marketplace performance versus last year. In the Beer business, we continue to see positive depletion and retail results from Crown's marketplace execution. The sale of our Australian and U.K. business will result in a dramatic improvement to most financial metrics. Our free cash flow generation profile has stepped up significantly. Our $600 million to $650 million free cash flow projection represents an approximate 14% yield on our current market capitalization. With that level of free cash flow, rough math would indicate a comparable basis EBITDA leverage ratio around 3x by the end of fiscal 2012. This provides us flexibility in our capital structure management. With that, we're happy to take your questions.

[Operator Instructions] Our first question comes from Kaumil Gajrawala of UBS.

As we think about the difference between shipments and depletions or the guidance of flat revenue growth on flat to marginal EBIT growth, can you give us a read on where maybe the flex points would be in SG&A or somewhere else where there might be some leverage if trends are any better or any worse than expected?

Well, Kaumil, the guidance is really what the guidance is. As far as the flattish EBIT growth in the guidance for next year, it is strictly a function of overlapping this year's shipment and depletion in balance. The underlying business, as I think that we reported, remained pretty strong. You look at the focus brands in particular, which constitute the majority of our profitability, are growing -- grew last year in the 10% range from a depletion point of view. So as far as flex points go, we'll be watching all lines of the P&L very carefully to ensure that we generate the results that we've guided to.

Maybe another way is there's probably some corporate expenses related to the divestitures that will get pulled out of SG&A. Would any benefits from that just be offset by negative leverage or something?

It's all figured into the guidance. We don't expect SG&A to go up much in fiscal '12. It will be relatively flattish.

Okay. Got it. And then as you think between debt reduction and buyback, is there a target cap structure at which there's less benefit to reducing debt beyond that point?

Yes. I mean, to optimize our lag, we should probably have an EBITDA leverage ratio in between three and four. So we'll probably be in that -- that will be the ideal range. That's not saying we wouldn't go lower than that if we felt that, for a temporary period of time, that made the most sense.

Okay, got it. And then last question on Crown. Are there any particular regions of the country that are disproportionately benefiting or contributing to the improvements at Crown? I'm trying to get a little bit of a read on if there's regions of the country where the economy is improving at a different pace than what would be happening on average nationally.

Yes, I would say, not really. I mean Texas has been a fairly strong market for us even through the recession, largely because of the oil interest in Texas. The economy there has not been as badly hit as other places, but in general it's a fairly across-the-board kind of thing.

We'd expect better growth in the geographies where we’re launching the Victoria brand, which we expect big things from. It did quite well when we did the test market in Chicago. So we expect that to grow in those geographies, one of which is Texas. Other than that, there's probably puts and takes.

Your next question comes from Judy Hong of Goldman Sachs.

First on the U.S. Wine business. So in the fourth quarter, can you give us the wine depletion number? I know you gave us the wine and spirits together, but just the total U.S. wine depletion number, and then also the focus brands that are just wine brands?

Yes. So depletions in the fourth quarter were low-single digit and below the total year. So the total year was about 30% depletion growth. So they were below that but still within the low-single digit range. And the focus brands were fairly consistent with what they invest for the year.

Okay. So high-single digit level?

Yes. And the focus brands are much higher than that, obviously.

Okay. And then, Rob, as you think about the health of the Wine business, and I think you've talked about generally being pleased with the health of the business. But it sounds like maybe the promotional activity remains intense. You're taking select price increases in some of the markets in wine. So I'm just trying to understand how you think about your ability to really pace your wine sales growth in line with the category growth. Does it really hinge upon the competitive dynamics getting more rational? Is there a risk that you really have to step up more spending to drive that improved depletion growth as you get into fiscal '12?

So what I said, Judy, was that we expect in 2012 to grow our depletions in line with the market growth. And we expect the market growth to be somewhat similar to what it was last year. So we, in other words, expect our depletion growth to be similar to what it was last year. Now, this is not premised on any significant or material change in the marketplace. Meaning, we are not premising our depletion growth this year on the fact that promotional activity will decrease or increase. We expect it to remain fairly constant and very similar to last year.

