Constellation Brands, Inc. (STZ) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead.

Thank you, Jackie. Good morning, everyone, and welcome to Constellation's Third Quarter Fiscal 2012 Conference Call. I'm here this morning with Rob Sands, our President and Chief Executive Officer; and Bob Ryder, our Chief Financial Officer. This call complements our news release, which has also been furnished to the SEC. During this call, we may discuss financial information on a GAAP, comparable, organic and constant-currency basis. However, discussions will generally focus on comparable financial results. Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial measures are included in the news release or otherwise available on the company's website at www.cbrands.com under the Investors section and Financial History. Please also be aware that we may make forward-looking statements during this call. While those statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations. For a detailed list of risk factors that may impact the company's estimates, please refer to the news release and Constellation's SEC filings. And now, I'd like to turn the call over to Rob.

Thanks, Patty, and good morning, and happy new year to everyone. I hope you all had a great holiday and the opportunity to enjoy some of our fine products throughout the season. Welcome to our discussion of Constellation's Third Quarter Fiscal 2012 Sales and Earnings Results. We continue to progress through the year with results that are generally in line with our expectations for most areas of the business. I'm especially pleased with our significantly improved consolidated margin structure and our continued progress in the area of free cash flow generation, which has essentially enabled us to fund our share repurchase efforts where we have already completed more than 50% of our current authorization. Our top line performance for the quarter was not surprising, as we continue to lap last year's third quarter U.S. distributor inventory build. As a reminder, our shipments to distributors last year exceeded distributors’ sales to retail as part of our U.S. distributor transition initiative. This had the effect of benefiting our sales and profits for fiscal 2011, but created a sales and EBIT comparison challenge for fiscal 2012. Now despite these sales trends, our U.S. Wine & Spirits depletions improved sequentially during the third quarter, with the entire portfolio growing almost 2% and focused brands growing about 6%. As previously discussed, we expected our depletion trends to improve as we progressed through the year due to the gating of the promotional spend for our U.S. Wine & Spirits businesses. This year, we are driving enhanced promotional and merchandising activity in the second half to better align with the seasonality of our business. As such, you can see in the IRI data, coinciding with our third quarter, that we gained volume share for total table wine and the Premium Plus segment, which represents the greater-than-$5 retail price point. This channel accounts for about 35% of our business. And our spirits sales remain robust as we gain share driven by our SVEDKA Vodka brand. However, growth for our total U.S. wine portfolio continues to lag that of the overall U.S. wine category on a year-to-date basis through the third quarter. Our U.S. wine share loss for this time period can be primarily attributed to a decline in value brands below the $5 retail price point as we increased net prices for some of our higher volume value brands such as Vendange and Arbor Mist. As would be expected, this action negatively impacted volumes, but to a bit greater degree than we originally anticipated. So what are we doing about this market share issue? We are in the process of revamping up innovation and new product development where we currently have more than 20 new product launches underway in fiscal 2012, many of which are included in hot categories that are experiencing significant growth. We currently have strong momentum for many of our newly launched products like Primal Roots Sweet Red Blend, Rex Goliath Moscato, Ruffino Prosecco, Woodbridge Malbec and the Simply Naked unoaked line of varietals. Our most recent introduction to the new product lineup is The Dreaming Tree brand, a collaboration between Steve Reeder, our award-winning winemaker at Simi, and acclaimed musician Dave Matthews, that is receiving rave reviews. This collection of new products is gaining traction and performed very well in the marketplace during the holiday selling season. And next year in fiscal 2013, we expect to have an increasing percentage of our sales growth coming from innovation. As I mentioned earlier, from a depletion perspective, during the third quarter our focus brands grew almost 6%, with several brands growing double digits, including SVEDKA Vodka, Black Box, Rex Goliath and Kim Crawford, just to name a few. However, the previously mentioned price increase on Arbor Mist has reduced our focus brands growth rate somewhat. To mitigate this, we have introduced Arbor Mist Pomegranate Berry Pinot Noir, which is doing very well in the marketplace, and we recently launched Arbor Mist Strawberry Moscato at Wal-Mart. This new flavor extension has exceeded all initial launch expectations. Next month, we are introducing Arbor Mist frozen wine cocktails at Wal-Mart in order to capitalize on one of the fastest-growing segments in beverage alcohol. We have other initiatives underway to drive some of our key focus brands. They include our recent relaunch of the Ravenswood brand with new labeling and a refinement of the Ravenswood blend to produce a more fruit-forward taste profile. Ravenswood is a great turnaround story, with recent SymphonyIRI trend showing mid-single digit volume growth rates during the third quarter. For Blackstone, we