Constellation Brands, Inc.

Hello, and welcome to the Constellation Brands Fiscal Year 2022 Q4 Full Year Earnings Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Patty Yon-Erlop, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Kevin. Good morning and welcome to Constellation's year-end fiscal 22 conference call. I'm here this morning with Bill Newlands, our CEO, and Garth Hankinson, our CFO. As a reminder of 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 or 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 fiscal 22 year-end call. Before I get started this morning, I'd like to comment on the announcement made earlier this week. relating to the proposal from the Sands family to declassify Constellation's dual share class structure. According to the family's filing, the proposal brings significant benefits that will accrue to the company and its shareholders, including increasing market demand from investors who prefer single class structures. The proposal is under consideration and will be negotiated exclusively by the special committee of our board of directors, and any agreement reached with the Sands family will require the approval of that special committee as well as our full Board of Directors. In addition, pursuant to the terms of the proposal, it would require the approval of holders of a majority of our Class A common stock that do not also hold shares of our Class B common stock. I'd like to remind everyone that the Sands family proposal was not Constellation does not intend to comment further on the proposal unless and until a definitive agreement is reached, the proposal is abandoned, or otherwise deemed advisable in connection with any further public disclosure by the SANS family. With that, let's proceed with a discussion of our excellent results and our guidance for fiscal 23. As I reflect on our performance for fiscal 22, I'm extremely proud of how our team pulled together to deliver a year of double-digit organic net sales growth and strong cash flow generation. Our team accomplished this while battling through year two of the pandemic, including various supply chain challenges, adverse weather events, rising inflation, rapidly shifting consumer preferences, and a host of other issues in the surrounding environment. Through it all, we stayed true to who we are and remained laser-focused on our consumers and building brands that people loved. We launched our consumer-led innovation while continuing to invest in future capabilities needed to win long term. We continue to deliver on our commitments to return value to shareholders and to serve the interests of all stakeholders by making a positive impact on our communities and the environment. In fact, earlier this morning, as part of our ongoing commitment to environmental stewardship, we announced our new targets to reduce greenhouse gas emissions by 15% by fiscal 25 and to restore 1 billion gallons of water withdrawals from critical watersheds and improve water accessibility in disadvantaged communities where we operate in each case by fiscal 25. With that as a backdrop, I'd like to frame up what we believe are key takeaways from our performance in fiscal 22 as we head into our new fiscal year. First, our strong overall performance continues to be headlined by our beer business, which delivered its 12th consecutive year of high-end growth. Our beer portfolio, led by our Modelo and Corona brand families, posted net sales growth of 11% and added 30 million cases of high-end growth, extending its leadership position as the number one high-end beer supplier and the number one share gainer across the U.S. beer market. Second, our wine and spirits business delivered strong organic net sales growth of 9% and solid gross margin improvement for the fiscal year. Our enhanced focus on consumer-led premiumization in wine and spirits continued to yield benefits as our high-end brands outpaced the overall U.S. wine and spirits category, primarily driven by Kim Crawford, Naomi, and The Prisoner. Third, we continued to execute against strategy, returning nearly $2 billion to shareholders in the form of share repurchases and dividends in fiscal 22. We continue to demonstrate this commitment with this morning's announcement of a $500 million accelerated share repurchase program, which, when completed, will bring us to about 75% of our $5 billion goal. Our continued strong performance in fiscal 22 and the investments we continue to make by a nice springboard for another successful year ahead. Now let's dive a little deeper into our business performance in 22 and our outlook for the year ahead. One outlook of our success, one hallmark of our success has been our beer business over the years has been the strength and continuity of leadership. Earlier this year, we announced that Jim Sabia assumed the role of president of our beer business. As many of you know, Jim has played a key role in the success of our beer business for many years, and we look forward to further building on the momentum under his leadership. Jim succeeds Paul Hetrich, who will continue to work with our beer operations team in Mexico to support our ongoing brewery projects in Nava and Obregon, as well as the construction of our new brewery in the state of Veracruz. Paul has been a driving force more than 35 years. I look forward to continuing to work with Paul, Jim, and the rest of our beer team to accelerate traction of our high-performing beer portfolio in fiscal 23. There are several industry trends that provide a solid platform for our portfolio growth in the year ahead. Total beverage alcohol servings per capita are expected to remain stable. with growth of about 1% to 2% annually based on population growth expectations. Premiumization in the beer category is projected to continue with the high-end segment taking share from the mainstream segment. Mexican imports, primarily driven by the Constellation portfolio, are expected to continue to drive traditional beer growth and will continue to be a key driver of gains in the overall beer