Constellation Brands Inc (STZ) 2017 Q3 法說會逐字稿

Welcome to the Constellation Brands third-quarter 2017 earnings conference call.

(Operator Instructions)

I'll now turn the call over to Patty Yahn-Urlaub, Vice President of Investor Relations.

Please go ahead.

Thank you, Laurie.

Good morning, everyone.

Happy New Year and welcome to Constellations' third-quarter FY17 conference call.

I'm here this morning with Rob Sands, our President and Chief Executive Officer, and David Klein, our Chief Financial Officer.

This call complements our news release, which also has been furnished to the SEC.

During this call, we may discuss financial information on a GAAP, comparable, organic, and constant-currency basis.

However, discussions will generally focus on comparable financial results.

Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial measures are included in the news release or otherwise available on the Company's website at www.cbrands.com.

Please also be aware that we may make forward-looking statements during this call.

Although statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations.

For a detailed list of risk factors that may impact the Company's estimates, please refer to the news release and Constellations' SEC filings.

Before turning the call over to Rob, I would like to ask that we continue our practice of limiting each Q&A session participant to two questions, which will help us to end our call on schedule.

Thanks in advance, and now, here is Rob.

Thanks, Patty, and good morning and happy New Year.

I hope you enjoyed the holiday and had the opportunity to include some of our great Constellation products in your celebrations with family and friends.

Now, before we get started with our discussion of third-quarter results, I'd like to thank those of you who participated in our recent New York investor meeting.

I hope one of your key takeaways from that meeting is that Constellation is better positioned today than it has ever been to generate growth and build value.

Our Business has never been stronger, and the prospects across our beer, wine, and spirits portfolio are compelling.

We sell a diversified portfolio of fast-growing premium brands from the US, as well as other parts of the world.

Our Business continues to produce very impressive results.

We are gaining share, improving margins, and making smart investments to fuel growth.

Consumer demand for our iconic brands remains very strong, and we have no reason to expect this to abate.

We are so confident about our future business prospects that we recently repurchased more than $800 million worth of our outstanding shares because we believe our stock is undervalued at current levels.

I believe it's the changing political and legislative landscape in the US that has recently impacted our stock price, particularly as it relates to potential changes to tax structure, tariffs, and trade policies, but I'll address this topic in a few moments.

With that said, let's focus our discussion on some of the industry-leading results we delivered for the third quarter.

Our beer business continues to be a powerhouse for growth, delivering third-quarter depletion trends of almost 11%, while contributing 60% of total US beer industry IRI dollar growth and significantly outperforming the high end of the US beer category.

Constellation Beers was the clear market winner for Labor Day, outperforming the category and all major competitors, while gaining both IRI dollar and volume share, with all core import brands driving these gains.

In addition to Labor Day, which marked the official close of our 120 Days of Summer selling season, Constellation was the US beer market growth leader during all key summer holidays, including Cinco De Mayo, Memorial Day, and July 4th.

During the quarter, Corona Extra aired TV campaigns during NFL games, while continuing to invest in boxing and the Corona Extra can format, and was the number-three share gainer overall among high-end US brands.

Casa Modelo was recently established to include all Modelo brands under a master branding strategy and portfolio approach.

During the quarter, this brand family launched new packaging and initiatives for more effective cross-promotion and awareness building, while setting the stage for enhanced product innovation and line extensions.

Casa Modelo continued TV advertising via both national Spanish language TV and national general market TV for Modelo Especial, with a strong presence in the high-profile NFL games.

These initiatives helped to solidify Modelo Especial as the number-two share gainer among all beer brands, as well as high-end brands in the US market, and drove depletion growth of almost 20% during the third quarter.

Pacifico continues to be on fire, with nearly 20% depletion growth during the quarter.

All core packages are growing, with 24-ounce single-serve can driving acceleration of the growth for this brand.

Ballast Point continues to be the fastest growing major craft brand in the US, and achieved a solid double-digit depletion growth during the quarter.

Operationally, our Nava brewery, currently operating at 20 million hectoliters, as well as our complete supply chain, continues to perform at exceptional levels to support our sales growth through the first three quarters of our fiscal year, with planned future expansions at Nava on or ahead of plan.

The Obregon brewery in Mexico remains fully operational as we transition the 400 highly skilled employees who have joined Constellation.

They have hit the ground running, now that this transaction is closed.

This acquisition allows immediate access to functioning brewery capacity to support our fast-growing, high-end Mexican beer portfolio, and provides flexibility for future innovation opportunities.

We have also become fully independent from our interim supply agreement with ABI, which was terminated with the acquisition.

Our Mexicali brewery project has been initially re-scoped to 5 million hectoliters of production capacity as a result of the Obregon brewery acquisition.

The Mexicali construction is picking up momentum, and we expect the first module to commission in late calendar year 2019.

Now I'd like to discuss the results for our wine and spirits business.

During the quarter, we advanced our premiumization strategy with the acquisition of Charles Smith Wines and High West Whiskey and Distillery.

Both of these portfolio additions are off to exceptional starts, and place us in categories with excellent potential and upside.

Our innovation efforts are also taking hold with brands like Robert Mondavi Private Selection Bourbon Barrel-Aged Cabernet, which has become one of the fastest growing super-premium SKUs in IRI.

The recently introduced Cooper & Thief, a bourbon barrel-aged red blend at the super-luxury price point, has been a hit with consumers.

And Ravage Cabernet continues to ravage the competition.

Casa Noble Alta Belleza, which is the first edition of a new line of limited-release luxury tequilas that retails for $1,200, began selling recently and has received rave reviews from the media.

Our higher-margin Focus Brands drove positive results for the quarter, posting depletion growth of almost 9%, driven by excellent trends for most of these brands, including Meiomi and The Prisoner, which continued to outperform our initial expectations.

Many of these Focus Brands continue to maintain their reputation for excellence among critics, with outstanding reviews, rankings, and 90-plus scores.

The 2013 Robert Mondavi Cabernet Sauvignon Reserve was named among the year's best US cabernets and blends in Wines and Spirits Magazine, and received 95-plus points from Robert Parker in the Wine Advocate.

Following a banner year of growth and recognition, including IRIs number-one New Zealand wine and number-one sauvignon blanc in the US, Kim Crawford has been named New World Winery of the Year by Wine Enthusiast Magazine.

Our newly acquired Charles Smith Kung Fu Girl Riesling scored 90 points in both the Wine Spectator and Wine Advocate, and was named to the Wine Spectator Top 100 wines three times in the past four years.

Meiomi Pinot Noir achieved a number-five slot on Wine.com's 2016 Top 100 list.

