Constellation Brands, Inc.

Hello, and welcome to the Constellation Brands Q4 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 will now turn the call over to Patty Yon Erlop, Senior Vice President of Investor Relations. You may begin. Thank you.

Thanks, Jawanda. Good morning and welcome to Constellation's year-end fiscal 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 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 year-end call. It's now been a little more than a year since the onset of the pandemic, and for many, it's been one of the most challenging years in recent memory. At this time last year, we outlined our philosophy for managing the business and navigating through this period of uncertainty. We committed to making decisions that prioritize the physical and economic safety, health, and well-being of our employees. We committed to remaining consumer-obsessed, relentlessly focused on doing all we can to meet consumer needs. We pledged to continue managing our business with discipline and ensuring appropriate balance between short-term needs and positioning Constellation for sustainable long-term success. And we pledged to continue making decisions aligned with our long-term strategic vision. This is what best-of-class companies do in periods of uncertainty, and I'm extremely proud to say that is exactly what our team delivered over the course of the fiscal year and then some. Working together with our distributor and retail partners, we overcame numerous headwinds posed by the pandemic to achieve strong earnings growth and record free cash flow while significantly reducing debt. This strong performance was led by our beer business, which delivered double-digit operating income and organic net sales growth for the fiscal year. Looking forward, we not only have an exciting innovation lineup for the coming year, but we expect our core portfolio to generate robust growth well into the foreseeable future, and therefore have plans in place to execute our next increment of capacity expansion in Mexico. Our wine and spirits premiumization strategy gained significant traction during the fiscal year, and the divestiture of several lower-end wine brands positioned this business for enhanced growth and profitability going forward. In addition to the strong performance of our business units, our company also stepped up to help industry partners and communities impacted by COVID and natural disasters and to lend our voice and support in combating social injustice in the U.S. This commitment continues through our additional $1.75 million contribution to the National Restaurants Association's Education Foundation announced earlier this week. to support on-premise recovery efforts, as well as our recent $10 million contribution to the Clear Vision Fund, designed to invest in minority-owned businesses, primarily those operating in underserved Black and Latinx communities, and through our most recent efforts to address the disturbing trend of violence against people of Asian descent across the country. In this regard, let me once again acts and our continued support of members of the Asian community in this difficult time. Our strong business performance, coupled with learnings from the past year and planned investments to enable growth, along with our continued commitment to making a positive impact on the world around us, positions Constellation for continued success in Fiscal 22 and beyond. Now, let's move to a more detailed discussion of our results and our plans for this year. Fiscal 21 marked the 11th consecutive year of growth for our beer business and reinforced our leadership position in the high end of the U.S. beer market. We drove exceptional performance across our beer portfolio, led by our Casa Madelo brand family, including Madelo Especial, Madelo Negra, and Madelo Chilada. which remained one of the biggest forces in the U.S. beer industry, delivering more than 13 million cases of growth to the beer category last year. Modelo Especial achieved yet another year of double-digit growth and now stands as the number three selling beer in the U.S. in dollar sales, with more than 145 million cases sold last year. the only imported beer to ever surpass 10 million barrels in volume. Modelo Negra continues to be the number one dark beer in the U.S. category, while Modelo Chilada once again achieved double-digit growth and remains the number one Chilada brand in IRI channels. The Modelo brand family is on fuego, but we're far from done. We have a tremendous amount of momentum with Casa Madelo, and we continue to have huge growth opportunities in front of us. Our core Hispanic drinker remains the foundation of our business, representing more than half of our volume, yet we're still growing volume, penetration, and buy rate with them. We're also making great progress with the non-Hispanic consumer, where we've grown penetration by 25 percent over the last two years. And while we continue to grow simple distribution, our effective distribution levels remain below industry leaders. All this represents a massive opportunity