Constellation Brands' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Constellation Brands (STZ)

Q4 2012 Earnings Call

April 05, 2012 10:30 am ET

Executives

Patty Yahn-Urlaub - Vice President of Investor Relations

Robert Sands - Chief Executive Officer, President and Director

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

Analysts

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

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

Lauren Torres - HSBC, Research Division

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

Brett Cooper - Consumer Edge Research, LLC

Reza Vahabzadeh - Barclays Capital Inc.

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

Gary Albanese - Auriga USA LLC, Research Division

Kevin V. Dreyer - GAMCO Investors, Inc.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Presentation

Operator

Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands Fourth Quarter and Fiscal Year 2012 Full Year Earnings Report. [Operator Instructions]

I would now turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations, for opening comments. Please go ahead.

Patty Yahn-Urlaub

Thank you, Maria. Good morning, everyone, and welcome to Constellation's Fourth Quarter and Fiscal Year End 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 been 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 in 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 risk of list -- list of risk factors that may affect 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.

Robert Sands

Thanks, Patty, and good morning, and welcome to our call. This morning, I plan to discuss Constellation's year-end results and provide a high-level outline for our plans for fiscal 2013.

It is certainly worth noting that we have had a very productive year in 2012, delivering against a number of key strategic goals and business initiatives. I would like to take a minute to highlight some of our achievements.

I am especially pleased with our record free cash flow results and our significantly improved consolidated margin structure, resulting from last year's sale of our U.K. and Australian businesses. We utilized our free cash flow to reduce debt and repurchased more than $400 million of our shares in fiscal 2012. This follows a $300 million accelerated share buyback transaction, which was completed in fiscal 2011. And in fiscal 2013, we plan to continue to return value to our shareholders in the form of a new $1 billion share repurchase program that has been recently authorized by our Board of Directors. We expect to execute approximately 50% of the new authorization this year after repurchasing the remaining shares available under our fiscal 2012 authorization.

We purchased the remaining portion of the Ruffino wine business, which is an iconic old world wine brand that builds a niche for Constellation in the growing Italian premium wine category. Ruffino is one of our larger focus brands, posting depletion growth of almost 10% in fiscal 2012. It is also the #3 Italian super-premium wine brand in SymphonyIRI channels.

We became more unified and integrated as one company by advancing our fusion technology initiative, and we are currently implementing a shared service infrastructure. Collectively, these initiatives are designed to create an integrated technology platform and enhance the processes that support our business.

We expanded our international presence by establishing an office in Hong Kong, and we are currently in the process of exploring next steps for our emerging market participation strategy.

Fiscal 2012 marked our highest level of brand building activity in recent history, which is paying off in the marketplace. A few examples include SVEDKA. We introduced new packaging configurations and flavor profiles, which helped the brand to surpass Gray Goose in volume sales, making it the second largest imported vodka brand in the U.S. today.

We launched more than 25 new products in fiscal 2012, including the introduction of 4 new wine brands in fast-growing categories. They include Simply Naked, Primal Roots, Rioja Vega and The Dreaming Tree.

In the U.S. beer market, Crown continued its launch of Victoria, which posted significant growth and was awarded the Leader's Choice Award as the Best New Product by Market Watch magazine. Victoria has also become the #1 new beer in terms of dollar sales in the SymphonyIRI food, drug, mass and convenience channels.

In response to the need of consumers looking for additional ways to enjoy products, Crown also expanded its draft beer offerings, which resulted in depletion growth of almost 60% for this format and increased brand recognition for the Modelo Especial, Negra Modelo, Pacifico and Victoria brands.

We have recently launched the next phase of our U.S. distributor consolidation efforts in markets where it makes sense. The signing of multi-year agreements with additional U.S. distributors covering almost 10% of our U.S. wine and spirits volume will give them the right to sell Constellation's portfolio of wine and/or spirits exclusively in their respective markets.

In the first phase of our U.S. distributor consolidation initiative, which incurred -- occurred in the latter half of 2009, we gave exclusive appointments to 4 distributors to represent approximately 60% of our U.S. wine and spirits business in 22 states. As you know, the ultimate goal of this differentiated distributor model is to drive profitable organic growth through fully dedicated distributor teams more closely aligned with Constellation's sales force; investment of incremental marketing and promotional support behind Constellation brands; a distributor incentive structure designed to significantly increase distributor performance, with a focus on higher-margin, higher ROIC brands.

One of the key metrics we utilized to measure the success of our U.S. distributor consolidation effort is depletion trends. I am pleased to report that those dates where our business has already transitioned to this model have outperformed the states where reconciliation has not occurred. And in terms of overall U.S. depletion performance for fiscal 2012, our distributor sales to retail for Constellation's total U.S. wine and spirits business across all channels increased approximately 2% for the year, with wine-only portion growing slightly less.

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