Constellation Brands Inc (STZ) — Q3 2020 Earnings Call Transcript

Thanks, Liz. Good morning and welcome to Constellation's third quarter 2020 conference call. I'm here this morning with Bill Newlands, our CEO; and David Klein, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any other non-GAAP 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 also 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 Happy New Year to everyone. I certainly hope you enjoyed the holidays and had the opportunity to include some of our awesome Constellation products in your celebrations with your family and friends. The end of every year is a time of reflection for me, and this year is no exception. As I reflect on 2019, I'm reminded that we're not only ending a certain fiscal year but a dynamic decade for Constellation Brands. Since 2010, Constellation has been on an incredible journey marked by strong financial performance and notable business milestones. Over the last 10 years, we've significantly increased the value of our stock and produced double-digit growth in sales, operating income, and operating cash flow. As a matter of fact, the closing price of Constellation's stock on December 31, 2009, was just over $15. Fast forward to December 31, 2019, we closed at almost $190. This incredible increase of more than 1000% over the last 10 years made Constellation the best performing stock in the S&P 500 Consumer Staples Index during this timeframe. One of the biggest drivers of our success was the game-changing beer acquisition that occurred almost halfway through the last decade. It enabled Constellation to buy Grupo Modelo brands in the United States, where we successfully built these brands for many years while positioning ourselves for this transformational opportunity. At that time, this deal allowed us to double the sales of our company, diversify our profit stream, significantly enhance our margin, earnings, and free cash flow while providing new avenues for growth. Since then, our beer business has made significant contributions to the overall sales, profit, and cash flow results for our business and continues to be a powerhouse for growth as the number one brewer and seller of imported beer in the U.S. market. Calendar 2019 marked the 10th consecutive year of volume growth for Constellation's beer business, solidifying our position as the leader in the high end of the U.S. beer market. These trends were driven by Corona Extra, Modelo Especial's explosive growth, and our successful innovation initiatives. In 2010, the Modelo Especial brand depleted approximately 35 million cases and then went on to achieve double-digit growth every single year of the past decade finishing 2019 at more than 140 million cases and there's more to come. In our most recent third quarter, this powerhouse brand posted depletion growth of almost 15% with double-digit growth in 46 of the 50 states while solidifying its position as the number four beer brand in the U.S. market. Corona Extra, which is the number seven beer brand in the U.S. beer category, grew from approximately 90 million cases in 2010 to more than 110 million cases in 2019 and stands as one of the few top-selling brands in the U.S. to grow consistently this past decade. From a quarterly perspective, the Corona brand family grew nearly 7% in IRI channels, driven by the continued strength of our Corona Premier and Corona Refresca innovations as well as the renewed growth of Corona Extra. Corona Premier continues to gain distribution, especially in the on-premise, and delivered double-digit depletion growth in 35 of the 50 states during the quarter. Corona Refresca was a top ten growth contributor to the U.S. high-end beer category during the third quarter. And finally, let's not forget Pacifico, which achieved double-digit depletion growth of nearly 16% and remained a top share gainer within the U.S. imports segment. We're excited about our plans for the launch of Corona Hard Seltzer this spring, which will help to further strengthen our position as the leader in the high end of the U.S. beer segment. Our launch strategy includes the largest-ever single brand investment for our portfolio of more than $40 million in marketing to support this introduction. We've already started to take orders from distributors and have received incredibly positive feedback from retailers who are excited about the prospects of Corona Seltzer and have already incorporated our newest portfolio addition into their shelf set programming plans for the spring selling season. As we've discussed, Corona Hard Seltzer will be introduced in four flavors, including tropical lime, mango, cherry, and blackberry lime. Corona carries unbelievably strong brand equity as the number one most loved brand among both Hispanic and total population drinkers aged 21 to 54, and that's why we've decided to use the Corona brand name on our new seltzer. Of course, the refreshment characteristics of seltzers perfectly match with Corona's refreshment DNA. There's been a lot of debate about the seltzer trend and where seltzers are sourcing their growth within the total beverage alcohol category. Our research shows that seltzers are taking share across the board from beer, wine, and spirits. While a significant amount of this growth originates from the beer category, it primarily comes from domestic premiums, ciders, and FMBs, with minimal interaction of seltzer consumption with imported brands. In addition, we are seeing increased overall consumption from those seltzer drinkers and new consumers who are entering the total beverage alcohol space through their interaction with seltzers. As for the trends that you've seen for Constellation's beer business, the IRI data covering the month of December aligns with our recent annual price increase, specifically in the California market, which briefly decreased features and promotions. The impact of these price increases are normal and frankly short-term in nature. Overall, we closed out the month with depletion growth in the high single-digit range of our year-to-date trends. Moving now to wine and spirits. I'm pleased that we've been able to execute a revised agreement with Gallo that paves the way for accelerated growth and margin performance for our wine and spirits business going forward. We believe it addresses the FTC concerns by excluding the sparkling wine, brandy, dessert wines, and concentrate categories from the original transaction. We are actively pursuing other opportunities to divest most, if not all brands in these categories, as we believe this is the best path to optimize our portfolio going forward. To be clear, the FTC needs to provide final approval of our revised agreement with Gallo. Once we have finalized all transactions, including the proposed divestitures, we expect this to occur by our fiscal year-end. We have entered into a separate but related agreement with Gallo to divest our Nobilo Wine brand. This fits with Gallo's portfolio strategy and allows them to expand in the New Zealand wine category without affecting our long-term goals and strategy or our opportunity in the New Zealand wine category in the U.S. at a price point greater than $11. This transaction is expected to close in the first half of fiscal 21. Despite the delay and timing revisions to the transaction, I'd like to remind everyone that we have benefited from almost an entire year of additional cash flow from the divested brands by the time the transaction closes, which has contributed to our debt reduction and share buyback activities. During the last decade, our team has created significant value by transforming and simplifying our wine and spirits portfolio through the rationalization and divestiture of assets in a premiumized business, which is the right strategy to enhance our lines for growth and financial profile going forward. This premiumization strategy is taking hold in the marketplace as our power brands continue to outpace our competitors and take market share at the price points that matter in the higher end. In fact, our power brands at the greater than $11 retail price point grew nearly 9% in IRI