Finally, High West Distillery recently received the Distiller of the Year award from Whiskey Advocate, America's leading whiskey publication.

This award represents recognition of excellence, innovation, and great-tasting whiskey, and it credits High West with pioneering a successful new paradigm for craft distilling.

We recently sold our Canadian wine business as part of our strategy to focus on premium, margin-accretive growth opportunities.

This strategic action was also the result of our ongoing efforts to identify value-enhancing opportunities to strengthen the financial portfolio of our overall wine and spirits business.

I'm also pleased to report that Constellation Ventures has been busy investing in two new minority interests, the newest which is Catoctin Creek Distilling Company, a producer of premium rye whiskey and gin from organic sources.

Earlier in the quarter, we also announced Bardstown Bourbon, the largest new whiskey distillery in the US.

Both of these investments provide us with the opportunity to further explore innovation in the brown spirits category.

Before I turn the call over to David, I think it's worth taking a moment to address some of the more frequent investor inquiries we've received since election day, including what potential changes under our new administration could mean for Constellation going forward.

One specific aspect of a proposed Republican tax reform plan, called Border Adjustability, could potentially disallow a deduction for foreign-sourced COGS, or cost of goods sold.

As you know, our imported Mexican brands can only be authentically produced in Mexico and sold in the US.

In order to understand how different tax reform proposals could impact our Business, we have modeled several different potential scenarios that include Border Adjustability, as well as some of the positive facets of a corporate tax reform plan, based on what we know today.

Overall, there are many unknowns related to future legislation, and it's still too early to make a definitive call on final outcomes and timing, because legislation has not been written.

As more details develop on these policies and legislation materialize, you can be assured we are prepared to respond accordingly.

As you would expect, we are closely monitoring the situation and we have significant resources dedicated to this effort.

We have been working directly with our legislators to safeguard our ability to continue to cost effectively produce and sell our imported beer, wine, and spirits products in the US.

Under every scenario of proposed tax reform, we remain confident in our ability to achieve the strategic goals we outlined during our recent New York investor meeting.

To reiterate these goals, we believe we can achieve EPS growth at a rate greater than 10% over the next three years, and we think Constellation is a very compelling investment which can produce significant value for our shareholders.

Our team is committed to delivering industry-leading returns.

We think we have the right brands, the right leadership, and the right strategies to do so.

The fundamentals of our Business have never been stronger, and we believe that Constellation provides the best-in-class combination of sustainable top-line growth and profitability in the consumer space.

We continue to build shareholder value, commercially, operationally, and through significant share repurchases under our $1 billion stock buyback program, while remaining committed to our leverage target.

I am also proud of the fact that we recently achieved investment-grade status for the first time of the history in the Company.

With all that said, I would now like to turn the call over to David, who will review our third-quarter financial results.

David?

Thank you, Rob, and good morning, everyone.

We're pleased with our impressive financial results for Q3 and our recent business accomplishments, as we continue to grow share and outperform the competition.

Our continued strong top-line and operating results were accompanied by a favorable tax rate benefit related to APB 23 accounting as we determined that a portion of our foreign earnings will be indefinitely reinvested.

This assertion allows the Company to record income taxes on certain foreign earnings using the applicable foreign jurisdiction tax rates rather than the higher US tax rate.

The FY17 year-to-date impact of this change was recorded in the third quarter of FY17, and helped drive comparable-basis diluted EPS growth of 38%.

As a result, we are now projecting a lower tax rate for the year, and this is driving an increase in our full-year comparable-basis diluted EPS target to a range of $6.55 to $6.65 versus our previous guidance of $6.30 to $6.45.

Looking at our Q3 FY17 performance in more detail, where I'll generally focus on comparable-basis financial results, you can see beer net sales grew 16%, organic beer net sales increased 12%, primarily due to volume growth of 10% and favorable pricing.

Beer depletion growth for the quarter came in at 11%.

Wine and spirits net sales increased 5%.

This reflects the acquisition benefit from The Prisoner Wine brands and favorable mix, partially offset by lower volume due to timing, as US depletion volume outpaced shipment volume during the quarter.

Our US depletions grew a little over 3% in Q3.

Beer operating margin decreased 30 basis points to 34.8%.

The impact of planned marketing investments and consolidation of the Ballast Point business were mostly offset by benefits from pricing and foreign currency.

For the Q3 year-to-date period, beer operating margin was 35.8%, up almost a full percentage point versus the same period last year.

Looking more closely at beer SG&A, about half of the year-over-year increase in beer SG&A for the quarter was due to an increase in marketing spend.

A majority of the remaining increase was driven by the overlap of a re-class from SG&A into COGS during Q3 of FY16.

Wine and spirits operating margin decreased 20 basis points to 27.3%.

Investments in SG&A and marketing were mostly offset by favorable COGS, benefit from the addition of The Prisoner Wine brands, and favorable mix.

On a year-to-date basis, wine operating margin increased 80 basis points to 25.6%.

Interest expense for the quarter increased $2 million, as higher average borrowings were mostly offset by a lower average interest rate.

Equity earnings totaled $28 million and were generated primarily by Opus One.

Our comparable-basis effective tax rate for the quarter came in at 16.4% versus 32.3% for Q3 last year.

This reflects the benefit of APB 23, which I highlighted earlier, as the FY17 year-to-date impact of this change was recorded in the third quarter.

We now expect our full-year FY17 comparable-basis effective tax rate to approximate 27%.

Let me spend a few moments discussing our debt leverage ratio, and recent business and capital allocation activities.

When factoring in cash on hand, our net debt at the end of Q3 totaled $8.4 billion, an increase of $436 million since the end of FY16.

Our net-debt-to-comparable-basis-EBITDA leverage ratio came in at 3.5 times at the end of Q3 versus 3.8 times at the end of FY16.

Our leverage ratio at the end of Q3 does not reflect a full year of EBITDA benefit from our premium wine and spirits brand acquisitions, including The Prisoner acquisition which was funded during Q1, and Charles Smith and High West acquisitions which were funded during Q3.

During the quarter, our credit rating was upgraded by Fitch, and Standard & Poor's, to an investment grade designation.

We're proud of this achievement and are committed to maintaining this status moving forward.

We saw the benefit of this upgrade in early December, when we completed a $600 million senior notes offering.

These notes are due in 2026 and carry an attractive interest rate of 3.7%.

In December, as part of our efforts to increase focus on higher-margin, higher-growth premium brands, we completed the sale of our Canadian wine business in a transaction valued at CAD1.04 billion.

We received cash proceeds net of outstanding debt of CAD775 million, or $581 million.

We received the proceeds from the outstanding debt prior to the sale.

