Constellation Brands, Inc.

Welcome to the Constellation Brands First Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the prepared remarks, the call will be opened for your questions. Instructions will be given at that time. I will now turn the call over to Patty Yon-Erlach, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Shannon. Good morning, and welcome to Constellation's First Quarter 2021 Conference Call. 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 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. Good morning, and welcome to our first quarter call, everyone. Before getting into a discussion of our quarterly results, I'd like to address two topics that have become extremely relevant to our business and our society at large. First, our thoughts and prayers go out to all those who have been impacted by racial injustice and associated acts of violence in both this most recent time period and throughout the years. We stand in solidarity with the black community in our belief that black lives do in fact and have always mattered. We categorically denounce bigotry, racism, social injustice, and acts of senseless violence in all forms. They are clearly inconsistent with our company values and our commitment to embracing diversity and creating an inclusive environment where all employees feel safe, respected, and valued. Earlier this week, we announced our commitment to invest $100 million to support African American black and minority-owned startups in the beverage alcohol space and related categories over the next 10 years. These small businesses serve as the fabric of their respective communities, and we must make it more equitable for them to access the capital needed to have a fighting chance at success. In addition, we've made a $1 million commitment over five years to the Equal Justice Initiative and their efforts to educate the public about the history of racial injustice in this country and to support their quest for equity in the criminal justice system. Furthermore, we have made a commitment within our company to enhance representation and access to opportunity for black team members at Constellation by strengthening our recruiting, hiring, and development programs. The conditions that have allowed systemic racial injustice to persist have existed far too long. We all have a role to play in creating a more equitable experience for African Americans in this country, and we're committed to doing our part to make this happen. Switching gears, our organizations, has responded and adapted to the challenges of the COVID-19 operating environment in an incredible and agile manner, which is reflected in our results for the first quarter. I'm especially proud of the efforts of the Constellation team members, of our distributors, and our retail partners, who worked together to ensure our customers' needs were met under very challenging circumstances. As I've said before, The health and well-being of our employees is our number one priority, and we've taken a number of preventative measures to keep them safe in our operations and out at retail to ensure our continued ability to meet the needs of the market. We've provided support and relief to our customers and our channel partners by donating more than $4 million in COVID-19 relief efforts and by donating PPE and sanitizer produced in our own facilities. Bottom line, I'm extremely proud of the way our team and industry partners have risen to the occasion, and I remain confident our business and our brands will emerge even stronger on the other side. Now, let's transition to a discussion of our performance in the quarter. As Garth and I run through the highlights, there are three key points I'd like you to take away. Number one, despite various headwinds, we delivered solid first quarter business performance and strong cash flow generation. We are winning in sales channels that are open. Beer depletions remain strong and consistent with long-term trends despite the lost selling day in the quarter and the virtual shutdown of on-premise sales. And our wine and spirit power brands continued to gain traction. Number two, The slowdown of our beer production in Mexico due to COVID impacted shipments and net sales in Q1, and this impact will extend into Q2 as well. We will make up some of that impact in the back half of the year as our beer production in Mexico has returned to normal levels. Number three, this short-term disruption to our import beer business does nothing to dampen our long-term prospects. Consumer demand and takeaway for our brands remains extremely strong, and our outlook for the year and over the long term remains extremely bright. Now let's talk more specifically about our performance in the first quarter, starting with our beer business. Imports continue to be one of the primary growth contributors in the high-end and total U.S. beer market, with Constellation delivering more than 80% of that import growth, driven by the Modelo, Especial, and Corona brand families. Solid first quarter depletion trends of 7%, adjusted for one less selling day, were driven by strong