Q1 2021 Constellation Brands Inc Earnings Call
Welcome to the constellation brands first quarter fiscal year 2021 earnings conference call at this time, all but doesn't have been placed in listen only mode.
During the prepared remarks, the cold we opened for your questions.
Instructions given at that time.
I'll now it's going to follow the Patti on her lot senior Vice President of Investor Relations. Please go ahead.
Thanks, Shannon good morning, and welcome to constellations first quarter 2021 conference call and here. This morning, with L. Newlink, our CEO and guard Hankinson, 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 release or otherwise available on the.
The company's website at Www Dot few brands dotcom.
Please refer to the news release and constellations SEC filings for risk factors, which may impact forward looking statements we make on this call.
Before turning the call over to Bill similar to prior quarters I would like to ask that we limit every one to one question per person, which will help us to enter Collin time, thanks in advance and now for yourself.
Thank you very good morning, and welcome to our first quarter call everyone.
Before getting into a discussion of our quarterly results I'd like to address two topics.
Become extremely relevant to our business and our society at large.
First our thoughts and prayers go out to all those who have been impacted by racial and justice and associated acts of violence in both this most recent time period and throughout the years.
We stand and solidarity with the black community and our belief that black lives do in fact and have always mattered.
We categorically denounce bigotry racism, social injustice acts of senseless violence in all forms.
There are clearly inconsistent with our company values and our commitment to embracing diversity and creating an inclusive environment. We're all employees feel safe respected and valued.
Earlier this week, we announced our commitment to investing $100 million to support African American Black in minority owned startups in the beverage alcohol space and related categories over the next 10 years.
These small businesses serve at the fabric of their respective communities and we must make it more equitable for them to access the capital needed to have a fighting chance of success.
In addition, we've made a 1 million dollar commitment over five years to the equal Justice initiative and their efforts to educate the public about the history of racial and justice in this country and to support their quest for equity and the criminal Justice system.
Furthermore, we have made a commitment within our company to enhance representation and access to opportunity for black team members at constellation by strengthening our recruiting hiring and development programs.
The conditions that have allowed systemic racial and justice to persist have existed far too long we.
We all have a role to play in creating a more equitable experience for African Americans in this country and we're committed to doing our part to make this happen.
Switching gears our organization has responded and adapted to the challenges of the cobot 19 operating environment in an incredible and agile manner, which is reflected in our results for the first quarter.
I'm, especially proud of the efforts of the constellation team members of our distributors and our retail partners, who work together to ensure our customers' needs were met under very challenging circumstances.
As I've said before the health and wellbeing of our employees is our number one priority and we've taken a number of preventative measures to keep them safe in our operations and now that retail to ensure our continued ability to meet the needs of the market.
We've provided support and relief to our customers and our channel partners by donating more than $4 million in cobot 19 relief efforts and by donating pp hand, sanitizer produced in our own facilities.
Bottom line I'm extremely proud of the way our team and industry partners have risen to the occasion and I remain confident our business and our brands will emerge even stronger on the other side.
Now, let's transition to a discussion of our performance in the quarter.
As guarded Tonight run through the highlights there are three key points I'd like you to take away.
Number one.
Despite various headwinds we delivered solid first quarter business performance and strong cash flow generation.
We are winning in sales channels that are open.
Beer Depletions remains strong and consistent with long term trends, despite the loss selling day in the quarter and the virtual shutdown of on premise sales.
Our wine and spirit power brands continued to gain traction.
Number two.
Slowdown of our beer production in Mexico, due to cobot impacted shipments and net sales in Q1, and this impact will extend into Q2 as well.
We will make up some of that impact in the back half of year as our beer production in Mexico has returned to normal levels.
Number three.
This short term disruption to our import beer business does nothing to dampen our long term prospects consumer demand and takeaway for our brands remains extremely strong and our outlook for the year and over the long term remains extremely bright.
Now, let's talk more specifically about our performance in the first quarter, starting with our beer business.
Imports continue to be one of the primary growth contributors in the high end and total us beer market with constellation delivering more than 80% of that import growth driven by the Mattel, especially out and Corona brand families.
Solid first quarter depletion trends of 7% adjusted for one less selling days were driven by strong off premise growth of almost 20%.
Due to the grocery and C store channels offset by a drag from the closure of the on premise channel, which was down about 75% year over year.
