Constellation Brands, Inc.

Welcome to the Constellation Brands Fiscal Year 2004 to 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the prepared remarks, the call will be open for your questions. Instructions will be given at that time. I will now turn the call over to Patty Yonerloff, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Shannon. Good morning, everyone, and welcome to Constellation's year-end Fiscal 2019 Conference Call. I'm here this morning with Bill Newlands, our CEO, and David Klein, our CFO. As a reminder, reconciliations between the most directly comparable gap measure and any non-gap financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and constellations SEC filings for risk factors which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance, and now here's Bill.

Thank you, Patty, and good morning, everyone, and welcome to our fiscal year 19 year-end call. I'm sure you've all seen the announcement we made last evening indicating that we have signed an agreement with Gallup to sell a portion of our wine and spirit business for $1.7 billion. This strategic action is a result of our ongoing efforts to identify value-enhancing opportunities for to better align our portfolio with consumer trade-up trends, and to strengthen the financial profile of this business. Our remaining wine and spirits business will primarily consist of wines at the greater than $11 price point and will include fast-growing, high-margin power brands like Kim Crawford, the number one Sauvignon Blanc in the U.S., Mayomi, the number one U.S. Pinot Noir, Svetka Vodka, the number one imported vodka in the U.S. Naomi, I already mentioned, The Prisoner, Robert Mondavi, Ruffino, as well as iconic brands like Schrader. With a tighter focus on this powerful collection of consumer love brands, we will be able to accelerate growth while increasing brand awareness, consumer demand, and household penetration. I'm confident that this optimized portfolio of wine and spirits brands will enable us to consistently deliver growth, exceeding the trends of the U.S. wine market, while migrating to an operating margin profile of 30%, a significant improvement from the 26% margin achieved for this business in fiscal 19. In a minute, I'll get into some of the exciting marketing initiatives we have planned for this year. But first... I'd like to highlight that several of these key brands achieved significant milestones and accomplishments this past year. We received Impact's 2018 Hot Brand Awards for Kim Crawford, Mayomi, Rufino Prosecco, and Robert Mondavi Private Selection. Our portfolio was also called out in the Beverage Information Group's 2018 Awards, where four of our brands achieved fast-track status, recognizing their impressive growth Those included Kim, Naomi, and The Prisoner. In addition, 10 of our brands were named rising stars, and seven more received established growth brand awards. We also have a strong innovation pipeline planned for the coming year. Some of those keys are new product launches for Woodbridge Rosé and Robert Mondavi Private Selection Rye Barrel-Aged Red Blend. We are already having excellent success with some of our recently launched innovations, including Svedka Rosé, Robert Mondavi Private Selection Rum Barrel-Aged Merlot, and Crafters Union Wine in a Can. We will continue to expand our Bourbon Barrel-Aged Innovation Program, which has been a resounding success, selling over 1 million cases of volume in its first two years. This initiative has reinvigorated Robert Mondavi private selection while also becoming the foundation for some of our other innovations like Cooper and Thief. We're also ramping up our consumer marketing efforts in the coming year. For the first time, we're taking advantage of new sponsorship opportunities with the PGA, the U.S. Tennis Association, and several NFL teams for Mayomi, Kim Crawford, and Woodbridge brands, respectively. And our new spread to marketing campaign, Bring Your Own Spirit, has been a resounding success, recently driving double-digit consumer takeaway growth trends in IRI channels. These efforts will help to achieve our goal of accelerating growth for a more premium collection of powerful wine and spirit brands. Now let's move on to our beer business. Constellation continues to be the cornerstone of growth in the U.S. beer industry, delivering 36 consecutive quarters of growth dating back to the beginning of fiscal 2011. High-end beer is driving virtually all the U.S. beer category growth, and our beer business is the leader in high-end beer. For fiscal 19, Constellation drove 40% of the U.S. high-end category growth and 100% of the import segment growth. we grew share in every U.S. sales region with accelerating trends on the West Coast where we already have significant market share. There are very few industry segments where this level of growth has been sustained over this length of time. Fiscal 19 also saw a monumental shift for the Corona brand family as it expanded its offerings from extra and light into a more comprehensive beer family with the launches of Premier nationally, Refresca in test markets, and the expansion of Familiar. The Corona brand family generated 7% depletion growth for fiscal 19, selling over 150 million cases, which positions Corona as the number one brand family in the high end. It is also expected to surpass Coors as the second largest brand family in the U.S. retail market. and short order. Corona Extra remains the engine of the Corona brand family and continues to be the number one most loved beer among general market and Hispanic consumers. For fiscal 20, incremental media investments are