In the fourth quarter, we expect to recognize a net gain on the transaction, which is preliminarily estimated to be $255 million.

In addition, we expect to pay income tax of approximately $70 million in connection with the divestiture, with most of that payment expected to occur in FY17.

At the end of December, we acquired the Obregon Brewery operation from ABI for $583 million, net of cash acquired.

This provides us with immediate functioning brewing capacity to support our growth, supply independence from ABI, and flexibility for future innovation.

We're committed to delivering shareholder value using every tool at our disposal.

During the quarter, we carefully reviewed the growth targets which were presented at our Investor Day in November in the context of tax reform.

After diligent review, we determined that all of the targets remain appropriate as stated.

This work provided us with confidence that the purchase of our shares would create value for our shareholders.

Therefore, we purchased 2.4 million shares of common stock at a cost of $367 million during Q3, and in December purchased an additional 3 million shares at a cost of $450 million.

All of the activity I just highlight demonstrates Management's ability to respond quickly and effectively to changing business conditions, the strength of our financial profile, the capital allocation flexibility we have as we operate at our leverage target, and the confidence we have in our ability to execute our premiumization strategy, drive profitable growth, and build shareholder value over the long term.

Now let's review free cash flow, which we define as net cash provided by operating activities less CapEx.

For the first nine months of FY17, we generated $824 million of free cash flow compared to $578 million for the same period last year.

Operating cash flow totaled $1.4 billion, up 30%, primarily driven by our earnings growth.

CapEx for the first nine months of the year was $592 million compared to $514 million for the prior-year period.

We are lowering our full-year CapEx guidance by $100 million to a range of $825 million to $925 million.

This primarily reflects some shift in the timing of Mexicali Brewery capital-related payments to next year.

We are also lowering our full-year operating cash flow guidance by $100 million to a range of $1.4 billion to $1.6 billion.

This is being driven primarily by anticipated tax payments associated with the Canadian wine business divestiture, and the loss of Canadian wine business operating cash flow during the fourth quarter.

Given these offsetting factors, we continue to expect FY17 free cash flow to be in the range of $575 million to $675 million.

Moving to our full-year FY17 P&L outlook, I shared earlier that we now expect our comparable-basis diluted EPS to be in the range of $6.55 to $6.65, and the increase is being driven primarily by our lower projected tax rate.

Our beer business continues to target net sales growth in the range of 16% to 17%, and operating income growth in the high teens.

This guidance continues to target beer operating margins in the 35% to 36% range.

For the wine and spirits business, we continue to expect net sales growth in the mid-single-digit range, and operating income growth in the mid- to high-single-digit range.

Interest expense is now expected to be in the range of $335 million to $345 million, and weighted average shares are now targeted at 204.5 million.

These updates reflect the share repurchase activity I noted earlier.

I would also note before closing that our comparable-basis guidance excludes comparable adjustments, which are detailed in the release.

In closing, our results for the first nine months of FY17 have us on track to achieve another phenomenal year of growth and financial performance.

Our focus on strong marketplace execution and making smart investments to support our Business continues to strengthen our business and financial model, providing us confidence in our ability to drive sustainable, profitable growth and build shareholder value over the long term.

With that, Rob and I are happy to take your questions.

(Operator Instructions)

Your first question comes from the line of Dara Mohsenian of Morgan Stanley.

Hey, good morning.

First, on the SG&A side, clearly you posted a high increase year over year as a percent of sales at the corporate level in the quarter that was driven by both beer and wine.

The beer comments were helpful, but I was hoping in wine you could also give us a sense of how much of the increase in SG&A was due to marketing moving up as a percent of sales versus maybe other factors and what those other factors are and how long they might last.

Dara, as a dollar amount delta year over year, the wine increase, similar to the beer, increase was about half marketing spend, as we invest more in our brands on the wine side and the other half was just investments primarily in people to drive our execution and NPD capabilities.

Okay.

Is that -- are those people costs and those execution capabilities, is that something you lap over in a couple more quarters in cycle or is it something that's just beginning at this point?

Last quarter you had some spending in those areas, too, so I'm just wondering when you cycle over that.

Yes, I would expect fundamentally that our SG&A range, really in both of our businesses, will remain in line with where its been historically over time as a percentage of sales.

Okay.

On Border Adjustability, the comments were helpful.

I'm curious if you did need to take a large price increase to offset any changes in taxes, could you clarify if you think distributors and retailers would more just pass on the dollar profit impact of any price increases from Constellation or do you think they might look to more to maintain margins, not just offsetting the profit dollar impact?

Also, you've shown a willingness to price to offset costs historically in beer.

Conceptually, if a tax change was large in nature, would you be willing to consider a mid- to high-single-digit price increase if needed to offset taxes?

Is that in the range of scenarios you run when thinking about the tax changes that you mentioned earlier?

When we looked at the tax changes -- and I really want to caution everybody because we're talking to people in Congress on this topic.

The Border Adjustability provisions haven't even been written, so it's hypothetical and of course we're trying to understand the effects that could take place but hard to get into a lot of specifics when answering.

I would say that we still would suspect that our pricing algorithm would remain consistent where it's been in the past of the range of 1% to 2% a year and that in order to mitigate any sort of a border tax, we would be more inclined to address elements of the supply chain that we would make -- put into the deductible category.

For example, if you look at elements of our cost inputs that currently come from the US that we could make deductible, I would put, say, the energy cost of producing glass in Mexico.

That's just one example of things we can do in our supply chain.

We turn that into a US cost instead of a Mexican cost and we then have a deductible expense for US tax purposes.

We think that, combined with a lower US tax rate and a reasonable phase-in period for any border adjustment tax, would be a more appropriate and value-creating approach than to really just jump on the price lever.

Your next question comes from the line of Vivien Azer of Cowen.

Hi, good morning.

Good morning.

In thinking about the beer trends, I think there's been a little bit of anxiety from some of the investors that we've talked to this morning around the 3Q print and beer results coming in a little bit below expectations.

I think that's being exacerbated by some of the press reports about the preliminary Nielsen numbers through December, so two part question for me, please.

Number one, can you walk us through the phasing of your beer trends through the quarter to help put the December numbers that we're seeing from Nielsen in context?

Number two, can you offer any perspective on why you thought December might have been soft and in particular, what's going on with craft beer in that context?

Thank you.

Vivian, number one, we don't think the quarter was soft at all.

If you look at IRI trends, for instance, consumer takeaway, this quarter our growth was, up to the most recent reporting period, 16% whereas last quarter, it was below that at approximately 14%.

We're actually seeing an acceleration at retail on consumer takeaway.

Then if you look at our depletion results for the quarter, we were at 10.7% depletion growth but this quarter, we were overlapping 16.2% depletion growth for the same quarter last year.