Okay. So is the softening trend that we're seeing in the food store data, is that more limited to that channel, and that other channels, the depletion trends are actually a little bit better than -- and your share performance is better than what you see in the food store channel?

In some cases, yes, and in some cases, no. Clearly, the mass merchandise channel is probably our strongest channel where we’re, I would say, significantly outperforming the market. And when I say mass merchandise, I'm talking about [indiscernible] mass merchandise, the Targets, the Calpians [ph] the Wal-Marts. We're doing extremely well in that particular channel. The on-premises remains a tough channel, and we're not planning on it getting much better. It's probably flattish at this stage. IRI is about 30% of the market. You see how that channel performed. We probably outperformed in liquor store states, the IRI channel. But all that said, what's really going on here is -- last year, we promoted extremely heavily in the first half of the year and then pulled back fairly dramatically on our promotional activity in the second half of the year. And you can see that in the IRI. It's plain and simple. As we move in to this year, we are smoothing our promotional activity quite considerably versus what we did last year. Okay? So you're probably going to see that because we were overlapping the very strong promotional activity in the first half of the year last year, and we're not going to do it the same way this year, we're actually smoothing it out more, you'll see IRI weakness during the first half as we overlap that strong promotional activity. And then, as we choose to promote more heavily during the year, eventually, you’ll see that reflected in IRI-type data. So I expect the IRI to be fairly volatile.

Okay. And then on the Crown JV, it looks like your guidance implies margin compression as you step up spending. So I guess it also implies that you're not planning to really look at pricing as a lever to get more margin. Is that correct?

Yes, so we talked about this in the third quarter. Crown's top line is moving quite well. We're actually in quite a good position pricing-wise. Crown really doesn't anticipate taking a lot of I'll call it front-line pricing, meaning just flat-out price increases. What they do anticipate doing is reducing promotion spending, which will end up -- you'll see it in IRI. You’ll end up with a higher net sales per case. The wide majority of that promotion savings will be reinvested in media and marketing, right? So you won't see much of that reduced promotion spending flow to the bottom line. However, the increase, the net increase in promotion and marketing in '12 over '11 is due to the JV partners’ agreement to ramp up that spending. And so Crown will be spending in absolute dollars more in FY '12 than it did in FY '11. You will see that flowing through their P&L.

Okay. And is that kind of a one-time incremental spending? Or is there some year-over-year increase obligation that Crown needs to take every year from a spending perspective?

No. Essentially, it is an increase in fiscal '12 over fiscal '11. That increase will remain through the eternity of the JV.

Your next question comes from Lauren Torres of HSBC.

Just actually trying to understand also your earnings growth guidance for this year. I'm just thinking about the pieces here. Obviously, I do understand the impact of the distributor inventory levels being high. But knowing that you're taking some pricing, maybe promotional activity won’t be that high generally for the industry this year, and depletions may still grow at this low-single digit rate. I'm just thinking about all that combined, why can't we see some better earnings growth? I don't know if your guidance here is just conservative at this point or there's other issues that we're not really thinking about in that mix.

There's one factor that you left out, which is you will see higher promotional expense this year versus last year. And the reason for that is you got to remember, we promote against depletions. And while shipments are fairly flat because of the overlap of the inventory build during the distributor transition, depletions are growing and therefore you'll see promotion growing. Now on a depletion basis, promotional expense per case won't really change very significantly. Okay? But if you're looking at the P&L, which is really based on shipments and not depletions, you're going to see promo grow as depletions grow. So that is what is going to offset what would apparently generate more EBIT growth this year, if you were only looking at the factors that you mentioned. So that's really what's going on here.

