Constellation Brands, Inc.

Welcome to the Constellation Brand Q3 FY22 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following prepared remarks, the call will be placed for your questions. Instructions will be given at that time. I will now turn the call over to Patti Von Erlaub, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Valerie. Good morning, and welcome to Constellation's Third 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, and Happy New Year to everyone on the call. I sincerely hope you were able to enjoy a safe and happy holiday season with family and friends. Calendar year 2021 was another challenging year for us. every industry, inflationary pressures, and severe weather events. That said, I'm incredibly proud of the determination shown by our team at Constellation throughout the year. They've worked relentlessly, navigating a myriad of evolving dynamics to deliver a very solid performance year to date and in Q3, putting us on pace for another strong year of financial performance and shareholder value creation in fiscal 2022. That said, I'd like to highlight a few key takeaways from the quarter. First, our beer business delivered a very strong performance in Q3, while having tough comps in fiscal 21. We continued to see robust consumer demand, yielding high single-digit depletion growth. We extended our leadership position as the top share gainer in the high end of the U.S. beer market, behind the strength of our Modelo and Corona brand families. while improving our inventory position. Our strong performance to date gives us confidence to increase top and bottom line guidance for our beer business in fiscal 22. Second, we continue to see significant runway for growth for our core imported beer portfolio in the years ahead, and we're investing in the next increment of capacity additions required to sustain our momentum, as this represents one of the most value-creating opportunities for our company and our shareholders. Third, our wine and spirits business has made solid progress in transforming both its brand portfolio and financial profile. Q3 marked another step along our journey as we continued to shift to a higher-end wine and spirits business focused on delivering increased revenue growth and margin expansion. While our wine and spirits business continues to navigate through a series of headwinds impacting its year-to-date performance. Our increased focus and investments behind our fine wine and craft spirits portfolio, margin accretion innovation, and e-commerce initiatives continue to gain traction and are enabling an increase in our net sales guidance for the business and fiscal 22. And finally, our strong overall total company performance in Q3 gives us confidence to increase our comparable basis EPS guidance for the fiscal year. Garth will provide additional details relative to our financial performance and fiscal year guidance in just a few minutes. Today, we are also excited about our announcement of a new agreement with a Coca-Cola company in the United States to bring the Fresca brand into beverage alcohol through manufacturing and distributing a new line of Fresca mixed cocktails. Fresca is currently the fastest growing diet soft drink in Coca-Cola's portfolio, and over half of Fresca consumers already use it as a mixer with spirits. Building on this great foundation and in alignment with emerging consumer preferences around convenience, flavor, and a preference for high-quality products, we plan to launch Fresca Mix, created by Fresca fans from around the globe. With that, let's talk in more detail about our performance in the most recent quarter. Our beer business posted depletion growth of more than 8% in the third quarter, outpacing the high end of the U.S. beer category. Modelo Especial continues to be our most significant growth driver, with depletions increasing over 13%. That is more than 5 million cases relative to the same quarter last year. It remains the brightest star in our portfolio as the top share gainer across the entire U.S. beer category in IRI channels while maintaining its position as the number one high-end beer brand. Our Modelo Cholata brand family has become an important growth contributor to our portfolio as the number one Cholata in the U.S. beer market and maintain its a quarter. We continue to build on this extremely successful innovation platform with a new entrant, Modelo Cholata Pina Picante, which was launched in August and is already a top share gainer among imported brands. Corona Extra sustained its reinvigorated growth trajectory and position as the second fastest import share gainer and the number three high-end brand in IRI prior year. Similarly, Corona Premier continued its strong performance with 8% depletion growth, which accelerated through distribution gains as supply conditions improved. From an innovation perspective within the Corona brand family, Refresca and Refresca Moss are back in production and contributing nicely to growth in our ABA portfolio. Meanwhile, Corona Hard Seltzer remains a in the seltzer category. We're making good progress to enhance our flavor profiles and we're on track to roll out the restaging of our variety packs, tropical mix pack and berry mix pack in the first quarter of fiscal 23. And we are diligently working to address To fuel the continued growth of our imported beer portfolio, we plan to deploy an increased level of investment over the next four fiscal years to support construction of a new brewery in Southeast Mexico in the state of Veracruz, as well as to expand and optimize capacity in our existing Nava and Obregón operations. Garth will give you additional details on that momentarily. Now moving on to our wine and spirits business, we remain committed to our vision to become a bold and innovative high-end wine and spirits business with distinctive