Ladies and gentlemen, thank you for standing by, and welcome to the Constellation Brands’ Fourth Quarter and Fiscal Year 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, Investor Relations. Please go ahead.

Thank you, Laurie. Good morning, everyone and welcome to Constellation’s fourth quarter and fiscal year end 2014 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. 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.

Thanks, Patty and good morning and welcome to our year end call. Well, it has certainly been another productive and very exciting year at Constellation. It was just about one year ago at this time when we received regulatory approval to proceed with the completion of our most transformational acquisition in the history of our company. As you know, the beer deal has positioned Constellation as the largest multi-category supplier for beer, wine, and spirits. We are not only the third largest total beverage alcohol company in the United States, but the number three brewer and seller of beer for the U.S. market as well as the largest marketer of imported beer. And to reinforce our position as a top-tiered player in this space, we posted the highest dollar sales growth in IRI channels for fiscal 2014 amongst our key competitors in the total beverage alcohol category. Our fiscal 2014 results are a testament to the significant contribution that our beer business is making as we had an exceptional year posting sales, profits and cash flow that were better than our expectations for both the Crown commercial business and our new brewery in Nava, Mexico. The beer segment generated sales growth of 10% with corresponding depletion growth of nearly 8%, which represents a significant outperformance of the import category and the overall U.S. beer market. As a matter of fact, in fiscal 2014, our beer business accounted for 85% of total import category dollar sales growth and gained more than 50 basis points of market share of the U.S. beer industry in IRI channels. So what’s driving this phenomenal level of growth, it’s a combination of robust consumer demand, strong sales execution, excellent support from our wholesalers, creative new marketing and advertising programs as well as the outstanding efforts of…

Thanks, Rob. Good morning everyone. As we close out fiscal ‘14 and move forward into fiscal ‘15 which is very exciting time at Constellation for employees, investors, lenders, vendors and consumers. As Rob said, fiscal ‘14 was a very strong year, where we closed our beer transaction, maintained or grew market share and are growing beverage alcohol categories, established some all-time highs with EBIT up nearly 60% and comparable basis EPS almost 50% while generating sales approaching $5 billion and free cash flow which surpassed the $600 million mark. And we exceeded all consolidated guidance metrics provided at the beginning of the year. We expect fiscal ‘15 to be another exciting year. We expect to maintain or grow market share and grow EBIT at or above our sales growth on an organic basis. On an absolute comparable basis, performance will be much better as we enjoy our full year of consolidated beer economics and we expect operating cash flow to cross the $1 billion mark. Let’s begin to look at fiscal ‘14 results. Our comparable basis diluted EPS for fiscal ‘14 came in at $3.25. This represents a sizable increase versus last year as we continue to realize the tremendous accretion attributable to the beer business acquisition, which is significantly enhancing our sales, operating profit, operating margin and free cash flow. The strong marketplace momentum and financial performance for the beer business continued in Q4. This drove year-to-date financial results ahead of our expectations and capped off a phenomenal year for Constellation. Given those brief highlights, let’s look at full year fiscal 2014 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 the year included $2 billion of incremental net sales related…

(Operator Instructions) Your first question comes from the line of Nik Modi of RBC.

Yes, thanks. Good morning everyone. Just two questions on my end. If you can just kind of reiterate, I am sorry if I missed it, how much CapEx has already been spent on the brewery expansion. And then the second question is really trying to frame the opportunity that you might have in China, certainly long-term it makes sense and probably a big opportunity, just trying to get some texture on how much of a P&L implication it could have in the next 18 months or so?

Sure, Nik. I will handle the first one and Rob can handle the China question. As far as how much capital was spent on the brewery in fiscal ‘14 that was just shy of $140 million and that pretty much all occurred in the fourth quarter.

On to China?

Sure. Hi, Nik. China, I think you really have to look at that as the long-term investment or I would say a long-term project. We are just really kind of getting up and running and developing our plans. It hasn’t been a material business there historically. So, the idea is developing it into a material business in that market, but it’s going to take a number of years. So, I wouldn’t expect it to have any real impact from a financial perspective in the short-term.