So let me augment that a little bit. Rob explained the big piece, which is basically, sales are going to be flattish. Sales are going to be flattish and EBIT will be slightly up for the North American wine business and it's due to the overlap of the inventory increase in fiscal '11. The other two pieces, remember, are Crown EBIT we’re forecasting to be down year-over-year because of the incremental marketing spend that I just described, and the Australia Europe business. Those profits are no longer there. So they have EBIT of about $15 million in fiscal '11 that -- they aren't there in fiscal '12. So they're the big three pieces.

That's about $0.03 or $0.04 on the CWAE Australia and Europe EBIT loss, by the way.

Okay. And also too with respect to U.S. consumer trends. Rob, I know you mentioned on-premise still being tough and not really expecting an improvement this year. With that said though, are you seeing as far as just take-home consumption, increased frequency of purchases, maybe trading up? Is the U.S. consumer you're seeing firming up a bit or we're really not seeing that yet?

I think that we have already seen the U.S. consumer firm up. I don't think that we're anticipating a big change in consumer behavior during our FY '12, so calendar year '11 and the beginning of calendar year '12. What we have seen is the consumer is definitely back, is definitely purchasing. We see very good growth in the Wine business in particular. The only negative -- there's really two negatives that we see, which is the consumer still remains extremely price-sensitive and is looking for a deal. And therefore, promotional activity remains robust. So the consumer is there and the consumer is purchasing, but the consumer really wants a deal. And number two, interestingly enough, the consumer is really taking advantage of the fact that there are deals out there, and we see a lot of trading up going on in the business because we see a lot of good promotional activity at some of the higher price points. So a good example is sort of wines between sort of $15 and $25 where the consumer is definitely taking advantage of the fact that you're seeing a lot of wines that we're selling above $20 pre-recession, now selling below $20. And therefore, they’re trading up to those wines from either the Super Premium or Ultra Premium category or they're trading from Super to Ultra or Ultra to Luxury. So you may recall, Super Premium, when we talk about that, that's $8 to $12. When we talk about Ultra Premium, it's $12 to $15. When we talk about Luxury, it's over $15. So we're seeing a lot of trade up activity driven by promotional activity in that regard. On-premise remains flattish. I don't see that changing that much either. I mean it could move to slightly up. And that's just going to take time, and it's going to be very closely tied to unemployment, and we all have our own opinion on where that's going to go. But I think everybody largely predicts that, as a trailing indicator, that unemployment will continue to be slow to rebound. There's other factors in the marketplace but I think they're going to keep sort of consumer behavior the same. I think that everybody has concerns about inflationary pressures as we go into this year. We don't expect it to really affect our business the way that it might affect others because it's very linked to gas and oil prices. And that isn't really a big, big factor in our cost of goods sold or that kind of thing. But I think it's going to be a negative -- continue to be a negative headwind relative to the consumer. So you get some positive headwind with the consumer or some positive wins with the consumer on the one hand offset with some headwinds related to inflationary pressure. So this all sort of reads to me that we're going to see a similar consumer environment to what we saw last year.

Okay. And if I could just ask lastly on Crown. You mentioned that incremental marketing investment. Is that really behind Victoria and the Modelo Especial or are you putting any more money behind the Corona brand?

Yes. We're putting more money behind the Corona brand. I mean, Crown is the strongest major beer company in the United States today, probably by a wide margin. The brands are performing very well as we come out of the recession. Corona has rebounded. Modelo Especial is probably the strongest major beer brand or significant beer brand of any beer brand in the country. And Crown is going to put more spending behind brand building and maintaining the strength of what are already very, very strong brands. And we are completely behind that and anticipate that for the long-term, it's going to be a very, very solid investment.

Our next question comes from Vivien Azer of Citigroup.

My first question has to do with the pricing that you guys are going to be taking. It seems like maybe we're already seeing a little bit in the scanner data. And I was wondering if you could comment on whether the price increases you're taking are in line with what you're seeing with your competitors. Are you more or less pricing relative to the category?

