Constellation Brands, Inc.

Welcome to the Installation Brands Q2 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 open for your questions. Instructions will be given at that time. I would now like to turn the call over to Patty Viglione-Urlam, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Jonathan. Good morning and welcome to Constellation's second quarter 21 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 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 second quarter conference call. Before I begin with a discussion of our performance in the quarter, I'd be remiss if I didn't acknowledge the continued and unprecedented challenges of this year marked by the ongoing impacts of the COVID-19 pandemic, ongoing social unrest rooted in a long history of racial injustice in this country, and the most recent string of natural disasters, including wildfires across the western part of the United States. As it relates to the fires, fortunately, all Constellation employees are safe and accounted for, and there have been no direct impacts to any of our facilities. That said, Our hearts go out to those who have been adversely affected by the fires, and we send our sincere thanks to the brave firefighters and other emergency personnel working tirelessly to battle the fires and keep people safe. I'd also like to thank the members of our Constellation team who continued to pull together despite adverse circumstances to drive the success of our business, including excellent second quarter results. As Garth and I review these results, we'd like you to focus on three key takeaways. First, in what was expected to be our most challenging quarter of the year, our team overcame COVID-related headwinds to deliver solid business performance in Q2. This performance was led by our beer business, which grew depletions by almost 5% as we continued to see incredible consumer demand for our portfolio of brands. While the COVID-related slowdown of our beer production in Mexico earlier in the year impacted shipments and net sales in Q2 and created some temporary out-of-stocks at retail, we are quickly recovering and expect inventory to return to normal levels by the end of Q3. And we're beginning to see accelerating consumer takeaway trends in IRI channels, as we work to ensure that consumers can find their favorite Constellation products on the shelf at retail. Second, our wine and spirit premiumization strategy continues to gain traction as our higher-end wine power brands outpace the US high-end wine category in IRI. Regarding the Gallo transaction, both Constellation and Gallo remain committed to completing this transaction and we're very encouraged by the progress that we've been making. We continue to receive positive feedback from the FTC staff in addressing the concerns that they raised related to the transaction. Based on our interactions with the FTC, we expect a consent decree will be submitted to the commissioners for review and approval in the coming weeks. We're happy to say that this marks the final stage in this process, Once final approval is received, closing can happen quickly, which allows us to forge ahead with the strategy for our wine and spirits business. And third, the strong performance delivered by our beer and wine and spirits businesses drove strong cash generation, allowing us to further reduce our debt and progress towards our desired leverage range. As a result, we are well positioned to deliver a solid year of organic growth in fiscal 21. Let's move to a more fulsome discussion of our beer business performance in the quarter. Despite the challenges posed by COVID-19, including the continued partial closure of the on-premise, which was down 50% in the quarter year on year, Constellation's beer business continues to be one of the largest contributors to U.S. beer industry growth. During the second quarter, our beer business delivered 11 percent growth in IRI channels overall and more than 15 percent growth for our priority SKUs. This performance was driven by 12 percent IRI growth for Modelo Especial, as the brand solidified its position as the number three beer brand in the U.S. beer market and the brand family is on track to deliver its 35th consecutive year of growth. The Corona brand family also grew double digits in IRI channels, with the most significant contributions coming from Corona Hard Seltzer, Corona Premier, and Corona Extra. We continue to be thrilled with the performance of Corona Hard Seltzer. Despite launching this new brand in the midst of a pandemic, which presented us with and prevented us from engaging in a number of the activities conducive to introducing a new brand, Corona Hard Seltzer has become one of the most successful new product launches in our company's history. With a launch of only one SKU to date, the brand continues to exceed our expectations and has already achieved the number four position in the category. To put this in perspective, Corona hard seltzer is the second fastest moving hard seltzer. Let me repeat that. Corona hard seltzer is the second fastest moving hard seltzer for those seltzer brands with significant distribution and velocity, and it remains strong as we continue to pick up distribution. These ongoing distribution gains have led to IRI ACV distribution approaching 70% since product launch in March, and to date, the brand has maintained incrementality levels at the 90% rate, significantly outpassing our expectations. Corona Hard Seltzer over-indexes to the Hispanic consumer relative to its competitors, which unlocks an untapped opportunity for this category with the fastest-growing demographic in the country. Currently, 15% to 20% of brand volume is estimated to come from Hispanic consumers, while other seltzer brands are closer to 10% to 15%. Our expectations for the hard seltzer category growth are extremely high, and our intention is to become a top three player in the hard seltzer market as we believe there's a natural and compelling connection between what the Corona brand stands for and what consumers want in a seltzer. refreshing, great taste, hint of flavor. And ours had zero carbs, zero sugars, and only 90 calories. In the future, you'll see us expand with new flavors, new packages, and even new platforms. So stay tuned. From an operational perspective, we continue to engage in constructive conversations with the Mexican government as it relates to our future plans for production in Mexico. Meanwhile, we're progressing with the 5 million hectolitre expansion of our Obregon facility, which is expected to be completed by the end of this fiscal year. As a reminder, after the completion of the Obregon capacity expansion, we believe we will have ample capacity at the Nava and Obregon breweries to meet consumer demand over the medium term. This includes more than doubling of our seltzer production capacity heading into our next fiscal year. Let's now move to the quarterly results for our wine and spirits business. I'm pleased that we're nearing the finish line with the gala transaction, which paves the way for accelerated growth and margin performance for our wine and spirits business going forward. It also aligns with the vision for our business to be a bold and innovative higher-end wine and spirits company with distinctive brands and products delivering exceptional consumer experiences. During the quarter, we continued to see the staying power of the consumer-led