Constellation Brands, Inc.

Welcome to the Constellation Brands Third Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants have been placed on 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, Liz. Good morning, and welcome to Constellation's Third 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 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 also refer to the news release and constellations SEC 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 orders, 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. Good morning, and Happy New Year to everyone. I certainly hope you enjoyed the holidays and had the opportunity to include some of our awesome Constellation products in your celebrations with your family and friends. The end of every year is a time of reflection for me, and this year is no exception. a certain fiscal year, but a dynamic decade at Constellation Brands. Since 2010, Constellation has been on an incredible journey marked by strong financial performance and notable business milestones. Over the last 10 years, we've significantly increased the value of our stock and produced double-digit growth in sales, operating income, and operating was just more than $15. Fast forward to December 31, 2019, we closed at almost $190. This incredible increase of more than 1,000% over the last 10 years made Constellation the best performing stock in the S&P 500 Consumer Staples Index during this time frame. One of the biggest drivers of our success was the game-changing beer acquisition decade. It enabled Constellation to buy the group of Modelo brands in the United States, where we successfully built these brands for many years while positioning ourselves for this transformational opportunity. At that time, this deal allowed us to double the sales of our company, diversify our profit stream, significantly enhance our margin, earnings, and free cash flow, Since then, our beer business has made significant contributions to the overall sales, profit, and cash flow results for our business and continues to be a powerhouse for growth as the number one brewer and seller of imported beer in the U.S. market. Calendar 2019 marked the 10th consecutive year of volume growth for Constellation Beer Business and solidified our position as the leader in the high end of the U.S. beer business. These trends were driven by Corona Extra, Modelo Especial's explosive growth, and our successful innovation initiatives. In 2010, the Modelo Especial brand depleted approximately 35 million cases and then went on to achieve double-digit growth in every single year of the past decade, finishing 2019 at more than 140 million cases. and there's more to come. In our most recent third quarter, this powerhouse brand posted depletion growth of almost 15%, with double-digit growth in 46 of the 50 states, while solidifying its position as the number four beer brand in the U.S. market. Corona Extra, which is the number seven beer brand in the U.S. beer category, grew from approximately 90 million cases in 2010 to more than 110 million cases in 2019, and is one of the few top-selling brands in the U.S. to grow this past decade. From a quarterly perspective, the Corona brand family grew nearly 7% in IRI channels, driven by the continued strength of our Corona Premier and Corona Refresca innovations, as well as the renewed growth of Corona Extra. Corona Premier continues to gain distribution, especially in the on-premise, and delivered double-digit depletion growth in 35 of the 50 states during the quarter. Corona Refresca was a top-10 growth contributor to the U.S. high-end beer category during the third quarter. And finally, let's not forget Pacifico, which achieved double-digit depletion growth of nearly 16% and remained a top share gainer within the U.S. import segment. We're excited also about our plans for the launch of Corona Hard Seltzer this spring, which will help to further strengthen our position as the leader in the high end of the U.S. beer segment. Our launch strategy includes the largest ever single brand investment for our portfolio, of more than 100, excuse me, more than 40 million in marketing to support this intro. We've already started to take orders from distributors and have received incredibly positive feedback from retailers who are excited about the prospects of Corona Seltzer and have already incorporated our newest portfolio addition into their shelf-set programming plans for the spring selling season. As we've discussed, Corona Hard Seltzer will be introduced in four flavors, including tropical lime, mango, cherry, and blackberry lime. 