Our pricing that we take – we’ve got systems and processes in place to make sure that it's in line with our competitors and that we're not getting out of whack with competitors. But remember, almost all of our pricing is in our non-focus and nonstrategic brand, which, you also have to remember, constitute a very large percentage of our business, not from a profit perspective but from a volume perspective. So we may take some pricing on things like dessert wines, sparkling wine, value products that are relatively large from a volume perspective but relatively small from a margin perspective. So it impacts our overall numbers quite considerably. That's why we have now added information about our focus brands and how those focus brands are doing from a depletion perspective. So that it's easier to separate sort of what's going on with the nonstrategic part of our portfolio versus the more strategic part of our portfolio or the strategic part of our portfolio. Really those 17 brands which we highlighted. Hopefully, that's going to be helpful to you.

No, definitely, it is. In terms of the nonstrategic brands in the portfolio, is there room to kind of clean it up, help you guys maybe better execute against the focus brand strategy?

Well, that's what we're doing in a sense. But they are profitable. And so, we're very carefully balancing with those brands, margin and volume. What we're not particularly concerned with is market share or volume per se because they're nonstrategic. So, we have to balance volume and margin on those brands very carefully. On the focus brands, we're very concerned with brand building. And the strength of those brands, both from a market share and volume metric point of view. On the other hand, even on those brands, like in any business, we want to make sure that we maintain their integrity from a margin perspective as well. So it's always a balance.

Got it. And my last question has to do with ad spending. I know you guys will disclose it when you put out your K. But can you give us a sense of what your ad spending was in the year?

When you say ad, do you mean specifically on like targeted media or what we call marketing?

It's the advertising. The advertising line that you guys break out as part of SG&A.

Outside of the beer business, we don't do a ton of advertising in the Wine business. Most of what we call marketing is on-premise. Now the Crown guys do, do quite a bit but that's not in our P&L.

Your next question comes from Dara Mohsenian of Morgan Stanley.

Can you discuss if your beer depletion results in the quarter came in relatively in line with your expectations prior to the quarter, or if there was any upside? And so far, in March and April post this quarter, have you seen any deceleration in the convenience channel with the higher gas prices or is momentum continuing?

Yes, I mean, it's a little early and that’s a pretty specific question, Dara. But I think in general, beer depletions are pretty much going in line with what our expectations are for the year. And as you know, we’re approaching, or at least the Mexican Beer business, the piece which is Cinco de Mayo, we’re kind of walking them, we kind of own that holiday. And that kind of kicks off the key beer selling seasons, and we are focused that we'll be doing a lot of our marketing spend in the second and third quarters, as we mentioned. You'll see a lot of our stuff on Major League Baseball. You'll see some new commercials, which have already started. And we're anticipating having relatively heavy marketing spend for the NFL season as well. So that's where you'll see our focus, and that's where most of the beer sales occur.

Okay. Have you seen any slowdown in convenience with the higher gas prices? Is that a big concern?

The convenience channel has actually come back a bit. But it could be affected by gas prices, it could be. And in our convenience channel, we do have a new – well, this year will be there for a full year, the 24-ounce Modelo Especial can. So that might be helping our results year-over-year as well.

Okay, that's helpful. And then, Rob, can you just give us an update on where acquisitions fit into your cash flow priorities? Obviously, you've outlined debt paydown and repurchases but I'm just wondering where acquisitions fit in at this point.

It's not terribly different than it has been in the past. Acquisitions are hard to predict because the opportunities have to be there, and they need to be very strategic, and they need to meet our financial criteria. And so we can't really predict when those types of acquisitions will present themselves. Clearly, our debt is down to levels and will get down to even lower levels where it shouldn’t be a concern relative to our making selective acquisitions. But those acquisitions have to be available and have to make sense for us. And lastly, until there are any, debt paydown will continue to be a priority for us. And obviously, with respect to the multi-year stock buyback that we announced, we will be evaluating the market and evaluating whether it makes sense to buy back stock as we move forward. So we’ve got a good mix of things that we can use cash for at this stage. And cash utilization strategy clearly is something that we're thinking about, given our very strong cash flow performance last year and our even stronger predicted cash flow performance this year and the fact that we expect a fairly strong level of cash flow generation going forward.

