Q4 2020 Earnings Call
[music].
Senior Vice President Investor Relations. Please go ahead.
Thanks, Josh Good morning, and welcome to constellations yearend fiscal 2020 conference call and here. This morning that they'll Newlands, our CEO and guard tickets and our CFO as a reminder, reconciliations between the most directly comparable GAAP measure in any non-GAAP financial measures discussed on this call are included in our news really.
These or otherwise available on the company's website at Www Dot tea brand Statcom.
Please refer to the news release and constellation FCC filing for Big factors, which may impact forward looking statements, we make on the top.
Before turning the call over to Bill similar to what we've done in prior quarters I would like to ask that we limit every one to one question per person, which will help us to end our contact.
Thanks in advance and ask yourself.
You, probably let me add my welcome as well, let me quickly frame up the key themes, you're going to hear from Garth and me today.
First we delivered strong performance in fiscal 20 led by our beer business, which generated double digit operating income for the year with accelerating I write trends as Q4 progressed that momentum has continued in the early stages of fiscal 2001.
We have ample brewing capacity to continue fueling the growth of our beer business in the medium term and we're working with local authorities and government officials in Mexico to ensure we have ample long term capacity as our business continues to grow and evolve.
Second.
Our high end power brands and successful new product launches fuel performance in fiscal 20, the drove accelerating depletion trends in Q4 for our wine and spirits business as our Premiumization strategy continues to take hold.
And third our strong performance and financial discipline generated record cash flow reduced our outstanding debt and build solid momentum heading into fiscal 2001.
We will talk in more detail about each of these areas, but before we go any further I'd like to take a minute to address current circumstances related to the cobot 19 outbreak.
First and foremost our thoughts and prayers go out to those affected by this terrible virus and to the first responders and healthcare professionals working to help those in need.
We sincerely hope the increased efforts to more fully contain this virus gained strong traction soon.
With this in mind, we operate with a customer focused mindset.
Genuine concern for people and their desire to make a positive difference in our communities that is core to our DNA, even more important today as our industry and communities face substantial hardships.
Such constellation along with a number of our brands has committed more than 2.5 billion toward coven 19 relief efforts that will directly benefit our business partners and communities now and through their recovery.
Specifically, we are supporting the National Restaurant Association Educational Foundation restaurant employee relief fund.
The us bartenders Gill and first responders, who continue to support those need in communities across the us.
I'm also extremely proud of the constellation team for their continued efforts to meet the needs of consumers and to help keep the economy going well also keeping our people safe.
The health and wellbeing of our employees is our number one priority and we've taken a number of preventative measures and provided a number of protections to keep our employees save in our operations and out at retail and to ensure our continued ability to meet the needs of the market.
Our production facilities in the US, Mexico, Italy, and New Zealand, our operational and our distributors are up and running.
Our teams are also working hard to ensure our distributor in retail partners have ample supply of our products to meet consumer demand, particularly in the off premise, which has seen accelerated growth as many restaurants and bars have suspended dine in services to help mitigate spread of the virus.
The on premise channel represents 85% to 90% of depletion volume for both our beer and our wine and spirits businesses and over indexes to the rest of the beverage alcohol industry in the us versus the on premise channel.
These trends are reflected in recent IRI data, ending 322, which shows accelerating consumer takeaway trends in off premise channels.
Specifically, we've seen IRI dollar sales growth for our beer business increased to 24% in the four week period, ending 322 versus 12 week and 52 week trends of 17 and 12, respectively.
For our wine and spirits power brands, we're also seeing accelerating growth of 23% and the latest four week period versus 12, and 52 week trends of seven and for.
During this time, we are focused on the channels. The consumer is choosing namely three tier ecommerce direct to consumer and the off premise, especially big box grocery mass and club channels, where we are working diligently to ensure high end stock positions for our key skews.
We've also adjusted our marketing approach to ensure our consumer messaging is in tune with current realities and by shifting our focus to digital and social media platforms as sporting events and other major gout gatherings are suspended.
Bottom line, we are well positioned to continue meeting the needs of consumers as well as our retailer and distributor partners.
We will continue to manage our business with focus and discipline, while remaining flexible and are willing to adapt as needed to shifting consumer behaviors and I remain extremely optimistic about the long term prospects for our business.
Now, let's get back to those themes that I highlighted at the top of the call.
As mentioned our beer business once again delivered exceptional results in fiscal 20 and continues to be the leader in the high end and a cornerstone of growth in the us beer industry.
Imports continue to be one of the primary growth drivers in the high end and the total beer category with constellation driving 100% of the growth in this segment.
The primary drivers of our beer portfolio growth continued to be our modelo and Corona brand families.
The trio of brands that comprise the custom Adela brand family includes Modelo Especial GL Mugello Negra Modelo Chelada and is one of the biggest forces in beer delivering more than 20 million cases of growth to the us beer category last year.
The dollar speciality led the way as the top non seltzer share gaining beer brand in the us beer industry, achieving depletion growth of more than 16% and acceleration over the previous years trend of 12%.