This is excellent performance considering that the country really began to feel the impact of cobot 19 pandemic in earnest in early March which coincided with the beginning of our fiscal year and our brands over index to densely populated states such as New York in California that had been signal.
Secondly impacted for a prolonged period of time.
One of the highlights of the quarter was the successful launch of Corona hard Seltzer.
As expected the brand name Corona drove extremely good trial of Corona hard Seltzer and the great taste profile is driving a repeat purchase intent of almost 80% which exceeded our expectations.
Corona hard Seltzer is already the number for hard Seltzer brand and recently achieved IR IRI market share of almost 6% of the us saltzman market.
Ongoing distribution gains have led to irit HCV distribution approaching 65 since product launched in March with early results for Corona hard Seltzer incrementality trending at around 90% also exceeding our original expectations.
We're also seeing high Hispanic penetration rates for the brand versus other hard shelters, which we believe will be a key growth driver going forward and a major point of differentiation within the fast growing demographic in this country.
We believe the refreshment attributes of Seltzer combined with the Halo effect of the Corona brand, which remains one of the most loved beer brands provides an opportunity to build one of the strongest hard seltzer brands in our industry.
During the quarter, we kicked off the summer selling season and gain share during the memorial day, and Cinco de Mayo holidays.
Cinco is a great example of changing consumer behavior during the pandemic when people enjoy our great brands in Cinco celebrations at all.
As a result, our cinco performance increased two to three times, what we would normally see in the off premise.
Our beer portfolio contributed nearly 20% to total us beer category growth during Cinco and claimed for of the top 20 share gaining brands in IRA channels, driven by Modelo, especially out as the top share gaining non seltzer beer brand Corona hard seltzer specific though.
And Modelo Chelada remotely sale.
As previously mentioned, we have returned to normal production levels at our breweries in Mexico.
During the mandated production slowdown in the quarter due to cope with 19, our focus on prioritizing production of our top selling skews, which represent about 75% of total volume helped minimize disruption at retail while supporting our efforts to ensure consumers could find our brands on the shelf.
And then the cold box.
While supply will continue to be tight on select slower moving skews throughout the remainder of the summer due to continued strong consumer demand for our brands in the off premise, we expect to return to normal inventory levels in the third quarter.
Let's now move quarterly results for our wine and spirits business, which experienced the same market dynamics as our beer business during the quarter with strong demand in the off premise offset by a decline in the on premise of almost 80%.
We continue to see staying power of the Premiumization trend with premium price segments, continuing to outpace value price segments further reinforcing our wine and spirits business strategy. In fact, we saw excellent consumer takeaway trends up over 25% for our power brands.
The higher write off premise channels during the quarter.
Our power brands are winning in the high end and across the majority of price segments in the us wine category with strong velocity and distribution gains that are outpacing the market.
First quarter Depletions for our collection of power brands grew 5% driven by Kim Crawford May All me second the prisoner brand family and Woodbridge by Robert Mondavi.
We continued to invest in additional ways to fuel portfolio growth through innovation capitalizing on priority consumer trends with successful product introductions like the prisoner unshackled for Pheno organic per SEKCO and Robert Mondavi private selection Buttery Chardan day, all of which are.
Performing well in the marketplace.
As you know some of our biggest success stories in innovation have come from the spirit Faro age category, where we currently enjoy a 40% market share.
The newest addition to this portfolio comes from the Woodbridge family, where we're seeing early success from the Bourbon barrel, aged Cabernet and red blend as well as the Rob barrel aged short.
You should expect to see continuing premium category, leading innovation from us as we emerge from the coven environment, including line extensions for May only in the Cabernet space and from the prisoner brand family with the addition of Cabernet and short neighbor Islands in the spirits category you will see.
Pure infusions as well as high West and spec Premixed cocktails and the RTD space.
We continue to invest in capabilities that position, our wine and spirits business for long term success.
As a result of shelter in place restrictions and the shutdown of on premise accounts due to cope with 19 ecommerce for beverage alcohol has exploded increasing three to seven times and volume versus prior year, depending on the channel.
Consumer awareness for ecommerce and beverage alcohol has significantly increased and accelerated changing consumer behaviors by several years.
With two thirds of consumer saying they are planning to continue their ecommerce habits postcode ecommerce is gaining share through platforms like instacart drizzly and other retailer online sites as consumers seek the convenience of these channels.
In line with this accelerated trend we acquired empathy wines in June.