channels during the third quarter, including brands like Kim Crawford, which has more than doubled its volume with a CAGR of nearly 30% since its acquisition in 2015. Kim Crawford, is another gem within our power brand portfolio that was the number one selling wine on wine.com this past year and has consistently outperformed its competitors, posting a 20% volume CAGR in IRI channels over the last decade. As we progress through fiscal 20, we continue to show steady upward progression in revenue trends for our power brands and expect mid-single digit sales growth for this collection of brands in the fourth quarter. Innovation and new product development are also critical to our success for the remainder of the year, and we feel we are well-positioned to drive these initiatives to the finish line. We've already had great success with the launch of Robert Mondavi Private Selection Buttery Chardonnay and Woodbridge ready-to-drink packs, which while gaining traction across all channels is doing especially well in the convenience channel. A channel growing at two times the rate of the total U.S. wine market. Both Woodbridge and Robert Mondavi Private Selection, which represent the most significant volume within the Robert Mondavi brand franchise, are outperforming in their respective price segments driven by marketing investments that we've recently made. We recently extended our highly successful Barrel-Aged program with the introduction of our RMPS Rye Barrel Aged Red Blend. As a reminder, we've sold more than one million cases of barrel-aged products since the inception of this program nearly two years ago, which helped to revive the Robert Mondavi Private Selection brand and has become the foundation for some of our other successful Barrel-Aged innovations like Cooper & Thief. We're also building on the success of wine in a can, where consumers are seeking products that are convenient, ready to drink, and sold in environmentally friendly packaging. These trends have helped to fuel the growth of Crafters Union, which is the number one growth driver in canned wine over the last 12 weeks. We plan to build on the momentum of this brand with the launch of Crafters Union Bubbles during the fourth quarter. Later this month, we will be releasing The Prisoner Unshackled, the newest addition to The Prisoner collection of brands in Red Blend and Rosé. We expect these brands to strengthen our ability to compete at the fast-growing $25 retail price point. On the spirits front, SVEDKA Vodka continues to significantly outpace the vodka category in IRI channels, driven by increased distribution within a core portfolio as well as the more recent introduction of the Rosie flavor. During the quarter, one of our most successful venture investments, Nelson's Green Brier, launched its first Tennessee Whiskey product. This Tennessee Whiskey is based on Nelson's original recipe dating back to 1860 and is the first time it's been bottled since provisions shut down the distillery in 1909. This is another milestone for Nelson's Green Brier as they continue to innovate and leverage the success they've already achieved. Overall, our U.S. wine and spirits business has executed changes that have resulted in a sharpened focus on consumer-preferred trends related to premiumization, innovation, and brand building. As a result, we have benefited from ongoing consumer trade trends, positive mix, and great consumer response to our new product introductions in the marketplace. Before moving on to Canopy Growth, I'd like to remind everyone that the core business activities I just highlighted are driving an increase in our EPS guidance for fiscal 20. Now a few comments about our investment in Canopy Growth, which continues to have the leading market share in Canada and is a leader in global cannabis sales. We remain bullish on the Canadian cannabis market as the conversion of the illicit market to the legal market continues to strengthen. Per Statistics Canada, in 2018, 23% of cannabis consumers obtained cannabis from a legal market, while in 2019 that number significantly improved to almost 50%. In addition, retail store sales have increased significantly in every province during the last 12 months. We expect further retail sales increases as products like vape, edibles, and beverages flow through the retail stores in Canada now that Rec 2.0 products have been released. We couldn't be more excited to see these products in the marketplace as Canopy now has the ability to showcase their best-in-class brands and intellectual property. We are also excited to see the progress the Ontario government has made to satisfy the demand of consumers by agreeing to allow more retail store openings beginning in early March. During Canopy's second quarter, they established leading recreational market share across Canada, including a noteworthy share of over 35% in Alberta, Canada's most developed provincial recreational market. In the U.S., in early December, the Canopy team introduced First and Free, allowing branded CBD products. These products come in a variety of formats including softgels, oil drops, and creams, and are currently available for sale via e-commerce on the First and Free website. Overall, we're pleased with the progress of the Canopy team and what they've accomplished in the last few months. As most of you know, in less than a week, my colleague, David Klein, will assume the role of CEO in Canopy Growth where I believe he will bring more focus and discipline to that business in executing their strategic priorities. We have also appointed Garth as Constellation's new CFO who will help lead our company through its next phase of growth. David has been a significant contributor to our organization during his time here. His accomplishments at Constellation are numerous, and I wish him great success at Canopy where I will continue to collaborate with him through our Canopy board interactions. During this time, David built an incredibly talented finance organization, which is why we're expecting a seamless transition as he assumes his new role. Garth brings a wealth of experience to this critical leadership position, most recently serving as Senior Vice President for our corporate development activities, where he's led the company's efforts in financial planning, reporting, analysis, as well as mergers, acquisitions, and our venture initiatives. Many of you will have the opportunity to meet Garth in the coming weeks, and I would like to publicly congratulate him and welcome him to our executive management team. In closing, we have accomplished a great deal on this exciting journey over the last decade. But I'm equally excited and optimistic about the next 10 years as well. We have a great product portfolio in a terrific industry, we have the right strategy, and we have an energized management team in place to execute our vision for the future. I'd like to reiterate two key takeaways from today's discussion. Number one, with every step we take, we are positioning Constellation for sustained long-term success. As we continue to premiumize the portfolio, the strategy has paid huge dividends over the years. I'm confident in the continuation of strong results for our beer business and the excellent prospects for our wine and spirits business going forward. Number two, our powerful cash generation capability and our desire to quickly deleverage and return $4.5 billion in cash to shareholders makes Constellation a compelling investment for the future. We remain steadfast in this commitment, and I believe our significant debt reduction to date, coupled with our second-quarter share repurchase are a testament to this commitment. We have a relentless consumer-focused on brands and categories that are high growth, high margin, and we're continuously working to build a solid and sustainable foundation of operational excellence, financial strength, and innovation. We plan to execute in these areas throughout the remainder of the year and well into the coming decade. With that, I'd like to turn the call over to my colleague, David, who will review the financial results of our third quarter.

