Constellation Brands Inc (STZ) — Q4 2020 Earnings Call Transcript

Thanks, Josh. Good morning and welcome to Constellation's year-end fiscal '2020 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 GAAP measure 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 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 what we’ve done in 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. I would like to extend my welcome as well. I want to outline the key themes Garth and I will discuss today. First, we had a strong performance in fiscal '20, primarily driven by our beer business, which posted double-digit operating income for the year, and we saw accelerating trends in IRI as Q4 progressed. This momentum has carried into the early part of fiscal '21. We have sufficient brewing capacity to support the growth of our beer business in the medium term, and we are collaborating with local authorities and government officials in Mexico to secure long-term capacity as our business continues to grow and refine itself. Second, our premium brands and successful new product launches contributed to performance in fiscal '20, driving positive depletion trends in Q4 for our wine and spirits business, as our premiumization strategy strengthens. Third, our solid performance and financial discipline produced record cash flow, lowered our debt, and set a strong foundation as we enter fiscal '21. We will delve deeper into these areas, but first, I want to address the current situation regarding the COVID-19 outbreak. Our thoughts are with those impacted by this virus, as well as the first responders and healthcare workers striving to assist those in need. We hope the efforts to control the virus gain momentum quickly. In this context, we maintain a customer-focused approach, showing a genuine concern for people and a commitment to positively impacting our communities, especially now as our industry faces significant challenges. Constellation, along with several of our brands, has pledged over $2.5 million for COVID-19 relief efforts benefiting our business partners and communities during their recovery. We are specifically supporting organizations such as the National Restaurant Association Educational Foundation, the Restaurant Employee Relief Fund, the U.S. Bartenders Guild, and first responders aiding communities across the U.S. I am proud of the Constellation team for their commitment to consumers and for helping sustain the economy while keeping our employees safe. The wellbeing of our employees is our top priority, and we have implemented numerous safety measures to secure their safety both in operations and at retail locations, ensuring we can continue to meet the market's needs. Our production facilities in the U.S., Mexico, Italy, and New Zealand are operational, and our distributors are functioning effectively. Our teams are working diligently to ensure our distributors and retail partners are well-stocked to meet consumer demand, particularly in off-premise venues, which have experienced significant growth as many restaurants and bars have limited dine-in services to help prevent the virus's spread. The off-premise channel accounts for 85% to 90% of depletion volume for both our beer and wine and spirits businesses and far exceeds the rest of the beverage alcohol industry's performance in the U.S. compared to on-premise channels. Recent IRI data shows noteworthy consumer takeaway trends in off-premise channels, with IRI dollar sales growth for our beer business surging to 24% in the four weeks ending in March 2022, compared to 12-week and 52-week trends of 17% and 12%, respectively. Our wine and spirits power brands have also seen substantial growth, rising by 23% in the latest four-week period, surpassing the 12-week and 52-week trends of 7% and 4%. During this time, we are focusing on the channels that consumers are choosing, particularly 3-tier e-commerce, direct-to-consumer sales, and off-premise venues, especially big box grocery, mass, and club channels, where we strive to maintain high stock levels for our key products. We have also adjusted our marketing strategies to ensure our messaging aligns with current realities, emphasizing digital and social media platforms as major events are suspended. In summary, we are well-prepared to address the needs of consumers and our retail and distributor partners. We will manage our business with focus and discipline while being flexible and ready to adapt to shifting consumer behaviors. I remain optimistic about our long-term prospects. Now, let’s revisit the themes I highlighted earlier. Our beer business again performed exceptionally well in fiscal '20 and remains a leader in the high-end segment as well as a cornerstone of growth in the U.S. beer market. Imports are one of the primary growth drivers in the high-end and total beer categories, with Constellation accounting for the entirety of growth in this segment. Key contributors to our beer portfolio's growth are the Modelo and Corona brand families. The Casa Modelo brand family, which includes Modelo Especial, Modelo Negra, and Modelo Chelada, delivered over 20 million cases of growth to the U.S. beer market last year. Modelo Especial achieved depletion growth of over 16%, surpassing last year’s trend of 12%, making it the highest non-seltzer share gaining beer brand in the U.S. Modelo Especial is now the fourth-best-selling beer brand in the U.S. and leads in major markets such as Chicago, Nevada, and California, where its sales exceed those of the two largest premium domestic light brands combined. This year, we plan to invest at unprecedented levels in Modelo to broaden consumer reach and enhance brand appeal. Our strategy includes innovation, investment in Spanish-language media, targeted programming, and new pack sizes like our seven-ounce Modelito, a favored