Executives: Patty Yahn-Urlaub - Vice President, Investor Relations Rob Sands - President and Chief Executive Officer Bob Ryder - Chief Financial

Officer
Analysts: Nik Modi - RBC Alice Longley - Buckingham Research Bryan Spillane - Bank of America/Merrill Lynch Bill Chappell - SunTrust Mark Swartzberg - Stifel Nicolaus Caroline Levy - CLSA Rob Ottenstein - ISI John Faucher - JPMorgan Ryan Gallant - Goldman Sachs Lauren Torres - HSBC Brett Cooper - Consumer Edge

Research
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Constellation Brands’ First Quarter Fiscal Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Patty Yahn-Urlaub, Vice President of Investor Relations.

Please go ahead. Patty Yahn-Urlaub: Thanks, Jackie. Good morning, everyone and welcome to Constellation’s first quarter fiscal 2015 conference call. I am 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 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 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.

Rob Sands: Thanks, Patty and good morning to everyone. Welcome to our discussion of Constellation’s first quarter fiscal 2015 sales and earnings results, which reflect a great start to our new fiscal year. Our beer business is on fire.

Our wine and spirits business is on track to meet its goals for the year. And we continued to progress as planned with our Mexican brewery expansion. We have recently celebrated the one year anniversary of our game changing beer acquisition and I believe that our strong financial and operational performance during this time is a living testament to the significant contributions that our beer business is making to our overall sales profit and cash flow results. In the first quarter, the beer segment generated results that were better than our expectations for both the commercial business and our brewery in Mexico. Beer net sales increased double-digits to 14%, which represents a significant outperformance of the import category and the overall U.S.

beer market. We continue to experience robust consumer demand for our iconic portfolio of Mexican beers, which is being driven by a combination of strong sales execution and excellent support from our wholesalers. The introduction of creative new marketing and advertising programs, which are resonating with consumers, continued distribution gains across the portfolio and the further expansion of new product offerings like Modelo Especial Chelada and Corona Light draft, which continued to exceed our initial growth forecast. Overall, the strong results that the beer business achieved in the first quarter are the primary driver of the upward revision to Constellation’s overall EPS guidance for fiscal 2015. As such, we now expect beer depletions in fiscal 2015 to increase high single-digits, which should drive sales growth in the 10% range with underlying operating profits for the beer segment expected to increase in the mid-teen range.

At this time, we believe we will have adequate supply to meet these sales goals for the year. I would like to remind everyone that the five core brands within the Constellation beer portfolio are ranked in the top 15 U.S. imported beer brands. Now, Corona Extra is the only top five U.S. beer brands in IRI channels that posted dollar share growth during the first quarter.

In addition, the brand grew depletions of more than 3% and accounted for 10% of U.S. beer category dollar growth. As you know, Corona Light is the number one imported light brand in the U.S. with a 55% IRI dollar share of the import light category and increased dollar share by almost 2 share points during the quarter. Modelo Especial recently achieved yet another milestone as it moved up into the number two slot as the second largest imported U.S.

beer brand on a volume basis in IRI channels, while also gaining distribution and 40 basis points of dollar share during the first quarter. And Pacifico and Negra Modelo each grew IRI dollar sales in the high single-digit range during the first quarter. While draft currently represents a small part of our overall volume, depletions grew more than 35% for this format driven by the market expansion of Corona Light in the first quarter. As we approach the Cinco de Mayo holiday, we continued to build our Corona de Mayo equity to assert Corona’s ownership over summer’s first fiesta in an effort to maintain momentum and keep Corona top of mind with consumers and our wholesalers as we kicked off a 120 Days of Summer. During the first quarter, initiatives included the national TV debut of the new Corona Extra 2014 television spots for general market and Hispanic consumers, the introduction of the Fill your Summer program, which is our first ever multicultural, bilingual summer program consisting of 18 weekly themes with activities, new contents and prize drawings.

Promotional, digital and radio advertising and digital video sponsorships launched leading into key occasions, including the World Cup and ESPN coverage of the NFL draft. The national TV advertising for Corona Light designed for sports and cable entertainment TV debuted in the first quarter for the key summer selling season. New ads for Modelo Especial’s Hispanic Real World campaign were introduced using general market media and strong support in targeted Spanish language TV and digital video programming. The Modelo Especial summer soccer promotion kicked off in May featuring a summer promotion that includes a sweepstakes and a campaign designed to engage consumers at all touch points. A national launch of Modelo Especial Chelada began in April, expanding outside of initial introductory states.

This initiative is supported by Spanish language TV ads on national Spanish networks, consumer sampling at retail, PR in key markets, social media engagements and C-store print trade ads. Now, from a brewery and operational perspective, all areas of brewery expansion including a new brewhouse, packaging area and warehouse are well underway. In many areas, crews are working around the clock. And as of last week over 1,200 craftsmen and construction workers were onsite. The first six fermentation tanks were recently hoisted into place and the massive concrete pour for the high density warehouse is progressing quickly.

Great care is being taken so that construction work does not disrupt existing brewery operations. In fact their brewery produced a record number of cases in May. We continue to work diligently to finalize our future plans for commodity sourcing on items such as glass as well as assessing options for longer term capacity expansion beyond the 20 million hectoliter expansion that is already underway at the Nava brewery. We will certainly inform you as soon as these plans have been finalized. From a wine and spirits perspective during the first quarter the business performed generally as expected with sales results impacted by the planned distributor inventory destocking.

The agreed upon make whole payment associated with this activity benefited gross profit margins for the quarter. First quarter wine and spirits depletions were a bit muted following a strong finish to our fiscal year in February when we posted depletion trends of more than 5%. In addition, quarterly depletions were impacted by some retail inventory destocking. Our expectation is that you should see improving depletion trends as we progress through the year similar to last year. Overall, we remained committed to growing in line with the U.S.

wine and spirits industry growth for fiscal 2015 and beyond. As such during the first quarter we gained market share in IRI channels and experienced excellent performance for a number of our Focus Brands including Mark West, Kim Crawford, Ruffino, Black Box, Rex Goliath and Woodbridge by Robert Mondavi. As outlined earlier this year one of key strategic objectives for the year is to focus our marketing efforts on a subset of our Focus Brands in order to drive key brands that have scale, higher margin and the greatest growth potential. Some of the initiatives recently executed that support this goal include the following. Increased TV advertising for specific Focus Brands including Woodbridge, Black Box and Robert Mondavi private selection, enhanced digital and print advertising as well as in-store programming for key brands like Clos du Bois Rouge and Estancia.

