Constellation Brands, Inc.

Welcome to the Constellation Brand Q4 Full Year FY20 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 Donatoff, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Josh. Good morning, and welcome to Constellation's year-end fiscal 2020 conference calls. I'm here this morning with Bill Newlands, our CEO, and Garth Hankinson, 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 Constellation's FCC filings for risk factors which may impact forward-looking statements we make on this call. Before turning the call over to Bill... Similar to what we've done in 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. Let me add my welcome as well. Let me quickly frame up the key themes you're going to hear from Garth and me today. First, we delivered strong performance in fiscal 20, led by our beer business, which generated double-digit operating income for the year, with accelerating IRI trends as Q4 progressed. And that momentum has continued in the early stages of fiscal 21. We have ample brewing capacity to continue fueling the growth of our beer business in the medium term, and we're working with local authorities and government officials in Mexico to ensure we have ample long-term capacity as our business continues to grow and evolve. Second, Our high-end power brands and successful new product launches fueled performance in fiscal 20 that drove accelerating depletion trends in Q4 for our wine and spirit business as our premiumization strategy continues to take hold. And third, our strong performance and financial discipline generated record cash flow, reduced our outstanding debt, and built solid momentum heading into fiscal 21. We'll talk in more detail about each of these areas, but before we go any further, I'd like to take a minute to address current circumstances related to the COVID-19 outbreak. First and foremost, our thoughts and prayers go out to those affected by this terrible virus, and to the first responders and healthcare professionals working to help those in need. We sincerely hope the increased efforts to more fully contain this virus, gain strong traction soon. With this in mind, we operate with a customer-focused mindset, a genuine concern for people, and a desire to make a positive difference in our communities that is core to our DNA, even more important today as our industry and communities face substantial hardships. As such, Constellation, along with a number of our brands, has committed more than $2.5 million toward COVID-19 relief efforts that will directly benefit our business partners and communities now and through their recovery. Specifically, we are supporting the National Restaurant Association Educational Foundation Restaurant Employee Relief Fund, the U.S. Bartenders Guild, and first responders who continue to support those in need in communities across the U.S., I'm also extremely proud of the Constellation team for their continued efforts to meet the needs of consumers and to help keep the economy going while also keeping our people safe. The health and well-being of our employees is our number one priority, and we've taken a number of preventative measures and provided a number of protections to keep our employees safe in our operations and out at retail and to ensure our continued ability to meet the needs of the market. Our production facilities in the US, Mexico, Italy, and New Zealand are operational, and our distributors are up and running. Our teams are also working hard to ensure our distributor and retail partners have ample supply of our products to meet consumer demand, particularly in the off-balance, which has seen accelerated growth, as many restaurants and bars have suspended dine-in services to help mitigate spread of the virus. The off-premise channel represents 85% to 90% of depletion volume for both our beer and our wine and spirits businesses and over-indexes to the rest of the beverage alcohol industry in the U.S. versus the on-premise channel. These trends are reflected in recent IRI data ending 3-22, which shows accelerating consumer takeaway trends in off-premise channels. Specifically, we've seen IRI dollar sales growth for our beer business increase to 24% in the four-week period ending 3-22 versus 12-week and 52-week trends of 17 and 12, respectively. For our wine and spirits power brands, we're also seeing accelerating growth of 23% in the latest four-week period versus 12 and 52-week trends of 7-12. and four. During this time, we are focused on the channels the consumer is choosing, namely three-tier e-commerce, direct-to-consumer, and the off-premise, especially big box grocery, mass, and club channels, where we are working diligently to ensure high-end stock positions for our key SKUs. We've also adjusted our marketing approach to ensure our consumer messaging is in tune with current realities and by shifting our focus to digital and social media platforms as sporting events and other major gatherings are suspended. Bottom line, we are well positioned to continue meeting the needs of consumers, as well as our retailer and distributor partners. We will continue to manage our business with focus and discipline while remaining flexible and are willing to adapt as needed to shifting consumer behaviors. and I remain extremely optimistic about the long-term prospects for our business. Now let's get back to those themes that I highlighted at the top of the call. As mentioned, our beer business once again delivered exceptional