Executives: Patty Yahn-Urlaub - VP, IR Rob Sands - President and CEO Bob Ryder - EVP and

CFO
Analysts: Nik Modi - RBC Capital Markets Bryan Spillane - Bank of America/Merrill Lynch Dara Mohsenian - Morgan Stanley Judy Hong - Goldman Sachs Tim Ramey - Pivotal Research Mark Swartzberg - Stifel Nicolaus Caroline Levy – CLSA Bill Chappell – SunTrust Robert Ottenstein – Evercore Vivien Azer - Cowen and Company Wendy Nicholson -

Citigroup
Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Constellation Brands’ Third 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 will now turn the call over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead. Patty Yahn-Urlaub: Thank you, Lorie. Good morning everyone, and welcome to Constellation’s third quarter fiscal 2015 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 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.

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 releases and Constellation’s SEC filings. And now I’d like to turn the call over to Rob.

Rob Sands: Thanks, Patty.

And good morning and Happy New Year to everyone. Hope everybody got a chance to enjoy some of our great products over the holiday with their family and friends. Welcome to our discussion of Constellation’s third quarter fiscal 2015 sales and earnings results. Before we get started with the review of the quarter, I believe it's worth noting that we posted another year of exceptional stock price performance with Constellation stock increasing almost 40% for calendar year 2014. Now this is the third consecutive year that Constellation was one of the best performing stocks in the S&P 500 Consumer Staples Index.

Our stock price has been on fire, increasing almost 400% during the three-year time horizon beginning in calendar 2012. This tremendous stock price appreciation is being driven primarily by our beer business which has incredible momentum and we believe strong potential for future growth. And we’re making smart investments now to ensure that we have the quality, capacity, control and flexibility to help us meet demand for our iconic beer brands well into the future. In addition to our on-going brewery expansion in Nava, Mexico, we recently began implementing our multifaceted glass sourcing strategy which includes the acquisition of ABI’s state-of-the-art glass plant which is located adjacent to our Nava brewery. The formation of

a 50:50 joint venture with Owens-Illinois, the world's leading glass container producer to own, operate and expand the Nava glass plant, and the execution of a glass supply agreement with Mexican glass manufacturer Vitro, which will begin to ramp up glass supply in fiscal 2016.

Overall we believe this comprehensive sourcing strategy provides an optimal solution for this essential component of our beer production process. Our third quarter beer results are evidence of the great momentum we are currently experiencing for the business, as we achieved depletion growth of 8% with strong underlying sales growth. These results are some of the best in the industry. In fact, Constellation’s beer business generated the vast majority of total U.S. industry volume growth in IRI channels during the third quarter.

We’re growing both volume and dollar share of the industry at a time when overall beer growth is lackluster for the U.S. beer market. Our entire Mexican portfolio, including Corona Light, Pacifico, Negra Modelo and Victoria are all delivering strong growth, which is leading to record sales results brand by brand across the entire business. Corona Extra continues to dominate as the number one imported beer in the U.S., selling greater than 50 million more cases than the next closest import competitor and growing at the highest trend rate in years. These results are being driven by distribution growth, velocity gains and incremental marketing support, including the general market and Hispanic Find Your Beach and Epic Moments advertising campaigns as well as the return of the O' Tannenbaum spot on English and Spanish language TV during the holiday season.

Modelo Especial continues to perform beyond expectations and is expected to soon surpass Heineken across all channels as the number two imported beer in the U.S. Continued investment in national Hispanic TV helped propel the continued growth of this brand, which posted consumer retail take away volume trends of more than 20% in IRI channels during the quarter. Corona Light posted solid growth during the quarter driven by the continued success of Corona Light draft which entered three new markets as well as increased distribution for bottles and cans. Ongoing marketing support featured national football retail promotions which helped merchandise the draft format in the on-premise channel during football season. Overall the strong shipment volumes that the beer business generated in the third quarter are the primary driver of the upward revision to Constellation’s overall EPS guidance for fiscal 2015.

Keep in mind the distributors also increased their inventory levels during the quarter in order to return them to more historical levels as well as to support the ongoing growth opportunities for our product portfolio going forward. As a result, the second time this year we are increasing our fiscal 2015 forecast for the beer business and now expect beer sales to grow in the low teen range with operating profit growth of mid to high teens. From a brewery and operational perspective, all areas of brewery expansion are well underway with the project expansion on schedule from both a timing and budget perspective. Our second can line which was installed in late summer has become operational and is expected to significantly supplement our can product availability as we continue to pursue this market opportunity. Major structural steel erection for the packaging building was completed on schedule in mid-December and the remaining beer tanks were installed in the brewhouse in late November.

We initiated investment activity for the recently announced 5 million hectoliter capacity expansion and we have progressed with rail logistics and site infrastructure additions resulting from this incremental capacity expansion. Finally, the glass joint venture has ordered materials for the construction of the next glass furnace to be built on-site at the newly acquired factory. Overall I am very pleased with the outstanding commercial and operational performance of the beer business. This has been driven by the dedicated efforts of our sales marketing and operations teams as well as our distributors who are collectively working together to deliver winning results. And now I would like to focus on operational results for our wine and spirits business.

During the third quarter, we achieved EBIT growth for the wine and spirits segment that is expected to drive results for the year at the upper end of the low to mid single digit guidance range that we previously provided. Our spirits business performed exceptionally well, posting sales growth of more than 25%. We began integrating the Casa Noble tequila brand into our portfolio and the brand is quickly gaining traction and beginning to contribute to our spirits business. The super premium tequila is a fantastic fit with our business and helps us to attract new consumers as tequila and Mexican beer share similar drinking occasions both on and off premise. We experienced excellent sales growth for our existing spirits brands during the third quarter driven by new flavor line extensions across our portfolio, including SVEDKA Mango, Pineapple and Strawberry Lemonade as well as the recent introduction of Paul Masson Grande Amber Brandy Peach flavor.

