Q2 2005 Constellation Brands, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Hello, and welcome to the Constellation Brands second-quarter

earnings release conference call. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). This conference is being recorded. If you have objections, please let us know now by pressing star and then zero.

Hearing no objections, I would like to turn the conference over to Phillippa Dworkin. Ms. Dworkin, you may begin.

PHILIPPA DWORKIN, SVP, I.R., CONSTELLATION BRANDS: Thank you. Good afternoon, everyone, and welcome to Constellation's second-quarter conference call for fiscal year 2005. This is Philippa Dworkin, Senior Vice President of Corporate Communications and Investor Relations. With me are Richard Sands, Chairman and Chief Executive Officer, and Tom Summer, Executive Vice President and Chief Financial Officer.

By now, you should have had an opportunity to read our media release, which was issued earlier today and has been furnished to the SEC. This conference call is intended to complement the release. During the call, we will discuss financial and statistical information on a GAAP basis and on a comparable basis. Reconciliations between GAAP and comparable basis measures are available on the Company's website at www.cbrands.com under the investor section. These reconciliations include explanations as to why management uses comparable basis measures, and why management believes they are useful to investors. Richard and Tom's discussions will generally focus on comparable financial results, excluding restructuring and related charges and unusual costs or gains.

Please also be aware that we may make forward-looking statements during this call. While those statements represent our best estimates, actual results could differ materially from our estimates. For a detailed list of the risk factors that may impact the Company's estimates, please refer to the media release and Constellation's SEC filings. If you have any further questions after the call, please call our Director of Investor Relations, Lisa Schnorr, at 585-218-3677.

At this time, I want to turn the call over to Richard Sands.

RICHARD SANDS, CEO, CONSTELLATION BRANDS: Good afternoon. We are very pleased to be here with you to discuss our second-quarter results. I'd like to spend a few minutes reviewing these results, and give you an update on some of the things happening in our industry.

We had another great quarter. Our second-quarter results demonstrate strength across the board, in all categories and geographies, and we continue to gain distribution and momentum for our key brands. Consolidated net sales grew 14 percent for the quarter. Excluding a 5 percent benefit from currency, net sales grew 9 percent, once again exceeding our growth target of 6 to 8 percent. Net sales in our beer business grew 17 percent, driven by both volume and price.

These results confirm what we've been saying all along. Our beer business is different from others. Our Mexican portfolio, particularly Corona, has tremendous brand equity, and represents the type of beverage alcohol product that consumers are moving towards today. Put another way, not all of beer is experiencing a stagnant consumer orientation. As we said after the first quarter, our beer results also confirm that the price increase is sticking. We continue to believe this is largely due to four factors. Consumers have become more accustomed to price increases in beer. We had a better reception to the price increase from retailers. Our competitors are closing the gap by also raising prices. Just a few weeks ago, Anheuser-Busch announced price increases for California. And finally, the Corona brand meets today's consumers' lifestyle and images.

Now, I imagine many of you are surprised by these strong results, because it was not apparent from the syndicated data that we all had the opportunity to review. Keep in mind, syndicated data captures only about one-fourth of the beer category. Since so much volume goes through on-premise and other channels, and since there continues to be a shift in consumer traffic from the scanned grocery channels to these channels and mass merchandisers or convenience stores, the data is unreliable for determining the trends of the entire category. During the second half of the year, we expect our beer growth to moderate, as we come up against more difficult comparisons. As you know, last year, we experienced very strong beer volume growth in November and December, ahead of the price increase that went into effect in January on our Mexican portfolio. During the third and fourth quarters, we would expect low single-digit beer net sales growth, as price increases more than offset potential reductions in volume.

Now, moving on to our spirits business, total spirits were up 5 percent from a year ago, driven by volume gains in branded spirits and an increase in production services. We continue to benefit from the overall growth in the category, and the much talked-about return of the martini. We had volume growth across our key brands, traditional brands like Black Velvet Canadian Whiskey, Skol and Fleischmann's vodka, and premium brands like our 99 Cordials line. And we continue to innovate. Earlier this month, we introduced our new 1792 brand of Kentucky Bourbon. For those of you who are wondering about the name 1792, it is the year in which Kentucky was admitted to the union.

Our production service business was up in the double digits, due to the timing of a large long-term contract. While this represents a small portion of our business, production services gives us better utilization of our manufacturing facilities. Looking ahead for spirits, we believe volume growth will continue to be in the low to mid single digits.

Now, on to Constellation wines. First, wholesale and other grew 25 percent, including a 13 percent benefit from currency. The primary driver was our UK wholesale business, which grew 28 percent, including a 14 percent benefit from currency. This business continues to exceed our expectations. The UK wholesale business gives our wine brand strategic access to the on-premise channel. Nearly 20 percent of our wholesale division's wine sales are Constellation Brands, and this percentage has been consistently growing.

In addition, our scale in this business allows us to capitalize on national …