to continue our momentum and double-digit growth for this brand family well into the future. During fiscal 22, we will continue to focus on making Modelo more top of mind with all consumers as we execute more high-profile activations to further engage our drinkers, and expand portfolio options to appeal to new consumers and unlock new occasions. These efforts will be supported by a 50% increase in digital, social, and e-commerce media. Medela will once again be an official sponsor of the Gold Cup soccer tournament and will be a major advertiser for the brand throughout the high-profile 2021 Summer Olympic Games. We'll also be delivering high-profile activations through our biggest sponsorship as the official beer of the UFC. UFC's increasing popularity is allowing us to reach more young multicultural drinkers than ever. This past year, UFC reached over 41 million viewers on TV, grew their social following by 70%, and became the number two largest sports property on YouTube. Modelo Cholata has been an extremely successful platform for us as well, and in fiscal 22, we will take our next step on the path to growth by launching our newest flavor, Modelo Cholata Pina Picante. Beyond Cholatas, we also have an opportunity to expand into the rapidly growing consumer trend of Betterment by launching Modelo Cantarito Style Cerveza, a refreshing, better-for-you, lighter lager made with a hint of real grapefruit, orange, and lime juice. With only 100 calories, it delivers lower-calorie beer, but with a flavorful and authentic experience, as it was inspired by the traditional Cantarito cocktail from Jalisco, Mexico. And to top it off, consumers love the idea. This is the highest-scoring Modelo new product concept we've ever had. As you can see, Modelo is poised for another great year in fiscal 22. Moving on to our next powerful brand family, the Corona brand family is thriving and embracing a new year full of possibilities. Our flagship Corona Extra brand remains the number six U.S. beer brand, growing IRI dollar sales by 11% and surpassing $2 billion in retail sales last year. In fiscal 22, you'll see a refreshed Corona, which will be enabled through a master brand strategy where Corona equities unite the entire family, and each sub-brand delivers unique benefits that play to distinct occasions, consumers, and motivations, while staying true to Corona's DNA. We have a full year of master brand retail initiatives, on-premise programs ready to go as markets reopen, and experiential plans that play to consumers' passion points, like music and live sports. For Corona Lite, our focus is on general market consumers, particularly females, who seek imported taste with fewer calories. For Familiar, our focus is on unacculturated Hispanics who shop in Hispanic-dominant accounts. To ignite our Corona Originals, best in national media spending across digital and social channels as well as national English and Spanish language TV with a significant presence in major live sports properties such as March Madness, the NBA Finals, Gold Cup Soccer, and the NFL. The Hotline will return to support our sports programs with Kenny Smith and Tony Romo covering the lines. Last year, Corona's new La Vida Mas Fina campaign was a smashing success and brought Corona back to the center of cultural conversation with its Snoop and Bad Bunny content generating an impressive one billion impressions across TV, digital, and social. Snoop and Bad Bunny will be back this year to share their fine life wisdom along with new friends. This brings us to Corona Premiere. Corona's answer to capturing growth in the exploding betterment segment. In fiscal 21, Corona Premier grew depletion volume almost 20% and increased its penetration at a faster rate than its major competitor and other domestic lights, demonstrating we are successfully trading up consumers. Our golf and active lifestyle platforms for this brand will be supported by a retail program, continued strong media investments in key tournaments, and our distinguished sponsorship of the U.S. Open at Torrey Pines in June. Moving on to Refresca, which is Corona's answer for flavor seekers. Because of Refresca's unique flavor experience, it has been incremental to Constellation and the category, bringing in a different consumer from beer and hard seltzer with a Hispanic index of 205 versus the FMV category. So we are happy to be able to bring the Corona Vrefresca variety pack back in fiscal 22 after a hiatus last year during the pandemic. We will also build on the initial success of Vrefresca by extending the brand into the growing high ABV FMV space with the launch of Vrefresca Mas, 24 ounce single serve cans with 8% ABV and mango citrus flavor. And this, brings us to Constellation's most successful innovation yet, Corona Hard Seltzer. With only one SKU, the Corona Hard Seltzer became the number four brand family in a very short period of time. While consumers have flocked to this category, Corona's iconic image, multicultural consumer base, and reputation as the number one most refreshing beer has allowed Corona Hard