And finally Dreaming Tree 360 degree activation programs that have begun in conjunction with Dave Matthews’ summer concert tour. We are reaping the benefits of some of these key marketing and promotional initiatives as we continued to be recognized by industry leading publications for our new products and our Focus Brands. The most recent noteworthy accolades include the following. Earlier this week the drinks business and intangible business published their 2014 power brands lists Robert Mondavi was named the number three most powerful brand in the world, moving up from the number four spot last year. The Beverage Information Group recently announced their 2014 growth brand award winners with 13 Constellation brands receiving awards, including Kim Crawford, The Dreaming Tree, Mark West, Black Box, Estancia, Ruffino, Woodbridge, SVEDKA and Rex Goliath.

In the April issue of Wines and Spirits magazine the 2011 Robert Mondavi, Napa Valley, Pinot Noir received 92 point score and the Best Buy designation, it was also included in the year’s best Pinot Noir feature. Constellation Wines claimed four spots in this year’s wine and spirits restaurant top 50 list, which is the survey of top-selling wines at America’s favorite restaurants and included Franciscan, Simi, Robert Mondavi and Ruffino. And one of our other key strategic initiatives for the year relates to our drive to deliver margin accretive innovation and new products. Some of the recent activities that we have underway include the national expansion of wine on tap which includes varietals from brands like Simi, Franciscan, Mark West and Clos du Bois. The line extension introductions of the (indiscernible) Red Blend, Rex Goliath Sangria and Black Box Pinot Noir, the launch of Arbor Mist Sangria Rita, which capitalizes on the growing popularity of spirit style sangria and margarita cocktails and after a successful trial period at a major retail chain, PopCrush is expanding into national distribution.

As we have previously discussed, we also continue to look for opportunities to leverage our sales and marketing efforts across our beer and wine and spirits businesses. One of our new initiatives includes the Corona and Rosatello brands, which have teamed up to develop a joint bilingual point-of-sale creative platform and consumer offer to drive display during the key summer selling season targeting California general market and Hispanic chains and independent retailers. Now, from a spirits perspective, while spirits net sales declined in the first quarter due to the timing of shipments, depletions grew in the low single-digit range. During the quarter, we launched SVEDKA Mango, Pineapple and Strawberry Lemonade as additions to SVEDKA’s flavor lineup as we continued to capitalize on the growth of flavored vodka. This activity is being supported by digital and billboard advertising and is being well received in the marketplace.

We also reintroduced the new SVEDKA Stars & Stripes in advance of the Memorial Day holiday, which has become a very popular consumer item. In closing, solid execution of first quarter results demonstrates that we continue to deliver on our key strategic imperatives across our beer and wine and spirits businesses. And I am excited about our prospects for the business for the remainder of the year. I would now like to turn the call over to Bob for a financial discussion of our first quarter business results.

Bob Ryder: Thanks, Rob.

Good morning, everyone. Our comparable basis diluted EPS in Q1 came in at $1.07, which represents a sizable increase versus last year. Q1 included some expected material activities in both of our businesses. In beer, we continue to realize the tremendous accretion attributable to the Q2 fiscal ‘14 beer business acquisition, which has significantly enhanced our financial and strategic profile. Sticking to beer, our Q1 financial performance and continued robust marketplace momentum drove the upward revision to our fiscal 2015 EPS guidance.

Turning to wine and spirits, sales were impacted by our previously announced distributor inventory reduction. Also as announced, this reduction did not impact EBIT as demonstrated by the strong Q1 segment EBIT growth. Some of this growth is timing related and we expect a good portion of this favorability to reverse in Q2. Our full year financial sales and EBIT goals for wine and spirits remain on track. Given those brief highlights, let’s look at Q1 performance in more detail, where my comments will generally focus on comparable basis financial results.

As you can see from our news release, consolidated net sales for Q1 included $868 million of incremental net sales related to the beer business acquisition as we consolidated 100% of beer sales as of the June 7, 2013 acquisition date. For Q1, beer segment net sales increased 14% on volume growth of 11%. Depletions were also very strong growing 8%. It’s typical to see distributor inventory build during our first quarter as we head into our strongest selling period for the year in beer. Wine and spirits net sales on a constant currency basis decreased 1%.

This reflected a shipment volume decrease of 4% primarily resulting from a planned distributor inventory destocking partially offset by a make whole payment from the distributor associated with the destocking as well as favorable product mix. For the quarter, consolidated gross profit increased $420 million and our consolidated gross margin was 44% versus 38% for the prior year first quarter. Incremental gross profit from the consolidation of beer was $410 million. This produced a beer segment gross margin of 47%. The increase in our consolidated gross margin primarily reflects the benefit from the consolidation of the higher margin beer business, the distributor payment associated with the inventory reduction and favorable wine and spirit product mix.

SG&A for the quarter increased $119 million. The incremental SG&A associated with consolidating the beer business was $123 million, the majority of which is marketing. This was offset by lower wine and spirits SG&A which was primarily driven by timing of compensation related expense. Q1 consolidated operating income increased $301 million. $288 million of the increase was related to the consolidation of the beer results with the beer segment generating an operating margin of 33% for the quarter.

The inclusion of the beer business results was the primary driver behind the 11 percentage point improvement in our consolidated operating margin for the quarter. Wine and spirits also contributed to the margin favorability as this segment reported a three percentage point improvement in operating margin due to the factors mentioned earlier. Roughly speaking the distributor make whole payment, positive operating – positive product mix and the timing of SG&A contributed equal thirds to the operating margin upside. Due to the timing of the beer business acquisition we did not record – recognize any equity earnings from Crown during the first quarter. For the prior year first quarter equity earnings for Crown totaled $66 million.