Good morning, everyone, and thank you, Bill. It's been a pleasure working with you and the team at Constellation. My time as CFO has been both exciting and fulfilling. I'm confident in leaving the company with Garth stepping in as the new CFO. Over his 18 years at Constellation, Garth has significantly contributed to our growth and understands the company's operations and finance well. We will continue to work together on crucial initiatives related to Constellation's investment in Canopy Growth. I will miss my interactions with our investors and analysts covering Constellation. I appreciate your ideas and feedback over the years and thank you for your support. I look forward to connecting with many of you in my new role at Canopy Growth. Now, regarding the financials in Q3, we delivered strong beer operating performance and cash flow results, and our Power Brand strategy in wine and spirits is gaining traction, with these brands outperforming the overall category. We have also closed the Black Velvet transaction and revised the original Wine and Spirits deal with Gallo, including an agreement to divest the Nobilo Wine brand and Ballast Point. Before we discuss the financial results, I want to update you on our guidance; we have increased and narrowed our full-year comparable basis diluted EPS range to $9.45 to $9.55, reflecting the updated Gallo transactions and strong beer performance. This range excludes Canopy equity earnings, which better represents our core business performance. We urge investors to focus on this metric since the Canopy equity earnings impact is non-cash. Our increased FY20 guidance now accounts for the revised Wine and Spirits transactions and the Ballast Point transaction closing by the end of fiscal 20, while we expect the Nobilo transaction to close in the first half of fiscal 21. As Bill mentioned, we believe our efforts to divest remaining brands will align closely with the value in our original agreement with Gallo, assuming we achieve the entire value of the earn-out. After completing these transformation activities, we anticipate that the wine and spirits business will eventually generate mid-single-digit topline growth and migrate toward a 30% operating margin over time. Now, let's look at Q3 performance and our full-year outlook in detail, where I will focus on comparable financial results. Starting with beer, net sales increased by 8% on shipment volume growth of nearly 7%. The reversal of the fiscal 2019 year-end over shipment was minimal in Q3 and lower than expected. We foresee the remaining shipment timing benefit from fiscal 19 reversing in Q4. Our import portfolio demonstrated continued strength, growing nearly 8%, primarily driven by strong performance of Modelo Especial. Accounting for an unfavorable impact from Ballast Point, total beer depletions increased by 7.3%. In Q4, we will regain an additional selling day lost in Q2, aiding high single-digit depletion growth in Q4. Beer operating margins increased by 200 basis points to 39.3%, with benefits from pricing and COGS partially offset by higher marketing and SG&A. COGS benefits were mainly due to FX, a one-time contractor cost reimbursement, and an inventory build ahead of our SAP S/4HANA implementation. The contractor cost recovery and inventory build enabled us to exceed our margin expectations for the quarter. I am happy to report that we completed the first phase of our SAP S/4HANA implementation for beer operations in Mexico ahead of schedule. This milestone marks over a year of planning, designing, and training for this critical initiative. We will keep you updated on future SAP S/4HANA milestones. Marketing as a percentage of net sales increased by 30 basis points to 11%, with marketing spend slightly below expectations. We anticipate fiscal 20 marketing as a percentage of net sales to be within the 9.5% to 10% range. For fiscal 20, we now expect net sales growth of 7% to 8%, which includes 1% to 2% pricing within our Mexican portfolio. We foresee full-year fiscal 20 depletion volume growth to exceed shipment volume growth by about one percentage point due to the planned reversal of fiscal '19 shipment timing benefits. We also expect fiscal 20 operating income growth of 8% to 9% and our full-year operating margin to range between 39.5% and 40%, improving from last year and our prior guidance of 39.3%. Looking ahead, we are excited to launch Corona Hard Seltzer at the beginning of fiscal 21, which will involve investments in production costs as we ramp up for this major innovation, in addition to significant marketing expenses. In wine and spirits, net sales declined by 10% on shipments down 14%, with depletions decreasing by 6%. Q3 results exceeded our previous expectations due to a shipment timing benefit. Our third-quarter wine and spirits results were somewhat affected by the timing of the Thanksgiving holiday, with retailer and distributor replenishment shifting to Q4 compared to last year. Additionally, we continue to face transition activities with distributors and have opted to avoid low-quality sales incentives and pricing actions that do not align with our strategy. The operating margin for wine and spirits decreased by 80 basis points to 26.2%, as mix benefits were outweighed by