Your next question comes from Reza Vahabzadeh [Barclays Capital]

So on the issue of the balance sheet, given your share repurchase program, would you anticipate continuing to reduce net leverage after FY '12 and getting below three turns or would you anticipate basically staying at those leverage levels? I'm just trying to find out what the ultimate net leverage goal is.

Yes, the answer to your question is it depends. If we don't find it appropriate to utilize cash in any other way, we will continue to reduce debt levels beyond FY '12. On the other hand, if opportunities present themselves that we think make sense or we determine to take advantage of our stock repurchase program, that will impede the rate at which we will continue to pay down debt. But absent a significant transaction, regardless of other activities, debt will continue to be paid down. I'm not going to make predictions beyond FY '12, but it is inconceivable that debt will continue to be paid down beyond '12.

Yes, this is like our favorite business issue, I guess, what to do with our cash. Good place to be.

Right. Well, it's a fair amount of free cash flow so it's a big question, I guess.

Sure.

And then as far as operating results for the fourth quarter, were they in line with your expectations for North America Wines as well as Crown Imports at the beginning of the quarter?

Yes. I'd say they're probably in line to slightly better than we anticipated. I'd say that the better mostly came from the Beer business and actually from the Australia U.K. business. They both performed a little better than we anticipated at the end of the third quarter. The U.S. Wine business was pretty much in line with what we thought.

Your next question comes from Mark Swartzberg of Stifel, Nicolaus. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: Rob, also talking a bit here about the U.S. Wine outlook. Could you talk a little bit more about the focus on the focus brands? The 9.6% we saw for the year, how was that in the quarter? And as you think about fiscal '12, what kind of assumption are you making about how that trend performs versus the overall portfolio trend?

Fourth quarter, the performance of the focus brands was very similar to the whole year. Okay? So high-single digit. On the depletion trends on the focus brands for the fourth quarter, we expect to see focus brands will continue to grow at a similar rate for next year as well. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: Okay, great. And as we try to think about the mass merchants having seemingly particularly strong growth in the quarter, how does that affect your product mix? Is that a good thing, a bad thing, an indifferent thing? I presume that the focus there is with your focus brands. But if that's the kind of right assumption, if you will, thinking out for the balance of the year, if that channel does better than your overall channel mix, how does that affect your mix, your product mix?

I think it's not an enormous impact. The on-premise channel generally has a better mix of product, meaning a higher-priced, higher-margin product. So that's not a huge part of the business. So the big thing we focus on from a mix perspective is the focus brands because these are our largest scale products, with the best gross margin and ROIC profile. So from a mix perspective, we really try to focus on that. From a channel perspective, outside of that on-premise that [indiscernible] commented on on-premise, we're kind of agnostic as to -- we make the same money generally by channel. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: Okay, fair enough. And then just on the pricing commentary from the prepared remarks and here in the Q&A, can you flesh that out a little bit more for us? Is it fair to think you're taking pricing really across the portfolio of different percentage levels? Or what's the detail I might have missed there?

No, I specifically said, we're taking pricing on value and specialty products. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: Got it, value and specialty.

Specialty products are products like dessert wines, social wine, sparkling wine and things like that.

None of them are in -- I don't think any of them are – one of them, maybe -- in our focused wine.

But largely on nonstrategic specialty and value product. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: And is the thought there that it helps encourage folks to trade up while also improving profitability in those particular products or is it more cost [indiscernible]?

No, we're just balancing margin and volume. And being strategic as to where we think we can take some pricing or reduce promotion and where we don't. That's basically it.