In addition, we gained IRI volume and dollar share of the three spirits categories that represent our market participation, including imported vodka, Canadian whiskey and brandy. From a wine perspective, outside the U.S., our Canadian business posted solid third-quarter results although our international business was negatively impacted by a decline in bulk wine sales and economic disruption in Eastern Europe. In the U.S., although the U.S. wine industry remains healthy overall, we have seen a bit of a slowdown in the market growth rates we anticipated when we set our original estimates earlier this year. Thus our third-quarter U.S.

wine results did not meet our growth expectations. In addition, the positive mix trends that we anticipated earlier this year have not reached targeted levels as our premium priced products are growing faster than our super premium and above products. This has resulted in U.S. market share dollar erosion especially in the super premium price segment which remains highly competitive and currently generates much of the U.S. wine category growth.

However we have gained share in the important premium and ultra-premium price segments of the market and we are working diligently to ensure our portfolio remains relevant and top of mind to consumers in all key price segments. For example, the wine consumers’ willingness to experiment with new brands and flavors over the last several years has opened a key opportunity for innovation and new product development. And although our recent new product development initiatives have seen mixed results, we remain committed to innovation and have launched an enterprise-wide product development process review to improve our results in this area and increase the success rate of our new product pipeline. In addition, we are currently initiating or expanding product releases in the U.S. for new wine such as PopCrush, Tom Gore Vineyards, Jail Break, Watchdog Rock and early lunch results for these brands are quite positive.

We know however that the success of innovation cannot come at the expense of the health of our established brands. As such we have plans in place to concentrate our efforts on an important subset of our focus brands in order to drive key brands that are mix and margin accretive, have scale and growth momentum. Although our U.S. wine business is not expected to achieve its expected market dollar share goals for the year as we are falling short of our initial expectations for volumes and depletions, we believe the hard work and significant accomplishments we have made throughout the last few years have favorably positioned the business going forward. We have negotiated the majority of our exclusive U.S.

distributor arrangements which include improved performance metrics and incremental incentives that are expected to benefit Constellation and enhance wholesaler and retail execution. We continue to experience solid depletion growth for a number of our fast-growing wine brands, including Kim Crawford, Ruffino, Black Box and The Dreaming Tree. And I would be remiss if I did not highlight recent awards and accolades for some of our key wine brands. Market Watch magazine recently awarded the Best New Wine Product of 2014 honor to Thorny Rose. Constellation Brands received 24 medals across the portfolio at the 2014 Sommelier Challenge International Wine competition.

Inniskillin Vidal 2012 reached the 99 point score, and Wine of The Year while Ruffino received seven medals, including best in class distinction and 96 points for the 2011 Ruffino Modus. Woodbridge by Robert Mondavi was featured in the Best Buy section of the November issue of Wine Enthusiast Buying Guide, while Robert Mondavi Napa Valley Cabernet and Robert Mondavi 2012 Pinot Noir Reserve both received 90 point scores. These awards and accolades are a great reminder of the exceptional quality and strength in our portfolio of lines. In closing, the strong commercial and operational performance of our beer business is driving significant contributions to our overall sales, profit and cash flow results. We are working diligently on the Nava brewery expansion in Mexico and we’ve begun to execute our new glass sourcing arrangements while maintaining the strong momentum of the beer commercial business.

We have a great premium wine business and plans are in place to work through the current set of challenges we are facing. And I'm especially gratified by the fact that Constellation was one of the best performing S&P 500 Consumer Staples stocks for the third consecutive year. Now I'd like to turn the call over to Bob for a financial discussion of our third quarter results.

Bob Ryder: Thanks, Rob. Good morning everyone.

Our comparable basis diluted EPS for Q3 came in at $1.23. That’s a 12% increase versus Q3 last year. We continued to see robust marketplace momentum for our beer business with depletion growth of 8%. This result was in line with our 8% depletion growth performance year-to-date and our high single-digit depletion growth target for full year fiscal ’15. As expected, we saw a shift of approximately 2 million cases to wholesalers from the second quarter into the third quarter as a result of the previously discussed Corona Extra recall activities.

This translated into a benefit of about 37 million of net sales and $0.06 of diluted EPS for the quarter. Even after excluding this benefit, beer shipment volume growth came in ahead of depletion growth during Q3 as distributors increased their inventory position during the quarter to be more in line with historical levels and to be better positioned to capture growth opportunities going forward. As a result of this activity, for fiscal ‘15 we now expect beer segment net sales growth to be in the low teens range versus our previous estimate of about 10%. Operating income growth for the beer segment is now expected to approximate 30% for fiscal ’15. When factoring in 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 to high teens range.

We still anticipate the full-year operating income margin for beer to approximate 32%. While net sales performance for wine and spirits was somewhat muted during Q3 for the reasons Rob mentioned earlier, EBIT primarily benefited from lower COGS. For fiscal ‘15 we see net sales for wine and spirits tracking towards the low end of our low to mid single digit range and EBIT at the high end of our low to mid single digit range. Due to the factors just mentioned, we’re increasing our fiscal ‘15 comparable basis EPS outlook to $4.25 to $4.35 a share versus our previous range of $4.10 to $4.25 a share. Our comparable basis guidance excludes unusual items which are detailed in the release.