higher COGS and SG&A as a percentage of net sales. Increased COGS mainly reflect freight cost pressures. Higher SG&A as a percentage of net sales includes marketing investments supporting power brands and new product development initiatives in the quarter. We now expect fiscal 20 wine and spirits net sales and operating income to decline by 8% to 10%, with updated guidance reflecting the revised transaction closing assumptions discussed earlier. We remain committed to our $130 million stranded cost reduction plan, now expected to be realized over fiscal 21 to fiscal 22. I am confident in the wine and spirits transformation strategy's effectiveness. Power brand performance continues to improve due to our increased focus and marketing investments. While we are falling short of our mid-single-digit Power Brand depletion growth target this fiscal year, power brands are increasing mix benefits and gaining market share in IRI channels, and we anticipate sequential improvement in depletion trends in Q4. Including these mix benefits, we believe our portfolio post-divestitures is on track for long-term targets, including mid-single-digit net sales growth and migrating to a 30% operating margin. Year-to-date corporate expenses reached $149 million, a slight increase from Q3 last year. We now expect full-year corporate expenses to be around $230 million due to increased insurance costs, higher incentive compensation, and IT spending, including S/4HANA implementation and other digital activities. We believe SG&A will decrease by the end of fiscal '22 once digital enablement activities are fully implemented, allowing us to eliminate redundant IT costs and optimize the benefits of the new platform. In Q3, comparable interest expense rose by 11%, primarily due to interest expenses pertaining to our Canopy Growth investment from November 2018. We now expect fiscal 20 interest expenses to be around $430 million. Our Q3 effective tax rate, excluding Canopy equity earnings, was 17.5%, compared to 14.1% last year, mainly due to lower stock-based compensation benefits. We expect our full-year fiscal 20 effective tax rate, excluding Canopy equity earnings, to be approximately 18%. The rate increase from our guidance is mainly affected by lower stock-based benefits and higher expenses for miscellaneous tax items than previously forecasted. Our full-year cash tax rate is expected to fall within the mid to high single-digit range. Regarding free cash flow, defined as net cash provided by operating activity less CapEx, we generated $1.5 billion for the first nine months of fiscal 20, reflecting a 14% increase, primarily due to strong operating cash flow and reduced CapEx. We now estimate full-year CapEx spending to be $700 million to $800 million, down from our original guidance of $800 million to $900 million, which includes about $560 million for expanding our Mexico beer operations, such as investments in breweries and a glass plant. We expect fiscal 20 operating cash flow to fall between $2.2 billion and $2.4 billion, with free cash flow estimated between $1.5 billion and $1.6 billion. Now, let's discuss several impacts excluded from Q3 comparable results. Last quarter, we noted an expected loss due to the write-down of assets held for sale related to the Gallo transaction. The actual write-down of $340 million was influenced by $250 million of contingent consideration associated with the revised transaction price, governed by accounting rules on when to record such considerations. We also recognized a $547 million net income tax benefit from the remeasurement of deferred tax assets due to tax reform in Switzerland. Concerning Canopy Growth, since our initial investment in November 2017, we have recognized a total pre-tax net gain of $223 million. In Q3, we noted a $534 million decrease in the fair value of our Canopy investment. Constellation's original warrants with Canopy have an exercise price of $12.98 Canadian per share and will expire on May 1, 2020, representing less than $200 million consideration. Additionally, the tranche A warrants will expire on November 1, 2023. The company will review the exercise of each warrant shortly before expiration and does not plan to make further cash contributions to Canopy beyond the potential warrant exercise. Lastly, regarding capital allocation, Constellation is committed to returning $4.5 billion to shareholders in dividends and share repurchases from fiscal 20 to fiscal 22. I am pleased to share that in Q3, we returned to our targeted leverage ratio, at the early end of our 12 to 18-month commitment made when we closed on the Canopy investments, excluding non-cash equity earnings related to Canopy. Continued deleveraging, supported by strong cash flow generation capacities, should enable us to be opportunistic and increase share repurchases as we approach fiscal 21 and 22. Reflecting on my time as CFO at Constellation, I am proud to have contributed during a period of significant value creation. I am optimistic about Constellation's future and believe the company is well-positioned for long-term success. I look forward to adding value for Canopy shareholders, including Constellation, in my new role at Canopy Growth. Bill and I are now ready to take your questions.