expected to ignite Corona's core growth, including Corona Draft and canned formats. As part of these efforts, we are increasing both English and Spanish language media across digital, social, and TV, including heavy emphasis on the NFL and the NBA, where Corona is expected to have the number one share of voice during the NBA playoffs and finals. Corona Premier was the number one new brand introduction in both volume and dollars last year, and was larger than the number two and the number three product innovations combined. We are seeing strong repeat purchases with consumers motivated by the low-cal, low-carb benefits of Corona Premier's premium image. Corona Premier is winning across all demographics, including our core Hispanic consumer base. To continue the momentum on Premier in year two, we plan to increase our marketing investment double digits across marketing channels, including the launch of new creative for this brand. We are also significantly increasing support in both English and Spanish language media to reach Corona Premier's diverse drinker base. Corona Premier's national TV advertising focus will air in March through October with strong presence in sports programming, including sponsorships like the U.S. Open Golf Tournament, where we will be a proud sponsor through at least 2021. New incremental distribution opportunities for Corona Premier include the launch of 18-pack bottles to provide trade-up opportunities in larger format channels, as well as the national launch of Corona Premier Draft to lean into the momentum of the brand increasingly. and to provide opportunity for consumers to sample in the on-premise. In last year's regional launch of Corona Familiar 6 and 12-packs, that brand became the fourth largest growth driver in the category and a top 10 high-end beer brand. The Corona Familiar 12-pack was the top package innovation in dollars and volume last year, and we believe the incremental runway for this brand is particularly with unacculturated Hispanic consumers. To fuel additional growth, we recently launched Corona Familiar 24-pack bottles regionally to capture larger social occasions with current Hispanic consumers. For fiscal 20, Corona Familiar's expansion will be supported through double-digit increase in Spanish-language TV, as well as digital, social, and in-store merchandising products to drive incrementality at retail. Let's move now to Casa Modelo. Modelo Especial is the leading growth engine in the entire U.S. beer market, hosting double-digit depletion growth in 26 of the last 27 fiscal years. It is the fastest-growing major beer in the industry, accounting for almost 40%. 40% of total category growth. Across the country, Modelo Especial is now the number one brand in three markets and the entire state of California and the number two brand in five additional major markets, growing double digits in 41 of the 50 states. From a channel perspective, Modelo Especial continues to be the fastest growing brand in the on-premise, with draft growing more than 25% last year. And in the off-premise, it became the number one selling beer in 7-Eleven, the biggest retailer and the biggest class of trade in beer. Modelo Especial has incremental momentum, and its superior velocity should command more space at retail when compared with other top 10 brands. The number of especial drinkers is up versus last year for both Hispanics as well as non-Hispanics as we continue to grow both penetration and loyalty with our core Hispanic base and the general market consumer. We've seen an incredible 60% increase in general market drinkers over the past two years, but we still have lots of opportunity as we estimate that less than 5% of the general market currently drinks Modelo. So, with this much momentum on Especial and the household penetration that still under-indexes major brands, we believe that this brand has a long runway for growth. For fiscal 2020, we expect to make our biggest ever investment in marketing support behind Modelo. We plan to continue to engage our core Hispanic consumer, by increasing our investment in Spanish-language TV, and we will be a major player in live sports, led by soccer, but rounded out by strong presence in the NFL, Major League Baseball, and NBA games. We'll be upping our game on NFL Sundays, and we'll strengthen our college football presence with a new edition of NCAA football for the first time. We plan to complement our live sports activity with significant investment in top-rated entertainment programming across Univision and Telemundo, while increasing our digital and social media activities as well. We will also be launching, literally, one of our biggest new items with the rollout of the Modelo 32-ounce bottle as the single-serve segment continues to be on fire. It also offers a trade-off opportunity as almost 75% of the volume in its 32-ounce format is held by domestic low-end brands that are in decline. Let's turn to Pacifico, our up-and-comer brand of our portfolio, selling almost 10 million cases this past year. The brand is attracting new drinkers, especially outside its core California market, and is seeing double-digit growth in many of these markets increasingly. through increased awareness with the national expansion of Live Life, Anchors Up campaign. For fiscal 20, we plan to push Pacifico aggressively through increased investment behind national media and sponsorships, as well as expansion in digital via Facebook and Instagram. We're increasing our national TV presence for additional engagement with consumers on key entertainment properties like The Daily Show, as well as live sports like the NBA playoffs, the