Interest expense for the quarter was $86 million, up 58% versus Q1 last year. The increase represents an increase in average borrowings as a result of the acquisition funding partially offset by lower average interest rates. That provides a good spot to discuss our debt position. At the end of May, our total debt was $7.2 billion. When factoring in cash on hand, our net debt totaled $6.8 billion, a decrease of $140 million since the end of fiscal 2014.

The decrease primarily reflects our free cash flow generation. In early June we made $558 million post closing purchase price adjustment payment for the beer transaction. This was funded through a combination of cash on hand and revolving credit facilities. I would also like to remind you that we have $500 million 8.38 senior note coming due in December. Our comparable basis effective tax rate came in at 32.5%, which reflects the benefits from integrating the beer business and compares to a 36.2% rate for Q1 last year.

We still anticipate our full year tax rate to approximate 30%. Now, let’s discuss free cash flow which we define as net cash provided by operating activities less capital spending. For the first quarter we generated $101 million of free cash flow compared to a use of cash of $19 million for Q1 last year. Operating cash flow for the quarter totaled $232 million versus $3 million last year. The increase was primarily due to the incremental benefits from the beer business acquisition.

CapEx for the quarter totaled $131 million compared to $22 million last year. CapEx for the beer segment totaled $85 million as brewery expansion activities continued to progress. For fiscal ‘15, we continue to expect free cash flow to be in the range of $425 million to $500 million. This reflects operating cash flow that is targeted to reach at least $1 billion as we continue to realize earnings benefits from the beer business transaction. And CapEx, that’s projected in the range of $575 million to $625 million.

As a reminder, our CapEx projection includes $450 million to $500 million for the beer business primarily related to expanding the brewery to 20 million hectoliters of capacity. Now, let’s move to our full year fiscal 2015 outlook. As a result of the strong beer business performance, we are now forecasting comparable basis diluted EPS to be in the range of $4.10 to $4.25 per share versus our previous guidance of $3.95 to $4.15. For fiscal 2015, we are now targeting net sales growth for the beer segment to approximate 10%. Shipment and depletion volumes are now targeted to grow high single-digits and significantly outpaced the import category and the total beer industry.

For fiscal 2015, we expect beer segment operating income to grow in the range of 25% to 30%. As a reminder, our fiscal 2014 beer segment operating income totaled $773 million and included 100% of the U.S. beer commercial business operating income for the entire year and brewery profits from the date of the beer business acquisition. When factoring an estimated full year of brewery profit for fiscal 2014, underlying operating income growth for the beer segment is expected to be in the mid-teens range. From a beer gating perspective, I would like to note that in Q2, we faced an easier comparison as shipment volume growth in Q2 last year was only 1%.

Beer will be facing some more difficult comparisons in the second half of this year as shipment volume growth in the second half of last year was over 13%. For wine and spirits, we continue to target net sales and EBIT growth for fiscal ‘15 to be in the low to mid single-digit range. As mentioned earlier, we expect some of the EBIT favorability in Q1 for wine to reverse in Q2 due to the timing of shipment activity. Our comparable basis guidance, excludes unusual items, which are detailed on the last page of the release. Before we take your questions, I would like to note that we are off to a great start in fiscal 2015 as the beer business continues to generate strong marketplace and financial performance, the brewery expansion continues to progress and the wine and spirit business is on track to meet its goals for the year.

With that, we are happy to take your questions.

Operator: (Operator Instructions) Our first question comes from the line of Nik Modi with RBC. Nik Modi - RBC: Yes, good morning everyone.

Bob Ryder: Hey, Nik.

Rob Sands: Hi, Nik.

Nik Modi - RBC: Hey, so just two quick questions. On the wine price mix, can you just kind of explain was that all mix or is there any bit of pricing in there? And then just generally what’s going on within the pricing environment within wine? And then the last question I guess this one is for you, Rob, given beer margins have been kind of in the 33% range the last couple of quarters, this is a seasonally high quarter in terms of expenses, just curious on kind of state of the union on the 30% to 35% target and kind of what you think about perhaps being at the upper end of that or even above that range over the next couple of years? Thanks.

Bob Ryder: Sure. Let me just comment on price mix smaller and then I will let Rob do the industry, what’s going on in the industry. So, for us for the quarter, I’d say that the upside to margin was primarily mix.

Pricing didn’t have a big impact. I will let Rob talk about what’s going on in pricing in general in the wine and spirits category.

Rob Sands: Yes, I think we see – Nik, we see some pricing now occurring in wine and spirits. Still I would say in line primarily we see pricing in the lower end of the wine business and we see some pricing in the higher end. The middle remains I would say pretty competitive, so sort of that $8 to $15 range is where we still don’t see a lot of pricing.

But I would say as a general proposition the pricing environment in wine and spirits is a bit more favorable than it has been in the past. We have taken some pricing on select brands as Bob said the margin accretion in the first quarter is probably more due to mix than it is to pricing, but we do have some pricing on some of our larger brands especially in the premium category and in sub-premium and sparkling. So as I said generally a more favorable environment.

Bob Ryder: Sure. Nik on the second, the beer margin question, so as you know, we just updated our guidance.

We are expecting this year to have margin expansion in beer as the guidance reflects about 10% sales growth and mid-teens EBIT growth, right. So we expect the beer business to continue gaining margin. Last year for the three quarters that we owned the business, our operating profit margin was around 31%. This year we expect that to be around 32% right now. So we do see some expanding margins.

