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·	Strong cash flow drives debt reduction

·	U.S. distributor inventory reduction substantially completed

·	Company increases full-year guidance

FAIRPORT, N.Y., Oct. 4, 2007 - Constellation Brands, Inc. (NYSE: STZ, ASX: CBR), a leading international producer and marketer of beverage alcohol, today reported diluted earnings per share (“EPS”) on a reported basis of $0.33 for the quarter ended Aug. 31, 2007 (“second quarter 2008”), compared with $0.28 for the prior year second quarter. On a comparable basis, second quarter 2008 diluted EPS totaled $0.35 versus $0.43 for the prior year.

 

“We have substantially completed our previously announced U.S. wine distributor inventory reduction initiative during the second quarter,” stated Rob Sands, Constellation Brands president and chief executive officer. “For the quarter, we delivered solid cash flow and reduced our debt by more than $200 million from first quarter levels. As anticipated, both the U.S. wine distributor inventory reduction and the lingering softness in our U.K. business impacted our overall performance. However, we believe the distributor inventory initiative, as well as our ongoing efforts to improve performance in the U.K., will better position us for long-term growth.”

 

 

 

		Reported			Change			Comparable			Change
Operating income		$	117			-35	%	$	125			-47	%
Equity in earnings of equity method investees**		$	80			NM		$	80			NM
Earnings before interest and taxes (EBIT)			-			-		$	205			-14	%
Operating margin			13.1	%		+30 bps			14.0	%		- 270	bps
Net income		$	72			5	%	$	77			-26	%
Diluted EPS		$	0.33			18	%	$	0.35			-19	%

*	Definitions of reported, comparable, organic and constant currency, as well as reconciliations of non-GAAP financial measures, are contained elsewhere in this news release.

 

**	Hereafter referred to as “equity earnings.”

 

^{NM = Not meaningful.} 

 

 

The reported consolidated net sales decrease of 37 percent primarily reflects the benefits of the SVEDKA Vodka acquisition, more than offset by the impact of reporting the Crown Imports and Matthew Clark wholesale business joint ventures under the equity method. Organic net sales decreased one percent on a constant currency basis.

 

Branded wine net sales decreased one percent on a constant currency basis and decreased three percent on an organic constant currency basis. For North America, branded wine net sales decreased four percent on a constant currency basis, reflecting strong growth in Canada that was more than offset by Constellation’s initiative to reduce distributor inventory levels in the U.S.

 

“Our Canadian business turned in a solid performance for the quarter, driven by very good results from Jackson-Triggs, Sawmill Creek, Inniskillin and new products,” explained Sands. “Our premium U.S. wine portfolio continues to deliver solid marketplace performance with brands such as Woodbridge by Robert Mondavi, Kim Crawford, Nobilo, Estancia, Toasted Head and Simi.

 

 

 

 

 

Organic net sales for branded wine for Europe increased four percent on a constant currency basis, primarily due to higher sales of popular priced wine in mainland Europe, and a slight increase in sales for the U.K. On a constant currency basis, net sales for Australia/New Zealand branded wine decreased seven percent. The branded wine market in the U.K. and Australia reflects ongoing competitive challenges and continued pricing pressure.

 

Total spirits net sales increased 25 percent for the quarter, primarily due to the March 2007 acquisition of SVEDKA Vodka, while organic net sales were up 11 percent primarily due to higher average selling prices and volume gains.

 

 

 

The decrease in operating income and the increase in equity earnings for second quarter 2008 were primarily due to the impact of reporting $78.8 million of equity earnings from the Crown Imports joint venture under the equity method. “Our Crown Imports joint venture is gaining traction and we look for continued growth as we strive to maximize the long-term potential for Corona and the other brands in the joint venture’s leading imported beer portfolio in the U.S.,” stated Sands.

 

Wines segment operating income decreased $38.9 million versus the prior year. This was primarily due to lower net sales associated with efforts to reduce distributor inventories in the U.S. and the impact of the U.K. and Australia business performance, partially offset by the increased contribution from the Canadian business.

 

 

 

 

 

 

For the second quarter, acquisition-related integration costs, restructuring and related charges and unusual items totaled $8.0 million, compared with $53.9 million for the prior year. Net income and diluted EPS were also impacted by interest expense, which increased 20 percent to $86.7 million for second quarter 2008, primarily due to the financing of the SVEDKA acquisition and $500 million of share repurchases. Due to strong free cash flow generated during the quarter, total debt decreased by more than $200 million from first quarter levels.