Seltzer to recruit new drinkers and expand the segment. In fact, Corona Hard Seltzer's year one volume delivered approximately 90% incrementality to our portfolio and continues to be the second fastest moving hard seltzer for brands with significant distribution. With no signs of slowing down, the Corona brand family expects ABAs to be a significant component in its future growth by expanding its base seltzer proposition and launching incremental innovations. we will continue to focus on growing distribution on variety pack number one while introducing new SKUs to satisfy different tastes, occasions, and channels. Our second variety pack is now in market with pineapple, strawberry, raspberry, and passion fruit flavors. We tested a variety of flavors, and consumers told us they wanted familiar, great-tasting flavors that pair well with the lime from Corona. In keeping with this theme of authenticity, amplified flavor, and natural betterment attributes, we're excited to announce Corona Hard Seltzer Limonada, which is launching in June in a 12-pack variety pack and will be line-priced with Corona Hard Seltzer. Inspired by traditional Mexican recipes, Limonada will break the mold by delivering authentic flavor with a splash of real lemon and lime from Mexico juice. at only 100 calories. To support the expansion of all Corona hard seltzers, including Limonada, we plan to invest approximately $60 million across all marketing touchpoints to maintain the number one share of voice in seltzers during the critical summer months and will include investment in premium sports properties like March Madness and the NBA. The plan also includes includes significant levels of Spanish language support to lean into Corona's strength with Hispanics. Last year, nearly 20% of Corona hard seltzers' volume came from Hispanics, an index of 136 versus the seltzer category. While we're on the topic, let me address the recent lawsuit filed by one of our competitors in opposition to our use of the Corona trademark for Corona hard seltzer. Earlier this week, we filed a motion to dismiss this lawsuit as we find these claims to be completely without merit, a blatant attempt to restrain a strong and well-established competitor in a high-growth segment of the U.S. beer market. We have fully complied with the terms of our sublicense agreement, and we will vigorously defend our rights under our sublicense agreement and applicable law. We expect it will take several months for a court ruling on our motion to dismiss. In the meantime, we continue to operate business as usual, as we expect our plans in the ABA and hard seltzer space, where we fully expect to further build on our momentum for many years to come. Bottom line, the Corona family growth roadmap is focused on three strategic priorities in fiscal 22. First, we will reignite the core with a refreshed Corona, complete with new packaging, best-in-class advertising, leadership levels of media and marketing investment, and culturally relevant activations. Number two, we will execute breakthrough innovation, which includes accelerating growth in betterment beer. And third, we will establish a beachhead in the ABA category. But let's not forget Pacifico. Let me repeat that. Let's not forget Pacifico. which is the fastest growing major Mexican import beer brand in the U.S. on a dollar sales basis and is on its way to becoming the next scalable national beer brand in the Constellation portfolio. We're doing things differently this year with Pacifico with a focus on Gen Z consumers whose attitudes over index with Pacifico's independent spirit. Our action sports and cause initiatives resonate strongly with their passions and values. For the first time, we'll have national coverage on major Gen Z relevant digital and social platforms, including Hulu, Instagram, Snapchat, Twitter, and Twitch. This will be year four of Pacifico being the official beer of the X Games, both summer and winter. 2021 is also an Olympic trials year, and we'll continue our strong partnership with the U.S. ski and snowboard teams, with activations at competitions across the U.S. and robust media support on NBC. I'm also excited to introduce Pacifico's first-ever innovation, created for Gen Z consumers with a thirst for new flavors. Pacifico's Citrus Agave Lager is Baja-inspired and made with a hint of agave, sea salt, and lime flavor. We're launching this month in two test markets, San Diego and Dallas, with three SKUs. We look forward to sharing these results and showing how innovation can grow the entire Pacific Gulf portfolio. From an operational perspective, I'm pleased to announce that we recently completed the 5 million hectolitre expansion of our Obregon facility, which, when added to our existing capacity, provides incremental flexibility. As is typical, it will take some months to fully optimize this operation over the coming months. Because our beer business continues to significantly outperform the U.S. beer market, driven by ongoing, robust consumer demand, we are absolutely committed to satisfying this growing consumer demand for our