Constellation Brands Inc (STZ) — Q1 2018 Earnings Call Transcript

Thanks, Laurie. Good morning and welcome to our first quarter fiscal 2018 conference call. I am Patty Yahn-Urlaub from Investor Relations and I’m here this morning with Rob Sands, our President and Chief Executive Officer; and David Klein, our Chief Financial Officer. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website. Please refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements we make on this call. Before turning the call over to Rob, I would like to ask that we limit each Q&A session participant to one question, which will help us to end our call on schedule. Thanks in advance, and now, here is Rob.

Thank you, Patty. Good morning, and welcome to our discussion of Constellation's first quarter fiscal 2018 sales and earnings results. Our quarterly results reflect the continuation of our winning streak, as we produced results that delivered our 16th consecutive quarter of double-digit comparable EPS growth. I’m also pleased to report that this morning we achieved a new all-time high stock price while significantly outperforming the S&P 500 so far this year. So let’s get underway with a review of the business performance that delivered these fantastic results. We’ll start with Constellation's beer business, which remained the number one growth driver in the high-end of the U.S. beer market, driving 60% of the growth of this market segment, while posting double-digit depletions and significantly improving margins. Excellent execution during the Cinco de Mayo and Memorial Day holidays drove significant market share gains for the quarter. As a matter of fact, Constellation claimed 5 of the top 15 high-end share gainer spots during Cinco de Mayo with Modelo Especial coming in as the number one growth driver followed by Corona Extra in the number three spot and Pacifico rounding out the top five. During this quarter we increased media investments for Corona Extra and launched new English and Spanish language National TV campaigns including a new advertisement highlighting limited edition can packaging. Casa Modelo’s flagship Modelo Especial brand is on fire, gaining distribution while delivering depletion growth of almost 20% for the first quarter. Also under the Casa Modelo umbrella, we launched the new Modelo Chelada flavor, Tamarindo Picante, which is supported with a fully integrated marketing and merchandising plan, as well as Modelo Chelada three packs, both of which saw strong sales in the quarter. We expanded our national TV advertising efforts during the first quarter for the Pacifico brand, which posted depletion growth of 20%, representing an acceleration from where we ended fiscal 2017. Our new product entrance into the marketplace including Corona Premier and the Corona Familiar are showing strong performance in markets where they are currently available, with velocities and consumer acceptance exceeding our expectations. Thanks to the great effort of the beer team, I am pleased to announce that Constellation recently tied for the top-ranked supplier in the latest Tamarron Malt Beverage Supplier Performance Survey. Now from an operations perspective, our Nava brewery completed its expansion phase to 25 million hectoliters last quarter ahead of schedule and we look forward to completing the next phase of expansion taking the brewery to 27.5 million hectoliters of capacity by calendar year-end. As we speak, furnace number three is heating up at the Nava glass plant and is expected to be producing glass later this summer, right on schedule. The Obregon brewery continues to perform at its very high utilization level and we are optimizing existing Obregon capacity and packaging capabilities that are designed to increase output by early next year. These actions have allowed us to take a more measured approach from a timeline standpoint to the greenfield brewery site in Mexicali while ensuring we have product supply to satisfy our growth expectations. Overall, the strong results that the beer business achieved in the first quarter are driving the upward revision to our EPS guidance for the year. David will have more to say in this regard in a few moments. Turning now to Ballast Point, this business has not performed to expectations from a growth standpoint. As a