 

 

During the second quarter, the company received an additional 0.9 million shares under the accelerated share repurchase transaction announced in May 2007, which completed the transaction. The company did not make any additional cash payments in connection with receipt of these shares. For the first half of fiscal 2008, the company purchased 21.3 million shares of its class A common stock through a combination of open market repurchases and an accelerated share repurchase transaction at an aggregate cost of $500 million, or an average of $23.44 per share.

 

 

The table below sets forth management’s current diluted earnings per share expectations for fiscal year 2008 compared to fiscal year 2007 actual results, both on a reported basis and a comparable basis.

 

 

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Net sales: low single-digit growth in organic net sales and low single-digit incremental benefit from the acquisitions of Vincor International Inc. and the SVEDKA Vodka brand and related business. As a result of these increases, and the impact of reporting the Crown Imports joint venture and the joint venture for the Matthew Clark wholesale  business under the equity method, reported net sales are expected to decrease 30 to 32  percent from net sales for fiscal year 2007

 

 

 

 

 

 

 

 

 

 

A conference call to discuss second quarter 2008 results and outlook will be hosted by President and Chief Executive Officer Rob Sands and Executive Vice President and Chief Financial Officer Bob Ryder on Thursday, Oct. 4, 2007 at 10:00 a.m. (eastern). The conference call can be accessed by dialing +973-935-8505 beginning 10 minutes prior to the start of the call. A live listen-only webcast of the conference call, together with a copy of this news release (including the attachments) and other financial information that may be discussed in the call will be available on the Internet at Constellation’s Web site: www.cbrands.com under “Investors,” prior to the call.

 

 

Reported basis (“reported”) operating income, equity in earnings of equity method investees, net income and diluted earnings per share are as reported under generally accepted accounting principles. Operating income, equity in earnings of equity method investees, net income and diluted earnings per share on a comparable basis (“comparable”), exclude acquisition-related integration costs, restructuring and related charges and unusual items. The company’s measure of segment profitability excludes acquisition-related integration costs, restructuring and related charges and unusual items, which is consistent with the measure used by management to evaluate results.

 

The company discusses additional non-GAAP measures in this news release, including constant currency net sales, organic net sales, comparable basis EBIT and free cash flow.

 

 

 

 

 

Tables reconciling non-GAAP measures, together with definitions of these measures and the reasons management uses these measures, are included in this news release.

 

Constellation Brands, Inc. is a leading international producer and marketer of beverage alcohol in the wine, spirits and imported beer categories, with significant market presence in the U.S., Canada, U.K., Australia and New Zealand. Based in Fairport, N.Y., the company has more than 250 brands in its portfolio, sales in approximately 150 countries and operates approximately 60 wineries, distilleries and distribution facilities. It is the largest wine producer in the world; the largest wine company in the U.S. based upon sales dollar value, the largest wine company in the U.K., Australia and Canada; the second largest wine company in New Zealand; the largest beer importer and marketer in the U.S. through its Crown Imports joint venture with Mexico’s Grupo Modelo; and the third largest spirits company in the U.S. Constellation Brands is an S&P 500 Index and Fortune 500® company. Major brands in the company’s portfolio include Corona Extra, Black Velvet Canadian Whisky, the SVEDKA vodka line, Robert Mondavi wines, Ravenswood, Blackstone, Hardys, Banrock Station, Nobilo, Kim Crawford, Inniskillin, Jackson-Triggs and Arbor Mist. To learn more about Constellation Brands and its product portfolio visit the company’s Web site at www.cbrands.com.

The statements made under the heading Outlook, as well as all other statements set forth in this news release which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by the forward-looking statements.

 

During the current quarter, Constellation may reiterate the estimates set forth above under the heading Outlook and elsewhere in this news release (collectively, the "Projections"). Prior to the start of the company's quiet period, which will begin at the close of business on Nov. 16, 2007, the public can continue to rely on the Projections as still being Constellation's current expectations on the matters covered, unless Constellation publishes a notice stating otherwise.

 

Commencing at the close of business on Nov. 16, 2007, Constellation will observe a "quiet period" during which the Projections should not be considered to constitute the company's expectations. During the quiet period, the Projections should be considered to be historical, speaking as of prior to the quiet period only and not subject to update by the company.