segment. Significant growth is projected in the flavors category, including seltzers, flavored beer, RTP spirits, flavored malt beverages, with all categories exhibiting strong future growth prospects. The on-premise sector has rebounded and is expected to continue to recover to drive incremental category growth. And finally, three-tier e-commerce and digitally influenced sales have proven sticky for beer. with revenue and share growing significantly. In fact, this channel is forecasted to deliver over-indexed growth relative to other channels. Each of these trends, combined with the static demographic tailwinds that work in our favor, either aligns with the core strengths of our beer business or our areas where we're investing to build capabilities needed to more fully compete and win. We have one of the most focused and highly efficient portfolios in the industry with a long runway for growth ahead. Our inventory position has been rebuilt and we have plans to invest aggressively behind our brands in fiscal 23. We also got some exciting new consumer led innovation on the way. Modelo Especial is the number two beer brand in dollar sales in the country and has significant distribution runway. over the medium term to facilitate mid- to high-single-digit total annual volume growth in the off-premise. Modelo Especial, currently under indexes with non-Hispanic consumers, but has strong momentum and grew household penetration 20 percent. I wish it was 70, but it was 20 with these consumers in the past two years. Yet there's still significant opportunity to close the awareness gap in order to drive further household penetration. For reference, Modelo Especial currently has only 80% of the household penetration of Corona Extra. We believe increasing total market penetration for Modelo Especial to Corona Extra levels will enable access to more than 2 million incremental consumers. Modelo Especial is the number five draft brand in the entire category, yet it only has 11% national distributions. This distribution opportunity, along with the velocity the brand delivers, makes Modelo, especially our draft, our biggest on-premise priority. In the FMB space, 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. For Modelo Cholata, we're forecasting double-digit takers in the medium term driven by expanded channel distribution with new patch sizes, formats, and flavors. Current awareness levels from Modelo Chilada are low relative to other flavor categories and large competitors. We expect to improve awareness and accelerate growth of Modelo Chilada through maximized social and digital media investments to broaden our demographic reach to general market consumers, as well as Spanish language TV to stay connected to core Hispanic consumers. Within our gelato lineup, we're aiming for additional growth for a product line that grew over 30% last year, has tripled in size over the past five years, and where we own almost 50% of the market nationwide. In fiscal 23, we're introducing a 12-ounce, 12-pack of limoni salad and a new gelato flavor, Naranja Picolsa, an orange and chili flavor. We're also extending the Modelo brand into new spaces to bring authentic Mexican flair to both lighter beer styles and flavored cocktail-inspired beer. Modelo Oro is a premium, sessionable, light cerveza with low calories and carbs rolling out in three test markets, Charlotte, Fresno, and Houston. This is a full-flavored beer that fits an active lifestyle. Another product aimed at the low-calorie crowd is Modelo Cantarizo Style Cerveza, a beer with fruit juice that mimics a popular Mexican beverage. It's rolling out in Atlanta, San Diego, and Arizona and celebrates the strong Mexican culture and heritage we see throughout the U.S. Shifting gears, we're excited by the resurgence of Corona Extra, which continues. This brand has over-indexed brand equity, indicating higher growth potential, both for the master brand and broader brand family, including younger and multicultural consumers, where we see significant opportunity to increase buy rates. Corona Extra also has a fairly high household penetration, yet it still lags behind some large competitors. Distribution opportunities also exist for Corona Premier, as there are still significant effective distribution gaps versus Corona Extra. And while buy rates continue to grow for Corona Premier, it still trails behind competing brands, indicating significant opportunity to increase velocity. Premier is currently underdeveloped in the canned format relative to its competitors, as experience indicates that cans are the preferred format for light beer drinkers. and format sizes. Finally, consumers have embraced Corona Premier in the on-premise, and our draft focus this year is designed to accelerate that trend. For the Pacifico brand, we're forecasting 10% to 15% total annual volume growth in the medium term from distribution alone. We're prioritizing growth in key DMAs for Pacifico to expand off-premise points of distribution in key cities, particularly in the West and Midwest regions of the country, which will be supported by digital media to reach target legal drinking age Gen Z consumers. We'll also activate consumer and customer-specific national accounts retail programs, as well as field marketing and sponsorships to support targeted investment markets. Pacifico had the hottest draft volume trend in the category during the last 52 weeks, followed closely by Medela. That trend, along with planned unique activations, positions Pacifico to continue to gain awareness with consumers. We've been increasingly focused on upping our game in the spirits-based RTD space with unique and compelling new brands. Last quarter, we announced a new agreement with a Coca-Cola company the U.S. market to create a new distinctive line of spirit-based, ready-to-drink cocktails using the well-loved and fast-growing Fresca brand. Fresca Mixed will debut this fall in vodka spritz and tequila Paloma layers. In support of our collective fiscal-free portfolio initiatives, we will continue to leverage our