Great. And just one quick follow-up, I know it’s still early in the transaction, but the margins have been tracking ahead of I think what most people have been expecting and I know there is still a lot of spending to come in the beer business, but have you thought about the 30% to 35% since you kind of initially gave that guidance, and if you think there is kind of where you might be in that range at the higher end maybe even able to exceed that at some point in the next couple of years?

Yes Nik. We are not updating our guidance in that area. We would be happy if it exceeds it, but we have still got quite a few of steps involved in negotiating our commodity contracts as a standalone company. Going forward, as you know, we have talked about – we haven’t settled anything on glass, which is a big piece of the cost, cost inputs for our business. So, we are very happy with the progress of the project, certainly the progress of the beer business, but we are not changing our margin guidance. What might be throwing people off a little bit is maybe in the fourth quarter, the beer business had increased margins and really what that is, is in the fourth quarter again I think volumes exceeded our expectations, but we spent accounting wise very little marketing in the fourth quarter. So, you had a pretty high level of sale certainly growth to the prior year with very little marketing expense against it. For the full year, the margin from the date of acquisition through the end of year was about 31%, which was a little bit higher than what we guided when the transaction just started, but very much in the ballpark. So, we are sticking to that mid 30% operating profit margin guidance.

Fair enough. Thanks a lot.

Your next question comes from the line of Bryan Spillane of Bank of America.

Hey, good morning.

Hey, Bryan.

Hey, Bryan.

Just two questions, the first one just related to the capital spending in, I think this is the crux of why the stock has responded the way it has this morning. Bob, could you walk through first now that you have got a better sort of perspective or a deeper perspective on the project and the cost increase. Is the brewery going to be more efficient and is there an enhancement in efficiencies both in the existing capacity and maybe what you are going to be building versus what you originally thought? And then the second question related to that is just I think there is some concern and you have got the run rate right now on volume growth and beer is very strong and how do we think about the potential to have to add more capacity going forward? Does the increase in spending at all make it less expensive to add capacity going forward?

So, yes, Bryan, I will answer that for you. Number one, the fundamental answer to your question is yes, we are designing the brewery in a manner to get more volume out of the capacity that we originally planned. So, we are expanding the brewery from 10 million to 20 million hectoliters in theoretical capacity that still remains the case, but in terms of the efficiency, i.e., how many cases will actually get out of that? We are expanding the brewery in a manner to get more cases out of that than we originally planned. That’s point number one. So, we are taking steps in that regard to plan for higher volumes than we originally anticipated. And then with respect to your second question, the capacity that we are currently building we do expect to be sufficient on four, I would say the mid-term meaning the next few years. But if the business continues to grow at the rate that it’s currently growing, we will have to be thinking about additional capacity increases sometime in the near future in the next couple of years and to begin that process so a good problem to have in essence.

Yes. And Bryan just to follow-up on Rob, we are currently assessing because volumes are doing so well. When do you expand capacity and where do you expand capacity, so related to that question if we were to put the next tranche of capacity expansion at the existing brewery, I think we would get some efficiencies from the $1 billion we are spending on the first 20 million hectoliters. If we decided to put the capacity somewhere else meaning you build another brewery or buy a brewery somewhere, then that wouldn’t help us so much. So we are currently in the thought process around that.

And then fair to characterize the higher price tag especially for the outsourcing in part helps to ensure that you meet the calendar ’16 deadline, meaning you are sort of paying to get the front of the line?

Yes, there is definitely a premium that we are paying to complete the project within the three year timeframe. There is no question about that. It’s pretty much half the timeframe in which the original brewery is built and it’s a pretty compressed timetable. And we have got to do everything in our power to ensure that the brewery is built in that timeframe, so.

