Below is the transcript of the Constellation Brands, Inc. (NYSE:STZ) Q3 2015 Earnings Conference Call, held on Thursday, January 08, 2015, at 10:30 am EST.
Constellation Brands, Inc. (NYSE:STZ) is a leading international producer and marketer of beer, wine and spirits with operations in the U.S., Canada, Mexico, New Zealand and Italy. In 2013, Constellation was one of the best performing stocks in the S&P 500. Constellation is the number three beer company in the U.S. with high-end, iconic imported brands including Corona Extra, Corona Light, Modelo Especial, Negra Modelo and Pacifico.
Company Executives:
Rob Sands, President and Chief Executive Officer
Patty Yahn-urlaub, Vice President of Investor Relations
Bob Wright, Chief Financial Officer
Robert Ryder, Executive Vice President and Chief Financial Officer.
Analysts:
Nick Mouldy, RBC Capital Markets
Brian Blaney, Bank of America
Dara Mohsenian, Executive Director, US Beverage/Household Products Sectors at Morgan Stanley
Judy Hong, Managing Director at Goldman Sachs
Kim Brainy, Capital Research Group
Mark Forsberg, People’s Financials
Caroline Levy, Beverage and HPC Analyst at CLSA
Operator:
Ladies and Gentleman thank you for standing by, and Welcome to the Constellation Brands [NYSE: STZ] Third Quarter since whole year 2015, our news conference call. All lines have them please unmute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. If you’d like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If your question has an answer and you wish to remove yourself from the queue, press the pound key. We ask before that you’ve pick-up your hands that to allow optimal sound quality, thank you. I now turn the call over to Patty Yahn-urlaub Vice President of Investor Relations
Patty Yahn-urlaub, Vice President of Investor Relations:
Thank you Lorrie Good Morning everyone and welcome to constellation’s third quarter’s fiscal 2015 conference call. I’m here to this morning with Rob Sands, our President and Chief Executive Officer, and Bob Wrighter our Chief Financial Officer. This call complements our new series, which is then furnace to the STC. During this calling may discuss financial information on the gap comparable organic in constant currency basis. However discussions will generally focus on comparable financial result. Reconciliations between the most directly comparable gap measure and needs and other 9 gap financial measures are included in the new 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. All those statements will present our best as to estimates and expectations actual results could differ materially from our estimates and expectations. For detail less risk factor that may impact our company’s estimate. Please refer to the news releases and constellations at STC filing. And now I’d like to turn the call over to Rob.
Rob Sands President and Chief Executive Officer:
Thanks Patty and Good morning and Happy New Year to everyone hope everybody got the 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 Constellations stock increasing almost 40% per calendar year 2014. And this is the third consecutive year that Constellation was one of the best performing stocks in the SMP 500 consumer’s stable index. Our stock price has been on fire increasing almost 400% during the 3 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 to meet demand for our iconic beer brands well into the future.
In addition to our on growing brewery expansion in Nava, Mexico, we recently begun implementing our Multi-faceted glass sourcing strategy which includes the acquisition of ABI’s as state of the art glass plant which is located adjacent to our Nava brewery. The formation of 50-50 joint ventures with Holland’s Illinois the world’s leading glass container producer to own, operate and expand the Nava glass plan and the execution of a glass supply agreement with Mexican glass manufacturer Vitro which will begin to wrap 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 brewery results are evidence of the great momentum we are currently experiencing for the business as we achieve 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 are growing both volume and our dollar share in the industry at the time when overall beer growth is lack luster for the U.S beer market. Our entire Mexican portfolio including Corona Light, Pacifico, Negro Modella 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 1 imported beer in the U.S, selling greater than 50 million more cases then the next closest import competitor and growing at the highest trend rate in years. These Result is being driven by distribution growth, velocity gains, and Incremental marketing support including the General market and Hispanic, Find Your Beach and Epic moments advertisement campaigns as well as the return of the 0th 10 in Palms spot on English and Spanish language T.V during the holiday season.