results in fiscal 20 and continues to be the leader in the high end and a cornerstone of growth in the U.S. beer industry. Imports continue to be one of the primary growth drivers in the high end and the total beer category, with Constellation driving 100% of the growth in this segment. The primary drivers of our beer portfolio growth continue to be our Modelo and Corona brand families. The trio of brands that comprise the Casa Modelo brand family includes Modelo Especial, Modelo Negra, and Modelo Chilada, and is one of the biggest forces in beer, delivering more than 20 million cases of growth to the U.S. beer category last year. Modelo Especial led the way as the top non-seltzer share-gaining beer brand in the U.S. beer industry, achieving depletion growth of more than 16% and acceleration over the previous year's trend of 12%. Modelo Especial is now the number four beer brand overall in the U.S. beer market, and the best-selling beer in major markets like Chicago, as well as the states of Nevada and California, where sales of the brand are greater than the two biggest premium domestic light brands combined. We plan to invest at record levels this year for Modelo to reach more consumers and to increase the brand's appeal among total market consumers. We'll accomplish this through innovation, investment in Spanish-language media, and targeted programming. And we'll extend the brand through new pack sizes, such as our 7-ounce Modalito, a popular format, particularly in C-stores. Innovation with new product offerings like Modelo, Chilado, Mango, Chili. And we're testing new spirits, barrel-aged offerings on a smaller scale that remain true to the essence of the Modelo brand, and align with consumers' desire for more flavor. I'm talking about Modelo Reserva, which is a golden, sessionable, refreshing lager with a 5.5% ABV that will be available in test markets in tequila and bourbon barrel-aged options. Modelo's strength with Hispanic consumers continues to fuel the growth of this brand, and with more than a million Hispanics reaching legal drinking age each year, Combined with our continued efforts to broaden our appeal with general market consumers, we believe we're only scratching the surface of where this brand can go. Our flagship Corona brand remains the number one imported brand family in the U.S., selling just shy of 150 million cases in fiscal 20. In fiscal 21, we'll embark on a comprehensive master brand restage for the consumer. for the Corona brand family that drives a more cohesive look and greater consistency in marketing communications across sub-brands, as well as new heritage and experiential programs designed to strengthen the bond consumers already have with Corona. We're also excited to launch a new cause marketing program focused on protecting our beaches through our partnership with Oceanic Global, a leader in ocean conservation. We believe this program will further deepen the emotional connection Corona consumers have with the brand. Corona Extra is the seventh largest brand in the U.S. beer category and remains the number one brand in New York City, Miami, D.C., and is the top three brand in eight other major U.S. markets. Brand equity for Corona Extra remains extremely strong, and sales have accelerated in IRI, with 4-week and 12-week trends outpacing their corresponding 52-week trends. We remain bullish on Corona Extra's future potential, knowing that there are several large DMAs that, based on hypercapita income, are ripe for Corona Extra growth. In only its second year as a national brand, Corona Premier grew depletions nearly 19% in fiscal 2020, to 10 million cases and became the number five growth brand in the U.S. beer category, with distribution continuing to grow double digits. In just two years, Corona Premier has achieved an ACV of almost 75, which is similar to some brands that have been around for decades. This brand is perfectly positioned to capitalize on the macro trends of betterment and premiumization as consumers trade up from domestic lights And we have plans in place to continue building traction for this brand, including winning with Hispanic consumers, who compromise about 30% of its consumer base. In fiscal 20, Corona Refresca became a 3 million case brand in its first year, with the variety pack becoming the number five top-selling new beer in IRI. This now gives Corona an ownable play in the ABA space, delivering tropical flavors to a range of consumers. To capitalize on the success of Refresca, we will be extending the brand into the high ABV FMV space this fall with the launch of Corona Refresca Mas, 24-ounce cans with 8% ABV in tropical berry and mango citrus flavors. We are very excited about this year's Corona Hard Seltzer launch, which is off to a strong start and has already achieved an ACV approaching 50 in its first month of national launch. As we've said before, the hard seltzer category continues to grow at a breakneck clip, and we believe it's here to stay. As an aside, our recent venture investment in pressed seltzer provides a wonderful complement with a unique value proposition and price point, as we believe the hard seltzer segment will price stratify over time. Our Pacifico brand grew depletions more than 13% in fiscal 20, which represents an acceleration over the previous year. Pacifico is the number seven beer overall in California, where it continues to grow double digits. In fiscal 21, our plans will focus on continuing to win in California, while