Constellation Brands, Inc.

Welcome to the Constellation Brands Q2 fiscal year 20 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 Yon Erlaub, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Joelle. Good morning, and welcome to Constellation's second quarter 2020 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 other non-gap financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.gbrands.com. Please refer to the news release and constellations FTC filing 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. Welcome to our discussion of Constellation's second quarter sales and earnings results. We delivered an excellent quarter, driven by strong performance of our beer business. And while our wine and spirits portfolio continues to be impacted by transition activities, related to the Gallo transaction, I am pleased with the pace of progress and the strategic transformation of this business. Now that we're at the halfway point in the year, I'd like you to focus on two key points as the second half of the year unfolds. Number one, Constellation and Gallo are working in full cooperation with the FTC while they continue to review our Wine and Spirits deal. We are confident in our ability to close a transaction which we now expect will occur by fiscal year-end 2020. For now, we have updated our fiscal 2020 EPS guidance to assume that we close at the end of the third quarter, but we will adjust accordingly as we get more clarity on exact timing. Meanwhile, we are fully committed to supporting our entire portfolio throughout the transition. Number two, During the second quarter, Constellation's beer business remained the number one market share leader in the high end of the U.S. beer market, representing 25% of high end growth, with Constellation growing share in every summer holiday. This is the 38th consecutive quarter of growth for our beer business, and I remain confident in the prospect that for this collection of iconic consumer-love brands well into the future. Why are David and I so confident? Several reasons. High-end trade-up is a continuing trend for the entire U.S. total beverage alcohol market. Premiumization is becoming more prevalent in U.S. middle market states like Ohio and Michigan, where a significant amount of beer consumption occurs. Legal drinking age Hispanic population growth is expected to continue at a CAGR of roughly 3%. We have ample distribution runway with traction from key initiatives like Shopper First Shelf, which is a compelling opportunity for our retail partners. We have significant opportunities to increase household penetration with key brands and Our beer innovation pipeline is strong and will continue to complement the other growth opportunities we have for the portfolio. As most of you know, the Modelo and Corona brand families are the powerhouse brands that represent the foundation of our business. So let's drill down and discuss some details of the opportunities we have for specific brands within these brand families. Let's start with Modelo Especiale. which generated the most dollar sales growth in the entire U.S. beer category during the quarter. Modelo Especial continues to be on fuego and recently achieved a significant new milestone, becoming the number one import beer and the number five overall beer in the U.S. beer market. Modelo Especial alone contributed almost 30% of the total category growth during the second quarter, with double-digit depletion growth in 44 out of 50 states. Modelo is growing with non-Hispanic, acculturated Hispanic, and multicultural consumers, and there remains significant upside to grow both penetration and buy rate with these consumers. As a matter of fact, in calendar 2018, we estimate that only five to six percent of non-Hispanic beer-consuming households drank Modelo Especial. For reference, that's roughly half the penetration that Corona Extra has in non-Hispanic beer households. Because Modelo has great growth momentum and excellent velocity, it should command more shelf space at retail compared to other top beer brands. And in the on-premise, Modelo Especial currently has distribution in just over 50% of the accounts that carry Corona Extra. We've already had excellent success this year, with the launches of Modelo Especial 32-ounce bottles, Modelo Chilada Limón y Sal, and Modelo Negra 24-ounce cans. Bottom line, we have significant runway for growth with this brand well into the future. Now moving on to Corona Extra. which is the number one high-end brand family in the U.S. beer market. This spring, the Corona brand family grew shelf space at retail almost 15%. One of the key drivers of this trend was Corona Premier, which experienced accelerating depletion growth throughout the summer months, while posting double-digit sales and distribution trends in IRI channels during the quarter. With our increased focus on Corona Premier in the on-premise this summer, it has become the fastest growing beer in this channel, a key channel to drive consumer trial. Corona Refresca has quickly become a top five share gainer in the high end of the U.S. beer category, with the Refresca Variety Pack becoming the number three new item in IRI channels during the second quarter based on dollar sales. Interestingly, Corona Refresca has higher velocity trends than one of its key competitors in this space, the Mike's brand family. We're very excited to announce that our new seltzer launch, planned for next spring, will be the next big innovation for the Corona brand family. Now, admittedly, this has been one of the worst-kept secrets, but as you all know, Corona carries unbelievably strong brand equity as the number one most-loved brand among both Hispanic and total population drinkers aged 21 to 54. And that's why we've decided to put the Corona brand name on our new seltzer. And of course, the refreshment characteristics of seltzers perfectly match Corona refreshment DNA. We believe that seltzers are here to stay and will therefore accelerate the volume shift in the category from the low end to the high end, where we are the market share leader. Corona Hard Seltzer will be introduced in four flavors, including tropical lime, mango, cherry, and blackberry lime. The brand will weigh in at 90 calories with a 4.5 ABV with zero carbs, and zero sugars. So let's now move on to Corona Extra, which is the number six beer brand in the U.S. market and boasts velocity trends that are two times the entire category. There continues to be runway for future Corona Extra growth, with the incremental contributions coming from draft and canned formats, as well as the Coronita product, and we plan to increase our marketing investments throughout the remainder of our fiscal year for this brand. Last, but certainly not least, Pacifico produced double-digit depletion growth this past quarter, driven by the national advertising campaign and retail promotions, as we will continue to support the independent spirit of this brand with the Live Life Anchors Up marketing campaign. As you can see, we have tremendous opportunities to grow the beer business through a combination of enhanced distribution, innovation, and executional opportunities across the