Modella Especial continues to perform beyond expectations and as expected to soon surpass high that came across all channels as the number 2 imported beer in the U.S, continued investment in national Hispanic T.V, 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 3 new markets as well as increased distribution for bottles and cans. I’m doing a marketing support featured national football retail promotions which helped merchandise the draft format in the un-premised channel during football season. Overall the strong shipment buying of the beer business generated in the third quarter are the primary driver of the upward revision to constellation over up BPS guidance for Fiscal 2015.
Keep in mind that the distributors also increase 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 private 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 a low gin range with operating profit growth of mid to high gins. 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 late summer has become operational and is expected to significantly supplement our Can product availability as we continued to pursue this market opportunity.
Major structural skill erection for the packaging, building was completed on schedule in mid-December and the remaining beer tanks were installed in the brewer house in late November. We initiated investment activity for a recently announced 5 million hectoliter capacity expansion and we have progressed with real logistics and sight 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 team 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 even 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 of on and off premise. We experienced excellent sales growth for existing spirits brands during on the third quarter driven by new flavor line extensions across our portfolio including speculum, mango, pineapple and strawberry lemonade as well as the recent introduction of Palmas ant, Grand amber, Brandy peach flavor. In addition we gained IRI volume and dollar share of the 3 spirits categories that represent our market participation including imported vodka, Canadian whiskey and brandy. From a wine perspective outside the U.S are Canadian business posted solid third quarter results although our international business was negatively impact by a decline in both wine sales in economic distribution in Eastern Europe. In the US although the US 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 US wine results did not meet our growth expectations. In addition the positive next trends that we anticipated earlier this year have not reached target levels as our premium price products are growing faster. The supper premium and above products.
This is resulted in US market share dollar erosion especially in supper premium price segment which remains highly competitive and currently generates much of the US wine category growth. However we have a 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 year has open the key opportunity for innovation and has new product development and although our recent new product development initiatives have seen mix results, we remain commit innovation and launch an enterprise wide product development process review to improve our results in this area and increase success rate of our new product pipeline. In addition we are currently initiating or expanding product releases in the US for new wine such as Pop Crush, Tom Gore Vineyards, Jailbreak, Watch Club Rock and early launch results free these brands are quite positive.
We know however the success of innovation cannot come at the expensive of the help our established brands as such we have plans in place concentrate our efforts on an the important subset of our focused brand in order to drive key brands that are mix and margin creative have scale, growth and momentum. Although our US wine business is not expected to achieve its respected market dollar share goals for the year as we are falling short of our expectations expectation for volumes and depletions. We believe the hard work in significant accomplishments we have made throughout the last few years have favorably positioned the business going forward.
We have negotiate the majority of our exclusive US 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 acolytes for some of our key wine brands.
Market Watch magazine recently awarded the best new wine product of 2014 honor to Thorny Rhodes, Constellation Brands [NYSE: STZ] received 24 medals across the portfolio at the 2014 Summer Yalles challenge international wine competition. Inniskillin Vidal 2012 reached a 99 point score and wine of the year while Ruffino received 7 medals including best in class distinction and 96 points to the 2011 Ruffino motives. Woodbridge by Robert Mondavi was featured in the buy section of the November issue of wine enthusiast buying guide. While Robert Mondavi Naperville Cabernet and Robert Mondavi 2012 Penonvior reserve both received 90 points scores.
These awards and acolytes are a great reminder of the exceptional quality and strength in our portfolio of wines. Enclosing, 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 up brewery expansion in Mexico and we have begun to execute our new last 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 am especially gratified by the fact that the constellation was one of the best performance SMP 500 consumer stables stocks for the third consecutive year. Now, I would like to turn the call over to Bob for a financial discussion of our third quarter results.
Bob Wright. Chief Financial Officer:
Thanks Rob. Good morning everyone! Our comparable basis to diluted EPS for Q3 commutative dollar 23, that’s a 12% increase versus Q3 last year. We continue to see robust market place momentum for our beer business with depletion growth of 8%. This result was in line with our 8% depletion growth performance here today and our high single digit depletion growth target for full year fiscal 15. As expected we saw a ship that have 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 6 cents of diluted EPS for the quarter. Even after excluding this benefit, beer shipment volume growth came in ahead of depletion growth during Q3 as distributers increased their inventory position during the quarter to the more in line with historical levels and to be better positioned to capture growth opportunities going forward. As 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 assessment of about 10%. Operating income growths for the beer segment is now expected to approximate 30% for fiscal 15.