This acquisition fits in nicely with our broader premiumization strategy and strengthens our position in the direct to consumer and three tier E Commerce channel, where we'll utilize empathy digitally native platform to reach new as well as thousands of existing loyal consumers.
In addition, empathy focus on producing high quality sustainable we made wines sold direct to consumer from its winery via its ecommerce platform at the 20 color price point and three variance white blend red blend and rozek.
Launched in 2019, the brand has sold approximately 15000 cases and acquired more than 2000 subscription customers.
We are all read a leading player in three tier ecommerce and have seen growth in this channel up more than 500% in the last three months.
We plan to leverage this acquisition as an opportunity to strengthen our position and outpace the market.
As you know, we recently revised the Gallo transaction to exclude our mission belt facility as the FTC wanted to ensure that we had adequate production capability for our Jay regime, cooks brands, which we decided to retain once they were excluded from the original transaction.
We're also one step closer to the finish line on this transaction with the signing of separate agreements to sell novel, New Zealand Savi on block and parmesan.
Randy.
As you will recall that December we entered into a separate but related agreement with Gallo to divest our novel brand for 130 million.
This fits with gallas portfolio strategy and allows them to expand into New Zealand wine category without affecting our long term goals, nor our opportunity in this category at the greater than $11 price point.
In addition, we've signed an agreement to sell Parmesan Grand Denver branding to sell direct for $255 million. As a reminder, last December we announced the Palma sign had been excluded from the original transaction due to FTC concerns and we indicated that we were pursuing opportunities too.
The best this brand at that time.
These transactions are subject to final FTC review and they are expected to close in the second quarter concurrent with our closely following the close of the Gallo transaction all proceeds will primarily be used to reduce debt.
Finally, we continue to be encouraged by steps, David Cline and the canopy team are taking to position the company to win in key markets and product categories over the long term.
The business continues to work through its transformational strategy with a leaner approach that will allow cannot be to be more flexible and adapt more quickly to changes in this dynamic cannabis market.
Canopy has seen early success from its read 2.0 products in the Canadian cannabis market, including beverages, which we are very excited about.
The Companys tweet and Houndstooth brand has been one of the most raved about cannabis beverages in the market with overwhelmingly positive consumer feedback.
We believe that beverages and other rent 2.0 products will attract new consumers to the market and further drive conversation.
Excuse me conversion from the illicit Mark.
We continue to believe that cannot be remains best positioned to win long term any emerging cannabis space as well capitalized to face the challenges associated with this current economic environment.
As I close let me again reiterate the three main takeaways from this quarter first despite various headwinds we delivered a solid first quarter business performance and strong cash flow generation, we're winning in the sales channels that are open.
Beer Depletions remains strong and consistent with our growth outlook for the future. Despite the loss selling day in the quarter and the virtual shutdown of on premise sales and our wine and spirits power brands continued to gain traction.
Number two the slowdown of our beer production in Mexico, Dubik coat due to coated impacted shipments and net sales in Q1, and this impact will extend into Q2 as well.
We will make up some of that impact beginning in the third quarter as our beer production in Mexico has returned to normal levels.
And number three this short term disruption to our import beer business does nothing to dampen our long term prospects consumer demand and takeaway for our brand remains extremely strong and I remain optimistic about our outlook for this year.
With that I would like to turn the call over to Garner who will review our financial results for the first quarter.
Thank you Bill and Hello, everyone.
Well start of our fiscal year marked the beginning of a global pandemic, resulting in rapidly changing market conditions.
His guidelines that impacted a majority of the quarter.
And increased operating cash flow and free cash flow by 16, and 24% respectively.
These strong cash flow results provide us with the financial flexibility needed to continue to focus on debt Paydown and liquidity.
During the quarter, we were able to issue debt at very favorable rates and used the proceeds to satisfy 700 million of debt coming due in November and pay down other near term maturities.
Now, let's review Q1 performance in more detail, we're all generally focused on comparable basis financial results.
Starting with beer net sales declined 6%, excluding the impact of the ballast point divestiture organic net sales declined 4% on organic shipment volume down 6%.
Partially offset by favorable pricing.
Q1 shipment volume was negatively negatively impacted by reduced production levels at our breweries in Mexico as part of Cobot 19 safety measures.