portfolio for years to come. Considering these factors, we remain confident in our ability to achieve 7% to 9% net sales and even growth for our beer business in fiscal 20 and beyond. Moving now to Wine and Spirits. As I mentioned, we continue to work with the FTC to finalize our wine and spirits transaction with Gallo. Meanwhile, business performance continues to be impacted by transition activities with distributors who have begun to reposition their portfolios for the change in ownership of brands upon the close of the pending transaction. In addition, we are overlapping a very strong second quarter last year, At that time, we executed select promotional activities for key power brands that we didn't repeat this year as they did not meet the returns and the target returns for the business. Why, you might ask. The Wine and Spirits Business Transformation Strategy is evolving under a new set of strategic imperatives that have a higher return target for these types of promotional activities. based on a more disciplined revenue modeling tools that we've implemented similar to what we do in beer. While our year-to-date depletion trends for our power brands are flat, we are confident in our ability to deliver depletion growth for this portfolio of brands in the mid-single-digit range for fiscal 20, and September has reflected that expectation. We're also pleased with the consumer takeaway trends for the power brands, which grew dollar sales 6% in IRI channels during the quarter, outperforming total U.S. wine growth of 3%. This demonstrates that the brands that will fuel our growth going forward have significant consumer-led momentum, which we believe will continue in the second half. What are the reasons to believe? As I mentioned, we are experiencing strong consumer takeaway trends for these power brands. In addition, we have an impactful innovation pipeline primed with new products launching for the key holiday selling season, which begins this month. We're especially excited about our wine-in-a-can launches, which will capitalize on one of the fastest-growing trends in the U.S. wine industry. We believe that our can format is the most attractive in this segment in terms of both taste and appearance, And we have a successful proof point with Crafters Union, which was our inaugural launch of Wine in a Can earlier this year. It has since become the number one growth brand in canned wine and a top five share gainer in the super premium price segment. In addition to launching the number one Sauvignon Blanc in the U.S., that being Kim Crawford, in a canned format, We will also introduce Kim Crawford rosé cans, that being the fastest growing spew in this format. And we will not only plan to launch Woodbridge wine in a can, but in a tetra pack format as well. In addition to our efforts in cans and tetra, The Robert Mondavi Private Selection Buttery Chardonnay is slotted for release this fall, as well as the Rye Barrel Aged Red Blend, which was recently introduced into the market. As you would expect, we will continue to support our innovation and brand-building efforts throughout the remainder of the year with impactful marketing campaigns to strengthen and build the portfolio. On the spirits front, Svetka Vodka continued to post robust consumer takeaway sales growth, trends of 6% in IRI channels during the quarter, bolstered by our marketing campaign, Bring Your Own Spirit. Svetka Rosé continues to outpace our expectations, while the core offerings in the portfolio remain extremely healthy as well. Our American whiskey, High West, has been growing double digits in IRI for the three years that we have owned the brand. Driven by an award-winning taste, brand authenticity, and strong distribution gains, we continue to expect High West to remain a solid growth contributor to our portfolio going forward. During the quarter, we signed an agreement to sell Black Velvet Canadian Whiskey to Heaven Hill for $266 million. This action aligns with our consumer-led premiumization strategy to deliver accelerated growth as we continue to execute the transformation strategy for our business. Our ventures team was quite active during the quarter as we made two new minority investments. The first is Montagna Distillers, a Colorado-based, award-winning American craft rum maker. Montagna's rums are currently distributed in more than 40 states nationwide. and seven countries overseas and can be purchased online. The second is Durham Distillery, a craft gin, vodka, liqueur, and ready-to-drink canned cocktail producer that was recently recognized as the number one craft gin distillery in the U.S. by USA Today. Additionally, Durham has earned more than 50 national and international awards. Both these investments are part of our Female Founders Initiative, which makes meaningful investments in female-led businesses doing disruptive and innovative work across beverage alcohol. Overall, we will continue to maintain our focus on premiumization, innovation, and brand building as the transformation strategy evolves for our wine and spirit business. Now a few comments about our investment in Canopy Growth. which continues to be the global leader in total cannabis sales. During the quarter, Canopy Growth and Acreage Holdings received overwhelming shareholder approval for the agreement that grants Canopy the right to acquire acreage and enter the U.S. cannabis market once federally permissible. As you know, this opportunity provides a path for Canopy to have a leading position in the U.S. upon federal cannabis reform. And speaking of that reform, I was excited to see that the U.S. House of Representatives recently passed the SAFE Act by a wide majority. While this bill also needs Senate approval, it would deliver access to traditional banking services for thousands of legal cannabis businesses in the U.S. and shows positive momentum in the legalization debate moving forward. We're also looking forward to the launch of REC 2.0 in Canada when Canopy, will unveil their portfolio of value-added, higher-margin products in various form factors, including drinks, edibles, and vape. In the U.S., the Canopy team has been actively developing a range of high-quality CBD products and related marketing plans, as well as securing the production resources necessary to bring these products to the U.S. market by the end of their fiscal year. New CBD product offerings include skin care and cosmetics, therapeutic creams, beverages, edibles, oils, and soft gels. Overall, we're pleased with the progress of the Canopy team and what they have done in the last few months. In closing, I am extremely pleased with the progress of our business at the halfway mark in the year. Our beer business continues to deliver industry-leading results and our Wine and Spirits business is successfully executing their transformation strategy. We continue to demonstrate our commitment to returning cash to shareholders with the share repurchases we made during the second quarter. And I'm bullish about our prospects across the business for the remainder of this year. With that, I would now like to turn the call over to David, who will review our financial results for the second quarter.