have new packaging in the works and 2 new line extensions. A red blend was introduced last fall, and we will be rolling out a Malbec in the New Year. One of the things which I am particularly proud is the string of awards and accolades that we continue to receive for many of our focus brands from several industry-leading publications. They include the following: in the December 31 issue of Wine Spectator, the 2008 Robert Mondavi Oakville Cabernet Sauvignon was named one of the Top 100 Wines of 2011. Wine Spectator also awarded the 2008 Robert Mondavi Napa Valley Reserve Chardonnay 93 points, while the 2009 Robert Mondavi Napa Valley Reserve Pinot Noir was awarded a 91-point score. The Franciscan Cabernet Sauvignon 2007 was named to the Wine Enthusiast Top 100 of 2011 list. And the Inniskillin 2007 Vidal Icewine received 92 points from the wine enthusiasts and 95 points from the tasting panel. Five of our brands made wine.com's Top 100 list for 2011, including varietals from Franciscan, Robert Mondavi, Ravenswood, Ruffino and Kim Crawford. Finally, IMPACT Blue Chip awards were given to Clos du Bois, Estancia, Robert Mondavi Private Selection and SVEDKA. Overall, we are catching up with industry trends in addressing some of the short-term challenges we face within our portfolio of brands. As you can see, we have several initiatives underway, and I believe we are firing on all cylinders from an innovation and new product development perspective. While our recent trends are improving, we are tracking a bit short of our goal of growing in line with the U.S. wine category growth for the year due primarily to our tactical decision earlier this year to take pricing in the value segment. However, we remain focused on achieving this goal and we are strongly committed to this as one of our strategic objectives in driving profitable organic growth over the long term. Moving to SVEDKA Vodka. During the quarter, SVEDKA posted double-digit sales depletion and consumer takeaway trends in addition to gaining share in the vodka category IRI channels. In advance of the holiday selling season, SVEDKA launched its first-ever limited edition party bottle package in the marketplace. This was accompanied by a multichannel marketing campaign, including mobile and social media applications. Now moving to the Crown Imports joint venture. As expected, Crown faced a difficult third quarter sales and earnings comparison versus last year when sales increased 22% driven by the rebuild of wholesaler inventories to more affable [ph] levels after Crown experienced supply-chain disruptions in the summer of calendar 2010. Despite these comparison issues, the Crown business remains very healthy, with depletions growing mid-single digits during the third quarter driven by Modelo Especial, Victoria and Corona Familiar. In addition, Crown continues to experience strong consumer demand resulting from the combined success of a number of promotional and marketing initiatives, including the Corona Extra "Find Your Beach" campaign and additional advertising investments during the NFL season. According to SymphonyIRI retail data, coinciding with the end of our third quarter, Crown continues to outperform the total U.S. beer industry, the import category and the other 3 major beer suppliers in both case and dollar sales trends in the food, drug, mass and convenience channels. And Crown is also the only major supplier to gain industry dollar share or case share. Throughout calendar 2011, Crown achieved several milestones and has received recognition from some of the most notable beer and marketing channels in the industry, including the following. This is the first year that Crown Imports has been named to Advertising Age's prestigious Marketers A-List. This is the second consecutive year that Corona Extra has been named one of the best global brands by Interbrand. Modelo Especial won an Impact Hot Brands Award and an IMPACT Blue Chip award, with Corona Light winning a Blue Chip award from Impact as well. Modelo Especial and Victoria each received Cheers Growth Brand Awards, and Victoria also received a Market Watch Leaders Choice Award in the best new product segment. These awards highlight the continuing success of the brand portfolio and understand -- underscore Crown's unique approach to marketing. Overall, calendar 2011 was the largest volume year for the collection of Modelo brands in the U.S. Throughout the remainder of the year, Crown has focused on market execution and optimizing promotional and marketing initial -- initiatives. Some examples include the continued expansion of the Corona Familiar 32-ounce bottle, primarily in Mexican and Hispanic markets throughout the U.S. Launched in the U.S. in calendar 2010, Corona Familiar had strong depletions in calendar 2011. Victoria will expand to select cities within those states where it is already available. In addition, new packaging configurations are being introduced for the brand in existing markets. Victoria already ranks as a top import and is larger than many national distributed competitors in the import category. Crown continues to expand its draft offerings for the Pacifico, Negra Modelo, Modelo Especial and Victoria brands, which are doing extremely well in existing markets. Year-to-date, through the third quarter, Crown's depletions for its draft offerings increased 60% versus the same period last year. Now in closing, we believe we are in good shape to deliver our financial objectives for the year. Even though we may fall a bit short of our depletion goals for our U.S. Wine business, we have solid promotional programs in place designed to drive continued improvement in these trends throughout the remainder of the year. I would now like to turn the call over to Bob Ryder for our financial discussion of our third quarter business results.