If you look at last quarter, we had 13.8% growth, which was higher than the same quarter or second quarter last year, which was 10.2%.

Now, the fundamental point is that these kind of fluctuations quarter by quarter in depletions are not indicative of much of anything as long as they're in a range of the kind of growth we've been experiencing, which is double-digit growth in the low teens.

You're going to continue to see fluctuations of this nature quarter to quarter in depletions based on what's happening with inventories at retail, shipments into our retail customers, et cetera, so you can't go by changes of, say, 100 basis points to judge whether the business is soft or not.

The simple fact is that consumer takeaway for our products is accelerating sequentially as we look at our results, so I don't think that we believe or see any softness whatsoever in the business.

In fact, I would say it's the opposite.

At the consumer level, to the extent that it can be measured, we are actually seeing acceleration and I'm sure that, that will shake out from a depletion point of view over the medium term, meaning throughout the year and into next year, so very, very, very strong results.

We are the leader in growth in beer in every possible respect and contributing most of the growth to the entire industry, so we think our results are, in actuality, outstanding.

To have double-digit growth following a 16.2% overlap is actually almost unbelievable.

Understood.

That's helpful.

Can you comment at all, please, on December, if you've had a chance to take a look at that data and your view on some of the softness in the scanner data for December?

Then if you could comment, please, on the broader slowdown that we're seeing in craft beer.

Thanks.

I think that number one, December continues to be strong.

We don't really see -- we don't pay that much attention to month-over-month fluctuations, but December continues to be strong results.

We were up, what, 13% in IRI in December, so actually it continues to be very strong trends.

As far as craft goes, look, craft's a tale of two cities.

You can't look at the craft number as a total number.

What continues to go on in craft is the major brands, Sam, Sierra Nevada, Blue Moon, which are all in the craft numbers, those continued to be down, big time, in the about 8% range.

Then you have sort of everything else, which continues to be up significantly and is not being dragged down by those numbers.

You've also got the, what I'll call, the local effect, which is a lot of the smaller local craft players eating up many of those larger older brands, which are now 25 years old.

As I said, It's really a tale of two cities, but most importantly, Ballast Point's IRI trends were up 54% for the quarter and it continues to be the fastest major growing craft brand in the category.

It is certainly the most premium significantly sized brand in the category.

While you're seeing a lot of stuff kind of going on in craft, it's really not something that you can think of in terms of a total category, because it's almost a meaningless term.

It's a brand-by-brand phenomenon, so you really have to look at the specific brands and companies that you're concerned about as to how they are performing.

Okay, thank you very much.

Your next question comes from the line of Judy Hong of Goldman Sachs.

Hi, Judy.

Hi, good morning.

A couple of follow-ups on the Border Adjustability comment.

First, just in terms of -- and I completely understand it's not written as part of the legislation, but what are you hearing in terms of the potential carve outs if indeed the Border Adjustability is included as a part of the tax reform?

And then, David, you've talked about some portion of your beer costs already classified as US costs, so can you give us the number today and potentially what that can get to?

Yes, so thank you for caveating that it hasn't been written because I think I'm going say that every time anyone asks about Border Adjustability.

We're in the field of concepts here.

Our understanding is that US based COGS will be deductible and right now, our US-based component of our beer COGS, inclusive of freight, is about 40%, meaning 60% of the COGS is from Mexico.

Now we have ways, things that we can do within our supply chain over time, but we're talking about long-term supply agreements.

We would have to take into account changes in freight and of course any changes or fluctuations in currency between the countries before you'd make final plans like that.

I would say when we do our modeling, we're looking at kind of staying in the range of foreign COGS that we have today and then picking up the benefits that are included in the rest of the tax package and assuming a reasonable phase-in period, which is how we come back to having a great deal of comfort in saying that we can grow EPS greater than 10%, as we described in November.

Okay.

Any color you're hearing in terms of the carve-out prospects?

What do you mean by a carve-out prospect?

If Border Adjustability is included, could Mexican beer be exempt from that adjustability?

Sure, it's possible that Mexican beer could be exempt because it's an inherently a Mexican product.

It's not the kind of thing that perhaps is being targeted, i.e, the movement of production from the US to Mexico.

In fact, in our particular case it's the complete opposite, which you have a US Company that brought inherently Mexican company and actually resulted in the creation of jobs in the US as opposed to the opposite.

Of course, we're making that point with our legislature -- legislators and I would say we fully understand and comprehend that point.

So yes, there could be a carve-out, but I think more importantly, I would reiterate what David said.

Number one, we're not necessarily relying upon a carve-out.

Number two, what we have been told, if you believe that Border Adjustability will in fact occur, which is a big maybe in the first place, if it does, there will be a relatively lengthy phase-in period.

That's what the -- that's what our legislators and the people on Ways and Means, et cetera, are saying and.

Furthermore, as David pointed out, we would have significant ability to mitigate the effect of it by moving COGS costs from Mexico to the US.

David gave a good example of it.

Energy, which is our very large component in the manufacture of glass, glass being the largest component of COGS, we buy it in Mexico right now.

We could shift our purchase of natural gas from Mexico to the US and increase our cost of goods sold component that's US-based and therefore mitigate the impact of the lack of deductibility of foreign COGS.

It's those kinds of things we are looking at planning on if this comes to pass so that we can maintain, as David said, our current pricing algorithm, which is sort of in the 1% to 2% and therefore we don't expect consumer demand for our product to be affected by Border Adjustability in any time frame that's probably relevant to our investors.

Got it.

That's helpful.

Then just a quick follow-up on Ballast Point --

Judy, I'd also point out that the other benefits of tax reform that's being suggested in the Better Way plan being put forth by the House has very significant other benefits which will also offset any negative from Border Adjustability.

I think that it could be a net positive when all is said and done, but it remains to be seen, as David has said.

The only details we get are from talking to the legislators who are involved right now in, I'll say, contemplating the details of these proposals.

That's the best anybody can know and I would say we probably know more about this than anybody, any corporation.

That's really helpful, so thanks for that.

If I can ask a quick question on Ballast Point.

In terms of the contribution to your sales, it looked like it slowed pretty meaningfully versus first half and then maybe even implying a down year over year, so just wondering if there's any kind of a destocking going on just from a shipment perspective for Ballast.

Then just in terms--

There's nothing going on with Ballast.

The business is up double digits, the IRI is up 54%, there's nothing going on with it at all.

It's a very small contributor to the results.

I mean, it's a very small business, right?

It's not meaningfully contributing to any of the numbers that we're talking about, but it will, one of these days, because it is a very fast grower and it continues to grow well.