result, we recorded an impairment charge related to the trademark value of the acquired brands for the first quarter. However, we remain committed to achieving our targeted return on investment for this acquisition. Ballast Point continues to gain distribution and is currently positioned as a top 20 craft brand in the U.S. market. Going forward, we are focused on gaining greater distributor alignment with the goal of a distributor network where possible, developing a more focused brand architecture led by the flagship Sculpin brand, investing in Ballast Point’s first consumer marketing campaign, and leveraging the import side of the beer business as well as other TBA resources within the company. Overall craft beer continues to be one of the key growth segments within the U.S. beer market. We plan to look for ways to leverage the Ballast Point craft beer platform, as it is an important part of our high-end strategy and we remain optimistic about the prospects for this business going forward. Now, before we begin our discussion of results for our wine and spirits business, I’d like to highlight our recent acquisition of Schrader Cellars, which is a California-based fine wine company known for producing superior quality distinctive wines. These wines are sourced from the prestigious vineyards of Napa Valley, including the famed Beckstoffer To Kalon vineyards in Oakville, California. Schrader Cellars is America’s highest rated maker of Cabernet Sauvignon with 19, 100-point ratings from legendary critics. Today, approximately 90% of Schrader’s inventory is sold direct to consumers through an elite mailing list. The remainder is sold through distributor channels to select fine dining establishments, with limited availability of approximately 4,000 cases per year. Schrader Cellars typically sells for $225 to $250 per bottle to customers on its mailing list. Overall, this world-class luxury wine portfolio adds cachet to our newly established Fine Wine sales organization. It also provides an opportunity for us to advance our Fine Wine strategy and more fully compete in one of today's fastest-growing wine segments, while optimizing our Napa assets and grape supply. During the first quarter, our wine business maintained its IRI market share position and delivered excellent margin enhancement driven by a combination of favorable mix and price as well as benefits from our recent acquisition and divestiture activities and our ongoing cost of goods sold optimization initiatives. We have also made good progress against our innovation and renovation activities. After the successful renovation of Robert Mondavi Private Selection, which is currently growing at 10% in IRI channels, we recently relaunched brands including Clos du Bois, Estancia, and Wild Horse. From an innovation perspective, we launched the new Seven Moons Red Blend wine brand as well as Cooper & Thief, which has now become the number three luxury red wine brand. Our acquired brands are also performing well with High West Whiskey, the Prisoner, and Charles Smith Wines posting recent IRI channel growth rates of 78%, 35%, and more than 100% respectively. During the first quarter, our wine and spirits depletion trends were impacted by the timing of promotional programs. However, we have solid programming in place for our key focus brands in the coming months including the launch of our new TV advertising campaigns for Kim Crawford, Black Box, and Woodbridge by Robert Mondavi. In addition, we are investing in a new digital campaign for the Meiomi brand which is the first-ever national advertising program for Meiomi. Our spirits portfolio posted excellent sales growth of 14% in the quarter driven by High West, SVEDKA, and Paul Masson Brandy. Overall, our wine and spirits business is on track to meet our goals for the year. In closing, I am very pleased with our first quarter results which have set the stage for this coming fiscal year. We’ve delivered exceptional performance across the business that demonstrates our commitment to sustaining profitable growth and building shareholder value. And we remain one of the best-performing companies among our consumer peers. With that, I'd now like to turn the call over to David, who will review our financial results for our first quarter fiscal 2018. Thank you.

