Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Hi, Judy!
Judy Hong , Goldman Sachs
Hey! How are you? So a few questions. First, Bob, on the news sale guidance for beer I just want to clarify that change is really all related to the shipment out performance versus depletion in Q3 and you are 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 gross initiatives behind your bottle portfolio on beer?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes, so the increase in beer is because depletions are pretty much within our guidance like high single digits and actually depletion growth has been very consistent. The impressive thing is there is substantial improvement because Q3 and Q4 is overlapping higher goal last year. So we are very happy with the top line. The reason for the increasing guidance is also the net sale increase and a lot of that. It is driven by the distributors bringing inventories back in line with historical levels. Regarding the economy. Hey look! Every time the consumer have more money in their pocket it is better for consumer product companies. Now whether we benefit more than other companies, I am not sure but it is certainly better having more money in consumers’ pockets than less.
Judy Hong , Goldman Sachs
And then just on that note, just diversions in terms of maybe the category performance or wine perhaps was sequentially a little bit weaker from the category level even with the consumer getting better. You have any sense what is driving some of the categories of the category softness online?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
You know 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 Muscat and red blends were going extremely rapid blends and consumers experimented I will say with new products. This year those products are still growing very well but not at the rate they were and not that this affects us particularly but there is a lot of pricing being taken in the bellow US 5 commodity segment of the wine business, the popular price and that’s turned into pretty heavy negative territory. So, I think that is driving the overall market down. Maybe a 100 basis points or so. It is a bad effect. It is still trending pretty much sort of consistently, you know plus or minus a 100 basis points with where it trended over historically over the long terms. But it is a little slower than we anticipated.
Judy Hong , Goldman Sachs
And then my last question, Bob, I have to ask beer margin question. 31.5% is very good margin but it was down a little bit since last year. Was it all related to the SGNA step up and was gross margin actually relatively stable? And just the phasing of the new glass contracts’ flowing through your cost timing of it because you have now the Vitro arrangement that started in October but it sounds like that is not going to really flow through until fiscal 16, so any collar just in terms of the phasing of how each of those contracts will start to really flow through your PNL? It will be very helpful.
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes, so Judy we would all be disappointed if you didn’t ask a few margin questions. So thank you for restoring our faith. I would say gross margin for the wine business was really consistent year over year, so the majority of the reduction in operating margin was due to our SGNA ramp up. Sorry, beer. As we get off our transition services agreement we start scoffing up in the beer segment, so we are maintaining our 32% operating profit margin for the beer segment for the year, so this is in line with what we have expected. Regarding the glass contracts, they really won’t start to impact us until next fiscal year