Now your question was more along longer-term because we gave some guidance that when the brewery is completed that we should have margins in kind of a low to mid 30% range. And we have stuck with that guidance and there is still obviously a lot going on in the beer business that the breweries being build out as Rob said there is about 1,200 people on the ground down there going up to about 3,000 building out to 20 million hectoliters and we still are buying 40% of our finished goods from Anheuser-Busch and all of our raw materials from Anheuser-Busch. And as we said we are currently thinking about transitioning from Anheuser-Busch for the raw material perspective and we have some bids coming in from the global providers of glass, hops, barley, things like that. And most likely we will be discussing the transition from the Anheuser-Busch and how those bids came out in a general frame probably in this calendar year. So I think when that flushes out we might be able to give some more specific guidance about where we see longer term margins in beer.

But we still don't have all those bids in, and we are not ready to talk about it to the outside world. Obviously, the big component of that is glass which we also aren’t ready to talk about it to the outside world. There is a lot of discussions going in that arena. So long answer to right now we are still sticking to the low to mid single-digit operating profit margin for beer. Nik Modi - RBC: Alright.

Thanks Bob.

Operator: Our next question comes from the line of from the line of Alice Longley with Buckingham Research. Alice Longley -

Buckingham Research: Hi, good morning. Can you hear me?

Rob Sands: Yes. Hi Alice.

Alice Longley -

Buckingham Research: Hi. Okay. So my question is a little bit more on the second quarter beer shipments and depletions, should I assume that shipments are up a little less or little weaker than depletions in the second quarter because you over shipped a little in the first quarter. And then the second part of that is what should we be looking for depletions in the second quarter, you talked about the easy comp and also we have got the World Cup and we have got weather that really just turned favorable over the Memorial Day weekend, so can you kind of go through that and breakout depletions in the second quarter and then shipments versus those? Thank you.

Rob Sands: Yes.

We try not to get too specific on quarterly guidance and my gosh, you are asking very specific question, but that’s okay. We do expect a very strong second quarter in beer for two reasons. We do have a lot of momentum in the marketplace as you see. And from a billings perspective, we have an easier overlap, I think it might be our easiest overlap of the year as I recall from last year, depletions were stronger than shipments last year. So, I think the depletion overlap is a little more difficult than the shipment overlap.

But for the full year, we still expect shipments and depletions to be aligned for the beer business and there is a lot of this quarterly activity going on, but I would probably try to focus more on what’s going on in the longer term and over the full year. Alice Longley -

Buckingham Research: I mean, is it likely that the second quarter depletions in volume terms will be similar to the first quarter?

Bob Ryder: That’s about all I am going to say about the quarterly guidance. Alice Longley -

Buckingham Research: Okay. Then just I guess I will add one more question, if you look at your beer shipments in the first quarter, price looks like it was about 3%, it was 3.5% and yet I think we have been working with 2% for pricing for beer and I think your guidance for the year sort of assumes 2% pricing. So, can you comment on that 3%?

Bob Ryder: Sure.

In that number, Alice, is also some distributor – beer distributor contribution to some of our marketing campaigns, because we will sit down every year with the distributors. And if we have some ideas that we think are really going to drive volume and then the distributors agree that they will sometimes, they will contribute and that contribution comes across in the net sales what looks like pricing, but it’s really not because that it’s a zero some gain that comes into an expense that’s further down on the P&L. So, I think from a pricing perspective, IRI just from price probably closer to like 2% versus 3%. Alice Longley -

Buckingham Research: Excellent, thank you.

Operator: Our next question comes from the line of Bryan Spillane with Bank of America/Merrill Lynch.

Bryan Spillane - Bank of America/

Merrill Lynch: Hey, good morning. I have got two questions relative to wine. I guess the first one maybe following up on Nik Modi’s question about the price mix on wine, I think Bob, if you could just walk us through net sales on a constant currency basis for the wine and spirits segment was down 1% and our wine shipment volumes were down 3.8%. So, explaining that, I think that gap makes it look like there is more price mix maybe in wine, but I am assuming that the make whole payment is contributing to that. So, could you just sort of try to give us some sense for how much the make whole payment contributed? I think in total, it looks like it could be somewhere in the $15 million range, I am just trying to get a sense for the size of that? And then I have a second question.

Bob Ryder: Yes. The make whole payment and you guys understand the math of it, right, so we are getting a payment against which there were no sales, right. So that really helps your margin. And for the quarter, the impact on math was probably between 75 and 100 bps for the quarter would be the impact on gross profit margin for that. Bryan Spillane - Bank of America/

Merrill Lynch: But on the revenue growth, what would it be – so it would have been the same dollar amount on the revenues, seems like it’s a credit that comes to the net sales line right?

Bob Ryder: Yes, that is correct.

It is a credit that comes through the net sales line, but it really – it’s not based on revenue, it’s based on EBIT, right. Bryan Spillane - Bank of America/

Merrill Lynch: Right.

Bob Ryder: So it kind of brings down your net selling price per case, but it increases your gross profit margin, right. So, it’s really – it’s quasi-confusing, but what I will tell you is for the quarter, mix had a bigger impact than the make whole payment. Bryan Spillane - Bank of America/

Merrill Lynch: Got it.

Bob Ryder: It is a very positive mix quarter versus prior year and I will tell you prior year was a very poor mix quarter. Bryan Spillane - Bank of America/

Merrill Lynch: That’s helpful. And then the second question just related to wine, Rob, there has been some speculation in the press about Treasury Wine Estates and the potential that it might be for sale and Constellation has been mentioned in that. And I obviously don’t expect you to comment directly on that, but just conceptually kind of where you’ve got, where you are thinking at this point in terms of M&A in wine and is it tuck-in, would you be open to doing something sort of more transformational, any comments around that would be helpful? Thanks.

Rob Sands: Yes.

I mean, I think that as it relates to M&A, whether in wine or any other categories, our position remains the same, which is as to use of capital, our primary focus remains on debt pay down at the current time. As you mentioned, tuck-in deals meaning if a brand came around that, that was something that was really hot met our financial objectives, filled the niche that we didn’t have. Of course, we would take a look at an opportunity like that, but generally, our strategy at the current time is all about driving organic growth and obviously we have got really good organic growth across all of the categories in the business. And there is a lot of upside and benefit to be gained through simple debt reduction following the beer acquisition. So, strategically, that’s what really makes the most sense in terms of how we are operating the business at the current time.