It's part of our strategy to continue to drive the portfolio towards growth brands.

Got it.

That strategy is working very well, by the way.

Got it.

Thank you for that.

Your next question comes from the line of Bonnie Herzog of Wells Fargo.

Hi, Bonnie.

Hi.

I just have a couple of quick follow-on questions.

First, on your total beer business, could you drill down on how your on-premise business has been performing versus off-premise?

I'm curious to hear how your beer business has been performing in the untracked channels off-premise.

Then could you touch on where you're at with national distribution for Ballast Point, please?

Thanks.

Yes, so in terms of on-premise and off-premise, our beer business is up high single-digits in the on-premise.

We think the market's down low to mid single-digits in the on-premise so we are gaining share and feeling very comfortable there.

On your last question, as it relates to Ballast Point's distribution, I think Ballast Point is about [25].

It is about [25] and we're in about 45 states.

I want to caution, when we talked about expanding into incremental states is that if we sell a case in a state, we would say that we're in that state.

We really need to continue to drive the sales execution and broadening up the base in each state that we go into with Ballast Point.

There's a lot of runway in front of us as it relates to Ballast Point.

So you expect that continued push on distribution to continue well into next year before you feel like you've gained --

We will continue maybe not next year.

It's hardly in distribution outside of California, right?

Okay.

Just circling back on maybe the untracked channels off-premise, just trying to get a sense of how your business is performing there, since we are all looking at scanner data.

I would say that our business is performing similar to what you're seeing in the track off-premise channel and the untracked off-premise channel.

That's about the best we can tell you.

We have no reason to believe otherwise, so I suppose taking a look at -- well, we have no reason to believe otherwise, let me put it that way, based on our distributors and their reported depletions.

Business is, as I had said, very, very strong.

All right.

Thank you so much.

Your next question comes from the line of Mark Swartzberg of Stifel.

Okay, thank you.

Hey, Rob, hey Dave.

Good morning, everyone.

A few questions.

I'll try to leave Mexico for the moment, but I will come back there.

You're doing very well with your balance sheet.

You've been very aggressive recently buying your shares.

It picked up further in terms of monthly pace in December.

You've got this new authorization that, in a sense, you're close to being done with if you take the pace you're already act to that in December.

The simple question is you, the two of you, as people advising the Board and saying, hey, we want to do this or that, how interested are you in presenting to the Board another $1 billion authorization?

Well, first of all, Mark, we have $800 million, approximately, remaining on the recent authorization.

Just for clarity, we -- I think that we have $600 million or $700 million remaining on our previous authorization that we spent as part of these repurchases and then we went into the new authorization by about $200 million.

My question is, the pace you're going at implies you're going to be done with that new authorization rather quickly, so what's your appetite for asking for an additional authorization?

The Board would be completely amenable to giving us any authorization that we ask for because the fact that David mentioned, which we think that our shares are, especially today, significantly undervalued.

That said, we have $800 million left on our authorization, so it's really not much of an issue at the moment.

We'll continue to make share repurchases opportunistically as we have in the past.

The only caveat on that is that we do desire to stay within our debt target of approximately 3.5, which is also important and to therefore maintain our investment grade rating.

That's probably the only real caveat on making stock repurchases, but we're gung ho on stock repurchases.

No one needs to convince us of that strategy.

All right, and your balance sheet is much more suited.

Fair enough.

On the beer business, on the front, so to speak, you mentioned how we should think about the increase in SG&A and part of it is an accounting change.

The portion that you refer to as half, the portion -- you said half of the increase is attributable to an increase in marketing spend.

I think one of the things that we're all trying to understand is how much should we think that, that's already shown up in a sense in the quarter in the way the depletion has already performed?

How much of that is kind of a yet-to-come benefit?

I realize no one has a crystal ball, but can you give us a sense, how much of that was trade related, how much of that increase was consumer related or -- because we're just trying to get a sense of we already see the benefits or are there some benefits yet to come and maybe trade versus consumer is one way to think about that?

The increase in marketing spend was mostly at the consumer level.

When we talked about -- when I talked about increase I'm really talking about the dollar increase.

We haven't really changed our overall strategy in terms of marketing expense as a percent of net sales.

So we still expect that to be in the 8.5% to 9% range and we track that very diligently to make sure that we're getting a return for it.

We continue to see the returns as we invest in our brands.

The best example I can give is that this year, we started investing from a marketing standpoint in Pacifico and we're seeing Pacifico, for example, in the last 12 weeks is up 27% in IRI.

You can expect us to continue to do that, but as a percentage of sales we really haven't changed our strategy.

That's great.

Okay.

Specifically in the case of Border Adjustability and sort of an immediate benefit that's come with Donald Trump being elected President is the peso has depreciated.

With the peso depreciating, you've talked to us historically about the portion of your COGS that are denominated in pesos.

Is there any benefit above simply that depreciation benefit we should be thinking about?

Is there something that's affecting your peso-denominated inputs themselves or your hiring dynamics?

I realize we're only two months since November 8, but I'm just trying to get a sense of how Mexico's economy, so to speak, is affecting your costs in Mexico.

Yes.

About 25% of our costs are peso denominated, which disconnects a little bit from the percentage that I said earlier, so 60% of our COGS being Mexican, and the difference is dollar-denominated contracts for goods that we purchase in Mexico.

Those contracts themselves really have an underlying FX component to them.

They just are denominated in dollars and it may take longer for any benefit from that to flow through.

As it relates to the Mexican economy, we're really not seeing issues from a hiring or a labor standpoint or costs within Mexico.

We're seeing no problem; we're also not seeing significant benefits.

Great.

Final question.

I don't know if you touched on this or not but you've drawn our attention again to the fact that 60% of your COGS for the beer business are relating to the operations in Mexico and your openness to moving glass or some other element to a location north of the border, but can you tell us, if we take a long view, a 3-year view, a 5-year view, a 10-year view, what portion of that 60% in your mind is eligible for movement north of the border?

That's harder to get to and I think you have to take into account any discussion of this, we could really only have after we know the specifics of any sort of border tax, because I think you'd have to look at the actual cost of purchase of changing moving supply chain components to the US.

You'd have to take into account freight and then of course you'd have to take into account the currency delta.

Maybe there's a scenario where the currency delta makes moving the supply chain irrelevant, so I think we would have to play that through when we actually know the conditions on the ground and we can't really know that today.

I think to your question, okay, if you are really talking about the longer term, it could be the majority of it because although the beer has to be made in Mexico, a lot of the components could be shifted if it was really determined to be advantageous.

Labor which is required to make and bottle the beer is a very small percentage of the total COGS.

It's only like 15% of the COGS.