Modelo Especial is now the number for beer brand overall in the us beer market and the best selling beer in major markets like Chicago as well as the states of Nevada, and California, where sales of the brand are greater than the two biggest premium domestic light brands combined.
Right.
We plan to invest at record levels. This year for modelo to reach more consumers and to increase the brands appeal among total market consumers.
We'll accomplish this through innovation investment in Spanish language media and targeted programming.
And we'll extend the brand through new pack sizes, such as our seven ounces moat Alito a popular format, particularly in C stores.
Innovation with new product offerings, like Modelo, Chelada, mango, Chile, and we're testing new spirits barrel, aged offerings on a smaller scale that remain true to the essence of the modelo brand and align with consumers desire for more flavor.
Im talking about Modelo, Reserva, which is a golden session of bolt refreshing lager with a 5.5% HBV that will be available and test markets into keala and Bourbon barrel aged options.
Madella strength with Hispanic consumers continues to fuel the growth of this brand and with more than 1 million Hispanics re reaching legal drinking age each year combined with our continued efforts to broaden our appeal with general market consumers. We believe we're only scratching the surface aware this brand can go.
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Our flagship Corona brand remains the number one imported brand family in the US selling just shy of 150 million cases in fiscal 20.
In fiscal 2001 will embark on a comprehensive master brand restaged for the concerns for the Corona brand family that drives more cohesive look and greater consistency and marketing communications across sub brands as well as new heritage and experience will programs designed to strengthen.
The bonds consumers already have with Corona.
We're also excited to launch a new caused marketing program focused on protecting our beaches through our partnership with oceanic global a leader in Ocean conservation.
We believe this program will further deepen the emotional connection Corona consumers have was the brand.
Corona extra is the seventh largest brand in the US beer category and remains the number one brand in New York City, Miami, DC and as a top three brand in eight other major us markets.
Brand equity for Corona extra remains extremely strong and sales have accelerated in IR right with four week and 12 week trends outpacing their corresponding 52 week trends.
We remain bullish on Corona extra his future potential knowing that there are several large deemphasize that based on high per capita income are right for corona extra growth.
And only its second year as a national brand Corona Premier grew depletions nearly 19% in fiscal 22 10 million cases and became the number five growth brand in the us beer category with distribution continuing to grow double digits in.
In just two years Corona Premier has achieved in HCV of almost 75, which is similar to some brands that have been around for decades.
This brand is perfectly positioned to capitalize on the macro trends of betterment and premiumization as consumers trade up from domestic lights, and we have plans in place to continue building traction for this brand, including winning with Hispanic consumers, who compromise about 30% of its consumer base.
In fiscal 20 Corona over Fresca became a 3 million case brand in its first year with the variety pack, becoming a number five top selling new beer.
In IR right.
This now gives corona and Ownable play in the space delivering tropical flavors to a range of consumers.
To capitalize on the success of or Fresca, we will be extending the brand into the high HBV FNB space. This fall with the launch of Corona for Fresca minus 24 ounce cans with 8% HBV and tropical Barry and mango citrus flavors.
We're very excited about this year's Corona hard Seltzer launch, which is off to a strong start and has already achieved in HCV approaching 50 in its first month of national launch.
As we said before the hard Seltzer category continues to grow at a break net clip and we believe it's here to stay.
As an aside our recent venture investment and press Seltzer provides a wonderful complement with a unique value proposition and price point as we believe the hard Seltzer segment will price stratify overtime.
Our Pacifica brand fruit depletions more than 13% in fiscal 2000, which represents an acceleration over the previous year Pacific, though is the number seven beer overall in California, where it continues to grow double digits.
In fiscal 2001, our plans will focus on continuing to win in California, while further expanding awareness and trial in key DM ace across the country.
This includes a 40% increase in digital marketing investment, including our first national you to buy a new sponsorship with the OE Chargers and continued partnerships with the summer and winner X games.
Which will help us to do just that.
In addition to our continued focus on accelerating growth for our core beer franchises were also leveraging innovation and domestic production capabilities to launch new to world brands that allow us to compete in growing sectors of the high end.
Our recent launch of two lane in partnership with country Music Star Luke Bryan is a great example.
This beer plays in the domestic high end sessional space and delivers on the refreshing taste consumers want with only 99 calories three grams of carbs and 4.2% Abbvie in fiscal 2001, Tulane will be available in select markets in the southeast.
In support of our efforts to build brands consumers love our commercial team continues to work with our three tier partners to ensure we deliver world class execution and retail.
This includes increasing adoption of shopper first shelf principles by making it easier for consumers to shop by organizing shelf flow in ways that help maximize growth and profitability and by meaning consumers, where they are going by allocating space speech on based on future growth opportunities.
And ensuring highly incremental packages with high velocity are represented with adequate holding power.
We currently have 6000 retailers that have implemented shopper onest shelf principles and those who have embraced this program have seen solid increases in overall growth and profitability for their category.