When factoring 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 a full year operating income margin for beer to approximate 32%, while on net sale performance for wine and spirits was somewhat needed during Q3 for the reasons Rob mentioned earlier, E-bit primarily benefited it 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 E-bit 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 cents to $4.25 cents a share. Our comparable basis guidance excludes unusual items which are detailed in the release.
Given those highlights, let’s look up to Q3 performance in more details 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 we outlined earlier, net sales increased 11%, wine and spirits net sales on cogs and currency basis were even with the prior year quarter. This primarily reflected higher spirit volume, off-set by the 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 favorable cost of goods sold; the wine and spirits.
Our consolidated gross margin increased just over 1% in point to 43.5% for the quarter primarily due to the favorable cogs and reduced bulk wine sales for the wine and spirits business, as she made for the quarter increased $18 million dollars. The increase was primarily due to higher SGNA for the beer business. Due to the factors just mentioned Q3 consolidated operating income increased 40 million and consolidated operating margin improved 90 basis points. Equity earnings increased 3 million dollars due to the strong results for our Opus One joint venture. Interest expense for the quarter were 86 million down to 4% versus Q3 last year. This decrease was primarily due to lower average interests rates.
That provides a good spot to discuss our debt position. At the end of November our total debt was 7.3 billion dollars. When factoring in cash on hand our net debt totaled 7.25 billion, an increase of 295 million since the end of fiscal 2014. During Q3 we issued 800 million of senior notes consisting of 400 million of 3.875 notes to 2019 and 400 million of 4.75% notes due to 2014. Our strong credit and financial profile combined with the favorable interest rate environment hoped us execute this attractive financing activity. Part of the proceeds from the notes’ insurance was used to redeem USD 500 M of 8.375 notes during the quarter. We still expect interest expense to be in that range of 345 to 355 M per fiscal 2015. Our effective tax rate per Q3 came in at 29% in 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 discuss free cash flow which we define as net cash provided by operating activities less capex. For the first 9 months of fiscal 15, we generated USD 209 M of free cash flow compared to USD 543 M for the same period last year. Operating cash flow for the first 9 months of the year totaled USD 750 M versus USD 629 M for the prior year period. This increase was primarily due to the benefits generated by the beer business. Capex for the first 9 months of fiscal 15 totaled USD 541 M compared to just USD 86 M last year. Capex for the beer segment totaled USD 435 M 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 USD 275 M to USD 350 M and capex to be in the range of 725 to 775. Our capex projection includes 600 M to 650 M 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 hedge contracts flow through our gap 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 losses allocated to the appropriate business segment for reporting and it will be included in our comparable earnings. This approach is in line with others in the consumer space. For Q3 there was a USD 20 M loss from this activity which was primarily driven by the mark to market additional on diesel fuel contracts. Before we start taking your questions I like to note we are very pleased with how fiscal 15 is progressed so far and we believe that 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 solidly of the growth through the year while our beer business has tremendous momentum in the market place growing well ahead of the total U.S. beer category. We are 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 continued 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 are happy to take your questions.
Operator
At this time I would like to remind everyone if you like to ask a question press * than the number 1 on your telephone key pad. If your question has been answered and you need to remove yourself from the queue press the pound key. Again we ask that you please pick up your hand set to allow optimal sound quality. Your first question comes from the line Nick Mouldy as RBC Capital Markets.
Nick Mouldy, RBC Capital Markets
Yes, thanks! Good morning everyone! So two questions from me. Just on the wine side you have real good margin expansion obviously going a bit late and I am just curious did you make a concerted decision to little priorities of a margin of a volume. Is that something we should expect kind of in the next 12 to 24 months? And then the last question is just you can give us some updated thoughts on Debby Vega continues to migrate towards your targets. How should be thinking about cash float distribution to shareholders?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Sure. On the end you saw we did have good beer margin. I am sorry! Wine margin performance in the quarter. We expect that to continue for the full year. We just changed our guidance to be at the low end of sales growth and high end growth which means we will see margin expansion this year. Long term basis. We still expect the wine segment to maintain margins. I think there was some positive outcome this year mostly around cost of good soil which are really hoping recover margins from the last few years’ erosion but I wouldn’t expect big margin expansion in the wine segment go forward but we do expect to at least maintain margins and I think amount EBITDA and free cash flow.