Thanks, Rob. Good morning, everyone. The quarter came in essentially in line with our Q2 earnings call discussion. Our free cash flow is running ahead of expectations and we've increased our free cash flow guidance for the year. As it relates to earnings guidance for the year, we're maintaining our comparable basis EPS goal of $2 to $2.10 provided at Q2, which is essentially the guidance provided at the beginning of the year exclusive of the benefits from reduced shares and reduced tax rate. For Q3, our comparable basis diluted EPS came in at $0.50 versus $0.66 last year. The majority of the EPS decrease was driven by a 17% decline in comparable basis EBIT. This EBIT result was in line with the expectations we outlined last quarter and was driven primarily by 3 items all related to overlaps of events which occurred in fiscal '11. These include the overlap of the Q3 fiscal 2011 distributor inventory build from our U.S. Wine & Spirits distributor consolidation initiative, the overlap of the Q3 fiscal '11 distributor inventory replenishment combined with the incremental marketing funding at Crown and the divestiture of the Australia and U.K. Wine business. We've generated $587 million of free cash flow for the first 9 months of the year, $287 million more than the same period last year. Due to this excellent performance, we've increased our fiscal '12 free cash flow target by $100 million to a range of $700 million to $750 million, an all-time high at Constellation. Through Q3, our strong free cash flow generation has enabled us to reduce debt, repurchase stock and acquire the remaining 50% interest in the Ruffino business. I will outline more details on this activity in a moment. Given those brief highlights, let's look at our third quarter 2012 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, consolidated reported net sales decreased 27%, primarily due to the divestiture of our Australian and U.K. business. North American net sales on an organic constant currency basis decreased 8%, primarily due to a decrease in volume driven by the overlap of distributor inventory build in Q3 last year. This result also reflects higher promotion cost partially offset by positive mix. Now let's look at our profits on a comparable basis. For the quarter, our consolidated gross margin was 40.5% versus 36.5% the prior year. This primarily reflects the benefit of divesting the lower gross margin Australian and U.K. business. I'd now like to discuss the segment operating income results to provide highlights of our operating income change. North America segment operating income decreased $21 million to $172 million, primarily due to the lower volume combined with higher promotional and transportation costs partially offset by favorable product mix. Corporate costs were down $6 million, primarily related to a benefit from the early redemption of notes receivable from Accolade, our former Australian and U.K. business, and from lower compensation cost. As a reminder, the Australia and Europe segment reported EBIT of $11 million in Q3 last year. Consolidated equity earnings totaled $53 million versus $71 million last year. Equity earnings for Crown totaled $43 million versus $58 million for the prior year. The remainder of equity earnings in Q3 of both fiscal 2012 and 2011 are primarily generated by Opus One. For the quarter, Crown generated net sales of $541 million, a decrease of 12%, and operating income of $87 million, a decrease of 25%. The net sales decrease was primarily driven by lower volume due to the overlap of the prior-year quarter distributor inventory build following the supply chain issues during the summer of 2010. As Rob mentioned, Crown depletions have been growing mid-single digits in an industry experiencing negative volume growth for the year. Lower volume and higher marketing cost drove operating income decrease. Interest expense for the quarter was $46 million, down 6% versus last year. This decrease was primarily due to lower average borrowings. Let's take a look at debt. At the end of November, our debt totaled $3.1 billion. This represents a $132 million decrease from our debt level at the end of fiscal '11. Our continued strong free cash flow generation and deleveraging efforts over the past several years have enabled us to redeploy a portion of free cash flow to repurchase stock. During Q3 2012, we repurchased about 5 million shares at a cost of $94 million. During the first 9 months of fiscal 2012, we repurchased 15 million shares at a cost of $281 million for an average cost of $18.79 a share. We expect total repurchases through Q3 to benefit diluted EPS by approximately $0.06 for fiscal 2012. During the third quarter, we funded the purchase of the remaining 50% of the Ruffino business for EUR 50 million or about USD $69 million. We also assumed debt net of cash acquired of EUR 54 million or about USD $73 million. Our comparable basis effective tax rate came in at 37% versus 29% in Q3 last year, which reflected the favorable outcome of various tax items. We continue to target a full-year tax rate of 27% for fiscal 2012. Several state and federal audits are still underway. The timing and resolution of these could favorably impact our tax rate for the year. Now let's discuss free cash flow, which we define as net cash provided by operating activities less CapEx. For the first 9 months of fiscal 2012, we generated free cash flow of $587 million versus $299 million for the same period last year. This improvement primarily reflects a reduced use of cash to fund receivables and a cash benefit for taxes. Our receivable balance increased less in [ph] the previous year due to timing of sales and the sale of our Australia and U.K. business. As a reminder, in Q1, we received a net refund of taxes primarily related to the Q4 fiscal '11 sale of our U.K. business. As mentioned earlier, we are increasing our fiscal 2012 free cash flow target by $100 million to a range of $700 million to $750 million. The increase is primarily due to the expected realization of additional cash tax benefits from the sale of our U.K. business that were previously targeted for fiscal 2013. We are also reducing our CapEx estimate by $15 million to a range of $70 million to $80 million. As previously discussed, we believe our sustainable free cash flow is in the $500 million-plus range. Now let's move to our full-year fiscal 2012 P&L outlook. As noted earlier, we continue to expect comparable basis diluted EPS to be in the range of $2 to $2.10 versus our $1.91 result in fiscal '11. This includes the estimated $0.06 benefit for share repurchases, which is consistent with our previous guidance. As outlined by Rob, we now expect depletions for our U.S. Wine & Spirits business to come in a bit below the market trend and our planned target for the full year. We expect the corresponding shortfall in sales volume to be somewhat offset by some mix benefits and cost reductions. We've also reduced our interest expense guidance. For Crown, we continue to target low to mid-single digit depletion growth for the year and flat to slightly down operating earnings due to the incremental marketing funding. I would also like to highlight a few Q4 fiscal '12 comparison items for you. For our North American business, we're facing an easier shipment comparison for Q4, as the inventory build during fiscal '11 was effectively completed by the end of Q3. We are also expecting lower promotional expense and some additional mix benefit in Q4 versus Q4 last year. For Crown, in Q4, we expect an improvement in sales growth and marketing spend to moderate versus the higher levels experienced in Q2 and Q3 of this fiscal year. Overall, the good news is that the Beer business continues to drive growth in a difficult category, and we are seeing improving depletions and marketplace trends for our Wine & Spirit business, as our focus brands are performing better and our new product development initiatives are gaining traction. Our strong free cash flow generation and deleveraging efforts have created flexibility in our capital structure management. This flexibility has enabled us to buy back a significant number of shares as we have repurchased $281 million of stock through Q3, which is on top of the $300 million we repurchased in the last fiscal year. We expect to continue to evaluate share repurchases as an opportunistic basis as part of our ongoing efforts to optimize the capital structure of the business. With that, we're happy to take your questions.