premiumization trend, with premium price point segments continuing to outpace value price segments, further reinforcing the strategy of our business. In fact, our higher-end wine power brands at the greater than $11 retail price point outpaced the U.S. high-end wine category in IRI channels, driven by Naomi, Kim Crawford, and the prisoner portfolio, all of which posted double-digit growth in IRI channels for the quarter. These trends drove excellent margin performance for the business, as price and mixed benefits for this higher-end stable of brands drove significant margin enhancements. Throughout the remainder of the year, we plan to continue to invest in capabilities that position our wine and spirits business for long-term success. The wine and spirits innovation pipeline is primed with impactful product introductions as we enter the peak seasonal period for the business. These initiatives are aligned with the key consumer macro trends of betterment, convenience, and sustainability, that we believe can drive scale going forward. Key product launches include the Prisoner Cabernet Sauvignon and Chardonnay varietals, Svedka and High West ready-to-drink cocktails, Ruffino Wine Spritzer, and Mayomi Cabernet Sauvignon. These initiatives will be supported throughout the remainder of the year with impactful marketing campaigns to strengthen and build the portfolio. And while we're already a leading player in three-tier e-commerce, we're excited about our renewed focus on the direct-to-consumer space with our acquisition of Empathy and our minority investment in the Booker Vineyards business, as we believe e-commerce, including DTC, can become a key growth driver for our business. E-commerce for beverage alcohol has exploded due to the pandemic, increasing three to four times in volume versus prior year. We were focused on e-commerce as a growing channel even before COVID and have further accelerated our strategy with increased resources and focus on digital shelf management and redeploying marketing dollars to support our digital commerce channels. Now, I'd like to take a minute to address the unfortunate wildfire situation in the West in a bit more detail. As mentioned, and thankfully, all of our employees are accounted for and safe, and no Constellation properties have been impacted by the fires. While we're more than 70% through harvest, it is still too early to determine the overall impact the fires and resulting smoke might have on this year's vintage. However, we continue to perform extensive testing and evaluation, and we have considered a number of potential contingencies and options as we progress through harvest based on our perspective at this point. That said, we are committed to providing consumers with the same high-quality wine they've come to expect from our higher-end brands, and despite potential impacts from the fires, we fully expect to be able to meet consumer demand for our excellent portfolio of products. Garth will provide some additional details in a few minutes on that topic. Now moving to our Ventures portfolio. Last year, we announced our commitment to invest $100 million to support African American, black, and minority-owned startups in the beverage alcohol space as part of our efforts to enhance diversity and access to opportunity within our industry. We're happy to say we've received significant interest in this program to date. We've also made good progress over the past several years with our Focus on Female Founders initiative, as female-funded and or female-led businesses now account for more than half of our venture's portfolio. We see an opportunity to make similar progress in supporting African American, black, and minority businesses in the coming years and look forward to updating you on our progress. We've recently acquired a minority stake in the Booker Vineyards business, a super luxury direct-to-consumer focused wine portfolio to further align our wine and spirits business to changing consumer preferences. We believe this relationship strengthens our fine wine portfolio and our long-term aspiration to build a strong omni-channel business that includes category leadership in DTC and three-tier e-commerce. Additionally, we recently acquired the remaining interest in Copper & King's American Brandy Company, which marks our first full ventures acquisition. Copper & King's is a cutting-edge distillery that primarily produces highly differentiated American brandy, with a tasting room and restaurant located in the heart of bourbon country in Louisville, Kentucky. This acquisition allows us to play in the rapidly emerging craft spirits market. where premiumization trends remain robust. Finally, we're pleased with the progress that the Canopy growth team has made in prioritizing their strategic direction to focus on what's needed to become a world-class CPG company. They've identified goals for their core markets, right-sized their footprint, balanced supply and demand needs, improved execution, and made progress in reducing operating expenses and cash burn. I'm especially excited about the successful launch of their REC 2.0 cannabis beverage products in the Canadian cannabis market, where Canopy has a 75% market share and the top four SKUs in the category, shipping more than 1.6 million cans since launch in March. For comparison, in the calendar year 2019, a total of 4 million cans of cannabis beverages were sold in the entire US market over the course of that year, so great progress to date. We believe that beverages and other REC 2.0 products will attract new consumers to the market and further drive conversion from the illicit market. And earlier today, Canopy Growth announced plans to bring its line of cannabis beverages to the US next summer through its revised agreement with Acreage Holdings. Overall, Canopy remains the best position to win long-term in the emerging cannabis space and is well capitalized to face the challenges associated with this current economic environment. In closing, I want to take you back to the three key takeaways mentioned at the top. I'm extremely proud of the results our team has driven in the face of continued adversity. In what was expected to be our most challenging quarter of the year, our team overcame COVID-related headwinds to deliver solid business performance in Q2. Our beer business continues to be a top growth driver within the industry, and we're seeing accelerating consumer takeaway trends in IRI channels as we work to rebuild our inventory position. Our wine and spirit premiumization strategy continues to gain traction, and we're in the final stages of completing our transaction with Gallup which paves the way for accelerated growth and margin performance for our wine and spirits business going forward. And our performance in the quarter drove strong cash generation, allowing us to further reduce our debt and progress towards our desired leverage range. As a result, we are well positioned to deliver a solid year of organic growth in fiscal 21. This year also marks our company's 75th anniversary. We have a strong legacy of success that we're extremely proud of. Our continued growth and resilience will help ensure the future of our company remains extremely bright. And as I often like to say to our team, we firmly believe the very best is yet to come. And with that, I would like to now turn it over to Garth, who will review our financial results for the second quarter.