format, particularly in convenience stores. We are also innovating with new offerings like Modelo Chelada, Mango Chile, and testing new spirits Barrel-Aged products that embody the essence of the Modelo brand while aligning with consumer demand for diverse flavor profiles. Our flagship Corona brand remains the number one imported brand family in the U.S., nearing 150 million cases sold in fiscal '20. This fiscal year, we will undertake a comprehensive master brand restage for the Corona family aimed at achieving cohesive marketing communications across all sub-brands and launching new heritage and experiential programs to enrich consumer connections with Corona. Additionally, we are excited to kick off a new cause-marketing initiative focused on beach conservation through our collaboration with Oceanic Global, a leader in ocean protection efforts. Brand equity for Corona Extra is exceptionally robust, and its sales trends have accelerated in the IRI data, showing 4-week and 12-week trends exceeding their 52-week counterparts. We feel optimistic about Corona Extra's future, as there are significant markets poised for its growth. As a young national brand, Corona Premier increased depletions by nearly 19% last year to 10 million cases and became the fifth fastest-growing brand in the U.S. beer category, with distribution expanding in double digits. We plan to build on this brand’s success, particularly among Hispanic consumers who represent roughly 30% of its market. In its debut year, Corona Refresca hit the 3 million case mark and became the fifth highest-selling new beer in IRI. This gives Corona a significant presence in the ABA space, offering tropical flavors to a broader consumer base. To capitalize on Refresca’s success, we will extend this brand into the high ABV FMB space this fall with the introduction of Corona Refresca Mass, featuring 24-ounce cans with 8% ABV in tropical berry and mango citrus flavors. We are eager about this year's launch of Corona Hard Seltzer, which has made a strong entrance and reached close to 50 in ACV during its first month nationally. The hard seltzer market continues to experience rapid growth, and we believe it is a lasting trend. Moreover, our recent investment in Press Seltzer adds a complementary offering with a distinct value proposition as we anticipate price differentiation within the hard seltzer segment over time. Our Pacifico brand saw over 13% growth in depletions last year, an increase from the prior year, making it the seventh-largest beer in California, where it continues to grow at double digits. In fiscal '21, we are focused on strengthening our presence in California while raising brand awareness and trial in key DMAs nationwide, supported by a 40% increase in digital marketing investments, including our first national YouTube campaign, a new sponsorship with the LA Chargers, and collaborations with the Summer and Winter X Games. In addition to amplifying growth for our core beer brands, we are also harnessing innovation and domestic production capabilities to introduce new brands that allow us to enter high-growth sectors. One notable launch is Two Lane, in partnership with country music star Luke Bryan, which delivers a refreshing taste with only 99 calories and 4.2% ABV, available in select Southeast markets this fiscal year. To reinforce our commitment to building beloved brands, our commercial team is collaborating with our three-tier partners to ensure top-notch retail execution. This involves increasing the adoption of shopper-first shelf principles to make it easier for consumers to shop and navigating shelf layouts for growth and profitability while ensuring that high-velocity products are well represented. We have implemented these principles in 6,000 retailers, with those who adopted the program seeing notable growth and profitability improvements. Fiscal '21 offers promising potential for our beer business, supported by a healthy core, master brand innovations, and emerging brands. From an operational standpoint, we are making strategic investments in our beer business, ensuring we have the capacity, quality, control, and flexibility to sustain our projected growth in the medium term. The capacity we are building in Nava, along with the anticipated completion of the Obregon facility at year-end, will allow us to produce over 400 million cases of beer. We have also completed construction of the fifth furnace at our glass plant next to the Nava Brewery, supplying 60% of our winery's glass needs and boosting logistics efficiency. Earlier this week, I met with Mexican President López Obrador and his team in Mexico to discuss our brewery construction in Mexicali. Our conversations were productive and yielded several options for consideration. We will keep working with local authorities and officials in Mexico to find the best solution for our business. We have had a positive, mutually beneficial partnership with Mexico for over 30 years, and we expect this to continue. Many have inquired about our operations. I assure you we are taking every precaution to maintain the safety of our workforce while also boosting product supply throughout our warehouse and distributor networks in the U.S. We currently hold nearly 70 days of product in the system and have redirected resources to boost production of our high-volume SKUs for essential off-premise accounts. Our operations remain smooth, and we are confident in our ability to satisfy U.S. consumer demand while avoiding any short-term disruptions to our retail partners. Turning to our wine and spirits premiumization strategy, we are seeing promising results as our business concluded fiscal '20 on a strong note, with power brand depletion growth and improved operating margins in Q4. This growth accelerated to over 4%, driven by double-digit increases for brands like Kim