Thanks Rob and good morning, everyone. Fiscal ’18 is off to a great start, our Q1 results demonstrated strong financial performance as we generated 7% organic net sales growth, expanded our consolidated comparable basis operating margin by 530 basis points, and increased comparable basis EBIT by 22%. These results include particularly strong operational performance by our beer business, which is driving an increase in our full year comparable basis diluted EPS goal to a range of $7.90 to $8.10 per share. I'll discuss the drivers of this in a moment, but first let's look at Q1 performance and our full year outlook in more detail where I’ll generally focus on comparable basis financial results. For beer, net sales increased 8% on volume growth of 7%. Depletion growth came in strong at 11.6% with excellent performance during the key Cinco and Memorial Day holidays. Shipment growth was below depletion growth primarily due to shipment timing. For Q2 fiscal ’18, we expect shipment and depletion growth rates to be similar, and as a reminder we are facing a difficult 14% depletion growth comparison for Q2 fiscal ’17. For fiscal ’18, we continue to expect net sales growth for the year to be in the 9% to 11% range; this includes 1% to 2% of pricing targeted for our Mexican portfolio. Beer operating margin increased 470 basis points to 40.3%. This strong result exceeded our expectation and reflects lower COGS, foreign currency benefits, and favorable pricing. The lower COGS reflect operational benefits, driven primarily by supply independence from ABI, including better-than-planned performance at Obregon, lower materials including benefits from glass supply sourcing, and lower freight costs. These benefits were partially offset by a $14 million increase in depreciation expense, which totaled $40 million for Q1. Given the strong operational performance, we now expect beer operating income growth to be in the range of 13% to 15%. The expected moderation in beer operating income growth and margin for the remainder of the year versus Q1 is being primarily driven by the continued ramp-up in depreciation, planned headcount addition to support our expanding operating platform, anticipated unfavorable foreign currency impact due to tougher peso comparisons in the back half of the year, and lower benefits related to ABI supply agreement independence as the year progresses. For wine and spirits, organic net sales increased 6%, reflecting favorable mix in price as well as volume growth. U.S. depletions were down 1% and shipment volume outpaced depletions during the quarter due primarily to timing, as we expect shipment and depletions to generally align for the full year. As Rob mentioned, we have solid promotional and marketing programs in place for key brands for the remainder of the year as part of our efforts to achieve our full year goals for the wine and spirits business. Wine and spirits operating margin increased 640 basis points to 29.7%. This improvement primarily reflects favorable mix in price with pricing benefiting from lower promotion spending due to timing, divestiture of the lower margin Canadian wine business, and acquisition benefits. For the remainder of the year, we expect to see moderation in our wine and spirits operating margin versus Q1, due primarily to higher promotion spending in support of the programming activities I just mentioned. For fiscal ’18, we continue to expect wine and spirits reported net sales to decrease in the range of 4% to 6% and operating income to be flat. These projections include the negative impact of the Canadian wine business divestiture and the estimated incremental benefits from High West, Charles Smith, and The Prisoner acquisitions. When excluding the impact of the Canadian wine business divestiture from our fiscal ’17 wine and spirits results, we continue to expect net sales growth of 4% to 6% and operating income growth of 5% to 7%. Interest expense for the year decreased 3% as the benefit of lower average interest rates was partially offset by higher average debt balances. We continue to expect fiscal year ’18 interest expense to be in the range of $340 million to $350 million. When factoring in cash on hand, our net debt at the end of May totaled $9 billion, which was level with our net debt balance at the end of fiscal ’17. In early May, we announced that we issued $1.5 billion of senior notes at attractive investment-grade interest rates. These notes were comprised of three $500 million tranches with 5, 10, and 30 year terms and interest rates of 2.7%, 3.5%, and 4.5% respectively. Proceeds from the offering were used to repay $700 million of 7.25% notes that were coming due in May, and together with revolver borrowings, we repaid the remaining balance of our U.S. Term A loan. Our net debt-to-comparable basis EBITDA leverage ratio moved down to 3.5 times at the end of May from 3.7 times at the end of fiscal 2017. While we continue to invest in our Mexican operation and return cash to shareholders with $100 million of dividends paid in the first quarter. Our comparable basis effective tax rate came in at 19.4% versus 31.6% last year. This improvement reflects the benefit of reinvesting foreign current under APB 23 and the adoption of ASU 2016-09, which requires excess tax benefits from stock-based payment awards to be recognized in the income statement. As a reminder, this benefit can fluctuate significantly depending on the timing and level of stock option exercises. As a result, we expect to see more volatility in our effective tax rate on an annual and quarterly basis. For fiscal 2018, we continue to expect the effective tax rate to approximate 22%. The full-year effective tax rate is forecasted to be higher than the Q1 rate, primarily due to an anticipated decrease in quarterly stock-based award activity throughout the balance of the year. Historically, Q1 has had the highest quarterly stock-based award activity. For Q2, we are targeting the effective tax rate to be in the 24% to 25% range. I’d also like to note for fiscal ’18 we expect weighted average diluted shares outstanding to approximate 201 million and net income attributable to non-controlling interest to approximate $10 million. As mentioned earlier, we are now projecting our full year comparable basis diluted EPS to be in the range of $7.90 to $8.10, the midpoint of this guidance targeting 18% growth. Our comparable basis guidance excludes comparable adjustments, which are detailed in the release. This includes an $87 million non-cash impairment charge recorded during Q1 related to the Ballast Point trademarks. As Rob discussed earlier, we are optimistic about Ballast Point and remain focused on achieving our targeted return on that acquisition. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx, we generated $165 million for the quarter. This was slightly below Q1 last year as double-digit operating cash flow growth was more than offset by an increase in CapEx. We continue to expect fiscal 2018 free cash flow to be in the range of $725 million to $825 million. This reflects operating cash flow in the range of $1.9 billion to $2.1 billion and CapEx of $1.175 billion to $1.275 billion, including approximately $1 billion of CapEx for our Mexico beer operations expansion. In closing, our cellaring portfolio, strong business fundamentals, and commitment to generating top-tier sales and profit growth will position us to deliver another strong year of financial performance and build shareholder value in fiscal 2018. With that, Rob and I are happy to take your questions.