As you can see we believe fiscal 21 holds great promise for our beer business with a healthy core master brand innovations and emerging brands poised to grow.
From an operational perspective, we continue to make strategic investments in our beer business to ensure we have the capacity quality control and flexibility to support the continued growth of our business in the medium term based on our forecasts.
The capacity, we've built and Nava plus over gone when completed at the end of this year will enable us to provide more than 400 million cases of beer, which has ample supply for several years to come.
We also completed construction of furnace number five at our glass plant adjacent to our Nava brewery, which now supply 60% of the glass needs for that brewery, resulting in significant logistic savings.
Earlier this week I met with Mexican President Lopez over door and his team in Mexico to discuss our brewery construction project in Mexicali, our discussions were constructive and surface several options for consideration.
We will continue to work with local authorities and government officials in Mexico to reach an optimal solution for our business.
We've had a positive mutually beneficial relationship with Mexico for more than 30 years and we fully expect this to continue.
Some of you have asked about our operations, let me just steady, but we are being exceedingly careful to protect our people and to maintain ultimate safety.
With that said over the past several weeks, we've taken steps to build ample product supply across our warehouse and distributor network in the US we have close to 70 days in the system.
And we've shifted resources to accelerate production up high volume skews for key off premise accounts.
Our facilities are currently operating and we remain confident in our ability to continue meeting the needs of us consumers and did not expect any near term service disruption to retailers.
Shifting now our wine and spirits Premiumization strategy continues to show promise as our business closed out fiscal 20 in a position of strength.
Hosting accelerating power brand depletion growth and operating margin improvement in the fourth quarter.
Fourth quarter power brands family depletion growth accelerated to more than 4% led by double digit growth for Kim Crawford May Ami and the prisoner brand family as this collection of brands continued to outpace the total us wine market.
Operating margin expansion was driven by our focus on more efficient price promotions with our mainstream power brands as well as market share gains and the higher end of our portfolio would may Ami and the prisoner family contributing strong mixed trends.
Innovation continues to fuel growth as we capitalized on innovation trends in consumer driven growth segments.
Our introduction last quarter of unshackled by the prisoner wine company has been extremely well received.
We further capitalized on barrel, aged wine trends with the introduction of new offerings from both Woodbridge and Cooper in thief.
Since launching our first barrel, aged blind series, a little more than two years ago, we have sold well over 2 million cases and that number continues to climb.
In response to the consumer led trend around convenience, we launched Kim Crawford wine and it can and our Crafters Union brand remains the number one growth driver in the can wind segment.
We're also excited about the recent launches of spec of botanical flavors, and riffing organic prosecco, which align with consumer trends for flavor betterment and sustainability.
Bottom line for fiscal 20, our wine spirits transformation focused on Premiumization continues to gain traction.
Our higher end power brands are driving mix and margin expansion.
Mainstream power brands are outgrowing the competition and our innovation initiatives are fueling growth through velocity and distribution gains.
Heading into fiscal 2001, we're committed to investments and bold innovations compelling marketing campaigns and immersive brand experiences with a specific focus on top markets and accounts and priority Dms.
We'll continue building momentum by further leaning into our Premiumization strategy and maximizing growth opportunities for a power brands through compelling marketing campaigns for Woodbridge, Kim Crawford may all mean spec and the prisoner.
We're instituting greater pricing discipline consistent with strategies that have proven very successful and building strong brands in other parts of our beverage portfolio.
And we'll continue to leverage the power of existing brands with strong equity.
We remain committed to mix and margin accretive innovation in growing sectors of the lions spirits categories that align with consumer trends.
We have a strong innovation pipeline plan for the coming year, including upcoming line extensions for female and SPEDRA vodka in the RTD space.
The launch of a new high West Premixed cocktail and the spirit space and the expansion of our highly successful barrel aged blind program.
You can also expect us to introduce new to world brands in the wine category.
In addition, we plan to leverage the success of shopper Onest shelf initiative developed by our beer business by adapting and implementing this program for wine and spirits retailers in fiscal 2001.
We recently took pricing on our Woodbridge brand beginning March Onest and to date, we have seen no negative impact from this action due to the consumer need to stick with tried and true brands in this time of uncertainty.
We are actively supporting this price increase with marketing investments, including National TV, as well as digital and social social advertising.
We are in the final phase of completing the revised Gallo deal and we continue to work with the FTC primarily on the brands that have been excluded from the original deal.
We have communicated our intent to retain the Cogs from Jay Roget brands and the FCC is currently reviewing our business plans to support so to support these brands in the future.
In addition, the FTC is betting that potential buyers, we have identified for parmesan Grand Denver, Brandy and our concentrate business.
We continue to work in collaboration with Gal to satisfy all FTC obligations and both companies are fully committed to getting this deal done with each step we're marching closer to the finish line and we expect to close the deal around the end of our first quarter.
Finally, we're very encouraged by the steps David Klein is taking in his new role as CEO of canopy growth.