Crawford, Meiomi, and The Prisoner Brand Family, all surpassing the total U.S. wine market. Our increased operating margins result from optimizing price promotions on our mainstream power brands and gaining market share in the higher-end segment with Meiomi and The Prisoner brands. Innovation plays a key role in our growth as we tap into consumer-driven trends. Our introduction of Unshackled by The Prisoner Wine Company saw fantastic reception, and we are responding to consumer demand for convenience with Kim Crawford in a can. The Crafters Union brand remains the principal growth driver in the can wine segment. We are excited about our recent launches of SVEDKA botanical flavors and Ruffino Organic Prosecco, which reflect consumer inclinations toward flavor, quality, and sustainability. Overall, our fiscal '20 wine and spirits transformation focused on premiumization has gained momentum, with our higher-end power brands driving mix and margin enhancement. Our mainstream power brands are outperforming competitors, while our innovation efforts are resulting in velocity and distribution gains. As we enter fiscal '21, we are determined to invest in bold innovations, engaging marketing campaigns, and immersive brand experiences, focusing on top markets and accounts in priority DMAs. We aim to build momentum by intensifying our premiumization strategy and maximizing growth opportunities for our power brands through impactful campaigns for Woodbridge, Kim Crawford, Meiomi, SVEDKA, and The Prisoner. We will apply greater pricing discipline, consistent with strategies that have effectively strengthened brands in other sectors of our beverage portfolio. We will also leverage the strength of existing brands with solid equity, maintaining a commitment to innovation that adds value in the wine and spirits categories aligned with consumer trends. We have a robust pipeline of innovation planned for the coming year, including line extensions for Ruffino and SVEDKA Vodka in the RTD sector, a new High West pre-mixed cocktail launch in the spirits segment, and an expansion of our highly successful Barrel-Aged wine program. Additionally, we plan to adapt the shopper-first shelf initiative from our beer business for wine and spirits retailers in fiscal '21. We recently adjusted pricing on our Woodbridge brand starting March 1st, and so far, we haven't experienced any negative impacts from this action, largely due to consumers' preference for established brands during uncertain times. We are supporting this price increase with marketing investments like national TV, digital, and social media advertising. We are in the final stages of completing the revised Gallo deal and are collaborating with the FTC regarding brands excluded from the original arrangement. We have expressed our intention to retain the Cook’s and J. Rogét sparkling wine brands, and the FTC is assessing our plans to support these brands moving forward. The FTC is also reviewing potential buyers we have identified for Paul Masson Grande Amber Brandy and our concentrate business. We are working closely with Gallo to fulfill all FTC obligations, and both parties are fully committed to completing this deal. We are making progress, and we anticipate closing the deal around the end of our first quarter. Finally, we are encouraged by the direction David Klein is taking at Canopy Growth. David and his team have recently announced four key priorities: enhancing Canopy's consumer connections, instilling focus and discipline across the organization, defining a clear path toward profitability and positive cash flow, and enhancing the company's credibility with key stakeholders. Canopy remains a leader in total cannabis sales, holding a significant market share in Canada. They have taken steps to streamline their business to align with consumer demand while positioning the company for sustainable future growth. Their recent launch of the cannabis beverage product, Tweed Houndstooth & Soda, has received an overwhelmingly positive response, and they plan to introduce more beverage products shortly, which I can attest are remarkable. These products could be transformative for the market. They have also completed their first shipments of cannabis-infused edible chocolates and Juju Power 510 batteries. We anticipate further revenue generation from these products as vape, edibles, and beverages gain popularity following the legalization of rec 2.0 products in Canada. Canopy is well positioned to thrive long-term despite challenges within the current economic landscape as many competitors struggle without sufficient capital. In summary, we concluded an outstanding fiscal '20. The impressive results we achieved were supported by exceptional execution and a focus on consumer needs while growing our core business and enhancing our portfolio and operations. We are facing a more challenging operating environment with rapidly changing market conditions. Although we are not providing formal guidance, we have shared the targets from our initial fiscal '21 plan, prior to the COVID-19 crisis. I want to emphasize that our strategy remains intact and that we are confident in the growth potential of our core business as I remain optimistic about our long-term opportunities. Historically, the beverage alcohol industry has demonstrated resilience during recessions and downturns, being largely non-cyclical and minimally impacted. Overall, we manage our business with a long-term perspective, making tough but necessary decisions to adapt to consumer trends while continually looking forward to shaping what’s next. We will remain agile in responding to rapidly evolving market dynamics, which has always been part of our identity. Now, I would like to turn the call over to Garth, who will discuss our financial results for fiscal '20 and our financial priorities for '21.