iconic brands, including Corona, Modelo, Pacifico, and Victoria. As such, we have developed plans to invest in the next increment of capacity in Mexico that will provide long-term flexibility to equip us production to capture the continued momentum and growth opportunities we see in the high-end segment of the U.S. beer market, which has consistently grown in mid-to-high single-digit range and is expected to continue to grow at these levels into the foreseeable future. It will also provide incremental, flexible capacity that will allow our breweries to operate at sensible utilization rates and and deal with unplanned challenges from things like weather-related issues that impacted the business during our recent fiscal year end. These have been key things from the pandemic. Our investments will not only support the expected future growth of our core portfolio, but for the emerging ABA or alternative beverage alcohol space and hard seltzers. Meanwhile, in addition to these initiatives, we continue to engage in constructive conversations with the Mexican government as it relates to our long-term plans for production in Mexico. Together with government officials, we're exploring options that include finding an alternative location in the southeast of Mexico that has adequate water supply and a skilled workforce. Garth will provide additional financial details in just a few minutes. To sum it up, The U.S. beer category is healthy and exhibiting strong growth led by the high-end segment. Last year, off-premise channels within the beer category grew 15%, with the high-end growing more than 25%. The velocity of our portfolio, as well as the growth and margin profile of our high-end beer business, is best in class. We're deliberate about our innovation efforts to ensure they're focused and disciplined and and we're well positioned against where the consumer is going and the future of this industry. We have significant distribution runway for our healthy core portfolio. We will continue to capitalize on the growth of the Hispanic population and the premiumization of the U.S. middle markets. And we are focused on ABA growth, leveraging our core brand equities because we see this as a significant growth opportunity as well. As a reminder, our fiscal year started March 1, and our first quarter runs through the end of May. As most of you know, last year, this coincided with the beginning of the pandemic when we experienced robust consumer demand for our products that led to record trends in off-premise tracked channels as consumers were in the pantry loading phase of the pandemic. In addition, during the spring of 2020, we slowed production in Mexico due to COVID, which led to some out-of-stocks in the U.S. marketplace during summer months. As a result, you should expect to see muted IRI and Nielsen trends early in our fiscal year due to the year-over-year unfavorable overlap until we start to overcome last year's out-of-stock issue when we expect our scan-in data to improve significantly. However, Recent four-week IRI trends show the Constellations beer business is significantly outpacing the tow U.S. beer industry and is outperforming the high end of the beer market. Let's now move on to results of our wine and spirits business. Fiscal 21 was a year of significant progress for our wine and spirits business. The Gallo deal and related divestitures allowed us to sell several lower-end brands. We established category-leading digital capabilities. We optimized our route to market to accelerate performance and built a robust innovation pipeline while driving solid results in the face of a very challenging external environment. In fact, our retained wine and spirits portfolio, excluding divested brands, delivered net sales growth of 5% for the year, driven by double-digit volume growth for Mayomi, Kim Crawford, and the Prisoner brand family. These same brands also achieved double-digit distribution gains in off-premise channels last year. Impactful innovations were also a driving force for growth and included Naomi Cabernet Sauvignon, Kim Crawford Illuminate, and the Prisoner Unshackled, which became the number one high-end new brand in IRI channels in fiscal 21. The wine and spirits business is well-positioned to consistently grow net sales low to mid single digits and produce operating income growth ahead of net sales to achieve a 30% operating margin over the medium term. This will be achieved by the business delivering a margin accretive mix, implementing disciplined pricing actions, taking out stranded costs, and executing other cost and efficiency improvements. In the near term, we expect fiscal 22 organic net sales growth in the 2% to 4% range. And what gives us confidence in these goals? We have solid plans in place to assure that our wine and spirits transformation focused on premiumization continues to gain traction. Our high-end brands are well-positioned to drive mix and margin expansion, and we plan to continue to take price on select products within select markets throughout the year. We'll leverage the strong equity of these key