Yes, we are happy to see that even with that increased capital costs as I mentioned earlier because I know a lot of investors are keeping an eye on our de-leveraging and keeping an eye on when we potentially reallocate capital. So all those de-leveraging targets and free cash flow targets even though we have increased these capital spend they all remain intact. So frankly after you get past the brewery, right what that means and you guys know your math guys right is the EBIT higher, right. So that’s going to drive much better returns after you get past this stage where kind of the snake is eating a camel.

Got it. Okay, I am going to get back in the queue. Thanks guys.

Your next question comes from the line of Bill Chappell of SunTrust.

Good morning. Just want to follow-up one more time on Bryan’s questions, excuse me. So I was just to trying to understand over the past maybe six to nine months at what point did it seems like the timeline for the new plant is still the same and the size is still the same, where did all of a sudden it changed in terms of your budgeted costs, I mean what came about really changed that versus what we saw kind of six to nine months ago when you are first talking about this?

Yes, well six to nine months ago we had obviously just closed the deal. We have very short timeframe to actually decide and agree to purchase the brewery and purchase it, we put together at that time a very rough estimate of what we thought the cost would be and we spent the last basically nine months bidding out the project and translating it into definitive cost which have resulted in the number that we disclosed. So there was definitely changes in the scope of the project from what we also originally – what we originally thought. And it was along the lines that Bryan suggested in that, although we are building the same 20 million theoretical capacity, okay and we expect to get more out of it and scope the project to get more out of it than originally planned. So whereas you might only get 80% or 85% efficiency out of your theoretical capacity, we are building the brewery now to get more out of it than that. Really as the result of the increased growth in the products that we are experiencing and that we expect to continue into the next fiscal years. So that’s basically why or how the brewery project cost increased from our original estimates which were really in many respects just a swag, in that we – it had not been able at that stage and obviously so to bid the project and to scope it fully.

Got it. And then just a couple of things also on the beer, wasn’t there at some point a change in the price you are paying for the 40% outsourced and will that change, any update on that? And then on the beer pricing in general is your guide to assuming a price increase for kind of the fiscal 2015?

Yes, there was a price reset for what we pay InBev for the finished goods that they are making for us based on the audited EBITDA of the acquired business, but building the brewery out does not change any of that. Those numbers are still intact.

Sure. And then in terms of overall pricing for this year to the consumer for the next year?

Yes, I mean, on pricing, we will – as we said before, beer is a very regional business. So, we look at what’s going on with volumes and what’s going on with competitors in our various different regions and we talk to distributors, we talk to retailers to try to assume what will happen to volumes, what will consumers’ reactions be to the price increase, and then we determine what that price increase will be on a regional basis, then it kind of rolls up. So, the only way you will know kind of what happens is to watch IRI, generally beer pricing occurs right after the peak summer season. So, September, October, you will be able to see what the big boys have done and what we have done and we take a guess generally what pricing would be when we give guidance. So that’s included in the volume and net sales guidance you would have seen in our beer segment.

Okay. I will get back in the queue. Thank you.

Your next question comes from the line of Caroline Levy of CLSA.

Good morning, everyone. Thank you so much. One of my questions is can you tell us what the difference was between beer volumes in California and in the rest of the country? I am trying to drive at mainly what the drought impact was on demand, but also my understanding is that in areas where Corona is strongest, it’s actually growing faster. So, if you can just sort of disaggregate a little bit of what you understand about your beer business?

Yes, there is a couple of things going on there, Caroline. We actually did have a very strong year in California. It’s our highest share state. It’s kind of where Corona began. I think we are around 20% share. But as Rob mentioned in his statements, right, they are experiencing a drought in California, so actually we experienced very good beer weather in California. And we also have like elsewhere in the country, very good consumer momentum from our great marketing and our great sales initiatives, but we did have pretty favorable weather for beer in California and we are very happy with our results out there in fiscal ‘14.

But I am just trying to understand what happened in the rest of the country, was the rest of the country up sort of mid single-digit?