[Operator Instructions] Your first question comes from the line of Kaumil Gajrawala with UBS.

If I could start maybe and just see if you can quantify for us the impact that Arbor Mist and Vendange have on your overall focus brand depletions?

Yes. It actually [indiscernible] had quite a significant impact. And if we had -- if we stripped out just those 2 brands, we would have gained share in the overall category -- wine category for the quarter. So that was -- that really has been a big driver of our overall market share loss in total wine. Now if you look at just table wine, we did gain share in the quarter. And if you look at Premium Plus, we gained share in the quarter too, and I mentioned that because clearly, the Premium Plus category above $5 is our primary focus.

Got it. And then also just a follow-up on quantification, is there any way for you to give us some context on what growth may have been -- on shipments, excluding the inventory build from -- at Crown last year?

Yes. This is Bob. Kaumil, I don't think we'd get into that kind of detail.

Okay, no problem. And then just clarifying something on your guidance for Crown. You said improved sales growth and marketing spend to moderate. I just want to understand because -- was that from a depletions perspective or is that from a shipments perspective? And then also, was the increased volume last year in 4Q also the replenishment of the supply issues?

Yes. So the replenishment of the supply chain issues in the Beer business was done by the end of the fourth quarter –- by the end of the third quarter. So the fourth quarter from a shipment depletion perspective was pretty clean, okay? So we expect to -- for shipments and depletions to continue to have pretty good growth in the fourth quarter. Now this year, one of the reasons that the Beer business' EBIT is down is the incremental marketing spend. We think the majority of that is behind us, as this year they spent the wide majority of that incremental monies in the peak summer season, so in Q2, Q3. So that's why I said Q4, we expect continued or even slightly better sales growth, which would -- the same as depletion growth for the fourth quarter and reduced marketing as opposed to the previous year.

Got it. And final question on prioritization of the free cash flow, you now have $100 million more than planned. Should we -- given how often you talked about the buyback in your prepared remarks, should we assume that much of that can go towards -- in incremental buyback?