Yes, it's dissimilar, Mark. I think I know where you're going. What the beer guys are doing with the sub-premium pricing versus the premium pricing. Just because of the sheer SKU count in wine versus beer, I don't think we approach the Wine business, "Let's price this and they're going to move up to this category." There's kind of too many SKUs to do that. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: Okay, great. And then just finally here, as we think about GM for U.S. wine or North America wine as we look out -- I guess two final question. What is your view about the kind of cost per case outlook you'll be facing over the next 12 months versus the last 12 and grapes obviously being a factor there? And then be -- I mean how are you thinking about GM overall? Obviously, the quarter was strong in the GM, some of that was just the sheer scale of the volume versus the cost base. But how are you thinking about the GM trend for North America wine over the next 12 months?

I guess a couple of things. The fourth quarter gross margin trend, I wouldn't get overly ingratiated with because of the year-over-year overlap and the fact that inventories were taken down in last year's fourth quarter. Okay? But that being said, in fiscal '11, the extensive harvest ’08 red vintage flowed through the P&L, so that increased our grape costs in fiscal '11, which tended to reduce our gross profit margin. That vintage is now behind us. So we don't anticipate increased grape cost per ton. Gross margin, we are focused on improving our gross margin in a number of ways. We have quite a few initiatives that we'll bring you through at the investor conference of how we're reducing our operating costs and how we’re approaching that quite differently, plus the focus brands, which you saw are growing faster than the rest of the category, tends to have a better gross margin profile. That will help us, and the U.S. consumer is trading up. You can see that in IRI and that also helps our gross margin profile. So trading up, our focus on reducing operating costs should all -- and reducing grape costs should all benefit our North American gross profit margin going forward. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: That’s great. And if I could just change topics for you, Bob. It's nice to see this tax rate having the benefits it is and you're saying it's kind of a multiyear phenomenon. If we kind of try to zero in on one of the things driving that improvement, which is simply these capital losses on the international wine sales, can you put some parameters over the kind of cumulative loss you think is deductible? Does it exceed $1 billion? And how deductible is it and what piece of deductibility might you get versus that capital loss?

Yes. I addressed a lot of this in my scripts. But I think what we said was, this gets a little confusing. From an effective tax rate perspective, meaning just the P&L tax rate, okay? All of that hit in the fourth quarter of 2011, and we called it noncomparable. Now from a cash perspective, in that noncomparable P&L benefit in the fourth quarter, it's just shy of $200 million. We said that, that $200 million number will be a positive cash in the bank in FY '11, FY '12 and FY '13. $30 million of it hit in FY '11, the remainder is about 50% in FY '12, 50% in FY '13. That's our current best guess. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: Got it. And you think that's the extent of the benefit from all the losses, the accumulated capital losses whether it was this latest sale or does that include the other sales that preceded that?

Right now, that's all we're anticipating. It’s about that $200 million cash benefit. Remember, that $200 million is an after-tax number, right. So the loss, you have to tax effect that. Mark Swartzberg - Stifel, Nicolaus & Co., Inc.: Okay. And if there is upside to that number, just kind of the potential upside of 10%, 40%, are we pretty close knowing where you are with...

Right now, we're really focused at putting the $200 million in the bank. So as new information comes forward on anything additional, we'll talk about it at that time.

Your next question comes from Christine Farkas of Bank of America Merrill Lynch.

Just quickly in the fourth quarter, you were helpful with respect to the $29 million of incremental profits that came from the step up in volumes, if you will, or the year-over-year timing. Could you help us with what the impact was on the revenue? And did you tell us what the shipment growth was in the quarter, not just for the year?

Yes, on the revenue side, Christine -- we said this last year, in the fourth quarter, it's about $60 million or $70 million of reduced revenue in fiscal '10 that we are overlapping. And that equivalized to, I think, $0.05 to $0.07 of EPS -- $0.07 to $0.09 of EPS, sorry.

Would I then look at your incremental $29 million on top of the revenue lap to give us an implication of what the margins were on those products sold, because that seems pretty high?

I don't know. That's pretty detailed. There's a lot of moving parts. So what I think, Christine, maybe you should give Patty or Bob Czudak a call.