You could get the vast majority of it, in one way or another, US based.

If the currency supports that.

Got it.

Okay.

Very helpful.

Thank you guys.

You also--

The details of everything else, and all of the puts and takes with everything else.

I mean, we wouldn't just totally disrupt the supply chain over the long run if it's not necessary, but we do have quite a bit of flexibility in what we can do, so hence our optimism, obviously, relative to this whole matter, as also evidenced by our stock value and our buyback activity.

I wanted to ask one last legislative thing.

This isn't so much a Constellation question, but your point, Rob, about having better insight into what's happening to Washington the many companies is simply the Senate.

We know what Kevin Brady and the House have put out there, we know what Donald Trump thinks, we know Paul Ryan thinks, but do you have any sense of either timing or leadership in this Senate, when we are going to actually hear someone from the Senate speaking with clarity about how they're thinking about this matter?

Well, I think that Hatch made some comments yesterday saying that he doesn't know yet what their view or opinion is on any of this.

I've talked to Schumer myself, personally, and I would say that on the Senate side, everybody is pretty reserved as to where this whole thing is going.

I would say there is a lot less clarity on the Senate side than there is on the House side.

I'd say we know a lot more about it than anybody else only in that we're told that other companies that should be concerned about this are just waking up to the whole matter, whereas we've been focused on it from the very beginning, having met ourselves with Ryan several months ago, so really over the last summer.

We've been quite aware of this and thinking about it.

Hence, as David has pointed out, we've been thinking well in advance of strategically all of the things that we can do and will do if necessary to mitigate the impacts of this.

I think we're totally ahead of the game and -- which is good, because our comfort level now is indicative of that fact, which is that we have been so far ahead of the game that we sort of know how -- know what we are going to do and we're not sort of relying upon hopefully this won't happen or what the probabilities are because nobody can predict any of that stuff.

All we can do is sit around and determine what our action items will be if something occurs and how we're going to do it.

As I said, we're pretty far advanced in that thinking.

Very helpful.

Thank you, guys.

Your next question comes from the line of Tim Ramey of Pivotal Research Group.

Thanks so much.

Hey, Tim.

Good morning.

Just going back to your commentary on wanting to stay within the investment grade bounds, sort of a more liberal interpretation of debt ceilings has really served Constellation well over the couple decades and certainly over the last five or six years.

What is it that makes you more comfortable in that 3.5 times or below range?

Is this a change in the ratings agencies viewing 3.5 times as investment grade which maybe wasn't true in the past or is this comfort on your level that you don't need to lever beyond that?

I think David will answer this as well.

I'll just give you my quick view on this, which is that it's really a size and scale thing, right?

Our EBIT and margins and the cash flow that this Company is and will be generating, especially as we complete over the next couple of years our capital.

Our large capital projects pretty much give us, I would say, the flexibility to do everything that we could possibly want to do without really having to deviate from sort of the mid-3 range.

That could deviate a little bit from time to time, but I don't really see that it's important.

We are going to have so much cash generation that I think that we feel pretty comfortable that we could pretty much internally fund just about anything that you could conceivably do in the alcoholic beverage business, right?

Sure.

That's my view on it.

David?

Yes, I would just reiterate that, that $2.5 billion of EBITDA that generated every year, you can stay at the 3.5 times when you have a fair amount of capital to allocate to other activities.

I would say that we're focused on saying that we will stay at the 3.5 times.

We're not looking to be levered below 3.5 times and if we go above 3.5 times, we would then want to get back to that number, but we are really thinking about it, Tim, as a target.

Thanks so much.

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

Great.

Thank you very much and congratulations on the investment grade rating and the continued tremendous business momentum.

Thanks.

On that point, you mentioned very interestingly that you had actually seen on a sequential basis an acceleration in the beer business.

I'm wondering if you could be perhaps a little bit more specific in terms of what you think those -- the potential triggers of that acceleration are.

Is it particular new SKUs, is it Corona cans, is it your C-store initiatives, the increased marketing?

Probably a little bit of all of the above but I'd love to get your thoughts on that.

Yes, well, I think first of all, you gave a pretty good litany of all of the things that are driving it.

Our marketing, our advertising, cans, SKUs, those are all things that continued to drive our consumer takeaway, and then there's some -- increased distribution is another big focus of ours and getting the right distribution in the right places.

It's not just increased distribution by the numbers.

It's quality of distribution, so that all relates to sales execution.

That's kind of motherhood and apple pie and we're doing a great job with it.

I think also if you look at what's going on at retail with even the craft segment, there is definitely now a movement to reduce the number of SKUs.

That is causing some regained focus at retail, which we always thought that this ought to happen.

The really fast-growing, high-margin bread-and-butter items that they have, which happens to be our portfolio and therefore more attention, more space, more distribution is being given to what they know is working versus what hasn't worked.

I think that sort of takes us back to Ballast Point, which is as you see some slowdown in the older, more established craft-type brands, a brand like Ballast Point, which will be supported, has strong sales execution behind it, these are the types of brands that will be sort of a beneficiary as things shake out a little more in the craft segment, as will our import portfolio, because it's clear cut that, that's what's driving all of the growth in the beer business at retail.

I think that we'll see our total portfolio be the beneficiary of the constant or anticipated changes that will occur over time, as has always occurred.

There's always been these kind of changes in the business.

On the one hand, it's a slow business to change.

On the other hand, there's constant change going on with all three categories.

In terms of that retailer re-spacing or kind of re-looking at their SKUs, and we certainly heard about that from Walmart, about when do you think that started?

Has that been going on kind of throughout 2016, calendar 2016, or do you see that really pick up in the second half of the year?

I think that it's just, I think that it's actually in its infancy.

I think that it's just starting.

You take a Walmart for instance, I mean, they love our products, because they are trying to -- they want higher margin, fast moving growing products on their shelf because they don't have that much space devoted to the category.

They want all of the best stuff.

Terrific, and--

I think that it's just starting and I think that you'll see us -- as I said, there's always changes that are going on in the industry across all three categories and the key strategically is to make sure that you're positioned to be the positive beneficiary of those changes.

That's why we make some of the comments that we do about being better positioned as a Company than we ever have been, because it's pretty clear to us that sort of given our whole portfolio and our strategy and our premiumzation strategy and our focus towards high-margin, high-growth brands that, that's going to really -- that really positions us to be the key, not one of but the key beneficiary of all of the changes that are going on.

Look, you see that in our results versus every other beverage alcohol Company, right?

Frankly versus almost any other Company in consumer goods, period.

There's no companies in consumer goods in general and are performing like we are that I'm aware of.

No, no, it's been tremendous.