Depletion volume growth for the quarter came in at 5.6% driven by Modelo especial and the successful launch of Corona hard Seltzer, a strong performance in the off premise channel more than offset the impact of the reduction in the on premise channel due to cope with 19 related shutdowns.
When adjusted for one less selling days in the quarter. The beer business generated nearly 7% of depletion volume growth and impressive result in this operating environment.
The large gap between shipment and depletion volume trends for Q1 was driven by the reduced production levels for roughly two thirds of the quarter and robust consumer demand.
This resulted in lower than normal distributor inventory on hand at the end of the quarter.
Im happy to report and reiterate that beer production in Mexico returned to normal levels in June.
And we expect distributor inventory levels to return to more normal levels during the third quarter of our fiscal year as some shipment volume shifts from Q1 and Q2 into Q3.
Bill gross margin of 55.6% was flat to prior year as favorable pricing and the benefit of the ballast point divestiture was offset by increased operational cost driven primarily by higher material costs and reduced throughput at our breweries, resulting an unfavorable fixed cost absorption.
Marketing as a percent of net sales decreased 220 basis points to 8.8% as marketing spend decreased due to the implications of cobot 19, essentially cancelling and or pro postponing, most sporting and sponsorship events.
With most sports programming on hold during Q1 and big events, such as the end see double play basketball tournament canceled in the short term, we're reallocating marketing dollars to lower cost digital marketing efforts and TV programming that consumers are engaging with in this current environment.
We are recalibrating, our marketing spend and strategy for the remainder of the fiscal year.
However, currently we still expect to spend in the range of 9.5% to 10% of net sales on a full year basis.
As such the marketing related margin benefit in Q1 is mostly related to timing.
As a result of the bulk mentioned factors beer operating margins increased 240 basis points to 41.7%.
Looking ahead to Q2, we expect shipment volume to be negatively impacted as we ramp back to normal production levels in June.
Keep in mind that we expect to see some residual margin compression in Q2 as the reduced production levels in Q1, and the start of Q2 will create unfavorable fixed cost absorption.
Which is expected to continue to work its way through the beer business results during Q2.
Moving to wine and spirits.
Power power brand depletion volume accelerated and achieved 5% growth as these brands continue to win in the higher end and across the majority of price segments in the U.S wine category.
Overall depletion volume declined 1%, reflecting the impact of the brands to be divested.
Net sales declined 7% on shipment volume down 13%.
Decline in net sales was driven by the following.
Lower volume and unfavorable comparison to Q1 prior year due to a very strong quarter last year for the brands to be divested.
On premise and retail tasting room closures throughout most of the quarter as result of coded 19.
And net sales of the Black Velvet brands are not included in this years Q1 as result of its divestiture late last year.
The decline in net sales is an improvement from our Q1 pre cobot targets, we provided for the wine and spirits business during our last sales and earnings call driven by the strength of some of our fast moving power brands, such as Kim Crawford Neomi and SVEDKA.
And an improvement in some of the in some of the brands to to be divested such as black box, and Palma son, which saw accelerated and robust consumer takeaway trends during Q1.
Excluding the impact of the black Velvet divestiture organic net sales declined 4%, reflecting shipment volume decline of 9%, partially offset by strong price and mix benefits in the quarter.
Operating margin increased 240 basis points to 28.3% as benefits from price and mix along with favorable SGN eight were partially offset by the black Velvet divestiture and higher Cogs.
In Q1, we saw the benefits of shipment volume mix, driven by many Ami and Kim Crawford and favorable pricing for Woodbridge and sped Cup.
In addition, we saw lower promotion expense as scheduled incentive programming activities did not occur due to the current operating environment and covered 19 related closures for the on premise.
While we expect to continue to see positive price and mix benefits the remainder of our fiscal year. They should tempur versus the very strong price mix results. We saw in Q1.
Depletion in shipment volume for our power brands is expected to temper in Q2, as we do not plan to replicate some lower return incentive programs that were that ran during our Q2 fiscal 2000.
However, we plan to ship some programming resources for these Brandt brands to the back half of the year to better align with timing for our key selling season for our wine and spirits business.
In addition, we are assuming a Q2 close for the Gallo and other divestiture transactions, which will negatively impact the quarter.
Therefore, we are expecting a decline of 25% to 30% in reported wine and spirits sales and operating income for Q2.
Q1, corporate expenses came in at approximately $51 million up 16% versus last fiscal year.