Yes, we had our strongest performance in fiscal ‘14 in the west and the south. We had strong performance, but not as strong in the Midwest and the East. Okay, it’s kind of how we broke out regionally, but we grew in every geography, we gained share in every geography, we grew in every channel, we gained share in every channel, but we did better in the west and the south.

Right, okay, thank you. Now, just moving to wine, the issue with the distributor inventories is this one distributor, is this something that’s a one quarter phenomenon, if you could just help us understand a little more about what’s going on there and how long it will take to work through the system?

Sure. It’s – yes, the answer is it’s one distributor and yes, we are anticipating that it will be a one quarter or first quarter phenomenon and as we mentioned it will have no impact on our bottom line, no impact on earnings whatsoever.

Okay. And as we think through one, I mean it’s always got challenges, but always for different reasons, but as a long-term top line growth rate is 3% to 4% reasonable sort of assumption given a blend of volume and – I mean volume and pricing do you think that still holds?

Yes, Caroline definitely sort of the 3%, 4% range is sort of a good number that’s sort of what the industry has been growing at. We are pretty optimistic about our wine business going into this year, our 2015 fiscal year as I have mentioned we got a lot of I am going to say tailwind this year. We have been focusing for the last few years on developing strong momentum behind our brands making sure our brands are healthy. And as we move into 2015, I think that our brands are healthier than they have ever been and that positions our self well to capitalize on that and take some actions to drive profit growth as I said. So I think that that business is going to be – it’s going to make a very good contribution to our bottom line growth this year.

Got it. Thank you so much.

Your next question comes from the line of Rob Ottenstein of ISI.

Thank you, guys. Can you give us your latest assessment in terms of when you may start paying a dividend, has that changed and also your thinking on M&A, is there any change there?

Sure, I will handle the first. I will let Rob handle the second. The dividend we haven’t changed the way we are thinking about it is we would start assessing redeploying capital to shareholders when we get close to being below four times EBITDA leverage and that goal has not changed. It looks like that will happen if everything happens the way we think towards the end of fiscal ‘16 is when we will get below that leverage ratio. So we would start to talk to investors and our Board in inverse order of course around that time. I will let Rob handle the M&A question.

Yes. So on M&A the answer is our position or our strategy has not changed relative to M&A. Our principle goal at the moment is debt pay down that’s really what we are focused on, but obviously M&A is opportunistic, so we keep our ear to the ground for investments that we think will generate superior returns to our shareholders. But generally the focus is debt pay down versus M&A.

And Bob, given the tremendous success of the beer business that you are achieving and the transformation of the company as you look to do incremental investment, do you see yourself gearing more towards beer or more towards wine, has that changed at all in terms of where you are looking to take the company long-term?

Well, as I have said, we are certainly focused on debt pay down at the current time, but as it relates to investments there is potentially good investments in all three categories. We look at it very fundamentally. I mean, we don’t have a favorite child necessarily. And so as opportunities arise we are going to look at investment opportunities in all three categories. And they will be evaluated on what generates the highest return in the shortest amount of time. That’s basically the bottom line right, IRR and payback. So we will see.

Are you taking a look at PBR?

Okay, Robert, I think we are going to move to the next question.

Well, we can’t comment on that obviously Robert.

Alright, thanks guys.

Your next question comes from the line of Brett Cooper of Consumer Edge Research.

Good morning, guys. Two questions, one on the beer side, one on the wine side, on the beer side, I am not sure if I missed it in your commentary, but what was marketing or what are you planning marketing to be up in ‘14?

In ‘15 or in ‘14?

I am sorry in fiscal ‘15?

Yes. So in the beer business, we are investing commercially both sales and marketing, investing ahead of sales, because we want to keep our momentum up and because the sales and marketing guys have some good ideas that we think are worthy of investing in. So marketing and sales will be going up faster than sales. Marketing in the beer business is about 8%, 8.5% of sales which has gone up over the last three to five years.

