Constellation Brands, Inc.

Welcome to the Constellation Brands Q1 Fiscal Year 2022 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 Jan-Urlaub, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Gigi. Good morning, and welcome to Constellation's first quarter fiscal 22 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 everyone to our first quarter conference call. Picking right up where we left off in Q4, our Constellation Brands team, with the help of our distributors and retailers, delivered another strong performance in Q1 of fiscal 22. While we overlapped the pantry-loading phase of the pandemic, which led to record trends in off-premise track channels last year, our continued focus on brand building, aggressive investments in growth, and the continued efforts of our team and trade partners position us to deliver another strong year of performance consistent with our long-term goals. As Garth and I detail some of the highlights from Q1, there are several key factors we'd like you to keep in mind that constitute our points of differentiation, our competitive strengths, and reasons to continue to believe in the future growth potential of our business and our ability to drive industry-leading total shareholder returns over the long term. Number one, our strong portfolio of core brands across beer, wine, and spirits continues to gain momentum while offering significant runway for growth in the years ahead. Nowhere is this more evident than in our beer business, which is off to an exceptional start, delivering double-digit depletions shipments, net sales, and operating income growth due to ongoing strong consumer demand. Number two, we continue to be relentless about keeping consumers at the forefront of our decision-making, and this is nowhere more apparent than in the strides we're making to strengthen our innovation capabilities and ensure we're capturing our fair share of growth in emerging categories. Number three, Our investment in Canopy Growth, along with the continued efforts of the Canopy team, are positioning this business to emerge as a leader in the global cannabis market as it comes to fruition and we inch closer to legalization in the U.S. And number four, our continued strong operating performance and cash flow generation enable us to resume share buyback activity with significant repurchases of more than $500 million and during the first four months of our fiscal year. In addition, we announced this morning that we will execute an accelerated share repurchase program throughout the remainder of the second quarter to repurchase an additional incremental $500 million of shares. We believe this demonstrates our strong commitment to maximize shareholder value, and we are on our way to achieving our $5 billion goal, of which about 50% will be in the form of share repurchases. This activity is also driving an increase in our EPS guidance for this year. Let's transition to a more detailed discussion of our performance in the quarter. As mentioned, our beer business is off to an exceptional start, delivering double-digit net sales and operating income growth, as well as depletion growth of almost 11% in the quarter. Excellent execution during the Cinco de Mayo and Memorial Day holidays led to market share gains, as Constellation remains a leading growth driver in the high end of the U.S. beer market. Modelo Especial led the way as the number one share gainer in the entire U.S. beer category and solidified its position as the number one brand in the high end. It also became the number two brand in dollar sales in IRI channels, posting depletion growth of 12% for the quarter. Modelo Especial continues to fire on all cylinders with no signs of letting up driven by ongoing strong execution at retail, impactful execution of high-profile marketing activations, and a significant increase in digital, social, and e-commerce media for properties like UFC, Gold Cup soccer, and the Summer Olympic Games, to name just a few. Corona brand family growth was driven by a return to growth in on-premise channels, which now represent approximately 11%. of our beer business volume, which accelerated and nearly doubled since fiscal 21. During the quarter, we launched Corona Hard Seltzer Variety Pack No. 2, which continues to gain shelf space and is already more than half the size of Variety Pack No. 1 in dollar sales and appears to have about the same incrementality as Variety Meanwhile, variety pack number one has held its distribution and velocity levels since the launch of variety pack two, and our hard seltzer family remains in the number four market position. Earlier this month, we launched Corona hard seltzer limonada, and while it's early in the launch cycle, initial consumer response has been very favorable. Ultimately, we believe the hard seltzer category will be dominated by a few large brands in the long run, similar to the light beer category, and we are positioning Corona Hard Seltzer to be one of those brands. We have plans to more than double our seltzer and ABA capabilities this fiscal year and expect to bring another 5 million hectoliters of capacity online next fiscal year, giving us the flexibility to continue to expand with new flavors, new packages, and even new platforms in this space. Overall, the seltzer category remains competitive. We believe it's an important part of the high end, and we plan to drive for success with our ambition to ultimately be a top three player in the space. Pacifico continued its strong momentum, posting depletion growth of more than 35% for the quarter as the number four share gainer within the import segment, driven by our focus on Gen Z consumers. As expected during the quarter, Constellation's consumer takeaway trends in the off-premise IRI and Nielsen channels were muted due to lapping last year's pantry-loading behavior at the start of the pandemic. Conversely, we experienced robust growth, especially in some of the more sizable non-track channels, including the on-premise, which grew depletions 250% versus last year when this channel was essentially closed. and the liquor chains, which grew almost 13% in the first quarter. These levels of robust consumer demand are impacting availability for certain package sizes and certain geographies. We are working with our distributor partners to ensure consumers can continue to find our brands on shelf throughout the summer, and we plan to make up some of this impact beginning in the third quarter. As a reminder, beginning in April of last year, our beer business had to significantly slow down production in Mexico due to COVID-19 restrictions. This led to out-of-stocks in the U.S. marketplace during the summer month. Therefore, as we progress through our second quarter, which runs June through August, we'll start to lap these out-of-stock issues, and we're already beginning to see improving IRI trends. Despite the short-term supply challenges we're facing, the momentum of our portfolio is stronger than ever, and our outlook for the remainder of the year remains extremely bullish. Our view is reinforced by recent four-week IRI trends that show Constellation's beer