further expanding awareness and trial in key DMAs across the country. This includes a 40% increase in digital marketing investment, including our first national YouTube buy, a new sponsorship with the LA Chargers, and continued partnerships with the Summer and Winter X Games, which will help us to do just that. In addition to our continued focus on accelerating growth for our core beer franchises, we're also leveraging innovation and domestic production capabilities to launch new-to-world brands that allow us to compete in growing sectors of the high-end. Our recent launch of Tulane in partnership with country music star Luke Bryan is a great example. This beer plays in the domestic high-end sessionable space and delivers on the refreshing taste consumers want with only 99 calories, 3 grams of carbs, and 4.2% ABV. In fiscal 21, Tulane will be available in select markets in the Southeast. In support of our efforts to build brands consumers love, our commercial team continues to work with our three-tier partners to ensure we deliver world-class execution at retail. This includes increasing adoption of shopper-first shelf principles by making it easier for consumers to shop by organizing shelf flow in ways that help maximize growth and profitability, and by meeting consumers where they are going, by allocating space based on future growth opportunities, and ensuring highly incremental packages with high velocity are represented with adequate holding power. We currently have 6,000 retailers that have implemented shopper-first shelf principles, and those who have embraced this program have seen solid increases in overall growth and profitability for their category. As you can see, we believe fiscal 21 holds great promise for our beer business with a healthy core, master brand innovations, and emerging brands poised to grow. From an operational perspective, we continue to make strategic investments in our beer business to ensure we have the capacity, quality, control, and flexibility to support the continued growth of our business in the medium term based on our forecast. The capacity we've built in Nava plus Obregon when completed at the end of this year will enable us to provide more than 400 million cases of beer, which is ample supply for several years to come. We also completed construction of furnace number five at our glass plant adjacent to our Nava brewery. which now supplies 60% of the glass needs for that brewery, resulting in significant logistics savings. Earlier this week, I met with Mexican President Lopez Obrador and his team in Mexico to discuss our brewery construction project in Mexicali. Our discussions were constructive and surfaced several options for consideration. We will continue to work with local authorities and government officials in Mexico to reach an optimal solution for our business. We've had a positive, mutually beneficial relationship with Mexico for more than 30 years, and we fully expect this to continue. Some of you have asked about our operations. Let me just say that we are being exceedingly careful to protect our people and to maintain ultimate safety. With that said, over the past several weeks, we've taken steps to build ample product supply across our warehouse and distributor network in the U.S. We have close to 70 days in the system, and we've shifted resources to accelerate production of high-volume SKUs for key off-premise accounts. Our facilities are currently operating, and we remain confident in our ability to continue meeting the needs of U.S. consumers and do not expect anything near-term service disruption to retailers. Shifting now, our wine and spirits premiumization strategy continues to show promise as our business closed out fiscal 20 in a position of strength, posting accelerating power brand depletion growth and operating margin improvement in the fourth quarter. Fourth quarter power brand family depletion growth accelerated to more than 4%, led by double-digit growth for Kim Crawford, Mayomi, and the Prisoner brand family, as this collection of brands continued to outpace the total U.S. line market. Operating margin expansion was driven by our focus on more efficient price promotions with our mainstream power brands, as well as market share gains in the higher end of our portfolio, with Mayomi and the Prisoner family contributing strong mixed trends. Innovation continues to fuel growth as we capitalized on innovation trends in consumer-driven growth segments. Our introduction last quarter of Unshackled by the Prisoner Wine Company has been extremely well-received. We further capitalized on barrel-aged wine trends with the introduction of new offerings from both Woodbridge and Cooper & Fee. Since launching our first barrel-aged wine series a little more than two years ago, we have sold well over 2 million cases, and that number continues to climb. In response to the consumer-led trend around convenience, we launched Kim Crawford Wine in a Can, and our Crafters Union brand remains the number one growth driver in the canned wine segment. We're also excited about the recent launches of Spedka Botanical Flavors and Ruffino Organic Prosecco, which align with consumer trends for flavor, betterment, and sustainability. Bottom line for fiscal 20, our wine spirit transformation focused on premiumization continues to gain traction. Our higher-end power brands are driving mix and margin expansion. Our mainstream power brands are outgrowing the competition, and our