The increase was primarily driven by unfavorable foreign currency losses, and an increase in charitable contributions primarily driven by cobot 19 support efforts.
Couple basis interest expense for the quarter decreased approximately 13% to $100 million, primarily due to lower average borrowings.
Our comparable comparable basis effective tax rate, excluding cannot be equity earnings came in at 19.3% versus 18.6% last year, primarily driven by lower level of stock based compensation benefits this year.
Moving to free cash flow, which we defined as net cash provided by operating activities less capex, we generated free cash flow of $542 million for the first quarter fiscal 2001.
This represents an impressive 20, 24% increase.
Cash flow improvements reflect strong operating cash flow and lower capex.
Capex totaled $144 million or 7% below last year's spend.
This included approximately $110 million of beer Capex, primarily driven by the 5 million hectoliter expansion project at our Oregon Brewery.
Well Cobot 19 safety precaution slowed expansion activities at our Oregon brewery. During Q1 construction activities are ramping back up and we expect the 5 million. Hectoliter addition to be claim to be completed by the end of fiscal 2021.
Let me remind you that with the completion of the over got capacity expansion. We believe we will have ample capacity at Nava and over again to meet consumer needs over the medium term.
Moving to Canada.
In Q1, we recognized a $197 million decrease in the fair value of cannot be investments.
These impacts were excluded from our comparable basis results.
The total pretax net gain recognized since our initial canopy investment in November of 2017.
Is $112 million.
On May Onest, we exercise the original warrants with cannot be for $174 million and increased our ownership position by approximately 3% to 38.6%.
The warrants were in the money and the amount was manageable from a liquidity and leverage standpoint.
We continue to believe in the long term and substantial opportunity in the emerging cannabis market and we remain confident that cannot be is best positioned to win in this space.
As a reminder.
The expiration of future and much lower larger warrant traunches were extended the calendar years 2023 and 2026.
We will evaluate the exercise of each of these warrants prior to expiration as we continue to see how the cannabis industry unfolds in both Canada and the use.
Furthermore, we do not plan to make any additional cash cash contributions to canopy beyond the potential exercise of these warrants.
Now, let's shift the discussion to outlook and guidance.
Given the unprecedented cobot 19 events that began to abruptly and dramatically impact consumers and the marketplace almost concurrently with the starve our fiscal year and given the related uncertainty volatility and fast moving developments that have evolved during the first quarter of our fiscal year.
We still do not believe it is prudent or appropriate to provide formal financial guidance for fiscal 21 at this time.
However, let me take a moment to reiterate that in a normalized environment. Our medium term growth algorithm remains unchanged for both our beer and wine and spirits segments.
This is a good spot to discuss our capital allocation strategy.
While we remain focused on our goal of returning 4.5 billion to shareholders in the short term given the uncertainty of the current environment, we will be focusing on maximizing free cash flow and utilizing utilizing that free cash to reduce debt and leverage creating the flexibility needed to fulfill our four and a half million dollar commitment longer term.
From.
As a result, we're moving this goal out to cover the fiscal.
20% 23 timeframe and the total cash return in the form of dividends and share repurchases to approximately 5 billion as we add another year of dividends into the mix.
In closing I want to reiterate that our cash generation profile remains strong our quarterly dividend rate has been maintained and we remain focused on actively and prudently navigating through that challenging environment presented by cobot 19.
And we look to provide updates as more factors become known.
With that Bill and I are happy to take your questions.
Thank you gentlemen, you asked a question you will need to press Star wondering your telephone withdraw your question Chris Alky.
Yes. Thank you please limit yourself to one question. Thanks, Zimbabwe, obviously you want.
Our first question comes from Bryan Spillane listen Ma'am your line is open.
Hey, good morning, everyone.
Hey, Brian.
So I guess a question on on the wide visit and on it may be two related one way.
Thank you took some price increases earlier this year on on Woodbridge and maybe some other brands so.
On the how the market reacted to that whether you feel like you were able to successfully get those price increases through and then maybe related.
Repositioning that you were planning to do the wind business this year.
Brand positioning in marketing increases in just want to understand if thats actually happening you will do that in this current environment. Thanks.
Sure you back so we Didnt fact take price increase.
On Woodbridge and I must say one of the things that has been a benefit of coated is that if there are any is that consumers have continued to buy tried and true brands of which Woodbridge is one and it was certainly helpful that we put our price increase through concurrently with that.