Perfect. And then on the wine side, back to the distributor inventory reduction, how did that come about, who drove it, and as some of your other distributor contracts come to an end if memory serves, would you expect to see more of these types of deals? And then as a side to that, when these things have happened in the past, sometimes you hedge your distributors than more against the brands in the market, this time you are getting a payment, can you just explain your thoughts on receiving a payment versus a greater investment in the marketplace from your distributor?

Sure. Number one, this is the particular circumstances of one distributor who desired to do something really outside of the parameters of our normal business relationship. That’s the answer number one. Answer number two is no, we don’t have any expectation that it will occur in any other context or in any other cases. And number three since it’s outside of our normal contractual relationship we felt that a make whole kind of arrangement was most appropriate in this particular case. And more importantly, as far as what we invest in the marketplace behind our business, we determine that completely on a commercial basis meaning it’s not based on any payments that we might receive or might not receive. We will spend what we think is appropriate to drive the business in any event. So it just still happens that with the way this particular transaction is structured, we don’t expect it to have any impact on the bottom line. And it is a – it is an isolated matter with one wholesale customer. So we bring it really to your attention and only in that it will affect the top line. In the first quarter, we really expect the top line materially even for the whole year. And as you said, it will have no impact on the bottom line. So that’s really, that’s it.

Perfect, thanks.

Your next question comes from the line of Bryan Hunt of Wells Fargo Securities.

Thank you. Two questions. One, Rob, when you start to talk about pricing and the value in the luxury segment of the wine business, it sounded as though you were a follower and not a leader, can you discuss maybe the level of pricing and clarify whether Constellation is leading or following price increases in the wine segment?

Yes, I would say, we have about a 15% total market share in the wine segment. As you know, it’s a pretty fragmented category compared to the other two categories in the beverage, alcohol business. Therefore, I am not even sure to talk of being a leader in this and that is even particularly relevant. We take a look at our products. We take a look at the competition. We take a look at the categories. We see what’s happening. And we decide what we are going to do. Over the last few years, there hasn’t been much pricing in the wine business period. We are seeing some opportunities for pricing as we move into our fiscal ‘15 and we are going to take those opportunities that we think that they are in the high end and the lower end. So that’s where we are going to focus in terms of that element of our strategy. So it’s really as simple as that. I don’t think leader or follower makes a lot of sense in terms of even the discussion in this particular context. But yes, we look around, we see what’s going in the marketplace and we make our judgments in that regard.

And with regards to magnitude, is there any comments around that you feel to make?

No. I mean, we are really developing our plans and our strategies for taking the pricing in the areas that we are going to take it and they are not fully baked at this time. So it’s really kind of hard to discuss the absolute magnitude of it at this moment.

Okay. And then my other question is when you look at the supply contracts across your businesses with the new beer business and the scale it brings to the company, you mentioned you haven’t worked on glass contracts yet and that’s an opportunity going forward, have you looked at any other supply contracts and has progress been made in kind of garnering savings given the new scale of the business?

Yes, number one, we didn’t say we haven’t or if we did say, we said it incorrectly. We have been working on glass and we have been working on other commodities. We are not at a stage yet where we are prepared to say exactly what our strategy is on glass. But it is something that we are working on. And yes we are working on the other commodities as well. And I would say the most we are prepared to say at the current time is I think that where we end up on commodities is going to be favorable.

And should we expect to see those (resources) this year?

That’s what we think.

Okay, right and should we expect to see those from a timeline perspective this year or is that…?

Sure. We will have something to say. I am sure we will have something to say on commodities as we go out, go through the year. Yes.

Alright, I appreciate your time. Thank you.

Your next question comes from the line of from Bryan Spillane of Bank of America.

Hi, Bryan.

Hi, thanks for taking the follow-up. So I am just going to give you a couple of quick kind of questions, some housekeeping items and then just one related to wine pricing. First just Bob if you could talk about just what the cash tax rate was for the year and what you expect it to be next year?