innovation initiatives are fueling growth through velocity and distribution gains. Heading into fiscal 21, we are committed to investments in bold innovations, compelling marketing campaigns, and immersive brand experiences with a specific focus on top markets and accounts and priority DMAs. We'll continue building momentum by further leaning into our premiumization strategy and maximizing growth opportunities for our power brands through compelling marketing campaigns for Woodbridge, Kim Crawford, Mayomi, Spetka, and The Prisoner. We're instituting greater pricing discipline, consistent with strategies that have proven very successful in building strong brands in other parts of our beverage portfolio. And we'll continue to leverage the power of existing brands with strong equity. We remain committed to mix and margin accretive innovation in growing sectors of the wine and spirits categories that align with consumer trends. We have a strong innovation pipeline planned for the coming year, including upcoming line extensions for Ruffino and Svedka Vodka in the RTD space, the launch of a new High West premixed cocktail in the spirit space, and the expansion of our highly successful Barrel Age wine program. You can also expect us to introduce new-to-world brands in the wine category. In addition, we plan to leverage the success of Shopper First Shelf Initiative developed by our beer business by adapting and implementing this program for wine and spirits retailers in fiscal 21. We recently took pricing on our Woodbridge brand beginning March 1st, and to date we have seen no negative impact from this action due to the consumer need to stick with tried and true brands in this time of uncertainty. We are actively supporting this price increase with marketing investments, including national TV, as well as digital and social advertising. We are in the final phase of completing the revised Gallo deal, and we continue to work with the FTC primarily on the brands that have been excluded from the original deal. We have communicated our intent to retain the Cooks and Jerry Roger brands, and the FTC is currently reviewing our business plans to support these brands in the future. In addition, the FTC is vetting the potential buyers we have identified for Palmasson Grand Amber Brandy and our concentrate business. We continue to work in collaboration with Gallo to satisfy all FTC obligations, and both companies are fully committed to getting this deal done. With each step, we are marching closer to the finish line and we expect to close the deal around the end of our first quarter. Finally, we're very encouraged by the steps David Klein is taking in his new role as CEO of Canopy Growth. David and the Canopy team recently announced they are focused on four key areas, improving Canopy's connection with consumers, instilling greater focus and discipline across the organization, defining a visible path for profitability and positive cash flow, and building the company's credibility with key stakeholders. Canopy continues to be the global leader in total cannabis sales with a leading market share in Canada. The company recently took steps to right-size its business to better align with consumer demand and position the company for long-term success. Canopy just launched its first cannabis beverage product, Tweed Houndstooth and Soda. which has received an overwhelmingly positive consumer response. And they plan to roll out additional beverage products over the last few months. And I can tell you, they are awfully good. These are game changers. They also have completed their first shipments of cannabis-infused edible chocolates and Juju Power 510 batteries in December of 2019. We expect... Further, revenue growth as products like vape, edibles, and beverages gain traction in the marketplace now that REC 2.0 products have been legalized in Canada. Canopy remains best positioned to win long-term and to face challenges associated with its current economic environment as many competitors without access to capital show signs of trouble. In closing, we reach the conclusion of an excellent year. in fiscal 20. Our path to these impressive results was paved with great execution and consumer obsession in growing our core business supported by investments to enhance our portfolio and our operations. We are now facing an increasingly challenging operating environment and rapidly changing market conditions. As you can see from our press release, we are not providing formal guidance However, we provided the targets that are included in our original fiscal 21 plan prior to the COVID-19 crisis. My goal in doing this is to reiterate that our strategy remains unchanged and to provide the confidence we have in the growth prospects for our core business as I continue to feel very optimistic about our long-term opportunities. When we look at the beverage alcohol category, we are generally a recession-resistant industry. In previous recessions and downturns, the PBA industry has generally been non-cyclical and only minimally affected. Bottom line, we manage our business for the long term, making tough but necessary decisions to adapt to consumer trends while always looking forward to deliver what's next. We will continue to quickly adapt to rapidly evolving market dynamics, which is a continuation of who we've always been. Now with that, I'd like to turn the call over to Garth, who will review our financial results for fiscal 20 and our financial focus for 21. Garth?