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, DNA. There's been a lot of debate about the seltzer trend and where seltzers are sourcing their growth within the total beverage alcohol category. Our research shows that seltzer is taking share across the board from beer, wine, and spirits. While a significant amount of this growth is sourced from the beer category, it is primarily coming from domestic premiums, crafts, and F&B brands. In addition, we're seeing increased overall consumption from those seltzer drinkers and new consumers who are entering the TBA space through their interaction with seltzers. As an aside, the trends that you've seen for Constellation's beer business in this week's four-week IRI data covering the month of December are related to our recent annual price increase, specifically in the California market. which frequently decreases features and promotions. The impact of these price increases are normal and typically short-term in nature. Overall, we closed out the month of December with depletion growth for our entire business in the high single-digit range of our year-to-date trends. Moving now to wine and spirits. I'm pleased that we've been able to execute a revised agreement with Gallup which paves the way for accelerated growth and margin performance for our wine and spirit business going forward. In addition, we believe it addresses the FTC concerns by excluding the sparkling wine, brandy, dessert wines, and concentrate categories from the original transaction. We're already actively pursuing other opportunities to divest most, if not all, brands in these categories, as we believe this is the best path to optimize our portfolio going forward. To be clear, the FTC needs to provide final approval of our revised agreement with Gallup once we have finalized all transactions, including the proposed divestitures, which we expect to occur by our fiscal year end. We have also entered into a separate but related agreement with Gallup to divest our Navajo wine brand. This fits with Gallup's portfolio strategy and allows them to expand in the New Zealand wine category without affecting our long-term goals and strategy or our opportunity in the New Zealand wine category in the U.S. at the greater than $11 price point. This transaction is expected to close in the first half of fiscal 21. Despite the delay in timing and revisions to the transaction, I'd like to remind everyone that we have benefited from almost an entire year of additional cash flow from the divested brands by the time the transaction closes, which has contributed to our debt reduction and share buyback activities. During the last decade, our team has created significant value by transforming and simplifying our Wine and Spirits portfolio through the rationalization and divestiture of assets in an effort to premiumize the business which is the right strategy to enhance our wine and spirit growth and financial profile going forward. This premiumization strategy is taking hold in the marketplace as our power brands continue to outpace our competitors and take market share at the price points that matter in the higher end. In fact, our power brands at the greater than $11 retail price point grew nearly 9% in IRI channels during the third quarter, including brands like Naomi, which has more than doubled its volume with a CAGR of nearly 30% since its acquisition in 2015. Kim Crawford, which is another gem within our power brand portfolio, was the number one selling wine on Wine.com this past year and has consistently outperformed its competitors, posting a $20 As we progress through fiscal 20, we continue to show steady upward progression in revenue trends for our power brands and expect mid-single-digit sales growth for this collection of brands in the fourth quarter. Innovation and new product development are also critical to our success for the remainder of the year, and we feel we are well-positioned Mondavi private selection buttery Chardonnay and Woodbridge ready-to-drink packs, which while gaining traction across all channels, is doing especially well in the convenience channel, a channel growing at two times the rate of the total U.S. wine market. Both Woodbridge and Robert Mondavi private selection, which represent the most significant volume within the Robert recently made. We recently extended our highly successful barrel-aged program with the introduction of RMPS rye barrel-aged red blend. As a reminder, we've sold more than one million cases of barrel-aged products since the inception of this program nearly two years ago, which helped to revive the Robert Mondavi private selection brand while also becoming the foundation for some of our other successful barrel aged innovations, like Cooper and Thief. We're also building on success of Wine in a Can, where consumers are seeking products that are convenient, ready to drink, and sold in environmentally friendly packaging. These trends have helped to fuel the growth of Crafter's Union, which is the number one growth driver in canned wine over the last 12 weeks. We plan to build on the momentum of this brand with the launch of Crafters Union Bubbles during the fourth quarter. Later this month, we will be releasing the Prisoner Unshackled, the newest addition to the Prisoner collection of brands in Cabernet, Red Blend, and Rosé. We expect these brands to strengthen our ability to compete at the fast-growing $25 retail price point. On the spirits front, Svetka Vodka continues to significantly outpace the vodka category in IRI channels, driven by increased distribution within a core portfolio, as well as the more recent introduction of the rosé flavor. During the quarter, one of our most successful venture investments, Nelson's Greenbrier, launched its first Tennessee whiskey product. This Tennessee whiskey is based on Charles Nelson's original