Even ones that are outside of our industry and category (inaudible) have not consistently performed as we have.

We're a bit of an outlier in that regard and will continue to be so.

Absolutely.

On the cost side, I just want to -- I believe in the last quarter, you mentioned that you thought advertising spend as a percent of sales would be flattish in the second half with a big chunk in the third quarter, as we just saw, versus the fourth quarter.

Do you still stand by that?

I would say that on an absolute dollar basis, once again we'll see some year-over-year growth in marketing spend, but from a model perspective, our marketing spend will end up in that 8.5% to 9% range for the full year.

Great.

Thank you very much.

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

Thanks.

Just a quick question on the taxes.

I think you had talked about a lower tax rate for 2018.

I assume there's no change in kind of the outlook there.

No, so we talked about having a mid-20%s sort of EPR as the target over the next three years and we aren't really giving guidance for FY18 but there's no reason to expect we would be outside of that.

Okay, thanks.

Also, just to make sure I understood the net leverage at the end of the quarter, that includes the cash used for share repurchase?

Just trying to understand kind of where we stand as of today.

Yes, so that 3.5 times was at the end of the quarter.

I would say that we're -- if the year were to end today, we're probably more in the 3.6, 3.7 range given the repurchases that took place in December.

In terms of future share repurchases, comfortable going above 4 times?

I would say again, we would -- we're focused on the 3.5 times range and if appropriate opportunities present themselves from a capital allocation standpoint, we will go above the 3.5 times but our objective is to always be able to quickly get back to that level.

Again, we would (technical difficulties) on the 3.5 times versus trying to -- if that's how high we could actually go.

Got it.

Thanks so much.

Your next question comes from the line of Laurent Grandet of Credit Suisse.

Yes, hello.

Thanks for the opportunity.

I'd like to come back to the SG&A point.

SG&A went up to 19.5% in the quarter from about 17%, 17.5% in the previous quarters.

You mentioned at the same time that the marketing spend was roughly 8.5% to 9% of sales, roughly, in the similar to the previous quarters.

Really would like to understand where did (technical difficulties) the balance of the SG&A?

Is it something we should see in the future quarters?

Is it some kind of initiative to support new brand introductions or to go after the on-premise channels?

Like to have more color about the SG&A and how we should think about it going forward.

Yes, so again, from a holding aside quarter-to-quarter volatility in total SG&A spend I would say that for, just focus solely on the beer business, our SG&A or our marketing spend will be somewhere between 8.5% and 9% of net sales.

In terms of the SG&A spend in our beer business, we expect that it stays in the historical range.

That's really in the 5.5% to 6% range, specifically in our beer business.

The incremental growth in SG&A in both businesses, really any incremental spend there is put in place to really drive innovation and better sales execution.

Again, our SG&A algorithm is not changing.

These are just quarter-over-quarter anomalies.

Okay, well, thank you very much.

In terms of focus I'd like to come back on the final question on Ballast Point.

I understand we do have (inaudible) 45% so both markets similar read to IRI.

I'd like to -- but if we dig more into the numbers, I mean, we see that the distribution now has been plateauing at about 23% for the last six periods and same-store sales seems to be now at minus 25%.

I mean, that's for the last few quarters, so what's the plan here to kind of push even further Ballast Point?

I understand it's still a small part of your algorithm but it's important for the future of the growth of the beer segment of your business.

We've got all kinds of programs to drive distribution of the product throughout the United States.

We've taken the brand national, we have very strong relationships with our distributors, we are increasing our support levels behind the brand and doing all of the standard things that one would do in this particular category, and that's an important caveat, to drive the business.

It's all about doing things like driving national accounts.

These kind of brands require a lot of grassroots type efforts.

We continue to develop new products, we continue to develop our retail model, we continue to win awards, which is important in the craft segment because it's a lot like wine in ratings.

I think we're on the forefront of that in actuality, so it's all good.

There's just nothing to be concerned about, or to complain about.

Thanks for adding some comfort on this.

Your next question comes from the line of Stephen Powers of UBS.

Hey, great, thank you.

Back to taxes, I guess really two questions, if I could.

First, your comments on Border Adjustability have been very helpful, but I'm wondering if you could comment also on what discussions you may have had around interest expense deductibility and how that aspect of potential tax reform has factored into the scenarios you've talked about?

Second, I just wanted to test whether your confidence in the 10% growth algorithm through 2020 under potential tax reform depends on the phase-in assumptions that you mentioned or if you've modeled scenarios where the adverse aspects may take effect more quickly and you can still hit the 10% number.

Yes, so in terms of interest deductibility, I think the general assumption is under the Better Way plan is that it wouldn't be deductible on a go-forward basis.

Our assumption there is that the existing interest would remain deductible.

In terms of phase in, the last time there was tax reform I think the phase-in period was four years, but this sort of tax reform really isn't about just setting up back office accounting departments to manage tax, the new tax code.

This kind of tax reform would require a time horizon that would allow companies to change their entire supply chain.

Our expectation is that it would at least be four years and our objective would be to advocate to make that as long as possible so that we could actually get through open supply agreements and so forth.

I would say that when we start looking at the three-year numbers, I think that there are a couple of things that play into it.

One is the phase-in period, of course, and we aren't assuming it's just an immediate phase in.

I think the other component that you have to keep in mind is if you look at, in particular, peso rates historically for us versus the current peso rate, so not incremental currency movement but the current peso rate, actually provides benefits to us that would be somewhat offsetting as we sit here today.

I think that it's not just phase in, right?

When do you think that the actual tax reform legislation will be enacted?

Right.

I mean, it's probably a year off at best.

Yes.

Right?

No, okay, that's all fair.

Just wanted to clarify.

We can only tell you what our legislators have been telling us, right?

Yes.

The first thing that's going to happen in Congress, which you're seeing right now, is Obamacare.

Yes.

Congress has a lot on its plate right now and to work through all of the details and get legislation like that passed, well, Congress is telling us that it's going to be a while in any event.

It is clear cut and again, this is literally what we have been told by the leaders, that Obamacare is the first thing on their plate.

Okay.

That's helpful.

That's going to take awhile.

Okay.

I don't want to get too far into the weeds here, but I just want to make sure that I'm thinking about this correctly from what you're currently doing.

It looks to me like today what you're doing in terms of -- you're essentially leveraging some pretty high transfer prices from Mexico to the US to keep profits today outside of the US.

I think 60% of your pretax income, effectively, is booked outside the US today.

I'm assuming in the future you would theoretically be able to reduce those transfer prices shift dollars, shift profits back to the US, hopefully at a lower tax rate and that, that's part of your -- the leverage you can pull?

Can you talk me through the transfer pricing algorithm there?