Given those highlights, let’s look at Q3 performance in more detail where my comments will generally focus on comparable basis financial results. As you can see from our earnings release, consolidated net sales for Q3 grew 7%. Beer net sales increased 16% primarily due to volume growth. Excluding the impact of the recall activity that I outlined earlier, net sales increased 11%. Wine and spirits net sales on a constant currency basis were even with the prior year quarter.

This primarily reflected higher spirits volume, offset by lower wine volume, higher promotional spend and lower bulk wine net sales. For the quarter, consolidated gross profit increased $59 million, primarily due to the higher volume for the beer business and the favorable cost of goods sold for wine and spirits. Our consolidated gross margin increased just over one percentage point to 43.5% for the quarter, primarily due to the favorable COGS and reduced bulk wine sales for the wine and spirits business. SG&A for the quarter increased $18 million. The increase was primarily due to higher SG&A for the beer business.

Due to factors just mentioned, Q3 consolidated operating income increased $40 million and consolidated operating margin improved 90 basis points. Equity earnings increased $3 million due to the strong results for our Opus One joint venture. Interest expense for the quarter was $86 million, down 4% versus Q3 last year. This decrease was primarily due to lower average interest rates. That provides a good spot to discuss our debt position.

At the end of November, our total debt was $7.3 billion. When factoring in cash on hand, our net debt totaled $7.25 billion, an increase of $295 million since the end of fiscal ’14. During Q3, we issued $800 million of senior notes consisting of $400 million of 3.875 notes due 2019 and $400 million of 4.75% notes due 2024. Our strong credit and financial profile combined with the favorable interest rate environment helped us execute this attractive financing activity. Part of the proceeds from the note issuance was used to redeem $500 million of 8.375 notes during the quarter.

We still expect interest expense to be in the range of $345 million to $355 million for fiscal ’15. Our effective tax rate for Q3 came in at 29% and compares to a 28% rate for Q3 last year. We continue to expect that our full-year fiscal ’15 comparable basis tax rate will approximate 30%. Now let's discuss free cash flow which we define as net cash provided by operating activities less CapEx. For the first nine months of fiscal ‘15 we generated $209 million of free cash flow compared to $543 million for the same period last year.

Operating cash flow for the first nine months of the year totaled $750 million versus $629 million for the prior year period. This increase was primarily due to the benefits generated by the beer business. CapEx for the first nine months of fiscal ‘15 totaled $541 million compared to just $86 million last year. CapEx for the beer segment totaled $435 million and is primarily related to the brewery capacity expansion. For fiscal ‘15 we continue to expect free cash flow to be in the range of $275 million to $350 million and CapEx to be in the range of 725 million to 775 million.

Our CapEx projection includes $600 million to $650 million of CapEx for the beer segment. As a reminder, we hedge certain commodities in the energy and agricultural categories. These commodity derivatives generally do not qualify for hedge accounting treatment. As a result, mark-to-market gains and losses on hedged contracts flow through our GAAP income statement. We exclude these mark-to-market gains and losses from our comparable earnings.

At the time that a commodity contract is settled, the gain or loss is allocated to the appropriate business segment for reporting and will be included in our comparable earnings. This approach is in line with others in the consumer space. For Q3 there was a $20 million loss from this activity which was primarily driven by the mark-to-market on diesel fuel contracts. Before we start taking your questions, I’d like to note we're very pleased with how fiscal ‘15 has progressed so far and we believe we are well-positioned as we head toward the completion of another phenomenal year for Constellation. Our wine and spirits business is on track to generate solid EBIT growth for the year while our beer business has tremendous momentum in the marketplace, growing well ahead of the total U.S.

beer category. We’re also pleased to have begun advancing efforts around our beer glass sourcing strategy with the recent formation of the 50-50 joint venture with Owens-Illinois and the JV’s acquisition of the Nava glass plant. In addition, our beer production capacity expansion efforts continue to progress as planned. The glass sourcing and capacity expansion initiatives will position us to support the momentum and significant growth opportunity we see for our beer segment. With that, we’re happy to take your questions.

Operator: [Operator Instructions] Your first question comes from the line of Nik Modi of RBC Capital Markets. Nik Modi : So two questions from me. Just on the wine side, you had really good margin expansion. Obviously volumes were a bit light, and I am just curious did you make a concerted decision to really prioritize margin of a volume, is that what we should expect kind of over the next 12 to 24 months? And then the last question is just, if you can give us some updated thoughts on debt to EBITDA continues to migrate towards your target, how we should be thinking about cash flow distribution to shareholders?

Bob Ryder: Sure. As you saw we did have good beer margin – I am sorry, wine margin performance in the quarter and we expect that to continue for the full year.

As you know, we just changed our guidance to be at the low end of sales growth and high end of EBIT growth which means that we will see margin expansion this year. On a long-term basis, we still expect the line segment to maintain margins. I think there were some positive outcomes this year mostly around cost of goods sold which are really helping recover margins from the last few years’ erosion. But I wouldn’t expect big margin expansion in the wine segment going forward. But we do expect to at least maintain margins.

And I think around EBITDA and free cash flow, we continue to -- as you know, we’re spending a ton of money in the beer segment which we're quite happy to do because return on capital in that segment is north of 40%. So it’s a very quick payback and the EBITDA growth of the total company will be growing well in excess of the capital spending growth, even though capital spending is going up so much and again a lot of that's driven by the beer segment the phenomenal EBITDA growth there. So I think in line with what we've been saying over the last two years, as we have pretty good visibility to getting our EBITDA leverage below four times, I would say that the number one agenda item for use of free cash flow is returning it to shareholders and probably at the top of that list would be an initiation of a dividend. We’re one of the few people certainly with our financial profile and in beverage alcohol and consumers in general -- consumer products in general they don't have a dividend and we’re quite confident that this really good free cash flow generation will continue. So wee will probably be looking for dividend in the very near future.

