Constellation Brands Class A (NYSE:STZ) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Timothy Ramey – D.A. Davidson: Just so many congratulations on this year and this deal, it is truly transformational. As we think about ’14 Rob I was intrigued by your comments that you do expect to see some margin pressure in wine and we’ve had this argument that we should begin to see wine pricing improving as the grape supply-demand balance improves. Can you expand a bit on that?
Robert Sands – President and CEO: We do have higher grape cost coming through from the calendar year 2011 and 2012 grape harvest. So, that’s what’s primarily putting the margin pressure on the wine side. Now, as it relates to pricing we’ve seen pricing in the low end of the market meaning below $5 which doesn’t really impact us because we don’t really have a significant portion of our portfolio in this segment. But generally in the segments which we call premium plus $5 and above sort of the mainstream of the commercial wine business between $5 and $15 we’ve actually seen very little to no pricing when you start looking at the market on a brand-by-brand and SKU-by-SKU basis, and I say brand-by-brand and SKU-by-SKU because if you’re looking at IRI data you have to be very careful to take into account that it appears that there is pricing, but it’s really all mix related as the higher priced products continue to grow at a faster rate than the lower-priced products. So, it is primarily higher grape cost coming through and no pricing which is driving some margin erosion, but relatively modest level of margin erosion. Right now, I would say our basic strategy is to continue to invest behind our focus brands to drive market share growth and make sure that they remain healthy, so that when the opportunity does arise, we will be able to leverage the P&L to take advantage of the investments that we’ve made and the strength that we’ve achieved for our big brands and our focus brands.
Timothy Ramey – D.A. Davidson: Just a follow-up on the Modelo Chelada launch if I heard you correctly by fall. Is that innovation that occurred strictly by Crown or it was that – is that also something with Modelo Corporate is launching as well?
Robert Sands – President and CEO: By the way that’s Chelada. It would be a very strange combination to have a beer (colada), because…
Timothy Ramey – D.A. Davidson: I was going to let you explain it.
Robert Sands – President and CEO: We’re not doing coconut beer just to be clear.
Timothy Ramey – D.A. Davidson: I’d be say, it would be innovative.
Robert Sands – President and CEO: You know it really would be. But Chelada just for everybody’s information, if you’re not familiar with it is a basically a combination of tomato juice or clamato juice and beer and it’s typically consumed combination. And the answer is that’s strictly a Crown innovation, although Modelo does have cheladas in Mexico. So, it is a Crown innovation for the U.S.
Timothy Ramey – D.A. Davidson: It doesn’t sound any worse when putting coconut juice in it. Thanks.
Robert Sands – President and CEO: Well, it’s actually quite tasty.
Judy Hong – Goldman Sachs: So, my first question is on the beer business. When I think about your guidance, I think you said, depletions and net sales are pretty much in line with each other, which I guess implies very little, if not, any pricing in 2014, and just given the cost inflation I was just curious how you’re thinking about pricing opportunity on Crown in 2014?
Robert Sands – President and CEO: Yeah, I think what we said Judy is low to mid-single digits on the depletions and the net sales and mid-single digits on EBIT. As it relates to pricing, generally we’re just simply not going to comment on pricing, primarily because it’s so uncertain basically at this point, as to what’s going to happen in the marketplace, but that said, we’re obviously pretty confident in our guidance of low to mid-single digit growth rate on the top line, which will put us in a position of gaining market share in beer once again and we should be able to leverage that on the bottom-line to mid-single-digit EBIT growth.
Judy Hong – Goldman Sachs: Then just thinking about more of a medium to long-term opportunity with capacity expansion in Piedras Negras can you just maybe either qualitatively or just give us some color as to what kind of margins you think is more of an appropriate margin once you move all of the capacity into Piedras Negras and what’s your sort of long term assumption?
Robert Ryder – EVP and CFO: Yes Judy, this is Bob. So, the way this will work we have transition services agreement with InBev in order to secure the fact that we can keep the U.S. consumers happy with all our wonderful products. As we build out the Piedras Negras facility the manufacturing will shift from InBev facilities to our own Piedras Negras facility. The Piedras Negras facility is a very efficient so it will be able to produce beer at a lower cost than we’re buying that beer from InBev for. So, overtime margins will improve because of that production shift from less efficient brewery to more efficient brewery. So you have that going on than you have all the same dynamics that all the beer players have in what’s going on with input costs, what’s going on with brewery – core brewery efficiencies, what’s going on in U.S. pricing dynamics. But what’s unique for us is the shift of production from InBev to Piedras Negras and we expect that by the end of three years we will be making all of our own beer, because as you get up to a $20 million that should be enough production capacity say to last us say five to seven years.
Judy Hong – Goldman Sachs: But your guidance for 2014 does not assume any of that benefit because it’s more medium to long term opportunity?
Robert Ryder – EVP and CFO: That’s correct. There is a bit of efficiencies from some warehouse capital spend but because of the late start to this year most of the capital spend we’re making will not result in increased production capacity it will be like down payments on long lead time equipment, engineering drawing and things like that.
Judy Hong – Goldman Sachs: And Bob just on the free cash flow guidance and it relates to your leverage target. So, if I hear you, you are saying you are kind of in the low 5 today in two years you think that will step down to be low kind of 4 times assuming with the free cash flow generation. So, it kind of implies maybe a free cash flow – ongoing free cash flow number of say maybe 700 million, 800 million per year versus this year which I guess we are seeing somewhere around 475 to 575. So, can you kind of comment on what is sort of the right ongoing free cash flow number and what’s driving that step up from this year into the next couple of years?
Robert Ryder – EVP and CFO: I’d say without giving specific numbers the two big drivers will be reduced leverage and reduced interest expense, as we delever. Reduced capital spending, but that won’t happen till like year four, because we will be spending our capital on the brewery for years one, two, three and actually year two and year three will be higher than year one and increased profits from the manufacturing of the beer because we will be making it in our facility versus making it in theirs and then add on to that our product categories are in high margin, high growth – it is a high margin, high growth industry. Also Judy as we get past the first year, we’ll most likely have lower one-time cost because we have the initial financing fees and the initial kind of professional service and transition cost that are going to hit us to next year which I talked about in my script.
Judy Hong – Goldman Sachs: The $80 million in total.
Robert Sands – President and CEO: Right, total of $80 million.
Judy Hong – Goldman Sachs: Okay, understood.
Robert Sands – President and CEO: Those intrinsic numbers, right, are going in our favor as we go forward and you will see that as we start to delever we should get some very good free cash flow and EPS leverage as we move out into time.