You shouldn't even think about that.

The transfer prices are set at market rates.

You have to think about the deductible component of COGS, which really doesn't change.

What matters is where you incur the costs, not necessarily where you've put the revenue.

Okay.

You put the revenue wherever the tax rate was most advantaged?

Yes --

The profits.

It's a shift in mindset (technical difficulty) adjustability.

It's really all about the COGS sourcing.

Okay.

The last thing, not on tax, I just wanted to see if you could add some comments on Corona Premier.

There's been some, from my perspective, some degree of apprehension amongst -- from the marketplace in terms of maybe pushing that too far to the detriment of main line Corona, so wanted to get a sense for what your rollout plan was there and kind of how big, how small, how fast, how slow, that kind of thing.

We are going to test market it in three or four different markets of different types, meaning more mature and less mature markets to get a good handle on how it interacts with our other products and then make a decision as to whether we will continue the product and roll it out or not.

I don't see any big issue with it.

Our distributors are excited about it.

The category is a good category.

Mic Ultra is one of the leading growth drivers in the industry right now.

The product's differentiated from our other products.

I'd say that we continue to believe that its got a high probability of success.

It's priced at Corona, right, so we're not worried necessarily about a cannibalization factor.

We would be only worried about the product fundamentally there not being successful or -- well, that's really it, because otherwise it's going to be one plus one equals three.

There aren't any margin concerns relative to cannibalization.

Okay, thank you very much.

I guess that it's only whether it's additive and successful.

That will be determined pretty easily in the test market scenario.

It's real straightforward, low-risk stuff.

Appreciate it, thank you.

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

Hey, guys.

Thanks for the question.

There's two.

I just wanted to confirm on the comments that when you're saying you're able to grow earnings 10%, that's off of the guided basis of $6.55 to $6.65 and that you'll be able to exceed $1 billion in free cash flow in 2019.

That's my first one.

Yes, we stand by the targets we put out there in November.

Okay, perfect.

Can you guys talk about the retailer -- (multiple speakers)

Hang on.

The only thing that when we look at the targets for the individual businesses, you do have to remove Canada, but our EPS target remains.

Okay, perfect.

Can you talk about retailer receptivity to taking on some of your smaller brands?

I guess they're not all that small, but things like Pacifico and Negra, relative to their willingness to do some of the craft brands?

Then talk about your expectations for incremental placements in smaller brands and/or packages into the coming year.

Yes, I'd say that they are dying for them, especially Pacifico.

(Multiple speakers) The only thing that's held us back on Pacifico is not retailer demand.

I mean, retailers are dying to get the product.

Up til now, we've been sort of production constrained just trying to feed the growth that we've had now that we've got Nava up to speed and we'll see the addition of another 5 million hectoliters of Nava in the next few months and we bought Obregon.

That's sort of cleared up and now, we are beginning to drive those brands like Pacifico.

I mean look, I don't want to necessarily predict the future but Pacifico has got a good chance of being the next Modelo Especial, while Modelo Especial still continues to have a huge runway and grow 20%.

I think the good news is that we've got Pacifico coming right behind Modelo Especial with huge retail demand and excitement about the product.

There's all kinds of anecdotes about Pacifico and what consumers are thinking relative to the product, probably the most interesting anecdote being that it is the sessionable choice of craft drinkers.

Perfect, thank you, guys.

Meaning craft drinkers, when they get sick of drinking double IPAs, their beer of choice is Pacifico.

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

Thank you for being so generous with your time.

Just wondering what your people in Mexico are saying about what the Mexican government's reaction might be to Trumponomics, border taxes, et cetera, whether there is any risk or opportunity there for you?

Also given that you've invested in these glass plants, does that put at risk your investments, be it the glass plants or your big production capacity?

Would any change in where you source goods lead some of that capacity to be unnecessary?

I'll answer the second point and then Rob can comment on the Mexican point.

What I would say Caroline is that I don't see a scenario where our glass joint venture wouldn't be by far and away the cheapest source of glass, even in the new tax regime, just simply because of the freight benefit of having that plant, and it's a highly efficient plant, sitting next door to our brewery.

About half of our glass needs will ultimately come from that joint venture facility and I would say that if we needed to move our other packaging sourcing elsewhere, we could do that given enough time, because we are sitting under quite long-term contracts with our packaging vendors.

I guess my comment on the Mexicans, and of course we do talk to the Mexican politicians as well as Pena Nieto, et cetera, et cetera, I think they are taking a measured view of the whole thing, not necessarily being overly aggressive in their comments about what they will do other than they're prepared to engage in reasonable negotiations.

They do not believe that the US, in the end, will enter into -- will take actions that would violate WTO principles and other principles of that nature.

I would say that the Mexicans are being measured in their comments, but on the other hand, if pushed they are certainly prepared to say that they will act accordingly if the US violates their agreements.

Got it.

My last question, if you don't mind, would just be to understand the margin expansion, the gross margin expansion in beer, the key drivers, like how much of a role did the peso play, how much of a drag was Ballast?

Yes, so I don't have the exact components of each of it but I would say the first thing is that when we talk about the SG&A re-class last year, that, that gave us a year-over-year comparable benefit on COGS on GP versus the negative hit on the SG&A.

Then in the current year, even though the peso has weakened substantially, in the current year, we're probably 75% hedged on the peso, so that effect is mitigated to a certain extent.

Then our -- we just continued to see improvements in overall performance at our Nava facility.

I think it's just the biggest jump may be the year-over-year re-class and then beyond that, we're just seeing some kind of expected improvements in total GP.

Just fair to say, then, that the benefit of the weak peso will continue to be felt next year because of hedging?

Yes, we talk about -- so we use a three-year hedging program for currency.

As I said, we are 70% to 75% hedged on the peso for this fiscal year.

Next fiscal year, we usually go into a fiscal year about 50% of our exposure hedged and then as we roll forward into the 24- and 36-month time horizon, it's lower numbers.

Assuming the peso stays where it is, we'll continue to see benefits coming into our P&L.

Thank you so much.

Thank you.

I'll now return the call to Rob Sands for any additional or closing remarks.

Okay.

Well, thank you, everybody, for joining our call today.

As we delivered fantastic results for the first nine months of FY17, we've never been more confident in our future prospects of our business.

We look to capitalize on our business' tremendous momentum as we execute our strategy and continue to build shareholder value.

Just as a reminder, during our next quarterly call, which scheduled for April, we will be providing our guidance for the upcoming fiscal year.

Thanks again, everybody, for joining our call and have a great rest of your day.

Thank you for participating in the Constellation Brands third-quarter 2017 earnings conference call.

You may now disconnect.