Nik Modi : And just real quick follow-up on that dividend point. When you think about the initiation, are you thinking about something nominal to begin with or do you think you can go closer to the payout ratio of your peers from the get-go just given the free cash flow generation of the company?

Bob Ryder: Yes, we’re still studying it. We are taking some good outside advice. But I would probably expect us to start on the lower side in order to give us a lot of room for increases. But we will look at the normal things like payout ratios, and because we expect our EBITDA to grow mostly behind beer to grow so robustly over the next few years, right, if you kind of set a payout ratio and your net income keeps going up we should have room to increase it.

But we probably start out at the lower end.

Operator: Your next question comes from the line of Bryan Spillane of Bank of America. Bryan Spillane : I’ve got two questions. One, just, I think in your prepared remarks when you walked through the commentary on the mark-to-market activity you referenced there was $20 million loss relative to that activity in the quarter. Was that $20 million included in the results or was it excluded from the result?

Bob Ryder: The $20 million was included in the GAAP results but we excluded from comparable earnings.

And the reason we do this, when we – none of our commodity hedges qualify for hedge accounting and we are hedging three years out. So you would see a lot of volatility in a quarter because you’d be marking to market almost 3 years of hedges every quarter, right? So we’re kind of putting that stuff in non-comparable earnings. It’s still in the press release, so you can see it. But we think it would kind of confuse the financial statement reader if we saw that in comparable results every quarter. And this quarter not surprisingly because of the rapid fall in fuel prices when we marked to market our diesel hedges there were losses and was about $20 million for the quarter.

Bryan Spillane : But by the time those hedges get settled at some point in the future if things don't change that settled hedge, will that somehow – could that potentially drag margins at some point in the future because it’s so far out of the money or –

Bob Ryder: Yes, absolutely. So sorry, I might have missed out last point. We will bring the gains or losses on these hedge contracts into comparable earnings when the contracts are settled. So to your point if diesel fuel prices don't change, this $20 million loss will come into the comparable results and we will allocate it to the individual segments based on their usage of fuel and because there's a lot more cases the majority of our fuel hedges are for the beer segment, although there are some for the wine segment as well.
Bryan Spillane : And then just a second question related to foreign exchange.

The dollar has strengthened relative to the peso pretty recently, and I guess I am curious to know, you have some peso denominated costs both in your capital spending, I am assuming some of the labor associated with the construction on the Nava brewery and also in your cost of goods sold in the beer business, I'm assuming there’s some peso related costs, or denominated costs in your cost of goods sold. So can you talk about if the dollar would continue to remain strong relative to the peso or continue to strengthen relative to the peso, will it have a positive effect both on what your dollar cash cost outlays are for Nava, and also will it have any impact at all on the gross profits of the beer business?

Bob Ryder: So good question. So in the beer segment and look, in the grand scheme of things we're very much a North American business and actually very much a US business and in the grand scheme of things we are a net importer. So a strong dollar will help us in the grand scheme of things. Now as you can see this quarter from a translation perspective there's some hurt because the Canadian dollar is devaluing versus the US dollar.

So we translate Canadian earnings, that was about a 1% hurt to our sales. On the peso specifically, our peso exposed costs are as you said Mexican labor, which is an enormous piece of our total cost of goods sold. But it's a relatively large piece and also as we spend capital, those capital costs by and large get capitalized in pesos. So the depreciation on those will also be exposed to foreign exchange, although that’s not necessarily cash because it's depreciation. So net, net the strong dollar will help us versus a Mexican import cost.

That also being said we do hedge our transaction currencies. So we aren't 100% exposed to those peso costs because we will have some hedges going out. But net, net a strong dollar versus the peso helps us.

Operator: Your next question comes from the line of Dara Mohsenian of Morgan Stanley. Dara Mohsenian : So I wanted to get an update on growth for the draft and can portions of your business in the quarter, and also what you think the cannibalization levels are in the remainder of your business from expansion in those two areas, or if draft is even additive to your business? And also, can you give us an update on the future plans in draft and extending additional brands into that segment, whether it's Corona Light or other brands, in terms of moving into more markets with Corona Light?

Rob Sands: Yes, Dara, number one, we have seen very strong growth in our draft business, about 40% growth and we’ve actually seen very little cannibalization with the draft business.

We’ve introduced it with brands like Corona Light and in actuality not only is there not cannibalization but when we put Corona Light draft in a on-premise establishment we tend to see a pickup in the bottle or can product in the area around it, because it's really marketing. So we've expanded our Corona Light draft into, for instance, three new markets and we've also been testing Corona in draft as well and are again having extremely positive results seeing you almost no cannibalization of our glass product when we put draft in, although we’re being very careful about that because we want to fully understand what the impact is. Cans, same thing, great can growth, great can opportunity, represents obviously a very large portion of the market that we haven't participated in. Cans are purchased for consumption in cases where glass can't necessarily be used, boats, beach, stadiums etc. and so that also represents a purchase opportunity that largely does not result in cannibalization for us.