official sponsorship of USC, the college football playoffs, as well as numerous NFL, NBA, and MLB teams. You'll see a significant increase in media investments to drive sustained awareness and consumer demand. Overall, we plan to recruit new trackers through advertising, investments in digital media, and localized programming. In addition, our portfolio initiatives will be enabled by increasing adoption of our shopper-first shelf approach, which continues to drive results and gain traction. We completed 14,000 shopper-first shelf sets last year, our highest total to date. As you can see, our beer portfolio is well-positioned to capitalize on prevailing category and consumer trends by leveraging our core brand's competitive advantages for existing and new platforms to deliver our medium-term net sales growth target of 79%. Now let's move on to our wine and spirits business. including a major distributor transition, migration to SAP, inflationary headwinds, and covert-related logistics and supply chain challenges, this business delivered strong organic net sales growth of 9% and solid gross margin improvement for the year. Marketplace performance for our higher-end brands continued to outpace the overall U.S. Lion Spirits category, primarily driven by Miomi, Kim Crawford, and the Prisoner Wine Company. And our increased focus on our higher-end price segments yielded benefits, as our fine wine and craft spirit portfolio achieved double-digit net sales growth, driven by the Prisoner Wine Company and High West. Our innovation efforts also produced excellent results, with growth contributions coming from Mayoni Cabernet Sauvignon, Kim Crawford Illuminate Sauvignon Blanc, which together both held the top two spots among new high-end products introduced over the last two years, as well as the Prisoner of Oriole Extensions, High West Ready to Serve Cocktails, and Woodbridge's Buttery Chardonnay, a three-liter box. Heading into fiscal 23, our strategic focus includes commitment to continued premiumization, margin expansion, accelerated growth in DTC channels, and continued growth in our international business. Our innovation strategy will be focused on prevailing consumer trends of premiumization, digital, betterment, convenience, sustainability, and enhanced flavor profiles. We have a strong innovation pipeline planned for the coming year, which includes the launch of Spedka Gin, Naomi Red Blend, Kim Crocker Tea Wine Spritz, Unshackled Chardonnay and Pinot Noir, and meat combo ready-to-serve cocktails. Today, we announced two small additions to our wine and spirits portfolio to complement our premiumization efforts, in line with Constellation's ambition to be the number one player in fine wine and among the top five in ultra-luxury and icon wines. We have acquired the highly acclaimed Oregon wine brand, Lingua Franca. This demonstrates our commitment to building a strong, omni-channel business that includes category leadership in DTC and three-tier e-commerce, while building our fine wine portfolio with a diverse collection of best wines from top wine regions around the world. We also acquired the remaining portion of Austin Cocktails, which began in 2018 as Constellation Ventures focused on female founders. Austin Cocktails is a leader the fast-growing premium RTD segment of the U.S. beverage alcohol market. It currently is distributed in 28 states and posted depletion growth of 135% in calendar 21 as RTD trends continue to rise in popularity among consumers. Overall, we expect fiscal 23 to be a dynamic year in our wine and spirits business. A tighter focus on higher-end brand strengthens the business and strategically positions it growth. We continue to believe that the cannabis market represents a significant long-term growth opportunity, and we're encouraged by the work Canobie is doing to further sharpen its strategy, right-size its operating expense structure and capital investments, and achieve profitability in Canada while strengthening its competitive positioning in the U.S. In their most recent quarterly results, Canobie maintained the number one share position in premium flower products in Canada and drove record performance for its BioSeal and Storz & Bickel product lines. We are encouraged by recent Canadian government changes to beverage equivalency regulations, allowing consumers to purchase cannabis beverages in greater quantities. And in the U.S., Canopy's THC strategy is anchored by strategic relationships with two profitable MSOs, Acreage and Terrascent, both of which are positioned in high-growth northeastern markets. Canopy continues to progress their US THC strategy by establishing a scalable footprint, best-in-class products, and national distribution networks required to unlock the U.S. market upon federal legalization. In closing, I once again want to thank our team, as well as our valued distributors and retailers, for your efforts in delivering another strong year of performance, and we're just as excited about our prospects for growth in the year ahead. led innovation is poised to continue extending its leadership position in the high end of the U.S. beer market. Our continued focus on premiumization in the wine and spirits business is producing results and we have plans to further focus our wine and spirits portfolio towards the higher end in fiscal 23. We remain committed to our previously stated capital allocation strategy and we remain on track to deliver our $5 billion commitment by the end of fiscal 23. And finally, I'd like to leave you with this. We operate in a very dynamic and seemingly ever-changing environment. But over the years, one thing has remained constant. Constellation has been recognized as an IRI growth leader more than any other CPG company in our peer set over the last 10 years. That's something we're extremely proud of, and we look forward to continuing to keep this momentum going into our new fiscal year. And with that thought, I would like to turn it over to Garth, who will review our financial results for 22 and our financial focus for 23.