Hey, good morning guys. So my one question is around M&A, given the expected inflection in free cash flow over the next few years. Can you discuss if you think M&A will become an increasing focus going forward, which of the business segments you might be most interested in for M&A, the relative size of deals you’re generally looking at, and then just remind us of the key criteria?

Yes, so I would say that our M&A strategy remains the same and I would refer you back to our capital allocation strategy in general, which continues to focus on keeping our debt levels around 3.5, returning money to shareholders in the form of share repurchases, dividends, and dividend increases. Selective M&A, mostly or I should say almost entirely of tuck-in type brands more of the Meiomi kind of nature. So, we just made one, Schrader, which I mentioned. We are going to continue pretty much along that path; we’ll look for brands across beer, wine, and spirits that we think fill niches that we don't have, that we think are highly synergistic with the platforms we have across those three segments. I would say really nothing at all has changed, and I don't expect anything different than what we've been doing.

Great. Thanks, it's helpful.

Hi, good morning. So, given how robust your trends are, it really stands in very sharp contrast to some of the softening that we're seeing more broadly in the beer category for a number of your competitors? So, a two-part question please. Number one, if you could just give us your view of what's happening more broadly in beer? And then number two, given this evolution in the competitive dynamic, how does that inform your optimism around distribution gains? Because I would think given how strong your growth is, it should facilitate that conversation with retailers. Thanks.

Sure. We've mentioned that we don't take two-part questions, but I'll address both in one response. Overall, the beer market is relatively flat to slightly declining. We believe this is closely linked to the growth of people aged 21 and older, which isn’t changing much, leading to a flat beer market. However, there is a notable shift away from domestic premium brands like Bud Light, Coors Light, and Miller Light towards the high-end segment. This shift is significant and favors our portfolio and craft brands, which are performing well and continue to grow. Our business, comparable in size to craft, remains the strongest part of the wine sector. While domestic premiums are declining, our portfolio and some small and medium brands are capturing much of that market share. We've provided analytics in previous conferences showing our expectations for this trend, with domestic brands decreasing and our portfolio gaining traction. Constellation has accounted for 60% of the growth in the beer sector. What we predicted previously is coming to pass, which essentially addresses your question.

Hi, good morning everyone. So, on Corona Premier, it looks like these test markets are progressing fairly well. How much time do you guys need before you can make an assessment on a national launch? And then just a housekeeping item, what were the shipments and depletions in beer ex-Ballast Point if you could give us that number?

So on that, Nik, the Ballast Point was about a 50 basis points drag on depletions for total beer.

Thank you. Hi, so I guess I have to ask a beer margin question. So clearly 40% is pretty impressive here. David, just I think your comment about this may not be sustainable for the balance of the year, so just trying to get a little bit more color around that. DNA and pricing I think is essentially a wash; the peso, I guess, is becoming a little bit of a headwind. But when you talk about the headcount increase, that’s potentially a headwind, can you just elaborate on - sort of quantify what that means? Can you compare the brewery margins for Piedras and Obregon and other kind of headwinds you’re envisioning?

Yes, so the first thing I want to say is that the operations teams at Nava and at Obregon performed exceptionally well in the first quarter while the plants were operating at high utilization levels. I would say that a portion of our rationale for increasing our EBIT growth rate for beer was really we have been pleased by the lack of transition friction at Obregon that we previously expected going into the year. So now for the remainder of the year, I think Judy, the biggest headwind we see is really coming from FX in the business. In Q1 on a year-over-year basis, we actually had a bit of a tailwind from FX. But we know that right now the peso is sitting below 18 pesos to the dollar, and we disclosed at the beginning of the year that our guidance was based around 20 pesos to the dollar, which presents a pretty significant headwind for us. Beyond that, we also mentioned depreciation that’s quantifiable; because we have already said that our depreciation is expected to increase about $60 million for the year. Additionally, as we move through the year, we’re bringing in more equipment online, which will require about 300 additional heads, putting a bit of a drag on our business. At the same time, utilization starts to decline in the plants, as remember, we run them at high utilization throughout Q1 and Q2, and then it drops off a little bit at the back half of the year. I know I say this every single time we talk about margins, but you just have to expect volatility in our margins as we try to optimize the lines and brew trends that we bring into service over the course of the year. So, we’re really happy to have achieved 40% operating margins in Q1 and I guess I will say Judy, you kind of called that before anybody else, but we do have to be careful because there are some significant and real headwinds for the rest of the year.