Bryan Spillane - Bank of America/

Merrill Lynch: Alright, thank you. Have a great holiday.

Rob Sands: Thanks. You too.

Operator: Our next question comes from the line of Bill Chappell with SunTrust.

Rob Sands: Hi, Bill. Bill Chappell - SunTrust: Good morning. Just one last one on the wine side, any kind of update on grape or input costs, maybe was there incremental inflation this quarter and are you still expecting kind of some relief as we move to the fall?

Bob Ryder: Yes. The grape input costs for this fiscal year we are not going to see much inflation from that at all, because the higher cost grapes have pretty much flushed through the P&L. So, that’s helping our wine EBIT growth for the year and helping us maintain the guidance of kind of flattish margins for the year.

Bill Chappell - SunTrust: So, as we look out I mean could the tailwind get bigger as we move to the back half of the year?

Bob Ryder: No, I don’t think it’s going to change that much. I don’t think we will see a lot of noise in grape costs for the year. It’s relatively flat. Bill Chappell - SunTrust: Okay. And then just on the tax, just to make sure, are you expecting it to be below 30% for one or all the quarters from here that you have to get back to that 30% for the full year?

Bob Ryder: Yes, it will have to be below for some of them, just the math of it, right, because we are at like 32.5% this year.

So, we are still sticking with the 30% for the full year, which would mean one or several quarters we will have to be below the 30%. Bill Chappell - SunTrust: Okay. So, but not just like a single quarter catch up, it will just be kind of even over the next three?

Bob Ryder: It’s – you can’t really forecast it, because it’s based on a lot of it’s based on actions of third parties and we are not sure when the timing of it will happen. Bill Chappell - SunTrust: Okay. And then last can you just kind of walk us through if we look at the Nava plant, I mean, things that are being done to – as the margins are ramping up kind of in front of the expansion, what’s helping to drive it beyond mix? I mean, what’s – what can you do, what have you done with the plant since you have taken ownership that’s kind of gives us excitement for the margins to expand between now and the finalization of the expansion?

Bob Ryder: The expansion is going to be kind of a date specific thing, right and the thing that will drive the margin increase on the expansion, when the expansion is done, it’s primarily freight.

Okay, because right now, we are buying 40% of our goods from InBev and they are being sourced from hundreds of miles south of brewery, right. So we make them at the brewery, we’ll have much lower freight, but then there is a lot of other moving parts like I mentioned earlier to Nik’s question what’s going to happen when we move to our own purchasing contracts versus buying from InBev, is that positive, negative or neutral? What’s going to happen around glass, which of course is the big input cost in beer, packaging is roughly 50% at cost of sales. In beer, what we had experienced so far is an incredibly well run brewery. The people and the process that we inherited when we bought the Nava brewery we couldn’t be happier with. I was just down there a week ago and the throughput on the brewery has surprised us on a positive perspective especially when you consider all of the stuff that’s going on to double the size of the brewery, right.

So that helped us, it was good because first quarter is one of the peak production quarters like you are trying to make as much as you can to fuel the peak summer selling season. Bill Chappell - SunTrust: Got it. Okay. Well, thanks for the color.

Operator: Our next question comes from the line of Mark Swartzberg with Stifel Nicolaus.

Mark Swartzberg -

Stifel Nicolaus: Hi. Good morning guys.

Rob Sands: Hi Mark. Mark Swartzberg -

Stifel Nicolaus: I guess two questions also beer related. Rob can you give us a little more perspective on specifically what’s driving the incremental growth you are seeing with Especial and to what extent you are seeing ACV gains and to what extent it’s coming from improvements in shelf space or velocity at existing accounts? And then I had a related beer question.

Rob Sands: Yes, Mark. I mean it’s a whole bunch of things. I mean it starts with the consumer and the consumer is voting with their feet. So, we had very strong consumer takeaway on the product and everything we are doing from a marketing perspective as it relates to the consumer is obviously really resonating with the consumer. And we go back to retail and wholesale and you get sort of a compounding infectiousness when you have a brand that’s on fire with the consumer which really means that it’s a mushrooming effect, right.

And it’s a cart and a horse question, in that the consumer is that the – the product resonates with the consumer, the consumer is demanding the product, the retailers sees that it’s hot with the consumer. The retailer and the wholesaler then invests more resources whether it’s manpower or dollars against the product which then circles back around and has the effect of even driving the products harder at retail. So fundamentally you sort of got the whole cycle working to the advantage of the brand. So it’s really a whole combination effects that people got very strong marketing behind the brand as well as our other beer brands. And again that continues to resonate with the consumer.

We are sending a very consistent message whether it’s on Corona or Modelo Especial. Modelo Especial is a very, very well known brand in Mexico, therefore it is a brand that is well known and trusted by the Hispanic consumer in the United States that population demographic group is very strong in terms of purchasing power and growth at the current time. So, we are seeing all the benefits of that. Mark Swartzberg -

Stifel Nicolaus: That’s for the ACV and same-store, is there – can you give us any perspective geographically on Especial at (indiscernible) with Hispanics and it’s growing I think kind of across the country but can you give us some perspective on comparative rates of growth geographically?

Rob Sands: Yes. We are actually seeing very strong growth in some of the most mature markets for Modelo Especial like Southern California where Modelo Especial has a share and its equal to or greater than Corona and we are continuing to see double-digit growth in some of these large markets.

And then in some of the more developmental markets like in the East and so on and so forth, we are continuing to see the brand really starting to catch on and we are seeing strong growth in those markets too. So it’s really across the board phenomenon and even in the mature markets we are seeing double-digit growth. Mark Swartzberg -

Stifel Nicolaus: That’s great. And then I was hoping you could unpack this comment about having adequate supply for your demand this summer? And there is a lot out there in terms of how much there is a glass shortage and who it affects and how, but can you just kind of set the record straight, is there some depletion number in terms of rate of growth? Will you start having problems with glass supply or are you sitting here looking at the next three months and saying it’s kind of a non-issue?