So these package additions are definitely driving growth in the overall beer business.
Dara Mohsenian : And then also can you discuss distribution expansion potential for the Modelo Especial brand, including where you currently stand from a distribution standpoint, your expectations for calendar 2015 versus the level of expansion you saw in calendar 2014, so is it continuing with the same pace or accelerating, decelerating? And then also just longer-term where you think the brand’s distribution level can get to versus Corona or other brands in the industry?

Rob Sands: So first of all, Modelo Especial has a huge runway for growth. Right now we’re at about – on IRI terms 60% ACV and that certainly does not represent full distribution in any regard. The products still skews from a demographic point of view, extremely heavily Hispanic, even though its penetration in the Hispanic population isn’t even where we would like it to be and where it could potentially be. So there's a huge runway in the Hispanic market and in the general market is very wide open for Modelo Especial and driving distribution and pods are one of our key initiatives on that brand.

So and it’s going extremely successfully. We’ve introduced this year -- because the brand is expanding into the general market now so well we’ve introduced general market television advertising which we think is going to even further accelerate the growth of this product. So the growth runway on this brand is tremendous and we don't really see any diminishment in growth rates or increases in penetration -- exactly where it's going to get to, I mean fully distributed product is usually around, I don’t know, 90% ACV. So exactly when we get there, I don't know but we’re going to work to get there and we have everything going in our favor. So the ability to increased distribution and as well as the ability to see velocity per point of distribution increase.

So all these things are going to contribute to Modelo Especial, continuing to be really the hottest major beer brand in the market of any significance. There's really nothing of that size that’s growing like Modelo Especial and just even anecdotally as you start, go around see what people are drinking, I mean you're seeing all of a sudden Modelo Especial becoming a popular product in the general market as well as in the Hispanic market.

Operator: Your next question comes from the line of Judy Hong of Goldman Sachs. Judy Hong : A few questions. First, Bob, on the new sales guidance for beer, I just wanted to clarify that, that change is really all related to the shipment outperforming versus depletion in the third quarter and you're not expecting any sort of acceleration in terms of depletion growth going forward.

And on that note, would you expect to see some improvement with gas prices down and you’ve got a lot of growth initiatives behind your broader portfolio on beer?

Bob Ryder: So the increase in beer is –because depletions are pretty much within our guidance, right, of like high single digits and actually depletion growth has been very consistent. The impressive thing is there is sequential improvement because Q3 and Q4 is overlapping higher growth last year. So we’re very happy with the top line. The reason for the increase in guidance is more so around the net sales increase and a lot of that is driven by the distributors bringing inventories back in line with historical levels. Regarding the economy, hey, look, any time the consumer has more money in their pocket, it's better for consumer product companies.

Now whether we benefit more than other companies, I am not sure but it's certainly better to have more money in consumers’ pockets than less.
Judy Hong : And just on that note, just the divergence in terms of maybe the category performance where wine perhaps was sequentially a little bit weaker from a category level even with the consumer getting better, do you have any sense of what's driving some of the category softness in wine?

Rob Sands: The category is off a little bit. It still remains quite healthy. There could be a number of factors that are contributing to that. Last year Moscato and red blends were growing at extremely rapid rates as consumers experimented, I’ll say, with the new products.

This year those products are still growing very well but not at the rate that they were and not that this affects us particularly but there has been a lot of pricing being taken in the below five dollar commodity segment of the wine business, the popular price and that's turned into pretty heavy negative territories. So I think that that's driving the overall market down, maybe 100 basis points or something to that effect. It’s still trending pretty much sort of consistently plus or minus 100 basis points with where it’s trended historically over the long-term. So but it is a little slower than we anticipated.
Judy Hong : And then my last question, Bob, I have to ask a beer margin question.

So 31.5%, very good margin but it was down a little bit versus last year. So was it all just related to the SG&A step-up and was gross margin actually relatively stable? And just the phasing of the new glass contract flowing through your cost, there is a timing of it because you have now the Vitro arrangement that started in October but it sounds like that’s not going to really flow through until fiscal ’16. So any color just in terms of the phasing of how each of those contracts will start to really flow through your P&L would be very helpful?

Bob Ryder: So Judy, we would all be disappointed if you didn't ask a beer margin question. So thank you for restoring our faith. So I would say gross margin for the wine business was pretty consistent year-over-year.

So yes, the majority of the reduction in operating margin was due to our SG&A ramp up -- beer was due to our SG&A ramp up. As we get off our transition services agreement we start stepping up in beer segment. We are maintaining the 32% operating profit margin for the beer segment for the year. So this is in line with what we expected. Regarding the glass contracts, they really won’t start to impact us until next fiscal year and even then the big impact is when we get our own furnaces up and when we get our own production up.

So I wouldn't expect glass to have an enormous impact on margins in fiscal ‘16 either. It's more a longer dated than that.

Operator: Your next question comes from the line of Tim Ramey of Pivotal Research Group. Tim Ramey : Did you say how long the diesel hedges were? When should we be thinking about seeing an EBIT positive impact coming through for lower fuel?

Bob Ryder: Well, it’s a combination of things. And we don't hedge a 100%, so and we hedge, I will say, a smaller percent of our exposure in outer years.

So we would hedge the most in the next 12 months and then month 12 to 24 will be lower percentage. So we will benefit for the unhedged piece, so we will benefit from that, right, because we’re pretty much paying the spot rate. The negative is the mark to market on the hedges and when those hedges get closed out, we will see that loss in our comparable earnings.
Tim Ramey : And then on the net debt to EBITDA, the way I do the math it looks like – yes, it might reach 4.0 times in the 4Q. I know your previous guidance has been below that by ‘16 and so maybe we’re splitting hairs here.

Are we a little ahead of the curve?