Yes. Well, I mean, our board authorization is still at the $500 million level. We have a little bit over $200 million left on that. We don't have any additional board authorization at this point. But as usual, we’ll be looking at the market and general trends to see whether we should be out there buying back more of our shares.

Your next question comes from the line of Judy Hong with Goldman Sachs.

Rob, just on the Wine business, just as you think about the payback that you've gotten in this -- in the current quarter from higher promotions. Obviously, depletions improved sequentially, but it seems like it sort of came at the expense of higher promos. So can you maybe help us understand, do you think you've got enough payback on those spending? What will sort of the competitive environment look like? And then as you look out in fiscal '13, with all lot of these new products coming in line, how should we think about the promotional spending? And then is 2013, finally, the year where you think that you can get your Wine business to grow in line with the category growth?

Yes. So, I think in terms of payback on promotional spending, we certainly feel that we are getting a payback, and you can sort of see it as a result of the sequential improvement in growth when we increased promotional spending. Now we do also mitigate that to a degree and fund it, by taking some of the actions, which we've taken such as increasing that price on our value brands, where we frankly don't care that much about share to help fund and offset some of the cost of promoting our Premium Plus portfolio. But in general, yes, promotional expense is up net net net. And yes, we think that it is paying back, given where we would otherwise be if we didn't do so. What was your second question, Judy?

So if that's the case...

As far as growing with the category next year, our plan is certainly to grow in line with the category next year. And as we built momentum this year and are either depending on the category, exceeding growth rates or nearing total category growth rates, we should go into next year with good momentum to achieve that.

Okay. And then Bob, just in terms of the whole shipment versus depletion delta on the wine business, are we completely now done just in terms of the distortions in the fourth quarter would still distort [ph] off cleanly as depletions matches shipments at your wholesaler level?

Yes. I mean, I'd say the wide majority of it is done. There could still be some adjustments for the fourth quarter because what we've said is for the full year, shipments will equal depletions, right? So you kind of adjust in the fourth quarter to get to the full year balance.

Okay. And then on the Crown side, just any update on thinking just in terms of how you're thinking about pricing? Clearly, your depletion trends have been pretty healthy, but the margins have not really followed through. So just how you're thinking about pricing at this point?

Yes, good question. So as we know, the beer category has been experiencing negative volumes. The larger domestic players have been taking some pricing. We actually at the Crown business took some frontline pricing in October, not as much as the domestic players, and the pricing was different by brands and by geographies. But the other thing that the Crown business is doing is reducing its promotion spending, which is, in essence, an increase in the net price to the consumer. Now that reduced promotion spending is reinvested in marketing. So that's why when you see the Crown income statement, you'll see a pretty big increase in marketing expense because there's 2 things going on there. There's money coming from promotion down into marketing and there's the incremental funding that's occurring on the Crown P&L versus the prior year. So it's a pretty big increase in the marketing spend. And looking at how volumes and how dollars sales growth has been doing versus the category, it seems to be being pretty successful, and the marketing has been pretty well received. Rob gave some of those awards. So I think those guys are doing a good job and feeling good about their top line. I think the marketing overlaps from prior year are kind of hurting the bottom line, but that should abate as we go into next year.

So if you take the frontline pricing and the reduced promo spending on Crown, the net price per barrel would've been up sort of 1% to 2% kind of level?

That's probably about right, maybe on the high end of that. Judy, you can kind of look at IRI and look at the volume growth versus the net sales growth, so you'll see that the net pricing to the consumer and IRI is up just north of 2%, which is less than the domestic guys but still pretty healthy, especially when you compare that to how the volumes are doing to prior year.

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

So you mentioned innovation as one of the primary drivers to drive improved wine market share trends going forward. But I think previously, you would thought that would play out this holiday season. So I just want to get a sense from you on how much of an increase in innovation contribution you're expecting in calendar 2012 versus 2011 or the pipeline of innovation you have planned versus this year, and if there's a significant ramp-up going forward?

Yes. We expect pretty significant increase in the contribution of innovation to our growth in next year, whether it's calendar 2012 or fiscal 2013, almost probably double the rate of the contribution that innovation made in 2012 or calendar 2011. So as I mentioned in my talk, we have very ramped up new product initiatives and expect to introduce almost 20 new products into the marketplace. And this year, it contributed roughly 200 basis points or 2% to our overall growth. And next year it should, as I said, contribute significantly more.

Okay, that's helpful. And can you give us an update on your thoughts for the pricing environment in the wine category as we look out to calendar 2012 here and an update on the promotional environment?