 

The company's forward-looking statements are based on management's current expectations and, unless otherwise noted, do not take into account the impact of any future acquisition, merger or any other business combination, divestiture, restructuring or other strategic business realignments, or financing that may be completed after the date of this release. Any projections of future results of operations, and in particular, (i) the company's estimated diluted earnings per share on a reported basis for fiscal 2008, and (ii) the company's estimated diluted earnings per share on a comparable basis for fiscal 2008, should not be construed in any manner as a guarantee that such results will in fact occur. In addition to the risks and uncertainties of ordinary business operations, the forward-looking statements of the company contained in this news release are also subject to the following risks and uncertainties: factors relating to Constellation's ability to integrate Vincor's business, and the SVEDKA Vodka business, successfully and realize expected synergies associated with the Vincor acquisition; the continued strength of Vincor's relationships, and relationships of the SVEDKA Vodka business, with their respective employees, suppliers and customers; the accuracy of the bases for forecasts relating to Vincor's business and the SVEDKA Vodka brand and related business; final management determinations and independent appraisals may vary materially from current management estimates of the fair value of assets acquired and liabilities assumed in the SVEDKA Vodka business acquisition; the company's restructuring and related charges, acquisition-related integration costs and purchase accounting adjustments associated with the Vincor integration plan (announced in July 2006) and the company's restructuring and related charges associated with the Fiscal 2007 Wine Plan (announced in August 2006) and its global wine restructuring plan announced in February 2006 may vary materially from management's current estimates of these charges, costs and adjustments due to variations in one or more of anticipated headcount reductions, contract terminations, or costs of implementation of these plans; the company achieving all of the expected cost savings from its Fiscal 2007 Wine Plan, from its Vincor integration plan and from its global wine restructuring plan due to, with respect to any or all of these plans, lower than anticipated reductions in headcount or other expenses, or a delay or greater than anticipated costs in their implementation; the company may realize lower than expected proceeds from sale of assets identified for sale under the Fiscal 2007 Wine Plan and consequently incurs a greater than expected loss on the sale of such assets; the impact upon net sales and diluted earnings per share resulting from the decision to reduce distributor wine inventory levels in the U.S. varying from current expectations due to the actual levels of distributor wine inventory reductions; the company achieving certain sales projections and meeting certain cost targets; wholesalers and retailers may give higher priority to products of the company's competitors; raw material supply, production or shipment difficulties could adversely affect the company's ability to supply its customers; increased competitive activities in the form of pricing, advertising and promotions could adversely impact consumer demand for the company's products and/or result in higher than expected selling, general and administrative expenses; a general decline in alcohol consumption; increases in excise and other taxes on beverage alcohol products; governmental bodies may increase tax rates; proportionately, the company's taxable income may be higher than expected in jurisdictions with higher tax rates; and changes in interest rates and foreign currency exchange rates.

 

 

 

 

The company acquired Vincor International Inc. on June 5, 2006 and the SVEDKA Vodka brand and related business on March 19, 2007. In addition, on Jan. 2, 2007, the company formed the Crown Imports joint venture with Grupo Modelo S.A.B. de C.V. for the purpose of importing and marketing Modelo's Mexican beer portfolio into the United States and Guam, and on April 17, 2007, the company formed the Matthew Clark joint venture with Punch Taverns plc to own and operate the U.K. wholesale business formerly owned entirely by the company. Risks and uncertainties associated with these joint ventures include, among others, each joint venture's ability to operate the business successfully, each joint venture's ability to develop appropriate standards, controls, procedures and policies for the growth and management of such joint venture and the continued strength of each joint venture's relationships with, including without limitation, its employees, suppliers and customers. Additional risks and uncertainties associated with the Matthew Clark joint venture include factors relating to higher than expected formation and/or start-up costs for the joint venture, and the accuracy of the basis for the forecasts relating to the joint venture's business, including any capital investment in distribution infrastructure or the realization of any distribution efficiencies.

 

For additional information about risks and uncertainties that could adversely affect Constellation's forward-looking statements, please refer to Constellation's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended Feb. 28, 2007, which contains a discussion of additional factors that may affect Constellation's business. The factors discussed in these reports could cause actual future performance to differ from current expectations.

 

 

 

 

 

 

 

 

 

 

 

 

 

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