David the cannot be team recently announced they are focused on four key areas and proven canopies connection with consumers instilling greater focus and discipline across the organization defining a visible past path for profitability and positive cash flow and building the company's credibility.
With key stakeholders.
Cannot be continues to be the global leader in total Canada sales with a leading market share in Canada.
The company recently took steps to right size its business to better align with consumer demand and position the company for long term success.
Cannot be just launched its first cannabis beverage product Tweed houndstooth and soda, which has received an overwhelmingly positive consumer response and they plan to rollout additional beverage products over the last few months and I can tell you. They are awfully. Good these are good.
Game changers.
They also have completed their first shipments of cannabis infused edible chocolates and juju power 510 batteries in December of 2019.
We expect further revenue growth as products like vape animals and beverages gained traction in the marketplace now that wreck 2.0 products have been legalized in Canada.
Cannot be remains best positioned to win long term and two faced challenges associated with this current economic environment as many competitors without access to capital show signs of trouble.
In closing.
We reached the conclusion of an excellent year in fiscal 2000.
Our path to these impressive results was paved with great execution and consumer obsession in growing our core business supported by investments to enhance our portfolio and our operations.
We're now facing and increasingly challenging operating environment and rapidly changing market conditions as you can see from our press release, we're not providing formal guidance. However, we provided the targets that are included in our original fiscal 21 plan prior to the cover 19 crisis.
My goal in doing this is to reiterate that our strategy remains unchanged and to provide the confidence we have in the growth prospects for our core business as I continue to feel very optimistic about our long term opportunities.
When we look at the beverage alcohol category, we are generally a recession resistant industry.
In previous recessions and downturns, the TV industry has generally been non cyclical and only minimally affected.
Bottom line, we managed our business for the long term, making tough, but necessary decisions to adapt to consumer trends, while always looking forward to de lever what's next.
We will continue to quickly adapt to rapidly evolving market dynamics, which is a continuation of who we've always been.
Now with that I'd like to turn the call over to Garner who will review our financial results for fiscal 20, and our financial focus for 21 God.
Thank you Bill and Hello, everyone.
Fiscal 2000, Mark another great year for constellation brands, we produced strong beer operating performance and cash flow results, while our wine and spirits power brand strategy continues to gain momentum as marketplace performance for these brands outpaced the overall us wine and spirits category for fiscal 2000.
Specifically in fiscal 2000, we grew comparable basis diluted EPS, excluding canopy equity earnings by 6% in.
In addition, we generated record operating cash flow 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 and dividends and share repurchases.
Before going into further detail on fiscal 2000 results I want to take a moment to discuss the rapidly changing market conditions due to the impact of Covance 19.
To Echo Bill, while the cobot 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 as 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 at 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 Gal transaction, we expect expect to receive approximately $850 million in cash, which we plan to use for debt Paydown to further advance and progress to further advance the progress we've made to reduce our leverage and maintain it within our targeted range.
More of fiscal 21 in a minute as I want to continue to expand on the fiscal 2000 <unk> financial performance, we delivered before the Covance 19 impacts again to unfold, where all generally focused 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 at 7.5% will depletion volume growth for our import portfolio grew 8%.
As expected depletion five growth was higher than shipment volume growth, primarily due to the f. wide 19 year end shipment timing benefit that reversed during our fiscal 20, most of which occurred in Q4.
Beer gross margin increased a 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 cost 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 krona brand families and in support of our innovation activities, including Corona hard Seltzer, which came in at the higher end of our previous guidance range.
As a result of the abovementioned factors, we achieved record full year operating margin of 40% and improvement of 70 basis points.
Moving to white.
Net sales declined 6% on shipment volumes down approximately 8%.
Full year net sales result, outperformed our previous expectations, primarily due to stronger mix benefits from our power brands in Q4, driven by the prisoner Unshackled and May Ami.
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 2000.
Operating margin decreased 50 basis points to 26% as mixed benefits and favorable SGN a were more than offset by higher Cogs, primarily reflecting increased great car 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 higher incentive compensation and a ramp up in IP spend to support our sep as for Hannah implementations.
Those increases were partially offset by a reduction in consulting costs.
Couple of eight 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 and cannot be growth in November 2018.
Partially offset by our debt Paydowns during fiscal point.
Our comparable basis effective tax rate, excluding cannot be equity in earnings came in at 16.1% versus 18.2% last year.
This improvement was driven by lower effective rates from our form businesses, partially offset by a lower level 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 showed continued strength growing over 11%.
When including an unfavorable impact from ballast point total beer depletions were up 10.8%, including the benefit of additional selling day in Q4.
Beer operating margin decreased 120 basis points to 39.3% as increased marketing and SNA spend was partially offset by benefits from pricing and Cox.
Marketing as a percent of net sales was 8.7% or 230 basis points higher than Q4 last year, driven by marketing investments and spend timing.
Wine and spirits net sales were up 1% for Q4 will shipment volume was down approximately 1%.
As stated earlier power brands continue to drive mix benefits.
Operating margin.