Thank you, Bill, and hello everyone. Fiscal '20 marked another great year for Constellation Brands. We produced strong beer operating performance and cash flow results, while our wine and spirits power brand strategy continued to gain momentum as marketplace performance for these brands outpaced the overall U.S. wine and spirits category for fiscal '20. Specifically, in fiscal '20, we grew comparable basis diluted EPS, excluding Canopy equity earnings by 6%. In addition, we generated record operating cash flow of almost $2.6 billion and record free cash flow of $1.8 billion. We also reduced debt by more than $1.4 billion and came within our target leverage range. And we returned over $600 million of cash to shareholders in dividends and share repurchases. Before going into further detail on fiscal '20 results, I want to take a moment to discuss the rapidly changing market conditions due to the impact of COVID-19. To echo Bill, while the COVID-19 outbreak and situation is unprecedented and creates a lot of uncertainty and volatility, one thing remains clear: we will continue to be agile in the marketplace and actively manage and responsibly navigate our way through this crisis. Constellation is a strong cash flow generator, has ample liquidity, financial flexibility, and significant capacity under our $2 billion revolving credit facility. Additionally, we remain committed to maintaining our investment grade credit rating, which allows for flexible access to capital markets and more favorable rates. Furthermore, as Bill mentioned, we continue to work in collaboration with Gallo to satisfy all FTC obligations and both companies remain fully committed to finalizing this transaction. As such, upon close of the Gallo transaction, we expect to receive approximately $850 million in cash, which we plan to use for debt pay down to further advance the progress we've made to reduce our leverage and maintain it within our targeted range. More on fiscal '21 in a minute, as I want to continue to expand on the fiscal '20 financial performance we delivered before the COVID-19 impacts began to unfold, where I’ll generally focus on comparable basis financial results. Starting with beer. Net sales increased 8%, primarily due to shipment volume growth of 6% and favorable pricing. Depletion volume growth for the year came in at 7.5%, while depletion volume growth for our import portfolio grew 8%. As expected, depletion volume growth was higher than shipment volume growth, primarily due to the FY19 year-end shipment timing benefit that reversed during our fiscal '20, most of which occurred in Q4. Beer gross margin increased 120 basis points to 55.6%, driven by favorability in pricing and FX. Our operational cost and efficiency initiatives helped offset the impact of inflation on costs such as materials, labor, and freight. Marketing as a percent of net sales increased 70 basis points to 10%, primarily driven by increased investment for the Modelo and Corona brand families and in support of our innovation activities, including Corona Hard Seltzer, which came in at the higher end of our previous guide range. As a result of the above-mentioned factors, we achieved record full-year operating margin of 40%, an improvement of 70 basis points. Moving to wine. Net sales declined 6% on shipment volumes down approximately 8%. Full year net sales results outperformed our previous expectations, primarily due to stronger mix benefits from our power brands in Q4, driven by The Prisoner, Unshackled, and Meiomi. Depletion volume declined 5%, while power brand depletions were up 2%. We remain confident that our premiumization strategy is working as power brand trends accelerated as we finished fiscal '20. Operating margins decreased 50 basis points to 26%, as mix benefits and favorable SG&A were more than offset by higher COGS, primarily reflecting increased freight costs and an increase in marketing as a percent of net sales, driven by our premiumization and innovation activities. Corporate expenses came in slightly better than our previous guidance, finishing at $224 million, up approximately 13% versus last fiscal year. The increase was primarily driven by an increase in insurance costs, high incentive compensation, and a ramp-up in IT spend to support our SAP S/4HANA implementations. Those increases were partially offset by a reduction in consulting costs. Comparable basis interest expense for the year increased 11% to $429 million. This primarily reflects additional interest expense related to the funding of our incremental investments in Canopy Growth in November 2018, partially offset by our debt pay down during fiscal '20. Our comparable basis effective tax rate excluding Canopy equity earnings came in at 16.1% versus 18.2% last year. This improvement was driven by lower effective rates from our foreign businesses, partially offset by lower levels of stock-based compensation benefits. While stock-based compensation benefits were lower on a full-year basis, the benefit came in higher than expected during Q4, which drove the tax rate favorability versus our previous guidance. Now, let's review Q4 results. Beer net sales increased 9%, primarily due to shipment volume growth of 7% and favorable pricing. Depletion volume growth for our import portfolio continued to gain strength, growing over 11%. When including an unfavorable impact from Ballast Point, total beer depletions were up 10.8%, including the benefit of an additional selling