off-premise growth of almost 20%, due to the grocery and C-store channels, offset by a drag from the closure of the on-premise channel, which was down about 75% year over year. This is excellent performance, considering that the country really began to feel the impact of COVID-19 pandemic in earnest in early March, which coincided with the beginning of our fiscal year. And our brands over index to densely populated states, such as New York and California, that have been significantly impacted for a prolonged period of time. One of the highlights of the quarter was the successful launch of Corona Hard Seltzer. As expected, The brand name Corona drove extremely good trial of Corona Hard Seltzer, and the great taste profile is driving a repeat purchase intent of almost 80%, which exceeded our expectations. Corona Hard Seltzer is already the number four hard seltzer brand and recently achieved IRI market share of almost 6% of the U.S. seltzer market. Ongoing distribution gains have led to IRI ACV distribution approaching 65 since product launch in March, with early results for Corona hard seltzer incrementality trending at around 90%, also exceeding our original expectations. We're also seeing high Hispanic penetration rates for the brand versus other hard seltzers, which we believe will be a key growth driver going forward and a major point of differentiation within the fast-growing demographic in this country. We believe the refreshment attributes of seltzer combined with the halo effect of the Corona brand, which remains one of the most loved beer brands, provides an opportunity to build one of the strongest hard seltzer brands in our industry. During the quarter, we kicked off the summer selling season and gained share during the Memorial Day and Cinco de Mayo holidays. Cinco is a great example of changing consumer behavior during the pandemic when people enjoyed our great brands in Cinco celebrations at home. As a result, our Cinco performance increased two to three times what we would normally see in the off-premise. Our beer portfolio contributed nearly 20% to total U.S. beer category growth during Cinco and claimed four of the top 20 share-gaining brands in IRI channels. driven by Modelo Especial as the top share gaining non-Seltzer beer brand, Corona Hard Seltzer, Pacifico, and Modelo Cholada Limone Sal. As previously mentioned, we have returned to normal production levels at our breweries in Mexico. During the mandated production slowdown in the quarter due to COVID-19, our focus on prioritizing production of our top selling SKUs, which represent about 75% of total volume, helped minimize disruption at retail while supporting our efforts to ensure consumers could find our brands on the shelf and in the cold box. While supply will continue to be tight on select slower moving SKUs throughout the remainder of the summer due to continued strong consumer demand for our brands in the off-premise, We expect to return to normal inventory levels in the third quarter. Let's now move to quarterly results for our wine and spirits business, which experienced the same market dynamics as our beer business during the quarter, with strong demand in the off-premise, offset by a decline in the on-premise of almost 80%. We continue to see staying power of the premiumization trend, with premium price segments continuing to outpace value price segments, further reinforcing our wine and spirits business strategy. In fact, we saw excellent consumer takeaway trends of over 25% for our power brands in the IRI off-premise channels during the quarter. Our power brands are winning in the high end and across the majority of price segments in the U.S. wine category with strong velocity, and distribution gains that are outpacing the market. First quarter depletions for our collection of power brands grew 5%, driven by Kent Crawford, Mayomi, Svetka, the Prisoner brand family, and Woodbridge by Robert Mondavi. We continue to invest in additional ways to fuel portfolio growth through innovation, capitalizing on priority consumer trends with successful product introductions, like the Prisoner Unshackled, Ruffino Organic Prosecco, and Robert Mondavi Private Selection Buttery Chardonnay, all of which are performing well in the marketplace. As you know, some of our biggest success stories in innovation have come from the spirit barrel age category, where we currently enjoy a 40% market share. The newest addition to this portfolio comes from the Woodbridge family, where we're seeing early success from the bourbon barrel-aged Cabernet and red blend, as well as the rum barrel-aged Chardonnay. You should expect to see continuing premium category-leading innovation from us as we emerge from the COVID environment, including line extensions for Mayomi in the Cabernet space and from the Prisoner brand family with the addition of Cabernet and Chardonnay varietals. In the spirits category, you'll see Svedka pure infusions, as well as High West and Svedka pre-mixed cocktails in the RTD space. We continue to invest in capabilities that position our wine and spirits business for long-term success. As