Bob Ryder: I think we’re pretty much where we expected. We’d expect to be right around that 4.0 range at the end of the year. And you’d have to see how our free cash flow comes in which we of course haven’t even finished our plan next year but a lot of that will be dependent upon what quarter we spend a lot of the beer capital. But probably my guess is a lot of our deleveraging will occur in the back half of next year but we would expect to be below four times in fiscal ’16, by the end of fiscal ’16. And as our planning process comes through, we will get better visibility to it by quarter.

Tim Ramey : And is that number kind of magical relative to the dividend discussion, maybe not for a covenant reason but just from management's mindset reason?

Bob Ryder: We’ve kind of made it magic I guess. Look, in all these discussions there's a lot of variables but we have to pick kind of one coefficient in the equation of fixed and what we’ve said is it’s the EBITDA leverage. And we’ve said we will begin reassessing returning cash to shareholders, because as you know we’ve been one of the more aggressive people in our space but we’ve done it exclusively through stock buybacks, when we bought back about 20% of our shares, under 20 bucks a share. We still have 750 million available under our board authorization. But I think what we have said now, since a lot has happened since we stopped our – since we put the stock buyback program on hiatus, that dividend will now trump stock buyback.

And what we’ve said is when we have really good visibility to getting below four times and staying there, that's when we start assessing the dividend and as we’ve all said that looks like it will be in fiscal ’16. So we’ll probably be talking about it for our fiscal ‘16 guidance.

Operator: Your next question comes from the line of Mark Swartzberg of Stifel Financial. Mark Swartzberg : I guess two wine questions. One is the COGS benefit you got in the quarter, do you think that that kind of trend is something we should be looking for going forward? I think in the Q&A here you’ve said that on an operating margin basis, you expect wine margins to remain relatively stable beyond the next few months.

And then secondly, as you look at your wine share outlook which is a little below where it had been, how are you thinking about addressing those share trends? Are you okay with underperforming the category? Do you intend to spend more to try to pick up those trends? Just help us with your thinking there.

Bob Ryder: So I will take the first half of that, Mark, and I will let Rob handle the second half. So on COGS I would say that there's probably some anomalous activities in fiscal ’15, I wouldn’t expect that to continue. Now what I would expect -- as I said earlier I would expect margins in wine to be higher at the end of fiscal ‘15 than they were at the end of fiscal ’14. We’re not giving guidance for fiscal ‘16 but I wouldn’t anticipate a lot of margin expansion going forward.

The wine market share question?

Rob Sands: Yeah, I think consistent with what Bob just said, no, we don't like losing a small amount -- even a small amount of market share and we have a lot of plans in place around innovation, around NPV, around concentrating our spend against higher growth elements of our portfolio which we think will address that. Largely however without spending a lot more money and I think consistent with what Bob said, also important is that we maintain wine margins, we don’t want to see deterioration in that segment of the business either. So we will implement basically plans and programs that will drive the top line but not necessarily increase spending and therefore hurt margins. So we intend to take a balanced approach in that regard but we definitely don't like and don't want to lose share. Now if you look at our wine, spirits segment, okay, first of all, spirits is performing extremely well, above our expectations and that's a real positive in the business and we’re looking at that segment of the business for further investment obviously because it’s performing so well for us at the current time.

And on the wine side, we had a couple of, I’d say, somewhat anomalous things that had impacted us. For instance, Eastern Europe impacted us to some degree this year. Even though it’s not a very significant piece of our business, it was just soft. That geography was so devastated by everything that happened, we lost some sales in Eastern Europe. We also exited some bulk wine related to the international market which did affect the top line but really didn’t have any effect on the bottom line because it’s just commodity bulk wine business and it was business that frankly just don't even want to continue doing and that affected the top line a bit.

And then in the US, we did take some pricing on some of our low-end products that impacted things on the top line but obviously contributed to our bottom line growth. And then as far as our promotional activity goes, we expect that we will be holding that flat pretty much this year. We didn't expect that to have much of an impact. It probably had a little bit of an impact but again on trying to keep a balanced approach to both the top line and the bottom line, I think that it's worked out pretty well. So all that said, we would like to hold market share, if not grow it but we’re going to keep a balanced approach to growing both the top line and the bottom line.

Mark Swartzberg : And if I could ask one quick follow-up on the cash return thinking, Bob –

Bob Ryder: And by the way, just on that note, I am reminded that we did have a pretty significant negative translation impact in Canada due to currency but as you are well aware that is largely accounting as a consequence of the strong dollar and the weak Canadian dollar, and that business being a largely domestic business.
Mark Swartzberg : And maybe this is a follow up for Patty or Bob, and on that, Rob, if we take Canada and we take Eastern Europe, we take the bulk wine, can you put those together and tell us some sort of overall, if you will, temporary revenue adverse impact?

Bob Ryder: You know, forex was worth about a percent, international was worth about a percent. So that would turn wine I guess from a negative 4 to a negative 2.
Mark Swartzberg : And what about the bulk wine impact?

Bob Ryder: That was probably less than a percent. Mark Swartzberg : And then on cash return, you’ve said just now to Tim, outlook for – the guide for fiscal ‘16 for clarity on your dividend intentions, could we think about the fiscal ’16 view as a more total view on cash return, including any potential for repo?

Bob Ryder: We’re still assessing that, Mark.

So we will talk about -- more about that in April.