Hey, good afternoon everybody. David, congratulations! I have a question on seltzer; it's obviously going to be an incredibly competitive category for calendar 2020. What's going to make your proposition different, and how are you thinking about your marketing spend and investment given that it seems like it's really building up to be a significantly competitive category this summer? And then separately, on your deleverage comments, are you happy to keep the levels where they are now, and everything incremental from here is a buyback to manage to those levels, or should we be thinking about it differently? Thank you.

Sure, I'll take the first half of that. We're very excited about Corona Hard Seltzer in part because of the refreshment DNA that's attached to the Corona brand. We obviously have done a lot of product testing and product research to ensure that we have a product that meets or exceeds the other key players in the marketplace. So we are quite comfortable with the sheer quality of the product that we're going to bring to the table. As usual, our marketing department will bring outstanding consumer communications around our critical brands. The last thing I would say is, we still believe that there is a lot of upside in the total size of the seltzer business. It was roughly 60 million cases in 2019, and we believe there could be a 2 to 3 times opportunity going forward and we expect to take a significant share of that opportunity. On the buybacks, our targeted range is three to four times. Our preference would be at the midpoint of the range, but now that we're back in the range, we will definitely look to be opportunistic as we move forward.

Thank you, good morning everyone. David, congratulations on your new opportunity. My question focuses on capital allocation. Many investors have expressed concerns about Constellation's capital allocation choices over the years, and the recent declines in the value of Ballast Point and Canopy have made things more challenging. Could you provide an overview of what insights you've gained as an organization from the Ballast Point experience? Additionally, how are you approaching capital deployment beyond the buybacks you’ve committed to? It would be helpful to understand your philosophical perspective as you enter your second year as CEO of this company.

Sure. I think one of the things David just pointed out, we remain as committed as we always have to getting ourselves into the range and as he said, we're pleased that we have gotten into the top end of our range earlier than we had anticipated. We have a tremendous amount of opportunity with our core existing franchises. You have seen, and you will continue to see, a relentless focus on the critical categories and brands that we see as high margin, high-growth opportunities, and we will invest to take significant share within those where we see issues and problems, much like you pointed out with Ballast Point or the low end of our wine business. We are prepared to take action to ensure we are focused on where the consumer is going rather than where they have been, and those are two examples of that. I think what that will allow us to continue to focus all of our attention on the premiumization play in both the beer business and the wine and spirits business so that we continue to be the leader and when someone sits in this chair ten years from now, they'll be able to tell the same story that I just told, which is a great decade of tremendous growth for our company and our shareholders.

Hi, good morning. My congrats to you, David. I really look forward to working with you as part of my coverage of Canopy. So, Bill, I just wanted to follow up on your commentary around the dislocation that you think hard seltzer is driving based on the consumer insights you offered. You think it's kind of broad-based and it's under indexing to imported beer. How are you thinking about, not asking for guidance for fiscal '21, but are you expecting that dynamic to shift given the introduction of Corona Hard Seltzer and perhaps more specifically how much cannibalization might you expect in terms of interaction between your core Corona offerings and that hard seltzer proposition? Thank you.