NHL playoffs, and Major League Baseball. And with more than 50 million Americans now participating in action sports, Pacifico is continuing its partnership with ESPN as the official beer sponsor of action sports' biggest events, the summer and winter X Games. We've added a new Pacifico partnership with the U.S. ski and snowboard team, and we will be the official beer sponsor of the Burton U.S. Open of snowboarding. The growth opportunities, though, don't end there. Innovation is the second piece of the equation that gives us confidence in our high, single-digit, top-line growth expectations for fiscal 20. We're building a strong pipeline of new, innovative products, leveraging the power of our existing brands to fill gaps in our portfolio and and complement our core franchises. We'll continue to invest in early-stage emerging brands that are both scalable, with high growth, and high margin potential. Our goal is to drive sustainable, high-end share growth through consumer-driven innovation that recruits new drinkers, expands occasions, and adds value to the category. But we will do it in a very disciplined and and focused way. During fiscal 20, we'll extend the Corona Master Brand to take advantage of consumer trends with the national launch of Corona Refresca. Corona Refresca brings a completely new drinker to the Corona franchise and allows us to carve out a space within the large and growing FMB category that's anchored in Corona's carefree lifestyle. Beginning this month, we're launching Corona Refresca nationally in guava lime and passion fruit lime six-packs, plus a new variety 12-pack with the added flavor of coconut lime. This year, we're also testing Wildish, which is to be introduced as a seltzer in the Northeast and as a tea in one to two additional test markets. It is being positioned as a platform to capture the opportunity driven by the health and wellness trend. And then there's Western Standard, one of my personal favorites. This offers a high-end, sessionable, full-flavored beer that will be available in five states this coming year. Alera and El Grito are products specifically developed to meet the needs of the fast-growing Hispanic consumer. Alera is an FMV that was created for bicultural and acculturated Hispanic and general market women and will be offered in four test markets this year, while El Grito is a newly created beer that will be part of our planned Four Corners expansion. Now, turning to the operations side of our beer business. As planned, we have completed the 30 million hectoliter capacity expansion at Nava, which brings our existing capacity, including Obregon, to 34 million hectoliters. This marks a monumental achievement over the past five years to provide ample supply to meet the growing demand for our beer portfolio while completing the project on time and on budget. Furnace number five is underway at Nava and expected to be producing glass by the end of this calendar year, and we will continue to make progress ahead of schedule with the 5 million hectoliter expansion at Obregon, which I highlighted last quarter. the Mexicali capacity expansion continues with expected completion by fiscal 23. As a reminder, upon completion, this planned expansion project will represent roughly 10% of our beer capacity in Mexico. To sum it up, I am excited about the strong, high, single-digit growth prospects for our beer business in fiscal 20. As you can see, we have excellent opportunities to grow our business through a combination of enhanced distribution and consumer innovation across our portfolio. And now just a few comments about our investment in Canopy Growth, which continues to be a leading share in the Canadian recreational cannabis market, supported by solid product inventories, a national sales force, and the rollout of value-added products, including soft gel caps, oral sprays, and pre-rolls. Throughout calendar 2019, we expect Canopy to benefit from favorable changes in the recreational Canadian market as brick-and-mortar retail stores come online and stimulate new growth in larger provinces like Ontario. Canopy is also preparing to deliver incremental value-added recreational products, including bathes, beverages, and edibles. which are slated to come online in the fall of this year in Canada. We share Canopy's view that a significant opportunity exists going forward for the inclusion of cannabis as an ingredient in future consumer products and medical therapies. Canopy's current patent portfolio includes more than 35 issued patents and 195 patent applications. including those related to a unique process it has developed to produce cannabis-based beverages, which are expected to be available when Canadian regulations open up this fall. So in closing, I hope your key takeaways from my comments this morning are as follows. One, I am confident in the ability of our beer business to generate industry-leading, high single-digit growth trends for fiscal 2020. with the initiatives we already have underway for this year. Two, fiscal 20 will be a dynamic year for our wine and spirits business. A tighter focus on high-performing brands strengthens the business and strategically positions it for future growth and success. Three, we are working closely with Canopy Growth on a focused long-term strategy to win markets and form factors that matter while paving a clear path to profitability. We are confident in their ability to achieve the previously communicated run rate of $1 billion next year. And with that, I would like to now turn the call over to David, who will review our financial results for fiscal 19 and provide guidance for the coming year. David?