Okay. And then on the shipments, your press release was helpful and gave us some shipments for the year, about 3½% in North America. Given the overlap, would you have the shipment growth in the fourth quarter?

Again, that's relatively detailed. The shipment growth in the fourth quarter would have been impacted by that $60 million to $70 million of overlap in the prior year. And we’ve given you the additional disclosures in the press release, but the one thing you have to be aware of when you look at shipment versus depletions, although the growth rate in both look similar, it's kind of a coincidence because you have to think about what the underlying absolute number is. And because in fiscal '11, shipments exceeded depletions, they don't necessarily work in concert. You have to really think through that.

Okay. I’ll follow up. And then just finally, you already touched on your views about acquisitions. But I'm just wondering, given your last transaction in Spirits with a net sale, how do you position yourself or how would you view yourself with respect to your Spirits portfolio. Is there room for acquisitions down the road?

Yes, I think that there is room for acquisitions down the road. Again, they have to serve a purpose. They have to be strategic, they have to contribute to our overall profitable organic growth imperative. There is room, but it's very hard to predict when acquisition opportunities will present themselves that make sense for us.

Our next question comes from Carlos LaBoy of Crédit Suisse. Carlos LaBoy - Crédit Suisse AG: Two questions. The first one on wine promotional spending, can you expand on that? I know you've spoken at length about it today. But if can you give us some more insight on the size, scope, timing, nature of this promotional spending for 2012. And walk us through how this goes through the P&L. Does it put pressure on pricing, as we go forward?

Sure. So we're expecting promotional spending levels rate per case basis, based on depletions, to be roughly similar to 2011 is the basic answer to your question. And just remember that promotion flows through the P&L as a reduction of gross sales and is, therefore, between the gross sales and the net sales line on the P&L. So you don't see it in net sales, you see it -- it's reflected in net sales but it reduces gross sales. Carlos LaBoy - Crédit Suisse AG: Okay. And just to clarify, is it flat relative to '11 or up relative to '11?

I’d said that it is relatively flat to '11 on a per case basis...

Or absolute dollars.

Okay, or absolute dollars for that matter, as Bob just pointed out. Carlos LaBoy - Crédit Suisse AG: Okay, and on Crown, what's the EBIT growth scenario for Crown looking out beyond 2012 if this reinvestment rate and spending behind the brand stays high? Do you expect it to remain high given the stage of development where these growth brands are or do you expect that we’ll see earnings growth out of Crown at least in line with revenue growth beyond this year?

The way the joint venture works, Carlos, is a lot of things are contractual. The Crown EBIT growth this year was a bit anomalous because of the increase in marketing spend. We don't anticipate any more increases in marketing or promotion spend, in the future. But the EBIT growth generally will go in line with what volume and pricing does. So if they continue to perform as well in the marketplace as they are now, yes, I'd anticipate EBIT growth.

Your final question comes from Neal Rudowitz of JPMorgan. Neal Rudowitz - JP Morgan Chase & Co: I'll just ask one question at this point. Can you just give us an update on the level of inventory at your distributors? It seems like the average inventory days would have to be higher relative to where they were when you started the transition. So is that the case? And if so, how much higher and is that sustainable going forward?

Yes. Our distributors carry, on average, about 60 to 90 days of inventory, and through the distributor transition, we added about five to 10 days, but we're within the 60 to 90 days on average that I mentioned. Neal Rudowitz - JP Morgan Chase & Co: So you started out lower then or just at the lower end of that average, I guess, before the transition?

I'm sorry, say that again. Neal Rudowitz - JP Morgan Chase & Co: So you started out at a lower than average level or at the low end of the range before the transition then? If you're still within the range now after a year and a half, is that correct?

Yes, it's a wide range though. I guess you could characterize it that way.

And that will be the end of our Q&A session for today's conference. I will turn the conference back to you, Mr. Rob Sands, for any further remarks.