a result of shelter-in-place restrictions and the shutdown of on-premise accounts due to COVID-19, e-commerce for beverage alcohol has exploded, increasing three to seven times in volume versus prior year, depending on the channel. Consumer awareness for e-commerce and beverage alcohol has significantly increased and accelerated change in consumer behaviors by several years. With two-thirds of consumers saying they are planning to continue their e-commerce habits post-COVID, e-commerce is gaining share through platforms like Instacart, Drizzly, and other retailer online sites as consumers seek the convenience of these channels. In line with this accelerated trend, we acquired Empathy Wines in June. This acquisition fits in nicely with our broader premiumization strategy and strengthens our position in the direct-to-consumer and three-tier e-commerce channel, where we'll utilize Empathy's digitally native platform to reach new as well as thousands of existing loyal consumers. In addition, Empathy focused on producing high-quality, sustainably made wines sold direct to consumer from its winery via its e-commerce platform at the $20 price point in three variants, White Blend, Red Blend, and Rosé. Launched in 2019, the brand has sold approximately 15,000 cases and acquired more than 2,000 subscription customers. We are already a leading player in three-tier e-commerce and have seen growth in this channel of more than 500% in the last three months. We plan to leverage this acquisition as an opportunity to strengthen our position and outpace the market. As you know, we recently revised the Gallo transaction to exclude our Mission Bell facility as the FTC wanted to ensure that we had adequate production capability for our J. Roger and Cooks brands, which we decided to retain once they were excluded from the original transaction. We're also one step closer to the finish line on this transaction with the signing of separate agreements to sell Navajo New Zealand Sauvignon Blanc and Paul Masson brandy. As you will recall, last December, we entered into a separate but related agreement with Gallup to divest our Navajo brand for $130 million. This fits with Gallo's portfolio strategy and allows them to expand in the New Zealand wine category without affecting our long-term goals, nor our opportunity in this category at the greater than $11 price point. In addition, we've signed an agreement to sell Paul Masson Grand Amber Brandy to Sazerac for $255 million. As a reminder, Last December, we announced that Paul Masson had been excluded from the original transaction due to FTC concerns, and we indicated that we were pursuing opportunities to divest this brand at that time. These transactions are subject to final FTC review, and they are expected to close in the second quarter, concurrent with or closely following the close of the Gallo transaction. All proceeds will primarily be used to reduce debt. Finally, we continue to be encouraged by steps David Klein and the Canopy team are taking to position the company to win in key markets and product categories over the long term. The business continues to work through its transformational strategy with a leaner approach that will allow Canopy to be more flexible and adapt more quickly to changes in this dynamic cannabis market. Canopy has seen early success from its REC 2.0 products in the Canadian cannabis market, including beverages, which we are very excited about. The company's Tweed and Houndstooth brand has been one of the most raved about cannabis beverages in the market with overwhelmingly positive consumer feedback. We believe that beverages and other REC 2.0 products will attract new consumers to the market and further drive conversation, excuse me, conversion, from the illicit market. We continue to believe that Canopy remains best positioned to win long-term in the emerging cannabis space and is well capitalized to face the challenges associated with this current economic environment. As I close, let me again reiterate the three main takeaways from this quarter. First, despite various headwinds, we delivered a solid first quarter business performance and strong cash flow generation. we are winning in the sales channels that are open. Beer depletions remain strong and consistent with our growth outlook for the future, despite the lost selling day in the quarter and the virtual shutdown of on-premise sales. And our wine and spirits power brands continued to gain traction. Number two, the slowdown of our beer production in Mexico due to COVID impacted shipments and net sales in Q1, and this impact will extend into Q2 as well. We will make up some of that impact beginning in the third quarter as our beer production in Mexico has returned to normal levels. And number three, this short-term disruption to our import beer business does nothing to dampen our long-term prospects. Consumer demand and takeaway for our brand remains extremely strong, and I remain optimistic about our outlook for this year. With that, I would like to turn the call over to Garth, who will review our financial results for the first quarter.