recipe, dating back to 1860, and it's the first time it's been bottled since Prohibition shut down the distillery in 1909. This is another milestone for Nelson's Greenbrier as they continue to innovate and leverage the success they've already achieved. Overall, our U.S. wine and spirits business has executed changes that have resulted in a sharpened focus on consumer preferred trends related to premiumization innovation, and brand building. As a result, we have benefited from ongoing consumer trade-off trends, positive mix, and great consumer response to our new product introductions in the marketplace. Before moving on to canopy growth, I'd like to remind everyone that the core business activities I just highlighted are driving an increase in our EPS guidance for fiscal 2020. Now, a few comments about our investment in cannabis growth, which continues to have the leading market share in Canada and to be the leader in global cannabis sales. We remain bullish on the Canadian cannabis market as the conversion of the illicit market to the legal market continues to strengthen. Per Statistics Canada, in 2018, 23% of cannabis consumers obtained cannabis from the legal market, while in 2019, that number significantly improved to almost 50%. In addition, retail store sales have increased significantly in every province during the last 12 months. We expect further retail sales increases as products like vape, edibles, and beverages flow through the retail stores in Canada now that REC 2.0 products have been released. We couldn't be more excited to see these products in the marketplace as Canopy now will have the ability to showcase their best-in-class brands and intellectual property. We are also excited to see the progress the Ontario government has made to satisfy the demand of consumers by agreeing to allow more retail store openings beginning in early March. During Canopy's second quarter, they established leading recreational market share across Canada, including a noteworthy share of over 35% in Alberta, Canada's most developed provincial recreational market. In the U.S. in early December, the Canopy team introduced First & Free, a line of branded hemp-derived CBD products. These products are offered in a variety of formats, including soft gels, oil drops, and creams, and are currently available for sale via e-commerce on the First & Free website. Overall, we're pleased with the progress of the Canopy team and what they've accomplished in the last few months. As most of you know, in less than a week, my colleague David Klein will assume the role of CEO at Canopy Growth, where I believe he will bring more focus and discipline to that business in executing their strategic priorities. We have also appointed Garth Hankinson as Constellation's new CFO, who will help lead our company through its next phase of growth. David has been a significant contributor to our organization during his time here. His accomplishments at Constellation are numerous, and I wish him great success at Canopy, where I will continue to collaborate with him through our Canopy board interactions. During his time at Constellation, David built an incredibly talented finance organization, which is why we're expecting a seamless transition as he assumes his new role. Garth brings a wealth of experience to this critical leadership position, most recently serving as Senior Vice President for our corporate development activities, where he's led the company's efforts in financial planning, reporting, and analysis, as well as mergers, acquisitions, and our venture initiatives. Many of you will have the opportunity to meet Garth in the coming weeks, welcome him to our executive management team. In closing, we've accomplished a great deal on this exciting journey through the last decade, but I'm equally excited and optimistic about the next 10 years as well. We have a great product portfolio and a terrific industry. We have the right strategy and an energized management team in place to execute our vision for the future. I'd like to reiterate two key takeaways from today's discussion. Number one, with every step we take, we are positioning Constellation for sustained long-term success as we continue to premiumize the portfolio, a strategy which has paid huge dividends over the years. I'm confident in the continuation of strong results for our beer business and the excellent prospects Number two, our powerful cash generation capability and our desire to quickly de-lever and return $4.5 billion in cash to shareholders makes Constellation a compelling investment for the future. We remain steadfast in this commitment, and I believe our significant debt reduction to date, coupled with our second quarter share repurchases, are a testament to this commitment. we have a relentless, consumer-obsessed focus on brands and categories that are high growth, high margin, and we're working continuously to build a solid and sustainable foundation of operational excellence, financial strength, and innovation. We plan to execute in these areas throughout the remainder of the year and well into the coming decade. With that, I'd like to turn the call over to my colleague David who will review the financial results of our third quarter.