Yes. I would say, starting with the promotional environment and the holiday season, it's been fairly consistent with how things have played out through the year and basically with last year. Now as you are aware from previous calls, this year's harvest in California was down, and in certain areas and certain varietals, oversupply is turning into undersupply, especially in the North Coast. And as a consequence to that, I would say that we probably think that you will see some pricing being taken on some -- especially higher end products that are suffering from some of the undersupply. That said, are we seeing any widespread examples of that? No. I've put that just more in the category of what people think as opposed to what's really happening. So we're going to be watching it very carefully as we go into next year and see what's happening out there in the marketplace.

Okay. And are you anticipating adjusting pricing at all in the value wines, given some of the demand elasticity issues, or are you more focused on profitability at this point?

We kind of pulsed that activity, so we've taken some pricing up on some of the value wines and then we've taken some of the pricing back down on the value wines, depending on whether we think we're getting the benefit from the pricing or not over an appropriate period of time. So it can kind of go both ways. But in general, I would say that we're going to be more inclined to price value wines than the opposite, meaning take pricing down or drive for volume or share.

Your next question comes from the line of Tim Ramey with D.A. Davidson. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Just -- Rob, wondering how you think about the dollar price point positioning of your portfolio now versus the wine category. It seems to me that it skews more favorably up the price point than it did several years ago, and that's been kind of where the growth is in the wine sector. Why shouldn’t we think that you would outperform the overall wine category in 2013, or fiscal 2013, I should say?

Well, again, whether we gain share or lose share in the category, it will be very dependent on sort of the decisions we make as to how we price various elements of our portfolio. Our portfolio is large. We've got a lot of wine, and I'll say outside of mainstream categories, whether it's beverage dessert wines, kosher wines, fruit-flavored varietal wine. And we are very tactical on our decisions from a financial perspective as to whether to opt more for pricing or whether to opt more for value. I'd say that's sort of the best measure of how we're doing overall is how we're doing on our focus brands, which is a relatively small portfolio of 17 brands and constitutes the vast majority of our profitability in the United States. So there, we're particularly interested in whether we're gaining or losing share. Now that said, one of the focus brands is the value brand. It is Arbor Mist, it's a big brand. And as I have said, we have made the decision, and we did so last year to -- or this year actuality of this current year to tactically raise prices on that particular brand and to sacrifice some volume, which did impact the overall growth rate of the focus brands. So it's some and some. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Got you. And just a quick one on some of the brands that you used to own over at Essencia. Any -- I hear that some of those are either on the block or somewhat distressed. Any thoughts on that? You've done -- you've managed those brands before, would it make sense to look at them again?

No. We sold them. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Okay. That's definitive.

Nothing that we sold that we want back at the moment.

Your next question comes from the line of Reza Vahabzadeh with Barclays Capital.

You talked about optimizing the cap structure, as well as the share buyback activities. Can you continue with the share repurchase activities and delever the balance sheet and get the leverage down to perhaps below 3x in the coming year, given your $600 million to $700 million -- $600 million to $750 million of cash flow?

Yes, Reza. This is Bob. I mean, obviously, you decide how much stock to buy back, right? So this year, we've given new guidance, which is improved, and we decide if we're going to buy any more stock in the fourth quarter, we have to decide, because next year, we should have $500 million-plus of free cash flow because it will be at least a sustainable year next year. So we would be able to delever and buy stock depending how much stock we buy back.

Right. And you still want to delever, right? In the past, I think you've thrown out 2.5, 3 turns as well?

No. I think what we've said is our ideal structure is 3 to 4 turns, right? And year-to-date, I think as of the -- if you just use our guidance and assume we don't buy back any more stock, I think we'll finish the year just under 3.4. Had we not bought any stock back, I think we would've been much closer to 3.0. So we've made conscious decisions by buying back stock to stay north of 3.0, and we will assess those as we go along.

Fair enough. And then have you commented on the food service channel, the restaurant channel on how sales are progressing in that channel for your products?

Yes. I think that we're seeing the on-premise channel up for the first time in a long time for us. We've probably gained share on a dollar perspective and lost share on a volume perspective because we've significantly changed the mix of product that we're selling in the on-premise to more high-end Premium Plus product from, I'd say lower end. So the on-premise is rebounding. It's up a bit, we believe, overall, and we believe we're gaining share from a dollar perspective.

But to the category itself, on-premise is up in terms of sales?

Correct. Probably in the 1% to 2% range.

Your next question comes from the line of Vivien Azer with Citigroup.

My question has to do with the focus brand strategy, specifically while I recognize that the wine category is highly fragmented, so you need a number of offerings to compete effectively. I do wonder a little bit whether 19 focus brands is maybe too many, and could you possibly better leverage your investments if you narrowed your focus a little bit? Is that under consideration at all?