Thank you.

Hi, thank you. Just going back to the point about the cadence of beer during the quarter. There has been a lot of volatility especially from your competitors, and your shipments have been lower than depletions, which is the nature of the business itself. But can you comment on the cadence throughout the quarter and if you are seeing acceleration of the shipment as you’re going through your second quarter? Thank you.

Yes, I think Andrea, the real disconnect in Q1 really was because of the strength of our depletions coming out of Cinco and then going into the Memorial Day holiday. It’s just a timing issue in terms of getting our shipments to align. Not necessarily on a growth rate basis, but on a case rate basis, we expect shipments and depletions in beer to align over the course of the year; there’ll just be fluctuations between quarters.

I have a follow-up question regarding your previous comment on foreign exchange. From my understanding, you are hedged for about 50% of your exposure to the peso at the current level, and the remainder is floating, correct?

About half of our currency exposure for the remainder of the year is hedged at various different levels, but it’s included in our outlook. We value the contracts at the same time we are valuing the remaining exposures.

And you also including that effect on your financial expenses, right? Your outlook for your financial expenses includes the cost of the hedges and the resets of the hedges, correct?

Yes, correct, correct.

Great, thank you. A question on Pacifico and the plans there. Just given what you’re seeing from the broader market competitively both with old and new competitors, I think the most obvious new catalysts are still moving into most in course hands. Does that change at all how you’re thinking about the timing or approach to the ramp-up of Pacifico over time?

No, not at all. There are always a few Mexican brands that are being introduced by various parties whether it’s Molson Coors or ABI; I mean, that’s not going to change. What I’ve emphasized about that is that the large part of the growth in the beer business is in our portfolio. A lot of people talked about it as imports or in Mexican; while it’s really Constellation’s imports in the Mexican portfolio. So these other entrants don’t really concern us very much. Pacifico is just doing exceptionally well without us frankly driving it, and we’re ramping up on our plants to drive Pacifico. We see this perhaps as the next big thing behind Modelo Especial; we have anecdotal evidence of market research indicating overwhelming consumer acceptance of the product. Historically we didn't drive it because we didn’t have the capacity to do anything more than what we’re doing. We now have the capacity coming on stream, and Pacifico is definitely the next logical brand that will drive behind Corona and Modelo Especial. So we’re extremely optimistic about that. In addition to our NPD, Premier has a huge amount of promise, and Familiar is like a phenomenon already. So we’re excited about all three brands.

Perfect, thank you.

Yes, thanks. My one question about wine and spirits margins; it’s only one quarter, but they’re dramatically above the way we all modeled it, and yet you haven’t changed your full-year margin view. My question is obviously we could have just gotten the modeling wrong, but to what extent did you consider the first quarter disappointing from a revenue perspective and what else has prompted you not to increase the margin guide for that portion of your business?

First, Mark, the thing that I think should be becoming more obvious is that while there is a lot of focus on the beer business, our wine and spirits business is extremely powerful with margins approaching 30%. We’ve publicly stated that our goal is to get them to 30%. What’s tempering our expectations for the remainder of the year is really two things: one is we got about 200 basis points of year-over-year improvement in wine margins as a result of the sale of the Canadian business. For the full year, that improvement will be more like 100 basis points because we sold the wine business before the end of last fiscal year. The second thing is that our promotions expense is accrued based on depletions, not shipments. We got some benefit in the quarter due to the difference between our shipments number and our depletions number. We’re very optimistic about wine margins, and our guidance for the year assumes that there is wine margin leverage. We remain confident in that, but we’re just being cautious because of the two items I mentioned.

And would it be fair to say that because depletions were down, they were disappointing versus your plan?

I would say that we’re on track to achieve our guidance for the year. As Rob called out in his script, we had some planned promotion timing differences that affected our depletions in the first quarter; we never want negative depletions, but we remain confident in our full-year guidance.

Hi, it’s actually Yatish in for Pablo. Just one question, regarding your typical retail store, would you be able to comment on average how many SKUs you would have for Corona versus Modelo Especial, is it like one-to-one, three-to-one? Any kind of rough idea would be helpful. Thanks.