business is outpacing the high end and continues to significantly outpace the total U.S. beer industry. Now moving on to wine and spirits. Our transformation of this business to a higher growth, higher margin operation continues to gain traction, and we made additional progress during the first quarter on a number of fronts, including furthering our fine wine and craft spirit strategy, building a robust innovation pipeline, advancing our DTC e-commerce and digital capabilities, while also implementing disciplined pricing actions. taking out stranded costs, and executing other cost and efficiency improvements. During the quarter, we made progress with the evolution of our fine wine and craft spirits business, especially as consumers returned to bars and restaurants and the on-premise channel. Our fine wine and craft spirits performance in the quarter was driven primarily by the Prisoner Wine Company, Robert Mondavi Winery, and High West, and we expect our enhanced capabilities in this space to begin to meaningfully inflect our wine and spirits business towards the higher end. Impactful innovations were also a driving force for growth during the quarter, including Naomi Cabernet Sauvignon, Kim Crawford Illuminate, and the Prisoner Unshackled, which were among the top ten innovations across the high end of the U.S. wine segment and IRI channels during the quarter. And we have a strong innovation pipeline planned for the remainder of the year, which includes the introductions of Woodbridge Wine Seltzers, the Prisoner Saldo Red Blend, and Unshackled Sauvignon Blanc, plus Robert Mondavi Private Selection 100, a new lineup composed of 100% Cabernet Sauvignon and Chardonnay varietals. We've also been investing to build a world-class three-tier e-commerce team by expanding our sales and marketing resources building new selling capabilities, investing millions of dollars where consumers shop, and integrating our teams to put focus and expertise closer to our accounts. While our three-tier e-commerce business is cycling the tremendous acceleration that was experienced last spring at the beginning of the pandemic, it is still growing three to four times compared to the spring of 2019 across beer, wine, and spirits. and the DTC portion of our e-commerce business saw impressive growth of 45% versus last year in the first quarter. We continued to forge partnerships with existing and emergent pure play retailers like Amazon, GoPuff, and Wine.com, omni-channel retailers like Walmart, Kroger, and Albertsons, and third-party marketplaces like Instacart and Drizzly, so that our consumers can shop whenever and wherever on their own terms. In addition, as part of our commitment to invest $100 million over 10 years in black, Latinx, and minority-owned small businesses, we recently made investments in Lafayette du Rosé and Sapere Aude sparkling wine. Both of these brands align with Constellation's premiumization strategy and present significant growth opportunities with differentiated high-end brands in growing sectors of the market. Lafayette de Rosé has taken a consumer-first approach to building a distinctive, authentic rosé brand that appeals to multicultural consumers. And Sapere Aude has taken an entrepreneurial approach to build a uniquely Californian sparkling wine with no residual sugars, low alcohol content, fine bubbles, and a refreshing brand identity that is simple and clean. We look forward to working with these brands and their dynamic founders to expand their access to key markets and consumers and to help realize their full potential. At the same time, our wine and spirits results for the quarter were impacted by a convergence of isolated factors. First, our international brands, like Kim Crawford and Ruffino, which are produced in their respective regions but sold primarily in the U.S., are experiencing global supply chain logistics issues, including shipping delays and transport interruptions, like so many other imported products. Second, we've experienced some startup issues in certain markets associated with our route-to-market transition to Southern Glacier's Wine & Spirits, which now has distribution responsibility across 70% of our U.S. Wine & Spirits brand portfolio. This transition became effective April 1, and we expect the transition issues to be resolved in the second quarter. Lastly, like many ERP system implementations, with a cutover to SAP, we have encountered a few transitional challenges, which we don't see as a prolonged issue. Collectively, these issues caused some supply challenges at retail for some of our larger key brands, which drove the negative depletion trend during the quarter. And while we're seeing lower inventory levels than normal for Kim and Rufino, they continue to drive growth. Despite these temporary challenges, we are confident in our ability to accelerate the growth and profitability of this higher-end portfolio of industry-leading brands in achieving our targeted goal of 2% to 4% organic sales growth for the fiscal year. Moving on to canopy growth. The synergies between Constellation and Canopy Growth continue to create value for both companies. Canopy recently signed a U.S. distribution agreement with Southern Glazers Wine and Spirits for Canopy's Quattro CBD beverage portfolio, which will be launched across seven U.S. states, with additional states to be added later this year, as well as their Martha Stewart CBD product lineup, which has seen early success extending into top-selling gifts for occasions including Mother's Day and Valentine's Day, which sold out prior to the holidays due to high consumer demand. Constellation and Canopy will continue to work closely together to develop Canopy's route-to-market strategy in the U.S. We remain optimistic about the prospects for federal U.S. legalization during this Congressional session and are bullish about Canopy's growth prospects and their ability to achieve profitability by the end of their fiscal year. As I close, I want to take a minute to thank our Constellation team members and our distributors and retailers for an excellent first quarter business performance. Thanks to all of you, our strong portfolio of core brands across beer, wine, and spirits continues to gain momentum. and we are well positioned to deliver another strong year of performance consistent with our long-term goals. Our beer business continues to be a top growth driver within the U.S. beer market, and we're delivering market share gains and accelerating depletion trends as consumer demand and takeaway remains extremely strong. Our higher-end wine and spirits brands continue to outpace the overall U.S. market, We continue to strengthen our innovation capabilities to ensure we're capturing our fair share of growth in emerging categories. Our continued strong operating performance and strong cash flow generation allowed us to make significant share repurchases in line with our commitment to return 5 billion to shareholders by fiscal 23 and drove an increase in our EPS guidance for the year. And with that, I would like to turn the call over to Garth, who will review our financial results in the quarter. Garth?