Operator: Your next question comes from Caroline Levy of CLSA. Caroline Levy : Two questions. One is pricing in beer; were you able to get pricing to cover the increased costs that you get with that inflation pricing from ABI when they sell you product? That’s the first question. How does pricing look right now for you and for the rest of the industry as best you can tell? And secondly, what happened to advertising and marketing spend in the quarter? Was it up or down for both segment if you could just highlight that? I am wondering as you go to fourth quarter for marketing, what activity you’d have around NFL because I guess the big brands do a lot around SuperBowl.

So would that affect the trend of this 8% depletions, the fact that you are heading into a time of heavy big brand marketing?

Bob Ryder: So on beer pricing as we talked most of the category pricing happens happens in the fall and I think that, that pretty much progressed on plan. We aren't necessarily correlating pricing to our ABI inflation. We’re at a higher level there. And you can see what's happening in the category in pricing if you look at IRI, if you look at Nielsen, regarding marketing, there’s some timing. So beer marketing is up every quarter, it's up year-over-year.

For this quarter, marketing as a percentage of sales in beer probably came down. That being said, to your point, we are – NFL is one of our heaviest properties for advertising. So we would expect that to ramp up in the fourth quarter and we expect marketing as a percentage of sales in beer for the full year to be up but we feel that that more than pays for itself as you can see with the results on the top line. For wine and spirits, we’re also increasing marketing. In the third quarter we increased it and we expect to increase it again in the fourth quarter, as Rob said mostly around our already successful focus brands, really slimmed-down version of focus brands like Kim Crawford, Mark West, brands like that, that have been very successful and we’ve seen positive response and we feel that there's a pretty good payoff for increasing marketing against those brands.

So we are continuing to invest in our brands, we’re just working right. I mean certainly in beer we’re growing well ahead of the category and wine didn’t have the greatest quarter. But we're still investing in the brands and those brands have had very good results and have responded pretty well to the marketing investments.
Caroline Levy : Do you have a number on the beer side for what base Corona grew, your main brand and what on-premise looked like?

Bob Ryder: So Corona has been pretty consistent. Corona Extra has been growing nicely in the low single digits and I'd say as far as channels, the total on premise for beer has -- is negative, it's been shrinking.

But we're gaining share in that channel. I'd say total on-premise we’re growing low single digits as well. All our brands are but a lot of that is Corona. Caroline Levy : Thank you. My final question is on margins.

The decline we saw in Crown in the third quarter was high SG&A. That doesn’t seem like that would get smaller, that’s going to ramp up as you get more independent. And until your glass costs begin to offset that, which is maybe a year out, should we then expect to the flattish margins in beer for a period of time?

Bob Ryder: I mean what we've said, this year we’ve given a 32% operating profit guidance which is up about a 100 basis points off last year's, I’ll call it kind of comparable, right, because we had a lot of activity last year, I would – we’re not -- we haven't finished our own internal fiscal ‘16 look but we’ve given guidance for the total beer segment, that will get up in the mid 30%, I would probably expect that to be more backend loaded as the total brewery and the additional furnaces come online more so like fiscal ’17, fiscal ’18 kind of timeframe.

Operator: Your next question comes from the line of Bill Chappell of SunTrust. Bill Chappell : Just a couple of quick questions.

First on the wine side, as you look out to calendar ’15, do you think that you can catch up with the category with kind of the new products, marketing, what have you and do you think the category will rebound? I mean are you seeing other things where we’re kind of maybe at a new normal level for growth?

Rob Sands: The change in growth rate in the category is pretty minor and sort of this is within the range that it can fluctuate up, it could fluctuate down. It’s actually kind of difficult to even know exactly where the category is growing because such a large percentage of it is really not even tracked and is therefore estimated. So when we talk about category growth it's an estimate. And I think that certainly we could see the category rebound to the previous levels of growth because we’re really talking about 100 basis points one way or the other. And then as it relates to us, yes, I think we can catch up.

We’ve got a lot of plans in place and it's really new products and new SKUs, new packaging that's one avenue that I think that will be more successful and as we move into next year because a lot of things that we put in place take some time to work albeit this year they were somewhat below our expectations. I think that nevertheless we've done some very positive things that position ourselves well for next year. And then we’ve got a lot of plans relative to our existing big brands and I think will drive growth as we go into next year as well. So yes, I think we can catch up.
Bill Chappell : And then to the beer, just back to the currency question, is there a way just to quantify in the most recent quarter what the peso I guess or what kind of impact it had on beer margin profits?

Bob Ryder: Not really.

That's getting down in the weeds.
Bill Chappell : But was it meaningful or just not something we can disclose?

Bob Ryder: Not tremendously because remember we have a lot of this hedge out.

Operator: Your next question comes from the line of Robert Ottenstein of Evercore. Robert Ottenstein : First question, could you give us a little color on how Pacifico and Victoria are doing, how much were depletions up for those two brands and how the distribution on those look at this point?

Bob Ryder: I mean they are growing, they are gaining share. Specifically Pacifico is our largest draft account and we’re being aggressive on the draft expansion and the marketing and sales guys in beer are very confident around Pacifico, it has enormous distribution opportunity and has a unique brand personality which we’re just beginning to advertise.

So both of those brands we’re growing low to mid single digits and we would expect that to continue into the future.
Robert Ottenstein : And roughly what percentage of -- if Corona is a 100%, what percentage of the accounts at this point have Pacifico and Victoria?

Bob Ryder: Pacifico, maybe if Corona is a 100%, maybe 20%, Victoria half of that. Robert Ottenstein : Half that?

Bob Ryder: Yes, Victoria, for the full year, Victoria we might sell like 2 million case or something but it’s growing very very fast. But we also think that look, right now consumers are very focused on authenticity and Victoria is probably the most -- it's probably the oldest most authentic Mexican brand out there. So we think that will really resonate with consumers as we really start to grow that brand and focus on it.