Increased 120 basis points to 28.9%, primarily due to mix benefits and lower marketing and SGN a spent.
Moving to fiscal 2000 free cash flow, which we defined 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's spend and inline with our most recent guidance.
This included approximately 520 million of Capex for our Mexico beer operation expansion.
Furthermore, through fiscal 2000, Weve cumulatively spent approximately 700 million in capital related to our Mexicali expansion expansion project.
Moving to our full year fiscal 21 piano and cash flow targets.
Given the unprecedented cobot 19 events that began to abruptly and dramatically impact consumers in the marketplace almost concurrently with the starve 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 2001 prior to cope with 19 as referenced as you think through your modeling and scenario work given the changing marketplace dynamics.
For pre Cobot 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 Divesture 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 greater than the benefits from product pricing and productivity.
Activity initiatives.
Moving to widen Spears for pre Cobot 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 spirits divestiture transaction with Gallo and a separate divestitures of palm assign trend Amber brandy and the concentrate business close around the end of Q1 fiscal 21.
Well the separate but related agreement to divest the novela wine brands to Gallo closes by the end of Q2 fiscal 21.
Lastly, the plan to retain the cooks and zero Jay sparkling wine brands is also included in our pre Cobas 19 target for fiscal 21.
Our pre cobot 19 expectation for Q1 wine and spirits results assumed a decline of 25% to 30% in sales and operating income due to the following factors.
Unfavorable Q1 F. Why 21 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 years Q1 result, as result of the divestiture late last year.
And distributors have have ample supply of brands targeted for the Gal divestiture as they seem to fiscal 20 year end close on the transaction.
Our retained portfolio power brands in the wine spirits business, including cooks and Jay Roueche, Jay targeted net sales growth of 2% to 4% on a pre cobot 19 basis for fiscal 2001.
Other pre covert 19 target assumptions include interest expense in the range of 385 to 395 million.
Comparable tax rate, excluding cap it cannot be equity earnings of approximately 18%.
Weighted average diluted shares outstanding targeted at approximately 195 million.
Operating cash flow in the range of 2.3 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 us for refinement and flexibility to make sure we prioritized and optimize this spend given the current business conditions and economic environment.
While our wine and spirits EBIT is moving down in fiscal 21 due to planned divestitures, we are maintaining our current quarterly dividend rate.
In addition, we remain focused on our goal returning significant capital shareholders balance between dividend payments and share repurchases.
However, in the short term given the uncertainty around the coated 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 the full flexibility to fulfill our 4.5 billion commitment overtime.
In closing I want to reiterate the constellation is a strong cash flow generator has ample liquidity and financial flexibility.
We remain focused on prudently navigating through the challenging environment presented by Cobot 19, and we'll look to provide updates including full year guidance as more factors become though.
With that Bill and I are happy to take your questions.
Thank you as a reminder, request and you'll need press star one on your telephone to withdraw your question principal punky.
Please limit yourself to one question.
Our first question comes from Bonnie Herzog with Goldman Sachs. You May proceed we do for us.
Thank you Hello, everyone.
Welcome back running.
Yes.
I wanted.
You get some clarification on.
The Mexican government decision, which determined that alcohol nonsense on I, just wanted to make sense and what you're you're sharing with us today.
If I heard you correctly you are not spending your production site what im hearing is a lot to be entered brewery are.
Thanks, I just wanted to make sure I heard you correctly and then.
Great to hear how you see that situation involving and maybe what your contingency plans are you did.
With that some of them I think finished inventory that you have on hand meet that demand.
But I just kind of wanted to understand where you're at with that.
Situation. Thanks.
Sure.
So as we stand today, we are currently operating.
We also have as I noted in my script.
Roughly 70 days through the system at either and that does not included retail tail that is purely.
That we have or our distributors have.
So we are fairly confident that we will see no disruption at retail.
From our operations and we'll be able to meet consumer demand as it continues.
Thank you on next question comes from Cold Mill cargo along with Credit Suisse. You May proceed with your question.
Thank you good afternoon everybody.
Bill I think you mentioned.
The year working through a series of options on what's going to happen with Mexicali.
Obviously, we don't know which of those options will take but could you at least give some insight on what your options are from the 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 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 continued to have for our brands. So while im not prepared.
Good to talk about the specificity of that we're very comfortable that our discussions will yield strong medium and long term benefits for our business.
Thank you. Our next question comes from the data with talent you May proceed with your question.
Thank you good morning.
I was hoping on Gill.
The on premise off price mix still very helpful. In terms of contextualize the revenue mix that God I was wondering whether you could offer any insight into the margin differential given.
Okay.
On premise and then as a follow up to that is it possible for you guys new on cans and bottles that are no longer being sold and the on premise into the authentically distributors. Thanks.
Thanks for question Vivian So to your first question the margin differential there is no margin differential for us between on and off premise because that goes through.
That will go through distributors. So same same margin for us as it relates to the question is can we move product out of the on premise to the off premise and let me let me touch on that Vivian in many instances distributors will.