Yes, so the cash tax rate for the year is kind of anomalous, so let me kind of walk you through. What we have said, we haven’t updated this guidance in a while, but we would expect a cash tax rate like the mid 20% on an ongoing basis. I would say that the beer structure will probably improve on that over the medium to long-term, and we will update you on that when things settle down. I would say that fiscal ‘14 and actually fiscal ‘15 as well are going to be pretty anomalous because of the big increase in the stock price and some option exercises from options that were expiring, etcetera or people that are just exercising some in the money, we get a tax deduction for that and that’s actually a reasonably big number, right. If you look at the cash flow statement, you can see the cash we brought in from option exercises. So that will bring the cash tax rate down, relatively dramatically while this situation goes on. We don’t expect it to last big time past fiscal ‘15. So I would call that not really an operating cash tax environment. It’s just that – the anomalous equity activity.

But it will be a little better. It will be favorable in ‘15 relative to sort of what your normal run rate ought to be going forward?

Yes, I would agree with that.

Okay, foreign exchange, just the peso-dollar exchange rate, and what – how should we think about that from a transaction translation impact for next year, or this year I should say?

Sorry, go ahead and finish your question.

I was going to say for ‘15.

Yes. So the way we handle this and actually – and we told you this on previous calls, the peso-dollar rate was more favorable than we thought because actually the rate physically has gotten favorable from when we closed the deal. We do hedge transaction exposure to the peso. There isn’t actually as much peso exposure as you would think, because most of the commodities in the beer industry are dollar-based. So, really the core peso exposure is our onsite labor at the facility which still is a sizable number, but nowhere near what you would think. And we do have hedge contracts, we go out two or three years on those and we are actually relatively hedged for fiscal ‘15, right. So – and as I recall that I haven’t looked at it in a while, but I think the peso dollar is around 13, right. So, we monitor closely and lay on hedges when they get more favorable, but we are not expecting a ton of volatility there in fiscal ‘15.

Okay. And then gross margins for the beer business in the fourth quarter and the full year, I know I think you disclosed that in the last couple of calls, are you going to – do you have that figure?

Yes, I think I had it in my script. I think it said it was 44%.

Okay, alright. I must have missed it, sorry about that. And then just the last one…

Please Bryan, I am exhausted man, come on.

It’s the lightning round.

Exactly.

The last one is just the wine pricing, Rob, if could you just characterize the decision to raise prices in wine both low end and in your premium wines, is it a function of your sort of assessment of the market, especially at the low end, where there has been quite a bit of pricing the last couple of years and so you feel comfortable with the pricing dynamic or the competitive activity sort of make you feel comfortable about taking prices up, is it a – or is it a question or a function of kind of now that you have made some marketing investments, new products investments you feel more comfortable raising prices behind that or is it have some effect on what you think sort of commodity cost or raw material cost might be in the future? Just trying to understand the motivation to take prices?

So yes, yes and no.

Okay.

So, yes, our assessment of the marketplace and so on and so forth is the fact that we do feel pretty well positioned given our previous investments and where we are relative to momentum in brand health that the timing is right and it’s no, it’s really not related to commodity, not related to commodity cost, although from a commodity cost perspective just kind of the opposite we have. We are not facing any particular headwinds this year in wine. So we are not expecting much inflation in cost of goods sold.

Okay.

So that will be helpful to us from a bottom line perspective.

Alright, thank you very much and thanks for being so generous with your time.

Our pleasure.

Thank you. That concludes the Q&A portion of today’s call. I will now return the call to Rob Sands for any additional or closing remarks.

Okay. Well, thanks for joining our call today. As Bob mentioned, the beer deal has been a real game-changer for us and the team plans to capitalize on the tremendous momentum that we have underway to continue to drive the growth, enhance financial performance of the business. As Bob said, we now expect the beer business to exceed our original expectations from a return on invested capital point of view. And I believe that our plans for fiscal 2015 prove that we have not wavered from our overarching strategic goal of generating profitable organic growth across all of our businesses, including our wine and spirits businesses. We have recently posted two videos on our website that provides nice views of the Nava brewery. I encourage you to take a look when you have a few moments. Thank you everybody for your participation today.