Well, I think that excites us about the Corona seltzer introduction is that, first of all, the category appears to continue to have real strength, and there is a lot of growth potential in it. As I said a moment ago, I think there's probably two to three times where it sits today, which creates tremendous opportunity for those of us who are going to play in the category. I think our expectation would be that we would have a similar cannibalization profile that we saw around Premier, which was as you might recall, was in the 70% to 75% range incremental. So we think this is a great opportunity for us. But I would also encourage all of you on the call to keep in mind, as exciting as this launch will be, Modelo Especial is likely to be our single biggest grower next year. This continues to be a brand that is absolutely on fire. It grew 15% in the most recent period and has had 30 plus consecutive years of double-digit growth. This is a brand that's going to be and remain a significant foundational play for this company for many, many years to come.

Hey, good morning everyone. And David, I want to extend my congratulations as well. I wanted to pick up on the beer guidance; so Bill, you sounded pretty positive. Despite some of the slowing that we saw in the Nielsen data. I think you attributed it to pricing, but as I look at the midpoint, if my math is right, it implies about 7.5% organic sales growth. The year-over-year comp is easier; if you do get an additional selling day. Can you talk about maybe what you're seeing in the business? Corona looks a little bit light; Premier looks like it's decelerated a bit. Is there anything that gives you cause a bit of pause here with the base portfolio in terms of some deceleration? And then, given that as we look at the 7-9% longer-term growth that you've expressed confidence in over the intermediate term, the fact that we had to tweak it modestly lower this year, should that be at all concerning for investors looking out to next year? Thank you.

Sure. No, I think you should be very positive about our expectations around our core business. We were particularly excited that the Corona Extra business returned and renewed in growth in the third quarter. As I stated, certainly the price increases we talked about, particularly in the State of California, gave us a very brief factor that you saw in the most recent IRI data, but we do not expect that to have any impact on our longer-term trends in the back, as I alluded to earlier our December depletion growth profile overall was in the high single-digit range, which is ahead of our year-to-date trends. So we remain very bullish. And when you think about things like Modelo and Pacifico and the addition of our seltzer business, I think you're going to see a continued strong delivery against our business in the range that we had said we would do. And with that, we will deliver for this year.

Hey, good morning guys. Also want to extend my congrats to David. Just two quick clarifications on the beer business. Bill, you mentioned that high single-digit depletion growth in December; I think that included an extra day. So ex the extra day, what type of rate are you trying to get? And then David, you mentioned the contractor and inventory timing benefit of margins in the quarter, can you give us a sense of how much that was? And those are more clarifications. If you give me the benefit of an additional question. You guys did comment on the fabulous track record of beer volume growth over the last decade, and kudos for that obviously an amazing track record. But if you do look at the year-to-date depletion growth of 7%, it's below that 9%-10% pace from the prior few years. I know it's close to what you guys originally expected. But just at a high level, taking a step back, I'm just curious for your perspective on the slowdown this fiscal year. Is that just more of a natural maturation as you move to larger case volumes? Should we expect sort of a gradual slowdown in depletion over time on larger numbers, or were there more discrete issues driving the sequential slowdown this year, and this is not sort of the start of a moderation trend as you look out longer term? Thanks.

So relative to our depletion trends for the fourth quarter, we expect fully expect that our depletion trends for the fourth quarter are going to be in the high single-digit range, much like December presented itself. Look, we remain extremely bullish about the long-range prospects for our beer business. We are significantly outperforming the overall category as well as the high end of the category, and that’s before we introduced our hard seltzer product, which will compete with brands that admittedly have gotten very big, very fast. This will provide us with, I think, renewed opportunity for growth, and we are very excited about the cost base for that going into the new fiscal year. Obviously, as a reminder, we will give fiscal guidance during our next call, so we will refrain from doing that at this point in time, but certainly, we're very excited, not only about the fourth quarter and finishing our year very strongly, but for next year as well. Regarding the contractor settlement, we experienced some benefits from the S/4HANA production build we implemented in Q3, which translated to several million dollars. Looking back at last year, we encountered issues with glass production during Q3. These impacts, which range from $3 million to $7 million each quarter, can sometimes benefit us or work against us. For context, our total operating margins were 39.5% in FY '18, 39.3% in FY '19, and we anticipate being between 39.5% and 40% this year. By year-end, we expect these timing discrepancies to resolve, resulting in a stable margin range for our business, which is notably the best in North America.

Hi, good morning everyone.

Hi, good morning.

I have a couple of questions. First, regarding beer. Bill, you mentioned the long-term outlook, and it seems you're still confident in achieving high single-digit growth. Can you elaborate specifically on Modelo, which continues to experience double-digit growth? Some people have expressed concerns about the recent details we've observed. What’s in the pipeline for Modelo to maintain this momentum? Additionally, David, it's great to hear that the outlook for a 30% operating margin remains intact for that business. Could you share the timeline for the stranded costs as they are eliminated following the divestiture of the lower-priced brands? Thank you.