day in Q4. Beer operating margin decreased 120 basis points to 39.3% as increased marketing and SG&A spend was partially offset by benefits from pricing and COGS. Marketing as a percentage of net sales was 8.7%, or 230 basis points higher than Q4 last year, driven by marketing investments and spend timing. Wine and spirit net sales were up 1% for Q4, while shipment volume was down approximately 1%. As stated earlier, our power brands continued to drive mix benefits. Operating margin increased 120 basis points to 28.9%, primarily due to mix benefits and lower marketing and SG&A expenses. Moving to fiscal '20 free cash flow, which we define as net cash provided by operating activities less CapEx, we generated a record $1.8 billion, compared to $1.4 billion last year. This represents an impressive 34% increase. Free cash flow improvement reflects strong operating cash flow and lower CapEx in the beer segment. CapEx totaled $727 million or 18% below last year spend and in line with our most recent guidance. This included approximately $520 million of CapEx for our Mexico beer operation expansion. Furthermore, through fiscal '20, we've cumulatively spent approximately $700 million in capital related to our Mexicali expansion project. Moving to our full-year fiscal '21 P&L and cash flow targets. Given the unprecedented COVID-19 events that began to have roughly and dramatically impact consumers and the marketplace, almost concurrently with the start of our fiscal year, and given the related uncertainty, volatility, and fast-moving developments that have evolved over the month of March, we do not believe it is prudent or appropriate to provide formal financial guidance for fiscal '21 at this time. With that being said, we thought it would be helpful to highlight some of our key financial targets, assuming a normalized environment for fiscal '21 prior to COVID-19, as reference as you think through your modeling and scenario work given the changing marketplace dynamics. For pre-COVID-19 fiscal '21, the beer business targeted net sales growth of 7% to 8%, which includes 1% to 2% of pricing within our Mexican portfolio. Including the impact of the Ballast Point divestiture, organic net sales growth is 8% to 10%. Operating margin in the 39.5% to 40% range as investments for the Corona Hard Seltzer launch as well as inflation headwinds, primarily related to glass, raw materials, transportation, and labor costs in Mexico are expected to be greatest in the benefits from product pricing and productivity initiatives. Moving to wine and spirits. For pre-COVID-19 fiscal '21, the wine and spirits business targeted net sales and operating income decline of approximately 30% to 35%. This assumes the revised wine and spirits divestiture transaction with Gallo and the separate divestitures of Paul Masson Grande Amber Brandy and the concentrate business closed around the end of Q1 fiscal '21, while the separate but related agreement to divest the Nobilo Wine Brand to Gallo closes by the end of Q2 fiscal '21. Lastly, the plan to retain the Cook’s and J. Rogét sparkling wine brands is also included in our pre-COVID-19 target for fiscal '21. Our pre-COVID-19 expectation for Q1 wine and spirits results assumes a decline of 25% to 30% in sales and operating income due to the following factors: unfavorable Q1 FY21 comparison due to a very strong quarter last year for the brands to be divested, sales of the Black Velvet brands are not included in this year's Q1 result, as a result of the divestiture late last year, and distributors have ample supply of brands targeted for the Gallo divestiture as they assumed fiscal '20 year-end close on the transaction. Our retained portfolio of power brands in the wine and spirits business, including Cook’s and J. Rogét target net sales growth of 2% to 4% on a pre-COVID-19 basis for fiscal '21. Other pre-COVID-19 target assumptions include interest expense in the range of $385 million to $395 million, comparable tax rates excluding Canopy equity earnings of approximately 18%, weighted average diluted shares outstanding targeted at approximately 195 million, and operating cash flow in the range of $2.3 billion to $2.5 billion. This is a good spot to discuss a few items around capital management and deployment. As you would expect, we’re reviewing in detail all expenses in capital expenditure plans for refinement and flexibility to make sure we prioritize and optimize the spend given the current business conditions and economic environment. While wine and spirits EBIT is moving down in fiscal '21 due to the planned divestitures, we are maintaining our current quarterly dividend rate. In addition, we remain focused on our goal of returning significant capital to shareholders balanced between dividend payments and share repurchases. However, in the short-term, given the uncertainty around the COVID-19 impact on our business, we will be maximizing free cash flow and utilizing that free cash flow to reduce debt and leverage. We believe longer term, we retained a full flexibility to fulfill our $4.5 billion commitment over time. In closing, I want to reiterate that Constellation is a strong cash flow generator, has ample liquidity and financial flexibility. We remain focused on fruitfully navigating through the challenging environment presented by COVID-19, and we'll look to provide updates including full year guidance as more factors become known. With that, Bill and I are happy to take your questions.