So I don't think that 19 is necessarily too many. But that said, we have had, I'll say, a strategy of narrowing our focus and investment against a smaller number of brand even within our focus brands. So fundamentally, the answer to your question is no, they're not too many, but yes, we agree that in terms of investment that probably narrowing the focus and making bigger bets against a smaller number of brands is probably strategically the way to go. On the other hand, a lot of these brands are very profitable and need to be looked after appropriately. So fundamentally, we agree strategically with what you just suggested.

Okay. Within that subset then, the really focused focus brands, where do those fall generally across the pricing spectrum?

Well, we look at those at -- first of all, we don't have a subset of focused focus brands. You made that up, not us. But going along with that concept, you kind of start with what is the biggest piece of the portfolio, and that's the Mondavi franchise, Robert Mondavi at Woodbridge by Robert Mondavi, okay? That in and of itself is a large part or the most important part of the focus brand portfolio. Then you got a few -- I'm not just talking about wine here, you got a few other important brands, like SVEDKA Vodka, like Kim Crawford. Those would be examples of brands that really rise to the top in terms of their level of importance, Clos du Bois in the overall focus brand portfolio. And I guess I didn't quite answer your question. If you look at Woodbridge, that's Premium. If you look at Clos du Bois, that's Super-Premium. If you look at Kim Crawford, that's Luxury. If you look at Robert Mondavi Private Selection, that's Super-Premium and Robert Mondavi Napa is Luxury.

Your next question comes from the line of Mark Swartzberg with Stifel, Nicolaus. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: So couple of questions on wine, and then one on Crown. Rob, you gave us that 2% depletion or that 2% contribution from innovation year-to-date for the wine business. Is that a contribution to depletions?

Yes. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: Got it, great. And then as you think about -- you remarked that you think you can grow in line with the wine category still in spite of some of these value challenges this year. How do you feel about your ability to grow operating income faster than the wine category, given the experience with spending and the mix issue and so forth?

Yes. So to your first question, we did not say that we would grow in line with the category this year. I would say that... Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: I'm sorry, I mean calendar '12, fiscal '13.

Okay, yes. And then to your second question, we should be able to leverage the P&L. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: You do expect to, great. And then over on Crown, are we kind of done with the structural step-up in marketing spend? Do you think fiscal '13 is more of a operating income in line with revenue type of year?

Yes. I mean, I think we're done, Mark, with the step-up in marketing. There might still be some flux between promo spend in marketing, but they kind of zero off, it kind of gets to the bottom line. So all you'll be left with is pretty much pricing and -- normal stuff, pricing and mix. Now we do have the contractual cost of goods sold increase, okay? So just normal stuff, but I think the increased marketing and promotion spending will be behind us, and it will be a apples-to-apples year if you look at fiscal '13 over fiscal '12 from a marketing and spending perspective at Crown. Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division: Great. And if I could build a little on the earlier question about operating income in wine growing faster than revenue. From where I sit, it's hard to see why your -- you have that view. Is that a function of your mix view? Is it simply leveraging of the fixed costs? Can you talk a little bit more about that, Rob?

Yes, I think, Mark, most of it would come from -- we have some pretty robust plans in place to reduce cost of goods sold, and we talked about these a number of times around things like reduced number of bottling lines or higher fixed cost leverage, some blend changes, some better warehouse management, some better grape buying, things around that. I think that we will keep SG&A growing below net sales, okay? So I think those 2 areas and COGS is the big number will be -- will help us leverage the P&L. The wild card, I think, will be promotion spending, okay? Because as you know, it's a pretty fractious industry. We're not the only player, and we kind of can't raise prices when nobody else is, which is -- Rob mentioned some of that earlier. So I think the things within our control, we feel pretty good about. I think the things that are little less within our control, like pricing and promotions, well, they're not within our control. That being said, we've had 2 years in a row of short harvests. So you would hope that the industry would reduce promotion spend and maybe increase prices, but time will tell.

Your next question comes from the line of Gary Albanese with Auriga USA.

I was wondering if you could touch upon inventory levels, is that roughly what you were expecting? And was that impacted from the cost of the higher cost from your grape harvest this year?

In terms of the harvest, the harvest from a dollar perspective will be smaller this year than it was last. And therefore, that's had a positive impact on our inventories and our cash flow this year. And I will say that the harvest was a bit smaller than we expected, and therefore, the inventory impact and positive cash flow impact was a bit greater than we expected. Hence, we started the year with lower cash flow guidance than we're ending the year with. And we've increased our cash flow guidance, and that was one of the components of why cash flow is coming in higher than our initial guidance. Is that what you were asking me about, Gary?