Sure, I'd say, and I've said this many times, I think Modelo remains the single largest opportunity for this company. It is just beginning to craft into the general market; it has had a very, very strong run with its core Hispanic base and continues to grow with that audience. And as many of you know, we do have a great tailwind with the growth of the Hispanic consumer in the United States, which will continue to give us a tailwind for quite some time. But as you know, our advertising and marketing activities around the Gallo have been expanded to a broader audience, and the growth profile within the non-Hispanic consumer is tremendous. So we see tremendous upside remaining in Modelo. To your question about what else we will be introducing, we have size opportunities with more products in different sizes. And as you all know, we have done nothing truly to innovate around Modelo outside of the business, which has done extremely well for us. So we think Modelo is going to continue to give us strong results into the next decade, and we will likely be the single largest growth product and brand for us going forward.

On the topic of stranded costs, it's a bit of the story we told at the beginning of this year, almost on a one-year delay. We, we're saying it's a $130 million stranded cost without getting into specifics, that will be included when we provide guidance next quarter. You can assume that a quarter to a third of those costs come out in FY '21, the rest in FY '22, because we have the flow through COGS to hit before it hits our P&L. So like FY '23 will be the first real clean year where we can take a look at that. We're seeing a lot of stranded costs coming up or being managed.

Great, thanks, good morning. So I was hoping you could talk a little bit about the increased marketing spend on Corona because last quarter you took the opportunity to say look, beer profitability is coming in a bit above plan. We'll put some extra money behind Corona; clearly, there's been some reaction. At the same time, the marketing spend on beer came in a little bit light of plan. So if you could just give us some color on why the spend was a little bit lighter than planned looking forward, and what in that marketing mix is particularly had a particularly attractive return would be interesting. Thanks.

Sure, and I'll comment on the kind of timing of spend; it really is a timing issue. We expect that we will finish the year in the 9.5% to 10% range of net sales. At the same time, we expect that we will see an uptick in our marketing spend in Q4 this year versus Q4 last year, some of that having to do with incremental investment behind our core brands, but also some of it having to do with basically production costs around the seltzer marketing campaign that Bill outlined earlier. So I think for marketing for us, it really is just a function of timing as we still focus on a 9.5% to 10% range.

Great, thank you very much. A couple of just kind of follow-up clarifications. First, it looks to us that the price mix was about 1.6%. Can you give us a sense of what that would have been without Ballast Point? And then second, following up on some of the comments on Corona seltzer, you made some comments that it's being well received by retailers; can you give us a sense of how you see the shelf sets coming out next year where Corona seltzer is going to be positioned on the shelf versus beer versus other brands? And then, if you look at the White Claw trends, they've been unbelievable, right? I mean, they're actually increasing share. I think the latest share is something like 67%, up from 60%. What gives you the confidence that this is actually a hard seltzer segment as opposed to a White Claw segment and that there is room for a lot of new competitors? Thank you.

Sure. So let's talk about the sets and where we expect to see Seltzer. Seltzer is not going to take space from our core beer franchise; the consumer views it as something different. The retailers view it as something different, whether it's on the shelf or in the cold box. So we think there will be a distinct differentiation of product location, not just cannibalizing existing shelf space. That's the way it's been so far; we believe that will continue. The answer to your question regarding whether this is a category or a brand; I think we've solved that question for ourselves with research. Our consumer and the seltzer consumer are very interested in the idea of Corona Hard Seltzer, in part because of the brand's refreshment bone. The strength of Corona in that whole refreshment experience is perfect for this. As we said earlier, these seltzer consumers have generally been increasing their overall consumption of the total alcoholic beverage category, which I think speaks well for the overall category of seltzers going forward. The strength of the Corona brand name together with the investment we're going to make against it, we're quite bullish on it.

And Robert, on the price mix question, it might be if we were just looking at imports; it might be 10 to 15 basis points, but not much more.

Thanks and congratulations from me to David. Maybe coming at the beer outlook from another direction. Just coming back and coming into calendar '19 at the beer event in Chicago, you guys were pretty adamant that beer margins would trend flattish, more or less in line with where you finished last year, call it 39.5%, as you said. But now we're three quarters into fiscal '20, beer margins have exceeded expectations three quarters in a row, raising the full-year outlook, and arguably 4Q would seem to have potential upside embedded in that as well. Acknowledging some of the Q3 benefits that could reverse, I guess as you step back, does any of that change your go-forward thinking as to where beer margins could ultimately aspire to? Especially without the recent drag from Ballast. I mean is there, I guess is there a structural upside to your prior outlook or do you attribute the recent strength just to some of those timing factors that you had mentioned earlier? David?

So I'll start with that; David can add as you would like. During that discussion, one of the things we were quite clear about relative to our guidance is that there will be some years where things go our way; costs are better, FX is better, certain things just simply are favorable to what we would view as a sustainable long-term proposition around our margin structure. This year has been one of those, and we're certainly happy to take it. But it's also realistic to recognize that those things can go either way. As I said, this year it has gone in our favor, and we continue to work, as you would expect, on our operational footprint to make sure we are extracting every ounce of opportunity as it relates to cost, but this year has gone our way, and we're quite pleased that it has.