Pickup and redistribute supply.
Where necessary or where a particular channel like on premise.
Has has effectively closed in many markets. So yes that in fact, often does occur obviously there is some format differences in terms of what people use in particular channels, but yes. It does occur just to reiterate it a piece of your question as well.
We are multiple points across both beer wine and spirits less reliant and on premise than the industry. Overall, so our business has been skewed historically and still as.
To the off premise channel, which is an instance, like this is very valuable.
But thats not to say as you've heard that we havent recognize the many challenges that are than 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.
I have run into very challenging times for those who are in the on premise.
Thank you. Our next question comes from Brian Spring with Bank of America Maze procedure your question.
Hey, good morning, everyone.
Guard, maybe just just two quick modeling this for you.
In terms of the on off premise split for spirits and want one it's fair to Peter could you typically.
In the fiscal 21 plan that was on the whole bid what was the growth expectation in those two channel. So we expect.
For whole versus growth at home and then second if you could give us a sense within both segments of just fixed and variable costs as we kind of want to run through sensitivity to look into a rough sense of of fixed and variable costs. Thank you.
Okay.
Yes.
Brian which would you mind repeating the first part of that question around the margins I, just I think quite catch that so so far.
Our is just trying to get an understanding of what is fixed versus variable costs within both the the beer and wine and spirits segments.
Okay, so a fixed versus variable cost.
Is it for both businesses is based skew highly towards variable call it somewhere in the neighborhood.
Third variable and one third fixed maybe a little bit higher in some cases on the beer side.
The variable costs really around free and packaging and in wine, it's it's great costs and packaging.
That I believe you're the first party. Your question was around the on premise versus off premise growth rates at for on premise growth rates. We were we are modeling in flat at four off premise it was.
Mid single digits.
Thank you. Our next question comes from Nik Modi with RBC capital markets. You May proceed with your question.
Yes, thanks, good morning, everyone.
Well just a question on on retail and we're hearing Bob we want to being pushed back.
When we set the being pushed back and I just wanted to get an understanding of.
Acting.
You guys, obviously that a lot of new products coming in a marketplace chronic sheltered by.
I need to the market the model mobile solution. So I think it'll give us some of the puts and takes and how thats going are you getting just must basis, yes, hey level. The placement some of the new products that we're going to come out in the market.
Any thoughts on that would be helpful.
Sure you bet.
We're seeing.
For a first of all obviously their words and particularly in March there was a lot of heavy up pantry loading people buying particularly those those brands, where they had a lot of comfort and of course, many many of our brands across beer wine and spirits all fit into that so that was obviously very helpful.
Keeping in mind, Nick the seltzer at much like refresh could get goes into different space and.
Selzer's, obviously been a very hot category, you see a lot of that product on the floor with us and with competitors as well so.
And we've already in just the first month, our team and our our distributors have done an outstanding job of getting the product out the market, we've almost chief 50%.
HCV and the first month, which is again record speed so.
We think the as time goes forward, you're going to continue to see.
Core skews critical skews being very important and in fact, we have made some adjustments in our production footprint to make sure that those core skews.
Our our fully available throughout the supply chain of because that's something that we think will occur in the near term until consumer spend more time in stores. We've also seen a very rapid uptick and click things like three tier E commerce click and collect.
Our company had single biggest and wine had our single biggest direct to consumer week, we've ever had last week as consumers again found alternate ways to continue to buy our products. So I think here just to summarize that youre going to continue to seek is critical skews.
Being stronger distribution positions.
But we've been very pleased with our distributors ability to continue to get critical new products remember most of the new things that we're doing this year, our master brand extensions.
So they are consistent and and part of strong brand families.
Not particularly as it at a time like this I think it's important because the consumer often at during recession or recessionary type behavior seeks out those core brands that they have a lot of personal comfort with and again our brands. Fortunately are part of that SAP.
Thank you our next person comes from double senior with Morgan Stanley. Please proceed with your question.
Hi, guys.
So I wonder as more of a longer term question in past cycles, we've seen some trade down occur in the beer category recessionary environment, including back in 2008 2009.
Can 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 X. The coded situation here to much higher share level today. Your brand mix has changed over time. So just was curious for your perspective on the degree.
Trade down risk or macro sensitivity, maybe versus seeing the past cycles.
Yes.
And I joke with Garnet earlier today, I guess, if your old enough you've been through a couple of these cycle. So I have.
What what we expect to see as this.
Brands are even more important at a time like this because many people are seeing the opportunity in our category is one of those for simple pleasures in life, let's face it the more people are sheltering in place the more that they look for those small pleasures in life and NR category is one of the.
Those that addresses that.
But but you often see.
Even stronger brand behavior that occurs during this time, so let's take let's take our Woodbridge Wind brand example.
We have seen significant pickup in the month of March.
For that brand because as I said in my script, it's a tried and true brand people know what they appreciate the quality for the price value relationship that exist there and we've seen quite a bit of an uptick against that brand. We've seen the same thing with Kim Crawford and May all me in the prisoner.