You know, we continue, as you know we are spending a ton of money in the beer segment which we are quite happy to do because you know the return on capital net segment is north of 40% with a very quick payback and the EBITDA growth of the total company will be growing well in excess of a capital spending growth, even though the capital spending is growing so much and again a lot of that is driven by the beer segment, by the phenomenal EBITDA there, so I think in line of what we have been saying in the last 2 years, as we have pretty good visibility to getting our EBITDA leverage bellow 4 times I would say that the number 1 agenda item for use of free cash flow is returning it to shareholders and probably at the top of that list would be and initiation of a dividend. We are one of the few people, certainly with our financial profile and in beverage, alcohol, consumers in general, and consumer products in general but we don’t have a dividend. We are quite confident that this is really good cash flow generation will continue. We will probably be looking at dividend in the very near future.
Nick Mouldy, RBC Capital Markets
Great. Thanks for the answer. Real quick follow up on that dividend point. When you think about the initiation, are you thinking about something nominal to begin with or you think you can go closer to the payout ratio it appears from the get go just given the free cash flow generation of the company?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes, you know, we are still studying. 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 you know, 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. 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.
Nick Mouldy, RBC Capital Markets
Perfect. Awesome. Thank you so much!
Operator
Our next question comes from the line of Brian Blaney of Bank of America.
Brian Blaney, Bank of America
Hey! Good morning and Happy New Year everyone! I’ve got 2 questions. One just, Bob thinking you’re prepared remarks when you walk through the commentary on the mark to market activity. Your reference, there was USD 20 M loss relative to that activity in the quarter. Will that USD 20 M been included in results or was it excluded from the results?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes, sure. The USD 20 M was included in the gap results but we excluded from comparable earnings and you know the reason we do this when we, none of our commodity has just qualified for hedge accounting and we are hedging 3 years out, so you would see a lot of volubility in a quarter because you have been mark to market almost 3 years of hedges every quarter, right? So, we are kind of putting that stuff in non-comparable earnings. It is still in the press release, so you can see it but we think it will kind of confuse the financial statement reader if we saw that in comparable results every quarter. This quarter not surprisingly because of the rapid fall in fuel prices when we mark to market our diesel hedges there were losses and it was about USD 20 M for the quarter.
Brian Blaney, Bank of America
By the time those hedges get settles, at some point in the future if things don’t change, that settled hedge could that potentially drag margins at some point in the future because it is so far out of the money or?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Modelo Especial brand, including where currently you are standing from distribution stand point, your expectation of 2015 versus the level of expansion you saw in calendar 2014.
Absolutely! I am so sorry. I might have missed that last point. We will bring the gains or losses on these hedge contracts in to comparable earnings when the contracts are settled. So to your point, if diesel fuels prices don’t change this USD 20 M loss will come into comparable results and we will allocate it to individual segments based on their usage of fuel and because there is 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.
Brian Blaney, Bank of America
OK. That is helpful. And just a second question related to foreign exchange. You know, dollar is strengthened relative for the peso pretty recently. I guess I am curious to know, you have some peso denominated cost, right? Both in your capital spending. I am assuming some of the labor associated with the construction on another brewery and also in the cost of good soil in the beer business. I am assuming there is some peso related cost or denominated cost in your cost to good soil. So can you talk about if the dollar continue were continuing to remain really strong to the peso or continue to strength in relative of the peso will it have kind of a positive effect in kind of both what your dollar cash cost outlays are for Nova and also will it have any impact at all on the gross profit of the beer business?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes. Good questions. In the beer segment, in look, in the grand scheme of things we are very much a North American business and actually very much a U.S. 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 prospective, there is some hurt because the Canadian dollar is devaluing versus the U.S. dollar, so we translate Canadian earnings. That was about 1% hurt to our sales. On the peso specifically, our peso expose cost, as you said, Mexican labor, Ok?