To some degree, to some degree. Let me move on to SVEDKA. I mean, double-digit growth again in the quarter. Are you guys still on pace to exceed or was it 4 million cases I think you said the last quarter?

Gary, I'm sorry, we're having a tough time hearing you.

Sure. SVEDKA, are you still on pace to exceed 4 million cases this year?

No, we'll be at slightly under it, but we're fundamentally on pace to be around 4 million cases. So yes, it's -- it will be around 4 million, and certainly, the run rate is at that level. And SVEDKA is generally meeting all of our expectations and continues to grow double-digit now on a very large base. It's the third-largest vodka brand.

Yes. I mean, being that, that’s a smallest segment, I know it's been posed -- the question’s been posed to you in the past about whether it fits. But is that actually an area that the Spirits business that you contemplate actually growing?

Well, our Spirits business is 3 brands basically, SVEDKA, Black Velvet and Paul Masson Grande Amber Brandy, 3 big brands. And yes, I mean, we're certainly, conscientiously and specifically trying to grow that business, with our primary focus being taking advantage of our position in the vodka category with basically the hottest large brand.

Your final question comes from the line of Carla Casella with JPMorgan. Carla Casella - JP Morgan Chase & Co, Research Division: If you -- looking at your distributor markets, what percentage of your business now is in markets where it's a sole distributor? And is there still more markets to go there?

So in terms of what we've consolidated, 60% of our business is -- has been consolidated in those markets where we've been able to do that in the United States, so 60%. And then of the remaining 40%, there's probably about another 8% for argument's sake that, in theory, could be more consolidated in the manner that we consolidated the initial 60%. And the reason that there's only 8% of the remaining 40% is because you have to remember that some of the markets are controlled state markets, like Pennsylvania, where there's really -- where the whole concept of consolidating contributors is inapplicable. And then another large percentage are what are called franchise [indiscernible], which means that we don't have the ability to necessarily terminate the existing distributors pursuant to consolidation plan. So it's difficult to change your distribution network in those franchise markets. So 8%. Carla Casella - JP Morgan Chase & Co, Research Division: Okay, great. And then do you see -- oh, go ahead sorry?

Sorry, just saying 8%. Carla Casella - JP Morgan Chase & Co, Research Division: Okay. Do you see a big difference in performance between the distributor and then -- I'm sorry, the sole distributor and the multiple distributor markets?

Yes, and it's not so much sole distributor and multiple distributor, although that's a part of it. But what really -- yes, the answer is yes. We definitely are outperforming in markets where we've implemented our distributor consolidation efforts. But then that -- what are some of the things that really drive that the -- where we're able to consolidate, we're able to have exclusive sales forces within those distributors selling only our products. And that gives us a lot of additional focus on our portfolio as being -- opposed to being just part of a general sales force that’s selling multiple products. So the answer is yes, we're outperforming in those markets. Carla Casella - JP Morgan Chase & Co, Research Division: Okay, great. And then just one follow-up, you may have already answered, and I may have missed it, but can you say whether there's been any change in terms of the timing of the Crown JV decision? Is that still an end of -- I think it's end of 2012 event we should know?

No. There's -- the initial term of the Crown contract was 10 years ending 2016. It cannot be terminated or altered for 5 more years. There are notice provisions as to what they may propose that would require them to give us notice 3 years in advance of the termination at the end of 2016. But there's 5 years left on the Crown contract period, and it automatically renews for another 10 years in the -- except in the event of their giving us advanced notice of nonrenewal. Carla Casella - JP Morgan Chase & Co, Research Division: Okay, great. So the earliest would be the notice period would be end of 2013?

That's only notice. Carla Casella - JP Morgan Chase & Co, Research Division: Right, only notice for the termination in 2012 if that were to occur, okay.

That was our final question. And I'd like to turn the floor back over to Mr. Rob Sands for any closing remarks.

Okay. Well, thank you all for joining our call today. I would say that overall, I'm very satisfied with the third quarter results, and would summarize the highlights as follows: We generated very, very strong free cash flow, and as a result, have increased our guidance for the year; our strong free cash flow results have enabled us to fund share repurchases, and we expect to be opportunistic in this regard as part of our ongoing efforts to optimize the capital structure of the business; we are experienced improving depletion momentum for our U.S. Wine business and the Spirits business as well, and our new product development initiatives are being well received in the marketplace; and our Crown Imports Beer business continues its strong marketplace momentum. Our plan is to continue solid execution of our initiatives throughout the final quarter of the year. Thanks again, everyone, for your participation.

Thank you. This concludes today's conference call. You may now disconnect.