Brands brands that the consumer appreciates and likes.
Similarly in beer.
Yes, when you when you have a brand like Modelo, that's the number for brand now and the entire US beer business, you've got a brand that has a great deal of trust and you're seeing that the trends that support that.
Fortunately Modelo and Corona are two of the most trusted brands in the consumers mine and therefore, we feel very comfortable that we will actually get a disproportionate amount of benefit that occurs when people go to the more tried and true brands. That's what we saw in 2008 Thats, what we saw in the previous recession before.
For that.
That those tried and true brands ended up winning.
And we think our brands are well positioned across beer wine and spirits.
To take advantage of that.
There's a little less experimentation during a recession environment and Thats why those core brands like ours will do very well.
Thank you. Our next question comes from Lauren Lieberman with Barclays. You May proceed with your question.
Great. Thank you.
My question was just continue and then going back to the conversation about Mexico production.
If we do in second place, where you to curtail production.
Even though there is no.
The retail and did so.
How should we think about the on margin greatly.
The plan.
Non.
Thank you got it did have an infringement margin, but does that even out ramp that.
So just kind of thinking that very very strict Kim question, but just trying to understand how we should think about that that impact on profitability.
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 lot of things have factor into that not the least of which is.
The peso and various other things that occurred during.
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 deliberate to retail.
Thank you. Our next question comes from Kevin Grundy with Jefferies. You May proceed with your question.
Thanks, Good morning, everyone.
Morning, Bill 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 give guidance, but maybe even qualitatively I think with 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 really hard to make conclusions on what's going on.
And how quickly consumers are going to.
Well, we'll destock there they're pantries, though.
And any comments you have potentially on.
How much of the on premise weakness will potentially be offset by by the off premise. Thank you.
Sure you bet now admittedly this is somewhat unprecedented so.
I think we need to all be careful with specificity of answers because in other recessionary periods. While you saw decreases in the on premise you didnt have shutdown in the on premise. So it is a little different with that said channel shift.
That does not unusual during recessionary times and you're obviously seeing that now in part because the on premise is in many markets is largely closed.
What what.
Again, if you are in the 85% to 90% range of the event for us and he off premise to start with the of the need to see some increase in channel shift is less significant than it is for someone who is more weighted to the on premise.
Let's take March as an example.
And admittedly there was some pantry loading that occurred during that month.
It more than made up the off premise more than made up for the on premise loss that occurred during that timeframe. It was an excellent month, but.
We're always reticent to be two project that forward because you don't know what the consumption profile will be I'll repeat what I said a minute ago, because I think it's a very true comment people look for small pleasures in their life. When you were in situations of recession multiply that by the fact that must investor now sheltering at home.
Now.
Those small pleasures.
Our business is one of those small pleasures and I think that will be advantageous for our business going forward.
As long as Ron the the the audit off premise question. Let me just go back to clarify a brian's question around the growth rates related to on versus off premise, Brian I'll give you a bit of an expansive so what I gave you is zero.
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 two to four range.
On beer total sales were targeting to be 8% to 10% on an art on an organic basis. So the on premise will be in the sort of low to mid single digits and off premise would be the remainder.
Thank you. Our next question comes from Rob Ottenstein with Evercore you May proceed with your question.
Great. Thank you very much.
I was just wondering if you could talk a little bit about how you may be adjusting your marketing spend and what's sort of flexibility you have on your contracts.
Obviously do you do a lot with Dsps and a lot of sports.
C and a lot of these events just aren't going to happen. So it is they're all.
Maybe at some kind of break out that you can you give us.
In terms of what is fixed.
For this year or let's say the calendar year next 12 months.
And what what areas you can possibly sabre redirect thank you.
Sure.
It's this is also as you would expect a bit of a moving answer.
Some things you've seen have been postponed therefore, we are not while we may not spending in the first quarter, we might well spend that when the events do occur assuming they do.
What we have done is that we have adjusted Jim Savion his team.
And both wine and spirits and beer.
Have done a fair amount to move to more digital and social media efforts.
Which is actually good that's that's very consistent with our the consumers going anyway. So we do have quite a bit of flexibility to move things around.
Around when you have cancellations, let's take the nch that as a cancellation. So choices are then made as to whether or not we reproportioned note that type of spend that we have.
In two other formats or we don't those decisions are ongoing of be difficult to give you a definitive answer at this point in time around that.
We will try to do that going forward as soon as we more more thoroughly understand what is canceled versus what is delayed.
We have a better handle on that'd be very difficult, but suffice it to say one of the one of the the traits that that we've seen with our marketing group.
To be very nimble and they are being very nimble.
Adjusting on the fly to more digital and social environments from from things, where we can't do live sports as you know.
Thank you and next question comes from Andrea to share with JP. Morgan You May proceed with your question.
Thank you and good afternoon as a follow up from the comments about the production in Mexico.
Our discussions Bill was the maximum Goldman.