Which isn’t an enormous piece of our total cost of goods sold but you know it is relatively large piece. And also as we spend capital, those capital cost by large be capitalized in pesos, so the depreciation on those will also be exposed to foreign exchange although that is not necessarily cash because it is depreciation. So net, net to strong dollar will help us versus our Mexican import cause. That also being said we do hedge our transaction currencies, so we aren’t 100% exposed to those peso cost because we will have some peso going out but net, net strong dollar versus the peso helps us.
Brian Blaney, Bank of America
Great! Thank you!
Operator
Our next question comes from the line of Dara Mohsenian, Morgan Stanley.
Dara Mohsenian, Morgan Stanley
Thanks! Good morning guys! So what are the given update on growths of the draft and K import exports of your business in the quarter? And also what you think the capitalizations level are in your business from expansion of those 2 areas worst draft as if you added it for your business? And also can you give us an update for the future plans and draft, and expanding additional brands in that segment whether it is Corona Light or other brands in terms to move in the market with Corona Light?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes. There are, you know, number one we’ve seen very strong growth in our draft business, about 40% in growth and we’ve actually seen very little cannibalization with the draft business. Introduced it with brands like Corona Light and in actuality not only is there of a cannibalization but when we put Corona Light draft in a on premise establishment we tend to see pick up in the bottle or can product in the area around it because it is really marketing. So we expanded our Corona Light Draft in Francis three new markets and we’ve also been testing Corona in draft, as well.
Again having extremely positive results seeing almost no cannibalization of our glass product when we put draft in although we are being very careful about that because we want to fully understand what the impact is. Cans are the same thing. You know, great can growth. Great can opportunity. Represents obviously a large portion of the market that we haven’t participated in. Cans are purchased for consumption in case where glass can necessarily be used both beach, stadiums, etc. So that also represents a purchase opportunity that largely does not result in cannibalization for us. These package additions are definitely driving growth in the overall beer business.
Dara Mohsenian, Morgan Stanley
OK. That is helpful. And then also can you discuss distribution expansion potential for the Modelo Especial brand including where you currently stand from a distribution stand point, your expectations for calendar 2015 versus the level of expansion you saw in calendar 2014. So are you in the same pace or accelerating? And then also just longer term. Where do you think that the brand’s distribution level can get to versus Corona or other brands in the industry?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes, so first of all Modelo Especial has a huge runaway for growth. Right now we are at about in you know ROI terms, 60% ACV and that certainly does not represent full distribution in any regard. The product still souse from demographic point of view extremely heavily Hispanic, even though if penetration in the Hispanic population isn’t even where we would like it to be and where it potentially be. So there is a huge runaway in the Hispanic market. In the general market is very wide open for Modelo Especial and driving, distribution and paths are one of our key initiatives on that brand and is going extremely successfully.
We’ve introduced this year because the brand is expending into the general market now. We have introduced general market television advertising which we think is going even further accelerate the growth of this product. So the growth runaway on this brand is tremendous and we don’t see any diminishing in growth rates or increases in penetration exactly where in it is going to get to. I mean fully distributed product is usually around, I don’t know, 90% ACV. Exactly when we get there I don’t know but we are going to work to get there and we have everything going in our favor, so the ability to increase distribution, as well as the ability to see velocity per point of distribution increase. So all these things are going to contribute to Modelo Especial continue to be really the hottest major beer brand in the market of any significance.
There is really nothing of that size, that is growing like Modelo Especial and just you know even Evan Donnelly is starting to go around see what people are drinking. I mean, you are seeing all the sudden Modelo Especial becoming a popular product in the general market as well as the Hispanic market.
Dara Mohsenian, Morgan Stanley
OK. That is helpful! Thanks!
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Sure.
Operator
The next question comes from the line of Judy Hong from Goldman Sachs.
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 and even then the big impact is when we get our own furnishes 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 is more longer dated than that.
Judy Hong , Goldman Sachs
OK. Thank you!
Operator
The next question comes from the line of Kim Brainy of Capital Research Group.