core brands while building momentum through fully integrated marketing campaigns and partnerships to drive distinctive and consistent messaging that creates demand for these brands, including Kim, Mayomi, Woodbridge, Ruffino, The Prisoner, High West, and Svetka. We remain committed to driving mixed and margin-accretive, scalable innovations by successfully addressing consumer trends, including the convenience, RTD, and betterment categories. We have a strong innovation pipeline planned for the coming year that includes the introduction of Woodbridge Wine Seltzer, the expansion of Svedka RTDs after a successful first-year launch, and new Prisoner family innovation that includes the launch of the Prisoner Pinot Noir, Saldo Red Blend, and Unshackled Sauvignon Blanc. We also plan to benefit in year two from this past year's successful innovation launches of Mayomi Cab, Kim Crawford Illuminate, and the Prisoner Chardonnay and Cabernet Sauvignon. Our wine and spirits brand continue to outpace the e-commerce category fueled by our outstanding performance in Instacart, Drizzly, and Amazon, and our wine DTC growth continues to outpace the market by close to 2x. In fact, Svedka has become the number one mainstream vodka on Amazon, while Kim Crawford Sauvignon Blanc and Naomi Pinot Noir claim number one positions in their respective categories on Drizzly, one of the largest online marketplaces for beverage alcohol. The early investments we made in this space has given us a key first mover advantage in and will continue to invest in DTC and e-commerce initiatives as consumers shift where and how they purchase beverage alcohol. The evolution of our wine and spirits strategy includes a critical next step to build category-leading, dedicated fine wine and craft spirits business, which will strengthen our portfolio and capabilities in this space to meaningfully inflect our business toward the high end. We believe that dedicating the proper focus and attention to our fine wine and craft spirits business will complement our leadership in our mainstream and premium businesses and will accelerate our goal to drive incremental profitable sales growth. As we pursue industry-leading growth for our wine and spirits portfolio, we are constantly assessing our route to market strategies to ensure we stay ahead of consumer trends and maximize our growth opportunities. our distributor partners play a significant role in achieving our goals and creating value for the market. To that end, we recently announced the evolution of our Wine and Spirits wholesale structure, whereby Southern Glazers Wine and Spirits assumed distribution responsibilities across approximately 70% of our U.S. Wine and Spirits brand portfolio effective April 1. Southern is a proven brand-builder with advanced capabilities in growing consumer segments, including digital commerce, fine wine and craft spirits, and ready to drink. And they have category-leading sales capabilities across on- and off-premise channels. We plan to leverage their strengths in these areas to help accelerate our category leadership. We are confident. They are the best partner to help us achieve our strategic ambitions, and we believe this move best positions us for long-term success and accelerated growth. Moving on briefly to Canopy growth. Over the past year, Canopy has made significant progress in strengthening their position in core markets and taking steps to prepare for the inevitable legalization of cannabis in the U.S., Canopy's successful rollout of cannabis beverages, as well as other RecPoint 2.0 products, has helped the company gain momentum. Currently, Canopy has the top three beverages in the Canadian recreational market, and they recently introduced their popular Quattro CBD beverages in the U.S. Over the coming year, we look forward to benefiting from Canopy's continued march toward profitability the rollout of Canopy-branded products in the U.S. through Canopy's arrangement with Acreage, and the improving legal landscape for cannabis in the U.S. In closing, let me reiterate how proud I am of the performance delivered by our Constellation team, along with our distributor and retail partners during a tumultuous year. Because of their grit, passion, and determination, We're operating from a position of strength as we head into the new fiscal year, and we're poised to deliver a solid year of performance again in fiscal 22. We will continue to invest aggressively to accelerate growth for our strong portfolio of industry-leading brands. We have exciting innovation in store for the coming year, and we're building capabilities in emerging channels such as three-tier e-commerce, while adding production capacity to fuel our growth over the long term. Make no mistake, we have bold ambitions for the future and look forward to delivering on our long-term vision, which includes generating industry-leading returns for our shareholders over that timeframe. And with that, I would like now to turn the call over to Garth, who will review our financial results for fiscal 21 and our financial focus for fiscal 22.