Rob Sands: Yes, it’s the latter. We are looking at the next three months and it’s a non-issue.

First of all on supply, what has occurred, there’s been some very isolated circumstances on SKUs, not on brands, but on some particular SKUs in some markets we have seen some supply tightness in the marketplace. What’s really driven that has nothing to do with anything related to the brewery or ABI or supply in general, it’s merely a consequence of the fact that the brands are growing at a rate, which intrinsically it can be hard to keep up with. Therefore, in a particular market like there was some reports on Florida, there was some supply shortages there on a particular SKU, well, Publix is a gigantic chain down there, ran a great big promotion and ran itself and everybody else out of inventory, that would happen or can happen under any circumstances when you are talking about the kind of growth that we are experiencing at the current moment in time. It’s frankly just difficult to supply and can be at the levels that we are talking about. Now, all that said, we think we have got the inventories within our own business at wholesale and at retail generally speaking that there should not be supply issues even with the growth that we are experiencing throughout the rest of the summer and of course we are planning for this growth.

Now, as I said, on an individual SKU basis in an individual market depending on what promotions are being run by the retailers, which we don’t necessarily have control over can something like that occur, yes, but we are not expecting anything of out of the ordinary in that respect. So, the supply situation is well in hand. We do not have a glass shortage. I don’t know where that comes from either. We have got as a general proposition plenty of glass to supply the brand.

And as I mentioned in my script, we are working on the glass strategy and we should be able to talk about that in the next few months. And I am sure we will see a favorable outcome there as well, so. Mark Swartzberg -

Stifel Nicolaus: Great, great. Thanks very much, Rob.

Rob Sands: Yes.

Operator: Our next question comes from the line of Caroline Levy with CLSA.

Rob Sands: Hi, Caroline. Caroline Levy - CLSA: Everyone, good morning. Congrats on the great results.

Rob Sands: Thanks.

Caroline Levy - CLSA: I was looking for some help with modeling the third quarter, because you had – I guess, Bob you had mentioned that shipments were up 13%, I don’t know I have a little more than that in my model in the third quarter a year ago, but it’s looking like that could be a down shipment year on quarter, a down shipment quarter. And I am just wondering if that’s how you are modeling it, you are looking at that comp and saying yes, we should expect very little shipment growth and then what the implications are for margins in that quarter, if that happens?

Bob Ryder: Yes. The statement I made was last year we experienced 13% growth in the back half. So that would have been Q3 and Q4 which were both strong quarters in beer last year, because they were subsequent to us becoming an independent beer company to the U.S. distributors.

So, we have been saying that along we have much more difficult overlaps in beer in the back half and easier in the front half. And our easiest overlap in beer from a shipment perspective is the second quarter. Then when you look next year, Q3, Q4 were very strong for beer. Caroline Levy - CLSA: But again, the implications on margins could also come through in the back half because of that, I mean, shipments and margins would be strongly correlated, I take it?

Bob Ryder: Yes, probably, but again from a full year perspective, right, what we are seeing is some pretty impressive numbers. We are saying we expect sales to be up about 10%.

We are saying profits to be up almost 1.5 times that, right. So there will be margin expansion in any individual quarter. There can be anomalous activity and it’s not as you know in every quarter you have anomalous activity in the previous year and the anomalous activity in the current year, so you can have some odd outcomes that’s why I look – like to look at full year or even year-to-date as you get more data in your margin analysis. So that’s how we see things playing out. Caroline Levy - CLSA: Thank you.

And then I just wanted to ask about A&M spending, I guess last year your ad spending was about $280 million, could you help us just quantify how much your spending is going up and if that’s timed particularly on beer around summer, so most of it’s going to happen before the back half?

Rob Sands: Yes. So marketing spend will go up this year versus last year. And in fact we expect it to be a higher percentage of sales as well. And we expect to spend most of it in the peak summer season. We are just spending a decent amount of marketing in the first quarter.

And because as we have made a conscious efforts to kind of do our media flights around when the consumer is drinking a lot of beer, right in the summer. And as Rob discussed, we have put some money behind World Cup, put some money behind boxing and we put a decent amount of money to work against major league baseball. So, we do expect marketing to go up this year both in absolute dollars. And as a percentage of sales, I would say roughly speaking, we would expect to spend between 8% to 9% of sales on marketing for the full year. Caroline Levy - CLSA: Thank you.

One more question if I may on Corona Light, do you have any anecdotal actual numbers to share with us on how that push is going on premise and how the brand is doing in markets where you really to get that brewer activity?

Rob Sands: Yes. So we – as you said we have made a concerted effort to push Corona Light through the draft – through draft which through the on-premise and that’s going very well. The consumer is really resonate with the product because it has much higher taste than other light beers, but still has the low alcohol, obviously they have recognized the brand and the retailers will ask pub owners really like it because it’s a higher ring for them right, it’s more expensive core than say a premium light. So that actually – that strategy is going as good or better than we anticipated. And it’s probably not statistically valid yet, but we also feel that in the markets where we are driving Corona Light we also sell more cases of Corona Light.

So we believe that that will go very well. Caroline Levy - CLSA: Thanks so much.

Operator: Our next question comes from the line of Rob Ottenstein with ISI. Rob Ottenstein - ISI: Great. Thank you very much.

As you look at your beer sales can you kind of breakout to the best you can where you see the surprise coming from, is it particular brands, SKUs, areas. And also do you have any data or any information from your guys suggesting where your share gains are coming from is it coming from mainstream light beers, premium beers, any particular brands or is it from some of the Heineken’s Mexican beers, just kind of a sense of where the share gains are coming from please? And then as a follow-up perhaps you could address any plans you may be making now to address the planned launch of Montego yet later in the year?

Rob Sands: Yes. I would say Robert that we are really happy with our growth throughout the country. Now, what I will tell you is that we are doing better in the West Coast as Rob said Modelo Especial is doing a great job growing in markets where it’s highly penetrated already. So our best geographies on a growth wise are the West and the South.