Robert Ottenstein : And then second question, you may have referenced in the SG&A line to incremental costs as you have to put them on, as you win yourself away from ABI, can you give us a sense of how much those costs were in the quarter? And is that kind of the right run rate going forward or is that going to continue to step up and any sense about how much upside there may be to those numbers if they do have to go up?

Bob Ryder: I would say that -- I would expect that to continue to ramp up because we have to build our own purchasing department, our own engineering department. Even from a commercial perspective you’re going depletions 8%, right, you’re going to have to invest more in your sales infrastructure, your marketing infrastructure. So I would expect those to continue to increase. Now on top of that we also have inflation which was contractual from InBev around our finished goods supply and our raw material supply. So we can’t really give numbers on that but there is a lot of moving pieces but I’d say if we move up in altitude, we still expect our beer segment to get to industry-leading operating profit margins when a lot of these moving pieces sell down.

Robert Ottenstein : And then just final question, I think there was some reference to increased investment in spirits. Is that referring to possible additional acquisitions in the spirits area and perhaps could you give us a sense of what kind of areas that if that's the case would make sense?

Rob Sands: No, we don't have any acquisition plans in the spirits category at the moment. And when I talked about more investments, it was really against our brands that we already have. We do have plans for new line extensions, new flavors etc. and because the spirits business is growing so well that gives us the opportunity to invest more behind the growth in the existing brands.

So that's basically what I was referring to, Robert.

Operator: Your next question comes from the line of Vivien Azer of Cowen and Company. Vivien Azer : My first question has to do with the Modelo brand. You mentioned that it currently has about a 60% ACV in IRI channels. Can you offer a point of comparison and where that was a year ago, or two years ago?

Bob Ryder: Probably it’s been growing mid single digits.

So now what I will say on Modelo Especial, it’s expanding distribution, yes but it's also growing what I’ll call per capita consumption. So in cities, take Los Angeles where it’s very well established with the Hispanic consumer, it continues to grow even where it is. So it's got both, I’ll say per cap consumption opportunity and expansion opportunity.
Vivien Azer : Understood. On the wine side of the business, are there any other opportunities to exit lower margin businesses like you did with the bulk wine?

Rob Sands: There is always opportunities to exit lower profit businesses but I would say that other than our normal SKU rationalization process, we don’t have any big plans for that.

Bob Ryder: We don't have an enormous exposure to the, I’ll say, under $5 at retail, we have maybe two or three significant brands down there and I will say they are a strong part of the portfolio and by and large they have pretty good margin profiles. But if opportunities cropped up, or if we feel that’s the right thing to do we pursue it. But I wouldn’t say we have any huge plans right now to do that.

Rob Sands: And also interestingly enough a lot of our sort of what constitutes that low end portfolio is a lot of our legacy stuff and actually as a consequence has pretty high ROIC as we look at the portfolio. So we factor all that into our decision-making as to whether we’re going to keep going with various things or not even though they may be not a 100% on strategy because there's a premium.

So we’ve got some dessert wines, we’ve got some products that toss your wines that aren’t 100% within our portfolio strategy today but actually represent or generate very high ROIC because of the legacy nature of the products.

Operator: Your final question comes from the line of Wendy Nicholson of Citi Research.
Wendy Nicholson : Hi, thanks for taking the questions, and two really quick ones. The first is, with the integration of the tequila business now behind you, can you remind us what the growth and EBIT margin gap is between spirits versus wine? I'm just wondering if the outsized growth in the spirits business impacts your ability to reinvest in the wine business or works against you? So that's question number one. And then question number two.

You've only got, I guess, six weeks, seven weeks left in the quarter. And so as you go into 2016, I'm wondering -- I know you haven't given us any guidance on the beer business but do you think inventory levels will kind of have trued up and be where they ought to be as you go into 2016 so we ought to have a closer match for depletions versus shipments? That would be helpful. Thanks so much.

Bob Ryder: Sure. So I will handle those, they’re kind of financial – so spirits in total has very similar economics to wine as far as margins.

Tequila specifically for us, now it's very small number of cases, we expect it to grow but it's very small. But it is at the higher price points – it will be by far the highest price point within our spirits portfolio. So it will have a better margin profile but I wouldn’t expect it to move the needle because it is so small in the near-term. And we don't -- we will look at wine and spirits similarly and they both have very healthy margins that can afford reasonable amount of marketing and sales investments against them. If I turn to beer inventories, I’d say we saw a pretty big increase in our distributors’ inventories in the third quarter as they get closer to replenish to historic levels.

We will most likely see that continue into the fourth quarter but we expect them to be at a pretty good back to normal trends by the end of the fourth quarter. So then we would expect as we go forward for more like shipments and depletions to be more in line with each other as we enter fiscal ‘16 and beyond. End of Q&

A
Operator: Thank you. I’ll now turn the call to Rob Sands for any additional or closing remarks.

Rob Sands: Okay.

Well, thanks everybody for joining our call today. Needless to say we are very pleased with our fiscal 2015 year-to-date results. Our beer business has tremendous momentum in the marketplace and continues to gain market share. Our high return investments in beer production capacity position us to support the significant growth of this business. We’re growing EBIT in our wine business and our spirits business gained share across the product portfolio.

And during our next quarterly call which is scheduled in early April, we will provide guidance for our upcoming fiscal year.

Operator: Thank you for participating the Constellation Brands conference call. You may now disconnect.