Yes, Steve, I would say that we are pleased. I’m convinced we have some of the best operations people on the planet. In order to produce the results that we do on a consistent basis. The caution I would provide is that when we are in the launch year from a seltzer standpoint, we know that we're going to be driving towards the high end of our marketing spend as a percent of SG&A range.

I think we've been clear about this: during the launch year for seltzers, we will be focusing on the upper end of our marketing spending as a percentage of SG&A. We also anticipate that there will be some pressure on gross margins as we start with seltzers. However, we believe that over time, seltzers won’t necessarily be a burden, and we do not expect them to remain one. You will see some fluctuations in our business, as Bill mentioned, but I’m quite pleased with our margin consistency, which has been in the 39.5% range for three consecutive years.

I would just add to David's comments that much like our beer margin structure is best in class, I think you would expect that our seltzer margin structure as we get to critical mass will also be best in class versus the competition.

Hi, good morning, David. Congratulations on your promotion and thank you for your work as CFO at Constellation. My question is a follow-up regarding the increased investment in seltzer marketing. Should we include part of this budget in the fourth quarter and also anticipate an increase in the early first quarter of fiscal 2021 since I understand the launch is scheduled for March? Additionally, I'd like some clarification on the wine and spirits segment. The implied profit guidance for wine and spirits in the fourth quarter shows a decrease so far, at 13% year-to-date. The full year is projected to decline by 8% to 10%, which suggests you expect improved performance in the fourth quarter. Could you elaborate on that? Thank you.

We anticipate that our marketing expenditure will increase compared to the previous year in the fourth quarter. You can estimate that it will fall within the 9.5% to 10% range. This is primarily associated with marketing costs for seltzer production, and we believe that the spending will be slightly higher in the first quarter and especially in the first half of the year as we introduce the product to the market. Our goal will be to stimulate consumer engagement during this period.

Thank you so much. And David, congratulations! Two quick ones. Any kind of guidance on what the peso versus the dollar impacted beer margins this quarter, or is that more to come in future quarters? And then also in terms of kind of what you talked about marketing spend in following Andrea's question.

Is this similar; when we look at the first quarter of 2021 to what we saw 18 months ago with the rollout of Premier in terms of kind of pulling forward marketing more spending very front-end loaded, or is it more balanced throughout the year?

Yes, so on FX and again, we get some volatility in FX. I think that’s a nice job of trying to lock in bumps in the peso, which gives us a little tailwind, especially given the volatility between the USD and the peso over the last couple of years. So we think that in the quarter that was about a 60 basis point impact on margins. And then, yeah, I think you can think about it a lot like Premier; so kind of the spread throughout the quarters of the year should look just like the Premier launch.

Yes, good morning, Bill. David, I have a question about Corona Premier and Familiar, specifically focusing on Familiar. The Nielsen data over the last few payouts indicates a sharp decline. Is this a strategic decision, as it appears, given your comments about prioritizing Corona in the refreshment space, possibly at the expense of Familiar to allow Modelo to expand? Regarding Corona Premier, its growth seems to have leveled off and is reaching the size of Corona. Is there an opportunity to refresh that brand and stimulate growth again, or are you content with how Corona Premier is currently performing? Thank you.

Familiar is performing very well, especially within the core Hispanic community it was designed for. We believe Familiar will continue to play a significant role, particularly with Hispanic consumers in specific demographics and regions. As for Premier, it is also doing quite well, and we are excited about its prospects. There has been some impact from cannibalization affecting Light, as expected, but Premier also attracts new consumers who are interested in its low-carb offering. We remain optimistic about Premier's future and plan to keep investing in that brand. Consumers are increasingly spending more on the entire Corona franchise, which highlights their trust in it. It remains the number one most trusted brand among both Hispanic and non-Hispanic consumers aged 21 to 54, allowing us to introduce new products like Refresca, Premier, and Hard Seltzer in the upcoming fiscal year. We are very positive about the overall Corona franchise, and its status as one of the few growth brand franchises over the last decade underscores its long-term viability.

Well, thanks very much. And I guess I'd be remiss, David, if I didn't say that all the congratulations you just received are well deserved. We're certainly going to miss you on this side, but we’ll be happy to have you back at Canopy. Thank you everyone for joining our call today. Before our closing, I'd like to reiterate what a powerful decade this year has been for Constellation. Our results over the past 10 years are a testament to the dynamic strategic efforts made by our strong management team through our current initiatives and priorities. We are positioning this company for sustained long-term success, and therefore we are just as excited and optimistic that the next 10 years will continue the momentum into the fourth quarter, as well as a strong finish to this fiscal year. As a reminder, during our next quarterly call, as I said earlier, we will be providing guidance for the upcoming fiscal year. So thanks again everyone for joining the call. I wish you all a safe, happy, and prosperous New Year and new decade. Thanks everyone.