But we are really happy with our growth around the country and we are pretty much gaining share in every space. I’d say that every one of our brands is growing versus prior year. I’d say that Corona, which is very well distributed, continues to grow quite nicely. In the first quarter, it put up some good numbers. Depletion growth was in the low single-digits.

Shipment growth was higher than that, because we had that inventory replenishment. And Modelo Especial continues to grow in the mid single-digits. So, it’s really all going quite well. Rob Ottenstein - ISI: But is the growth coming from other imports like Heineken, is it coming from Coors, Miller, Bud, or is it kind of all of the above?

Rob Sands: Yes, Robert, this is Rob. I would say that it’s really kind of across the board.

It’s kind of hard to say exactly where the share gains are being sourced from, but you can look at our growth and our brands versus pretty much any of the other categories within beer probably with the exception of craft. So, it’s across the board sort of phenomena. And I’d say that if you look at the industry overall, you’ve got Constellation beer, right, which is about the same size as craft and you have got a craft of the whole category, which is about the same size as our beer business. And those two segments are I would say taking share just generally across the board. Rob Ottenstein - ISI: That’s very clear.

And as you think about the expected launch of Montego this fall, anything that you are hearing about that and how are you thinking about preparing your brand strategy and marketing to combat that?

Rob Sands: So, I would say, a couple of things in that regard. First of all, there has been a lot of launches by a lot of companies over the years. And in the recent past and in the distant past of brands that were designed to compete with our portfolio, right. Rob Ottenstein - ISI: Yes.

Rob Sands: You can think of brands like – you can remember all kinds of attempts.

And again, our brands are extremely well established with the consumer. So, I would say we don’t fear competition particularly. And we have seen examples of it many times and we just kind of stick to our knitting and drive our business the way we have been driving in the past which has been a particularly good strategy. Now as it relates to Montego, first of all, it’s not an established brand in Mexico, it’s not known to the Mexican or the Hispanic consumer, it’s just another brand basically. So, it doesn’t pose any particular threat to us that it’s different than anything else that has been done by any of our competitors in the past.

On another note much sort of like the clustered theory of fast food restaurants, why do they all build on the same corner, hopefully, if it experiences some success, it will expand the category for everybody. So, I think it could actually have a positive impact on driving sort of the whole Mexican import category should it be, should it gain any success at all. So, again, we are just not – we are not particularly fussed by one company introducing one brand that might theoretically compete with some of our brands. So, that’s sort of the bottom line. Rob Ottenstein - ISI: Great.

And then just in terms of the upside to your expectations and original budgeting, is that more in Corona Extra and Modelo Especial and any particular SKUs just trying to get a sense where you are doing better than you had expected?

Rob Sands: Yes. Our business is a general proposition, which means all of our beer brands are growing at a faster rate than we would have predicted prior to the beginning of the year. And as I have said in the past this is with the kind of growth that we are experiencing it is difficult to predict if it’s hard to make forecast and to give guidance and to remain reasonable given the market at the same time. So you got to balance all those things. We can’t just make up crazy numbers, so we try to come up with what we think are reasonable numbers.

And then in our own internal planning we also made sure that we plan for the contingency that the business will grow faster than we expect because it’s really little downside in doing that. So don’t confuse, our guidance and our forecasting and our attempt to be reasonable given sort of where the market is with what we are doing from a capacity perspective to ensure that we have sufficient supplies to meet market demand, so two different things. Rob Ottenstein - ISI: Okay great. Thank you very much.

Rob Sands: Thank you.

Operator: Our next question comes from the line of John Faucher with JPMorgan.

Rob Sands: Hi John. John Faucher - JPMorgan: Good morning. Thank you. Just wanted to ask one quick question, well I guess two quick questions about the guidance.

The first is if we look at the order of magnitude of the upside for this quarter not a whole lot extra flowing through, just any comments on that in terms of why the rest of the year maybe isn’t going up a little bit more. And then a clarification on the free cash flow guidance which stated the same, is it simply that with the sales coming in better, higher receivables, higher inventories what have you – is it working capital that’s offsetting the higher net income on the free cash flow guidance? Thanks.

Rob Sands: Yes. So I will let Bob answer the free cash flow. On the guidance for the year as Bob said a number of times second half of the year we are overlapping 13% growth I mean it’s sort of simple as that.

Again we are back to the point I was just previously making which is we can only sort of forecast reasonable numbers and our guidance is based on that and we have a pretty significant overlap in the second half of the year. And we had some pretty easy comps in the first half of the year. So yes, we grew 14% in sales in the first quarter and that was a good result and we are very pleased with that. And as Bob said we expect probably from a sales perspective a pretty strong second quarter because we had a very low sales month – quarter in the second quarter last year with 1% growth and then we overlapped the 13% growth in the second half of the year. So that’s what it translates for the whole year into the low-single digit growth of sales that we have been – that is included in our guidance.

So I would sort of like the fact that we can do at the current moment relative to our guidance for the year. But your crystal ball is as good as ours in many respects.

Bob Ryder: John on the free cash flow it’s the first quarter alright and even if you flow through the after tax impacts of our increased if you call EBIT guidance, we are still within the range that we provided for the full year. So we feel it was worth readdressing it. And we will be readdressing it as the year goes on.

But we thought it’s only the first quarter, so let’s see how the year comes out and we are still within the free cash flow range. John Faucher - JPMorgan: Okay, thanks. And then one clarification that the wine benefit having you guys said that was 75 to 100 basis points and that’s a total company gross margin is that right, that’s how we should back into that number?

Rob Sands: It’s just still wine gross margin. John Faucher - JPMorgan: It’s wine gross margin. Okay, thank you very much.

Operator: Our next question comes from the line of Ryan Gallant with Goldman Sachs. Ryan Gallant -

Goldman Sachs: Thanks for taking the question. Just had a quick one, how are you planning to address your debt that’s coming due this year? Do you think you will have to approach the market for that?