In the company, we have very few SKUs as a general proposition, but I don’t know the answer exactly to your question, how many SKUs of Corona we have versus Modelo Especial, we will get back to you on that.

Thanks so much. So, as I recall, these are the best-ever margins in wine and beer, and as spectacular as they are, the biggest news in the quarter is the ability to issue this debt at amazing rates, which gives you a tremendous amount of optionality in the M&A market. Rob, you kind of soft pedal debt saying it’s incremental, it’s tuck-ins but there was a rumor of a very large deal this quarter, and it seems like with your current balance sheet, you may be really well positioned to do a major deal. Can you talk about not anything specific, but the optionality of a significant deal?

Yes, I mean I think that it remains fundamentally as I said, which is I think the real opportunity is brands and tuck-in deals, and that's something we can keep doing while meeting our financial disciplines, which is an important part of that. We buy brands like Meiomi or other brands we can tuck into our existing infrastructure. These things are growing high double-digits, and we are buying them at reasonable multiples, which post synergies generate actually a high return. So I’d say fundamentally that strategy versus buying something really big is a good strategy from a financial perspective, and from the perspective of positioning our portfolios across wine, beer, and spirits for continued growth and margins. That’s really the strategy, right. It's to keep driving this kind of growth and these kinds of margins and the kind of leverage we’re seeing in our P&L as relates to M&A. Now there are other elements like NPD, things like Premier and Familiar, but as it relates to the M&A, we can keep sort of adding on a very financially viable basis these kinds of brands. As far as anything big goes, there are two issues: one is there’s nothing for sale, and two, there’s very little that would be of any interest even if it was for sale, fundamentally for three reasons. One is the financial element, will it generate the return that we want? And number two, we go back to sales, growth, and margins. There are very few big opportunities that could potentially be somewhat dilutive to our sales growth and our margins. So we would tread pretty carefully on anything like that. So yes, in the end we’re talking about big things you can count on a half a hand; there's not much in the business.

And I would also add to that, Rob, that last year we bought $1.2 billion of our own stock back at $151 a share. So we still think we’re the best buy in alcohol.

Yes, that investment is looking pretty good right now.

First off, just congratulations on a terrific quarter. If you could give a little bit of clarity; there’s just a question that I have around guidance and a comment that you made, Rob, earlier on if I got it right, and that is despite raising the EPS guidance, it looks like you’re keeping your cash flow guidance flat. There was also a comment that you said early on that the progress you’re making, I think you said at Obregon and some of the other facilities was allowing you to moderate the rollout or the expenditures in Mexicali if I got that right. So I'm just trying to put those items together to think through what your cash flow guidance means here.

Yes, so I’ll let David answer part of this question, but my comment about Obregon and Mexicali was just really more of the same; the guidance we’ve given thus far on our CapEx as it relates to Mexicali and Obregon hasn’t changed. We basically told you about that when we acquired Obregon that we would cut the first stage of Mexicali back to 5 million hectoliters because we didn’t need to go to the full 10 million hectoliters on Mexicali given that we bought almost that amount in Obregon and we’ll have that amount as we make some small modifications to Obregon. So, there’s really no difference; put it this way, there’s no difference between what we said previously at the end of the year and what we’re saying now; we’re just in essence repeating ourselves. As to your point on EPS and cash flow, I’ll let David talk about that.

Yes, so Robert, I think on total cash flow guidance, the largest lever, as you’re pointing out, is our capital expenditures. I would just say that one quarter into the year, it’s too early to call any changes there. But we clearly carefully manage our working capital and our CapEx spend to optimize those numbers.

Good morning, everyone. So with approximately 75% of retail market share in Mexican beer, could you give us some comfort as to why you think retailers will give you more shelves, more market share? It’s not usually their typical mindset to put all the eggs in one basket, especially now that there is a bit more competition coming in Mexican beer? Thank you.