So, I wanted to get some clarification on the Mexican government's decision, which determined that alcohol is non-essential. And I just wanted to make sure I understand what you're sharing with us today, that if I heard you correctly, you are not suspending your production. But, what I'm hearing is a lot of the other brewers are suspending. So, I just wanted to make sure I heard you correctly. And then, curious to hear how you see this situation evolving and maybe what your contingency plans are. You did share with us some of the finished inventory that you have on hand to meet the U.S. demand. But I just kind of wanted to understand where you're at with that specific situation. Thanks.

Sure. As we stand today, we are currently operating. We also have, as I noted in my script, roughly 70 days' worth of product through the system, and that does not include what is available at retail. That is purely what we have or what our distributors have. So, we are fairly confident that we will see no disruption at retail from our operations and we will be able to meet consumer demand as it continues.

Bill, I think you mentioned that you're working through a series of options on what's going to happen with Mexicali. Obviously, we don't know which of those options you'll take. But, could you at least give some insight into what your options are from this stage?

We're not prepared to go through what the exact options are. What I would say is this. We had a very productive meeting with the President and his team. I think there is mutual agreement that we have been a strong player in Mexico for 30 plus years, and that that strong relationship is going to continue, and that we will have solutions for the long-term to make sure that we are able to meet the strong consumer demand that we continue to have for our brands. So, while I'm not prepared to talk about the specificity of that, we are very comfortable that our discussions will yield strong medium and long-term benefits for our business.

Thank you. Good morning. I was just hoping to understand the on-premise off-premise mix, Bill, very helpful in terms of contextualizing the revenue mix. But, Garth, I was wondering, whether you could offer any insight into the margin differential, given the presence of kegs in the on-premise. And then, as a follow-up to that, is it possible for you guys to move cans and bottles that are no longer being sold in the on-premise into the off-premise with the distributors? Thanks.

Thanks for the question, Vivien. In response to your first question, there is no margin difference for us between on-premise and off-premise since everything goes through distributors. Therefore, the margin remains the same for us. Regarding your follow-up question, can we move product from the on-premise to the off-premise?

Let me touch on that Vivien. In many instances, distributors will pick up and redistribute supply where necessary or where a particular channel, like on-premise has effectively closed in many markets. So, yes, that in fact often does occur. Obviously, there's some format differences in terms of what people use in particular channels. But yes, it does occur. Just to reiterate a piece of your question as well. We are multiple points across both beer, wine, and spirits, less reliant on on-premise than the industry overall. So our business has been skewed historically and still is to the off-premise channel, which in an instance like this is very valuable. But, that's not to say, as you've heard, we haven't recognized the many challenges that our friends in the on-premise are having at the moment. And we, as a company and many of us as individuals have made significant contributions to help those who are in need at the moment and who have run into very challenging times for those who are in the on-premise.

Good morning, everyone. Garth, I have two quick modeling questions for you. First, can you provide insights on the on-premise and off-premise split for spirits and wine for the year? In the fiscal '21 plan, which was unaffected by COVID, what was the growth expectation for those two channels? What did you anticipate for growth at home versus in the on-premise? Secondly, could you give us an overview of fixed and variable costs within both segments? We would like to understand sensitivity to get a rough idea of fixed and variable costs. Thank you.

Bryan, could you please repeat the first part of that question regarding the margins? I didn't quite hear it clearly.

So, the second part is just trying to get an understanding of what is fixed versus variable costs in both the beer and wine and spirits segments?

Yes. So, for both businesses, the cost structure is primarily variable, roughly two-thirds variable and one-third fixed, with some cases being slightly higher. In the beer segment, variable costs mainly include freight and packaging. For wine, it's also freight costs and packaging. As for your question about the growth rates, we were expecting on-premise growth to remain flat, while off-premise growth is projected to be in the mid-single digits.

Thanks. Good morning, everyone. Bill, I have a question about retail. We are hearing that product resets are being delayed, and I wanted to understand how this is affecting your business, especially with new products entering the market. Corona Seltzer has launched but hasn't reached full distribution yet. Could you share some insights on how this is playing out? Are you gaining more shelf space for your top SKUs in place of some new products that were supposed to hit the market? Any thoughts on this would be appreciated.

We're seeing a lot of heavy pantry loading, especially in March, as people purchased familiar brands. Many of our offerings in beer, wine, and spirits benefited from this trend. Additionally, Seltzer has emerged as a popular category, with substantial availability both with us and our competitors. Our team and distributors have done an excellent job getting the product to market, achieving nearly 50% ACV in just the first month, which is a record pace. Moving forward, critical SKUs will remain highly significant, and we've adapted our production to ensure these core SKUs are available throughout the supply chain, especially until consumers return to spending more time in stores. We've also seen a sharp increase in online orders, including click-and-collect services. Last week, we had our highest direct-to-consumer sales in wine to date, as consumers explored alternative purchasing methods. In summary, we expect critical SKUs to be in stronger distribution positions, and we're pleased with our distributors' ability to introduce new products. Most of our launches this year are master brand extensions, which aligns with consumer preferences during challenging economic times as they seek out core brands they trust.

So, I wanted to ask more of a longer term question. In past cycles, we've seen some trade down occur in the beer category in a recessionary environment, including back in 2008, 2009. Could you just spend some time discussing how your product portfolio might be more or less at risk from a macro slowdown versus past cycles on a theoretical basis, sort of ex the COVID situation, due to much higher share level today, your brand mix has changed over time. So, just curious for your perspective on the degree of trade down risk or macro sensitivity may be versus what you see in the past cycles?