brands and products delivering exceptional consumer experiences. In an effort to make this vision a reality, we recently reorganized into two distinct commercial teams within the business. One focused on our fine wine and craft spirits brand and the other focused on our mainstream and premium brands. While each team has their own distinct strategy, both remain aligned to our goal of accelerating performance by increasing revenue growth and expanding margins. Our fine wine and craft spirits business is delivering solid growth this year, driven by brands like The Prisoner, Unshackled, Robert Mondavi Winery, and Hyde West, as well as strong gains in our direct-to-consumer e-commerce, hospitality, and international businesses. Our mainstream and premium business is focused on maintaining share in the mainstream wine segment while delivering and continuing to deliver growth through premium segment brands such as Naomi and Kim Crawford in line with our consumer-driven premiumization strategy. While we've experienced recent headwinds on mainstream brands like Woodbridge, Robert Mondavi Private Selection, and Spedka, IRI trends for these brands have improved overlapping the peak of the pandemic, supported by an increased focus on more relevant branding, strategic pricing, and innovation. Throughout our Wine and Spirits portfolio, we've launched several innovations that are creating momentum and driving growth, including Kim Crawford Illuminate and the Prisoner Unshackled, both of which we also launched multiple initiatives. First, the editor's collection, an exciting collaboration between Arsini Winery and the Hello Sunshine Book Club, the book club community founded by media mogul and innovator Reese Witherspoon. Second, Spectre's Ready to Drink, vodka soda mix pack. And third, our new Woodbridge three liter box. We've also experienced successful market expansion for our Woodbridge Robert Mondavi Private Selection Spirit Barrel Aged Wines. Within our DTC portfolio, we launched exclusive SKUs for the Robert Mondavi Winery and the Prisoner's Salvo Red Blends, as well as High West's Midwinter Nights Dram, and they're ready to serve Manhattan and Old Fashioned Cocktails. Within the three-tier e-commerce landscape, Constellation continues to outpace Mayomi's sales in the three-tier e-commerce channels increased 27% versus the prior year. Currently, about 10% of Mayomi's sales come from three-tier e-commerce, which is the highest level among leading U.S. wine brands and IRI e-commerce channels. While we advance our strategic agenda in Wine and Spirits, we continue to address a number of headwinds that have impacted our year-to-date performance. We continue to lap last year's COVID pantry-driven loading, where we experienced outsized growth. However, upcoming comparable growth rates are less challenging. Throughout the year, we've experienced out-of-stocks and other operational challenges related to our SAP implementation, a difficult domestic and international logistics environment, and a route-to-market transition of 70% of our distribution to Southern Glacier's wine and spirits. The encouraging news. These issues are all stabilizing. We are rebalancing our inventories and expect more standard service levels for the balance of the year. Based on our year-to-date performance, we are raising organic net sales guidance from 2% to 4% to 4% to 6% for fiscal 22. And before I close, just a couple quick notes on canopy growth. Clearly, recent results have been disappointing. and there are meaningful near-term challenges facing Canopy and the overall cannabis market in Canada, as store openings have been slower than previously anticipated due to the pandemic. However, we continue to believe that the cannabis market represents a significant growth opportunity in the CPG space over the next decade, given the predicted U.S. market size of roughly 100 billion post-legalization, which is double the size of the spirits market the size of the beer category. We're encouraged by Canobie's innovation agenda, with more than 40 new SKUs launched globally during their recently reported second quarter. In addition, Canobie purchased the right to acquire Juana Brands upon a U.S. triggering event, which includes U.S. federal legalization of cannabis. Juana Brands is the number one share of the gummy market in Canada, with more than 40% market share and the largest multi-market presence in the U.S. gummy market. The gummies category is one of the fastest-growing segments in both the U.S. and Canadian cannabis markets, accounting for over 70% of all edibles purchased. Juana's asset-life licensing model approach will allow them to scale quickly in the U.S. and provide Canopy a highly distributed brand upon U.S. legalization. In closing, I would like to reiterate our main takeaways from this quarter. Our beer business continues to deliver impressive performance. Its growth remains ahead of the high end of the U.S. beer market in IRI channels, and we now expect to achieve 10% to 11% net sales growth and 6% to 7% operating income growth for fiscal 22. We remain confident in the robust longer-term growth process ability to capture this significant value creation opportunity by expanding and optimizing our production capacity over the next four years. Our wine and spirits business continues to move toward its long-term revenue growth and margin expansion vision, which is further enabled by the clearer strategic focus of its newly configured fine wine and craft spirits and mainstream and premium teams. And in spite of an ongoing challenging environment, Our strong overall total company performance gives us the confidence to increase our comparable basis EPS guidance for the year. We look forward to continuing to build a portfolio of products that consumers love and delivering another strong year of financial performance