Yes, I think it’s fairly simple. Our shelf space relative to our market share greatly under indexes. I can’t even tell you what that number is, but we have a much smaller percentage of shelf space in the store than we have in the market share, and the proposition is simple. Increase our shelf space and you’ll sell more of our beer. And it’s not just shelf space; it’s cold box space as well, versus giving that space to declining low-margin products. So you get two choices: you can give the space to us and sell more of a high-margin item or give the space to somebody else and watch your sales and velocity decline. As I go around and talk to retailers, they get that. Retailers need to rethink their assortment in beer. Fundamentally, their beer assortments make no sense anymore for them, assuming their goal is to improve their sales and margin as a business. It makes no sense; they have 20% of the store allocated to 5 billion crafts that nobody has ever heard of, and then allocate the vast majority of the rest of the store to low-margin declining brands, and a smaller amount to fast-moving, high-margin, high-end brands. So we expect to see a change in that, and we're certainly driving, as the high-end leader in beer, that change. I think it’s a change that has to happen sooner or later, and that's going to dictate that you’ll see trends in beer actually accelerate as that change occurs. For us, it's a gigantic opportunity because we're punching under our weight. We not only have the opportunity to generate the kind of performance we have been, but enhance that performance if we can start getting retailers to act on this understanding. We’re having some success in that regard, and we expect to have more success going forward. I think you’ll see retailers start rethinking their assortment in beer to take advantage of the high-end and Constellation opportunity in particular.

Hi, good afternoon. This is actually Stephanie on for Bill. I’m just trying to get an understanding of the wine business organic growth. Obviously, you are entering your first and second year after your Prisoner and Meiomi acquisitions. So, how much of the growth in the quarter is coming from distribution gains and should we start to see some tougher comps in the remainder of the year? Or I guess put another way, is the growth coming from distribution gains compared to the overall growth of the market? More color there would be helpful. Thanks.

Yes, I would say fundamentally, organic growth, it’s hard to get at that number. But I think that you can fundamentally look at IRI as the best measure of our organic growth, which I think the market is growing sort of low single-digit right now, call it in that 3% type range, with 200 basis points of price mix. We expect to grow in line with that organically and fundamentally with some quarter-to-quarter type fluctuations. We feel fairly confident that’s what the year is going to look like in general. Our shipments and depletes will equal each other by year-end, and as I said, we think you will see conversions between shipments, depletes, and IRI in our wine business. That’s sort of how things are shaping up, which is good. It’s a strong performance, especially given the profitability of that business, and the fact that we can leverage and generate higher bottom-line returns. It’s a very strong business in many respects. I always like to say that it’s only in contrast to the beer business that these questions even get raised. As a standalone business generating 30% margins with mid-single-digit sales growth, leveraging the P&L, if you weren’t looking at it in contrast to our beer business, you would be running around saying, this is one of the best businesses that there is.

Good morning everyone and congratulations. I would like to know how Corona and Corona Light performed as well as insights on your flagship brand, Modelo Especial and Corona Light. Additionally, in evaluating the success of Premier, are you considering its market share impact, its effect on Ultra, or how do you define its performance when you mentioned it’s doing well?

So, Rob in his script talked about Modelo Especial approaching 20% depletion growth. Corona Extra was in that 6% range, and Corona Light was a little bit less than that. So all of the brands are performing quite well, and Rob maybe want to take the Premier question.

Yes, I think Premier looks very strong. We are looking at things like velocities per point of distribution, which appear to be very strong. Cannibalization is not something we’re overly concerned with because there is really no margin disadvantage. As long as one plus one equals three, we are okay with that. We don’t want cannibalization of something that’s good with something that’s not sustainable. The key is making sure that we believe from a consumer acceptance standpoint that Premier represents a sustainable and growing proposition, which right now I would say our preliminary read on that is looking pretty good in terms of contributions it can make and its sustainability and positioning in the marketplace. We’re talking about some of the hardest brands in beer; that’s Corona, Modelo Especial, and Mic Ultra. Premier is a more upscale competitor to Mic Ultra with the power of an elite brand behind it. Anyone can make a beer with caloric and carb characteristics of Mic Ultra, but with the power of an elite brand behind it, along with all the consumer acceptance and recognition, we believe it’s a hot segment of the market that’s here to stay. We like the profile of the product well, and test results back that up, indicating it has extremely strong consumer acceptance.

Thank you very much, everyone, for joining today’s call. I want to reiterate how very pleased we are with the fantastic execution that drove our excellent first quarter results, and my kudos to our people, our distributors, and our retailers who continue to be part of the virtual cycle that drives those results. We are very optimistic about our future business opportunities, which gives us the confidence to raise our full-year EPS guidance. As we head into the July 4th holiday weekend, I hope you remember to drink some of our fine wine products, as well as beer and spirits products, to your celebrations and please enjoy them responsibly. Thank you, and everyone should have a great 4th of July weekend.