Kim Brainy, Capital Research Group
Good morning! Thanks! Did you say how long the diesel hedges were? When should we thinking about seeing and even positive impact coming through lower fuel?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Well, it is a combination thing and we don’t hedge 100%, right? So we hedge a smaller percent of our exposure in outer year. So we will hedge the most in the next 12 months and then month 12 to 24 will be a lower percentage. So, we will benefit for the on-hedged piece of diesel. We will benefit from that because we are pretty much paying the spot rate. The negative is the marked market on the hedges, right? And when those hedges get closed out we will see that lost in our comparable earnings.
Kim Brainy, Capital Research Group.
OK. And then on the net debt, the way I do the math you actually may reach 4.0 times in the Q4. I know you previous guidance has been below that by 16 and so maybe we are splitting hairs here a little bit. Are we little ahead of the curve?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
I think we are pretty much where we expected. We’d expect to be right around that 4.0 range at the end of the year and it happens to be how our free cash flow coming in. Of course, we haven’t even finished our plan next year but a lot of that will be depended upon what quarter we spent a lot of the beer capital. But probably my guess is of our due leverage will occur in the back half of next year. But you know, we would expect to be below 4 times in fiscal 16, by the end of fiscal 16 and as our planning process comes through we would have better visibility to it by quarter.
Kim Brainy, Capital Research Group.
Got it. Is that number kind of magical relative to the dividend discussion? Maybe not for covenant reason but just for managements’ mindset reason?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
We’ve kind muted magic I guess. In all these discussions there is a lot of variables but we have to pick kind of one cold fish of the equation of fix and what we said is that the EBITDA leverage and we’ve said we will begin reassessing returning cash to shareholders because we have been one of the more aggressive people in our space but we’ve done an exclusively from stock buy backs when we bought back about 20% of our shares under USD 20 a share. We still have USD 750 M available under our Boar authorization but I think what we’ve said now since a lot have happened since we’ve stopped our, you know, since we put the stock buyback program on high at us that dividend will trunk stock buyback and what we’ve said is when we have really good viability to getting below 4 times and staying there that’s when we will start assessing a dividend and as we all said it looks like it will be in fiscal 16. We will probably, you know, talking about it for our fiscal 16 guidance.
Kim Brainy, Capital Research Group
Sounds good. Thanks so much!
Operator
Our next question comes from the line of Dara Mohsenian, Morgan Stanley
Dara Mohsenian, Morgan Stanley
Thanks! Good morning guys! So what are the given update on growths of the draft and K import exports of your business in the quarter? And also what you think the capitalizations level are in your business from expansion of those 2 areas worst draft as if you added it for your business?And also can you give us an update for the future plans and draft, and expanding additional brands in that segment whether it is Corona Light or other brands in terms to move in the market with Corona Light?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes. There are, you know, number one we’ve seen very strong growth in our draft business, about 40% in growth and we’ve actually seen very little cannibalization with the draft business. Introduced it with brands like Corona Light and in actuality not only is there not a cannibalization but when we put Corona Light draft in a on premise establishment we tend to see pick up in the bottle or can product in the area around it because it is really marketing. So we expanded our Corona Light Draft in Francis three new markets and we’ve also been testing Corona in draft, as well. Again having extremely positive results seeing almost no cannibalization of our glass product when we put draft in although we are being very careful about that because we want to fully understand what the impact is.
Cans are the same thing. You know, great can growth. Great can opportunity. Represents obviously a large portion of the market that we haven’t participated in. Cans are purchased for consumption in case where glass can necessarily be used both beach, stadiums, etc. So that also represents a purchase opportunity that largely does not result in cannibalization for us. These package additions are definitely driving growth in the overall beer business.
Operator
The next question comes from the line of Mark Forsberg of People’s Financials.
Mark Forsberg, People’s Financials
Yes, thanks! Good morning guys! I guess 2 line questions. One is the cox benefit you got in the quarter. Do you think that kind of trend into something that we should be looking for going forward? I think in the Q&A year on the operating margin basis you expect wine margin basis to expect relatively stable, you know, beyond the next few months. And then secondly, if you look at your wine share outlook which is a little below where it have been how are you thinking about addressing those share trends? Are you OK with underperforming the category? Do you tend to spend more to try to pick up those trends? Help us with your thinking there.