Bob Ryder: Yes, we can’t wait to payoff that 8 3/8% note. So, we currently have the flexibility, we are in good position to do what we want to, right. We can use our revolver, which would give us very positive arbitrage, because our securitization facilities are LIBOR plus 90 and the revolver is LIBOR plus 175, which is quite a bit less than the 8 3/8% notes, right or I think we can do this at any point in the year, right, if we would like to secure some longer term financing albeit at a higher rate than the securitization or the revolver.

We could also do that. So, we are kind of keeping our powder dry around that to see how the markets behave, how rates are, and how we feel our future free cash flow needs will be. Ryan Gallant -

Goldman Sachs: Got it. That’s all I have. Thanks.

Operator: Our next question comes from the line of Lauren Torres with HSBC. Lauren Torres - HSBC: Good morning, everyone. Just a follow-up on beer and specifically the Corona brand, I think in one of your responses to a question you said that depletions of the Corona brand were up low single-digits in the quarter, just curious to get your perspective on the pricing or the ability to price on this brand, it seems like there hasn’t been aggressive pricing or at least there has been some pullback in pricing. So, I was just trying to get the correlation here, if you feel there is more room on pricing on the Corona brand, do you think that low single-digit growth rate is still achievable or you feel is pricing on that brand, you can’t press it that hard that you will see some pushback on the volume side?

Rob Sands: Yes, I mean, first of all, where we priced for this year is sort of fairly well-known in that low single-digit range of around 2%. And then as far as our pricing trends go for the future, it’s really a function of what occurs in the marketplace, which obviously we watch very carefully and what occurs on a market-by-market basis.

So, right now, I would say it’s difficult for us to comment on what will happen relative to our pricing in the future, because we simply don’t know what is going to occur in the rest of the markets. So, we will have to wait and see. We take a very strategic position relative to pricing. We do it market-by-market, brand-by-brand. And we do it largely on a reactive basis.

So, we will see what happens. We can’t really tell you right now. Lauren Torres - HSBC: But Rob, what are you seeing now though, I mean from a competitive standpoint, is there within the import category and who you consider your peers, has there been very little or no pricing in the category?

Rob Sands: No. I would say that you can look in the category, you can look in IRI, and there has been about low single-digit pricing. That’s been the case.

There has no suggestion of anything other than that.

Bob Ryder: It’s been the case for two or three years.

Rob Sands: Right. Lauren Torres - HSBC: Okay.

Rob Sands: So, we don’t see anything different right now.

Lauren Torres - HSBC: Okay. So, that’s more or less sustainable rate of pricing you see going forward?

Rob Sands: Well, we are not commenting on the sustainability of anything going forward. As I said, we judge that more on a real-time basis. So, don’t know. Lauren Torres - HSBC: Okay, alright.

Understood. Thanks.

Rob Sands: Thanks.

Operator: And our final question comes from the line of Brett Cooper with Consumer Edge Research. Brett Cooper - Consumer

Edge Research: Good morning guys.

Two questions. The first getting back to the planning question, I mean, given the fact that you guys are guiding to high single-digits depletions growth, I mean it would appear that if you kind of trace this forward, you guys – when you guys open the additional capacity on a brewery that you are going to be close to that capacity given the trends we are seeing in the market. So, what I guess other things are you thinking about in order to make sure that you have the capacity to fulfill the market as we get three years out or so?

Rob Sands: Yes. Like any business that’s growing at the rate that we are growing, well, we will have to be capacity planning well in advance of the growth to ensure that we have the capacity that’s necessary to meet the market demand. So that’s what we are going to do.

Brett Cooper - Consumer

Edge Research: Okay, alright. And then a modeling question on the wine business, I mean did you guys expect depletions to be down 2%. And I guess what I am trying to drive out is if I back out shipments relative to depletions, it would seem that shipments trail depletions by 300,000 cases or so. I mean is that the level of inventory you were expecting or the inventory reduction that you were expecting?

Bob Ryder: Shipments and depletions were about the same number for the quarter, but when you look at growth, it gets odd, because then your year-over-year, but it was very – it was somewhat of a confusing quarter for wine because of the prior year shipment depletion, prior year mix compared to this year’s mix and the reduction in distributor inventory. So, I don’t blame you for scratching your head a little bit on that, but for the full year shipments will equal depletions for the wine category and there might be some quarterly ups and downs as the distributors do what they have to do to move the product.

Brett Cooper - Consumer

Edge Research: So, depletions and shipments will match despite the fact that there was a wholesaler or whatever, wholesaler that reduced inventory, is that right?

Bob Ryder: No, it’s just for the full year it won’t be all that material to the shipments depletions, right. For the quarter, it was, but for the full year, it won’t be. Brett Cooper - Consumer

Edge Research: And then so it’s fair to assume that for the next three quarters or the last three quarters of the year, the numbers for shipments and depletions should be roughly in line, is that fair?

Bob Ryder: No. What I will say is I can’t tell you what’s going to happen for quarter, but I can tell you for the full year, shipments will pretty much equal depletions. Now, to your point, the distributor inventory reduction obviously, they continued to deplete, but we didn’t shift right, which was material for the quarter, but it won’t be that noticeable for the full year.

And the quarter numbers can get a little anomalous, because you just have third-parties doing what they have to do to fill consumer demand. Brett Cooper - Consumer

Edge Research: Okay, perfect. Thanks guys.

Operator: And that was our final question. I’d now like to turn the floor back over to Rob Sands for any additional or closing remarks.

Rob Sands: Yes, thanks everyone for joining our call today. We are really pleased with our quarterly results and we have had a great start to the year. The team plans to continue to capitalize on the tremendous momentum that we have underway in the beer business to drive growth and enhanced financial performance. From a wine and spirits perspective, we are gaining traction and are on track to achieve our goals for the year. And I hope you have the opportunity to enjoy some of our fine products, especially the SVEDKA Stars & Stripes during the 4th of July holiday later this week.

So again, thank you everybody for participating in our call today.

Operator: Thank you. This concludes today’s conference call. You may now disconnect.