Yes. I joked with Garth earlier today that if you've been around long enough, you've seen a few of these economic cycles, and I have. What we expect is that brands will become even more significant during times like this, as many individuals seek simple pleasures in life. The more people are sheltering at home, the more they search for those small joys, and our product category caters to that. Typically, we also observe stronger brand loyalty during such periods. For instance, our Woodbridge wine brand has experienced notable growth in March; it's a well-known brand that consumers trust for its quality relative to price, and we've witnessed a substantial increase in its sales. The same trend applies to our brands like Kim Crawford, Meiomi, and The Prisoner, which consumers favor and respect. In beer, Modelo has become the fourth largest brand in the U.S. beer market, commanding a high level of trust among consumers, which is reflected in current trends. Both Modelo and Corona are recognized as two of the most trusted brands, and therefore we are confident that we will benefit disproportionately as consumers gravitate towards more reliable brands. We observed this during the 2008 recession and in previous downturns as well; established brands tend to prevail. We believe our brands across beer, wine, and spirits are in an excellent position to capitalize on this trend, with consumers likely to show less willingness to experiment during economic downturns, favoring core brands like ours instead.

My question is about the production in Mexico. If we reach a point where production needs to be reduced, even without technical difficulties, how should we view the impact on margins? If the plant is shut down for a month, I would expect margins to be pressured, but does that balance out when production resumes? I'm curious about the short-term effects and how we should consider the overall impact on profitability. Thank you.

Well, again, I'm going to repeat myself, but I hope you'll bear with me on it. We continue to operate in Mexico. And as long as that is a consistent statement and we expect that it will be, we wouldn't expect that there would be any significant issues around our margin structure. Obviously, a lot of things factor into that, not the least of which is the peso and various other things that occur during times like this. But, I think the best way to think about it is we have 70 plus days in the pipeline for our beer business and we expect to have no disruption in our ability to produce product and deliver it to retail.

Thanks. Good morning, everyone.

Good morning.

Bill, I wanted to pick up on the on-premise, off-premise dynamic. I know this is a difficult question to answer and I appreciate that you don't want to give guidance. But maybe even qualitatively, I think what a lot of investors are kind of wrestling with is how much of the unprecedented weakness in the on-premise channel is potentially going to be captured in the off-premise. And we've seen big pantry loading at this point, but really harder to make conclusions on what's going on in terms of how quickly consumers are going to destock their pantries. So, any comments you have potentially on how much of the on-premise weakness will potentially be offset by the off-premise? Thank you.

Sure. This situation is somewhat unusual, so we need to be cautious with our answers. In previous recessions, we saw declines in the on-premise channel, but we didn't experience shutdowns like we have now. Channel shifts during recessions are not uncommon, and we're witnessing that primarily because many on-premise locations are closed. For us, given that we are already heavily weighted towards off-premise sales, the impact of this shift is less significant compared to those who rely more on on-premise sales. For example, in March, there was a notable increase in pantry stocking, which more than compensated for any losses in the on-premise sector. It was a strong month overall. However, we are cautious about projecting those results into the future since consumer behavior is uncertain. As I mentioned earlier, during tough times, people tend to seek out small pleasures in their lives. With many of us staying at home now, our products represent one of those small pleasures, which should benefit our business moving forward.

As long as around the on and off-premise question, let me just go back to clarify Bryan's question around the growth rates related to on versus off-premise. Bryan, I gave you a bit of incomplete answer. So, what I gave you is zero on-premise growth and mid-single digits. That was really for wine and spirits, as you think about their total sales being in that 2 to 4 range. On beer, total sales were targeting to be 8% to 10% on an organic basis. So, the on-premise would be in the sort of low to mid-single digits and off-premise would be the remainder.

Could you discuss how you might be adjusting your marketing expenditures and the flexibility you have with your contracts? Given your significant involvement with ESPN and various sports events, including UFC, many of these events may not take place. Is there a way you can break down what expenses are fixed for the current calendar year and provide insight into where you might be able to save or redirect funds?

This is a somewhat fluid situation. Some planned initiatives have been postponed. While we may not utilize our budget in the first quarter, we could allocate it when the events take place, assuming they do. Jim Sabia and his team have made significant shifts towards digital and social media efforts in both wine and spirits and beer, which aligns well with current consumer trends. We have considerable flexibility in reallocating our resources. For instance, with the cancellation of events like the NCAAs, we have to decide whether to adjust our spending into other formats or maintain our original plans. Those decisions are still in progress, and it’s challenging to provide a definitive answer at this moment. However, our marketing team has demonstrated agility, swiftly adapting to digital and social environments, especially in the absence of live sports events.

As a follow-up on the comments about the production in Mexico in your discussions, Bill, with the Mexican government. In order to stay open, could you prove that your production facilities are safe enough to be made operational through the end of April? And then as a follow-up to the margin commentary, how much of your Mexican peso dominated costs are hedged at this point in light of the devaluation of the Mexican pesos?