Just staying open could you prove that your production facilities that safe enough to remain operational through the end of the cool and then as a follow up to the margin commentary how much of your Mexico peso denominated cost that has that it's going to like of the devaluation of the next thank you.
So going to take the first half of that let me just let me just tell you is some of the things we've done that we've done this in wine and spirits as well as beer and I think it's important as I said our employees 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 plan to make sure. They are not overlap of ships shifts in case, there any issues that occur with People's health. So we're doing everything humanly possible to make sure that while we continue to operate in a safe and effective.
Manner.
Within all of our operating facilities. The same is true of that New Zealand than and Italy as well so first and foremost we are taking great care.
To make sure we are operating correctly I.
I think that that will likely be respected.
By the government 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 are taking to make sure that we're protecting our people.
We believe is best in class, we're keeping track of everything possible.
To ensure the safety of of our employees and that effort will continue gardening on a touch in the second piece sure on the on that on the hedging piece. So as it relates to both commodities and on currency were current for the current fiscal year physical 21, we are hedged on both fronts in excess of 80%.
We are using this period of time, though as we see some movements on commodities and in currency to layer in additional hedges for the next couple of years. So we could see some some further benefits in incoming fiscal years.
Thank you. Our next question comes from Laurent Grandet Guggenheim You May proceed to your question.
Yes. Good morning. Thanks, what are your for the so to put up question looks for the.
Juan.
You said you realize you were focused on the call brands going full law than not and that makes sense.
So just any color that said there is concern Rosa call, Brian and be we'd be HOKA one of your focus points for the for the next two modes. That's one question on digital put up on sorry to come back on before.
Manufacturing in Mexico that.
This morning, again I mean.
One of your competitor set up on Sunday April thieves, Grupo Modelo would spend via production and distribution operations.
So I assume.
70, 70 days of inventory.
See you won't see to beat going up a good really was the Mexican government.
On the mix Gideon.
Some shape, so why im very something I don't say right now you have you decided.
Well again some of the government decision that point that plastic substrate. Thank you.
So, let's let's tackle your first question, which is cells are certainly.
Our Corona brand family.
Since we approached 150 million cases of product in fiscal 20 is one of the critical things and critical brands that we have within our portfolio.
Seltzer as you know is one of the fastest growing sub segments.
Within the alcohol beverage business as well therefore.
The combination of the great Corona branding plus the hot category of Seltzer is a wonderful combination and we're expecting that that's going to be important part of our success story for fiscal 2001.
I do need to be very very clear with you.
We're not doing anything against what the government of Mexico.
Is suggesting.
We certainly our company is known for respect being respectful of the laws and approaches of any company in any country in which we operate and that certainly will continue I have no no comment regarding a competitor what they're choosing to do or not choosing to do I personally would suggest you asked them what I would say is today.
Currently we are operating and we will continue to do what's appropriate.
Under the restrictions that supplier don't apply.
And any company in wood in any country in which we operate.
Thank you. Our next question comes from broker with MKM Partners. You May proceed with your question.
Thank you everyone. So on the 70 days of inventory in the system how much of that is in Mexico, and I guess I was hoping the 10-K, how much of it is in Mexico and how much of that is actually allowed to leave Mexico in into the United States is that allowed to come over the border right now.
So to answer your question the vast majority of that answers in the United States between either either inventory at our distributors or in our Dcs. So the vast majority of it.
I would say.
Of in excess of 80% of that's already in the United States.
Thank you. Our next question comes from builds to grow with Suntrust. You May proceed with your question.
Thanks.
Just wanted to go back to make the Kelly and I understand you can't talk about where it goes from here, but could maybe give us an update on how much money has been put into it and now any kind of color on how you got this far down the path and we got to this this.
State.
Yes, I'll take the first part of that to date, we have spent approximately.
$700 million in Capex 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 theres been changes in government. During the time that this that this facility has been started what I would say is this 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 are dart, we remain extremely confident in our long term ability to meet the consumer needs in the United States for the critical brands Modelo Corona specific out and other related brands. So I don't feel that.
Does anyone any good to micro manage.
The 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 governments.
Engagement with us on that topic.
Thank you. Our next question comes from from came with EPS. You May proceed with your question.
Hi, Thanks, a question.
Wine sell question.
It is safe to say that the escalating coded related work stoppages and disruptions I could have an impact on the idea of achieve ability of the new timing or is that already baked into your.
Baked into your new outlook.
No. So thank you for the question, though we think that the the decoding situation is baked into the current timeline that being said I don't know how much are you know how much more disruption covert 19 could have in terms of.
The government ability to work.
I can tell you right now that the FTC continues to be actively engaged in our conversations and into review this process and and we factored all that into the timeline provided.
Thank you I'm not showing any further questions at this time I would knowledge current turn the call back over to build new ones for any further remarks.
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 we'll continue to quickly adapt to the rapidly changing market dynamics as we navigate through fiscal 2001.
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 aren't.
I'd like to thank you all again for joining the call and I Hope you in your loved ones remain healthy and say during this unprecedented time. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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