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
So I will take the first half of that market wrap handle the second half. On cox I will say that there is probably some anomalies activities in the 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 hire at the end of fiscal 15 and they were in the end of fiscal 14. We are not giving guidance for fiscal 16 but I would be anticipating a lot of margin expansion going forward. So, that answers about the wine market share question.
Rob Sands, President and Chief Executive Officer
Mark I think consistent with what Bob just said no, we don’t like losing a even a small amount of market share and we have a lot of plans in place around innovation, around NPD, around concentrating our spends against higher growth elements of our portfolio which we think will address that largely however without spending a lot more money and 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 will 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, look at our wine and spirits segment.
First of all spirits is performing extremely well. Above our expectations and that is real positive in the business and we are looking at that segment of the business for further in-placement. You know, obviously because it is performing so well at the current tact and the line side. We had a couple, I will say, somewhat anomalous things that impact us. For instance Eastern Europe impacted us to some degree this year, even though it is not a very significant piece of our business it was just so, you know, that geography was so devastated by everything that happened. We lost some sales in Eastern Europe. We also exited some bulk line related to the international market which did affect the top line but didn’t really have any effect on the bottom line because it is just commodity bulk line business.
I was business that we frankly don’t even want to continue doing. And that affected the top line a bit. And then in the U.S. 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 that much of an impact. It probably had a little bit of impact but again trying to keep a balanced approach to both the top line and the bottom line. I think it have worked out pretty well. So all that said we would like to hold market share if not grow it but we will keep balanced approach to growing both the top line and the bottom line.
Mark Forsberg, People’s Financials
That is great! I wanted to ask one quick follow up on the cash return thinking, Bob
Rob Sands, President and Chief Executive Officer
By the way I just found out that note, I am reminded that we did have a pretty significant negative translation impact in Canada due to currency but as you are all aware that is largely accounting as a continuance of the strong dollar and the weak Canadian dollar. That has been a largely domestic business.
Mark Forsberg, People’s Financials
And maybe this is a follow up for Patty or Bob and on that Rob, if we take Canada, if we take Eastern Europe, if we take the bulk line. Can you put those together and tell us to the overall if you have temporary revenue adverse pack?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Although it is a 4 experts work the bottom a percent. Their national is worth about a percent, right? So that will turn wine I guess from a negative 4 to a negative 2.
Mark Forsberg, People’s Financials
Got it. And what about the bulk line impact?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
That was probably less than a percent.
Mark Forsberg, People’s Financials
Less. OK. Great! Just on cash return you said just now that Tim look for the guide of February, for fiscal 16 for clarity on your dividend intentions. Could we think about fiscal 16 view as ore total view on cash return including any potential for repo?
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes. We are still assessing that marks. We will talk more about that in April.
Mark Forsberg, People’s Financials
OK. Great! Thank you guys.
Operator
The next question comes from the line of Caroline Levy of the CLSA.
Caroline Levy, CLSA
Thanks and good morning everybody. Two questions. The one is pricing in beer. Will you be able to get pricing to cover the increased cost that you get with that inflation pricing from AB? You know, when they sell your product. That is the first question. How does pricing look right know for you and the rest of the industry the best you can tell. And secondly what happened to advertising and marketing spend in the quarter? Was it up or down for both segments? If you could just highlight that and I am wondering you are going to Port Quarter for marketing. What activity you would have around in a fill because I guess big brands do a lot around Super Ball? So, with that effect the trends of this 8% depletions? The fact that you are heading into a time of heavy big brand marketing.
Robert Ryder, Executive Vice President and Chief Financial Officer, Constellation Brands [NYSE: STZ]
Yes, so you know on beer pricing we talk about most of the categories’ pricing happens in the fall. I think that pretty much progressed on plan. We are not necessarily correlating pricing to our ABI inflation. We had a high level there. You can see what is happening on the category and pricing if you look at IOR, if you look at Nielson. Regarding marketing, there is some timing. You know, beer marketing is up every quarter. It is up year over year but for this quarter marketing it is percentage of sales and probably beer came down. That being said to your point we are in one of our heavies properties for advertising so we expect that to ramp up in the next quarter and we expect marketing as a percentage of sales and beer for the whole year to be up but we feel that more than pays for itself.