So, Garth, I'll take the first half of that. Let me just tell you some of the things we've done. And we've done this in the wine and spirits as well as beer. And I think it's important. As I said, our employees are our number one priority. We are testing for temperature as people enter our facilities. We are keeping social distancing in our facilities to make sure that people are safe. We have changed how we run shifts in our plants to make sure there are not overlaps of shifts, in case there are any issues that occur with people's health. So, we are doing everything humanly possible to make sure that we continue to operate in a safe and effective manner within all of our operating facilities. The same is true of that in New Zealand and Italy as well. So, first and foremost, we are taking great care to make sure we are operating correctly. I think that will likely be respected by the government of Mexico. They have obvious concerns for their entire economy, as our country has great concerns for our economy, to make sure that people are being protected. And I think the kind of steps that we're taking to make sure we're protecting our people, we believe is best in class. We're keeping track of everything possible to ensure the safety of our employees, and that effort will continue. Garth, do you want to touch on the second piece?

Sure, regarding the hedging aspect, for the current fiscal year, we are hedged on both commodities and currency by over 80%. We are taking this time to implement additional hedges for the next couple of years as we observe movements in these areas. Therefore, we may experience further advantages in the upcoming fiscal years.

Good morning, and thank you for the opportunity to ask my questions. I have two follow-up questions. First, you mentioned a focus on core brands moving forward. I would like to know if Corona Seltzer is considered a core brand and if it will be a focus for the next two months. My second question is about manufacturing in Mexico. This morning, one of your competitors announced that on Sunday, April 5th, Grupo Modelo will halt beer production and distribution. Since you have 70 days of inventory, it makes sense to maintain good relations with the Mexican government regarding the Mexicali brewery situation. I am curious why you have decided to go against the government decision on this matter. Thank you.

Let's address your first question about seltzer. Our Corona brand family, which approached 150 million cases in fiscal 2020, is one of our key brands. Seltzer is also among the fastest growing segments in the alcohol beverage market. The combination of strong Corona branding and the popular seltzer category presents a great opportunity. We anticipate that it will play a significant role in our success for fiscal 2021. I want to clarify that we fully respect the guidelines set forth by the government of Mexico. Our company has a reputation for adhering to the laws of every country we operate in, and we intend to uphold that. I cannot comment on the actions of our competitors, and I suggest you reach out to them for their stance. For now, we are continuing to operate within the applicable restrictions in the countries we are in.

Thank you, everyone. So, on the 70 days of inventory in the system, how much of that is in Mexico? I guess, that'll show up in a 10-K, but how much of it is in Mexico and how much of that is actually allowed to leave Mexico and into the United States? Is that allowed to come over the border right now?

So, to answer your question, the vast majority of that is in the United States between either inventory at our distributors or in our DCs. So, the vast majority of it I would say, in excess of 80% of that is already in the United States.

I just want to go back to Mexicali. And I understand you can't talk about where it goes from here. But can you maybe give us an update on how much money has been put into it? And then, any kind of color on how you've got this far down the path and we got to this stage?

Yes. I'll take the first part of that. To date, we have spent approximately $700 million in Mexicali.

So, what I would say is that there are a lot of decisions that have been made as time has gone on. As you know, there have been changes in government during the time that this facility has been started. What I would say is we've been operating in Mexico for 30 years. It has been a tremendous partnership with the people of Mexico and with the government of Mexico and with the local States within Mexico. We remain extremely confident in our long-term ability to meet the consumer needs in the United States for the critical brands of Modelo, Corona, Pacifico, and other related brands. So, I don't feel that it does anyone any good to micromanage the approach to the situation. What I would say is we're going to have a very solid solution for our long-term prospects and we certainly appreciate the government's engagement with us on that topic.

Hi. Thanks for the question. I got a wine sale question. Is it safe to say that the escalating COVID-related work stoppages and disruptions could have an impact on the, I guess, achievability of the new timing, or is that already baked into your new outlook?

So, thank you for the question. We think that the COVID situation is baked into the current timeline. That being said, I don't know how much more disruption COVID-19 could have in terms of the government's ability to work. But I can tell you right now that the FTC continues to be actively engaged in our conversations and in the review of this process. And we’ve factored all of that into the timeline that we provided.

I'd just like to thank everyone for joining our call today, particularly in these challenging times. I believe we've done an excellent job of building vital momentum in fiscal '20 as we head into what admittedly will be a volatile start to our new fiscal year. Through our strategic initiatives and priorities, we are positioning Constellation for sustained long-term success and will continue to quickly adapt to the rapidly changing market dynamics as we navigate through fiscal '21. As the environment evolves, and more factors become known over the next few months, we hope to be able to provide much more clarity on the prospects for our business for the year in which we are in. I'd like to thank you all again for joining the call. And I hope you and your loved ones remain healthy and safe during this unprecedented time. Thank you.