And Woodbridge has actually been outperforming our expectations around the pricing increase throughout the first quarter. So so far so good we're going to continue to watch that as you would expect but so far that's that's gone very well I.
I would also say that some of the new product introductions that we have put into.
Woodbridge have performed or and we're expecting to continue to perform very well.
Thats, a very important brand for us.
A lot of the work that we're doing more broadly around our brands is continuing.
We've seen a tremendous increase in direct to consumer and three tier ecommerce, which goes very well to strong brands like the prisoner and May Ami and.
And brands of that help so we're going to continue to put focus on those brands.
We think there very well positioned and those brands and our tried and true band brands in the mined in the consumer which at the moment is where the consumer spending their dollars.
Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.
Alright. Thank you good morning, everyone.
Hi.
I had a question on out of stocks. It say key summer holiday. This week with of course, so hoping you guys could share with Destino, how you feel specifically about the holiday and your supply also you know maybe love to hear some more color on what you're doing on to minimize the disruption for out of stock for instance.
I've heard from some other distributors that you're doing drop loads. So I guess I'm trying to get a sense from you how flexible you can be on the production side.
With all of this and then maybe finely can you touch on how big of a drag some of these started Jason maybe any initiatives you might be taking to minimize the situation how big of a drag it might be on your margins if at all thanks.
Sure.
Let's start with our belief is that our operations team has best in class and we're doing everything we can do at the moment to expedite shipments.
From our breweries through our distribution facilities and out.
Through our distributors to consumers.
Certainly.
Because of the reduced production that occurred.
During about 70 plus days.
Mostly in the first quarter.
It's certainly reduced our ability to ship to normal levels, but lets keep in mind the demand for our brands for Modelo and Corona have never been stronger we were up almost 20% in the off premise channel during the quarter and we're seeing consistent.
Depletion levels as we start Q2 as well so we're in a very strong position keep also in mind that during the mandated coven 19 reduction in production.
We produced the skews, primarily that led to 75% of our sales so while a consumer may or may not be able to buy a particular skew in all likelihood we would expect that a person who wants to buy with delo or Corona and the brand families associated with those will be able to.
By those during the holidays.
Thank you. Our next question comes from Nik Modi with RBC. Your line is open.
Yes, good afternoon, everyone.
Bill I know that obviously, there's a lot of noise in the numbers and.
The question I think the pop question, most investors hobbled how long.
What the growth curve for for the beer business will look like you know not only next six months, but the next Q3 years. So I was hoping maybe you can provide some context on the following three points right one is.
Number of new households are.
Trial serves that you've seen and repeat rates on those new trials that you've seen since this whole pandemic started.
The second point would be.
I understand the how to stock situation, you were able to actually provide products and maybe some packages mark down, but I'm sure that out of stock did cost be some sale. So I'm. Just curious maybe you can help comprised of contacts on how much business would have grown on completion had there been no issue an out of stocks at all and then the third point is obviously retailers.
Our.
Thinking rethinking how do you think about the sell something you guys have been doing for the last two to three years now and so how you think this environment might shape or accelerate some of your shopper first initiatives and more spacing for your brands retail longer term.
Sure.
Let's take it in reverse order.
Relative to the shelf obviously, the one thing that's occurred during this particular timeframe as some of the resets that would normally occur.
Have been pushed back as as many retailers are focusing their attention on throughput from their existing shelf sets, we think that analyst day.
Come into the fall season, there do fall resets.
But this will continue to increase the probability of shopper first because I think it's become more and more clear that brands that are that have strong demand behind them and ours are two great. Examples would the modelo and Corona franchises are demanding more space and they're demanding more space because the take at as their against them.
It's kind of difficult to give you a specific example, about what we could have grown because you had so many different factors involved in the quarter.
You know our quarter of course started almost concurrent with the pandemic, which was a little different than if you were on a calendar quarter admittedly, but.
When when you look at the fact that on premise was effectively closed but off premise was up almost 20% you've got a lot different dynamics in play there.
As I said earlier, we sincerely believe that.
The consumer wanting to buy our brands will be able to buy Corona modelo.
And certainly.
The start up Corona hard Seltzer has also been or a real a real success.
We have already shipped in excess of 3 million cases.
Parana hard shelter and as I said in my prepared remarks at the takeaway and repeat has been exceptional so one of the things we are seeing relative to your first question in terms of consumer purchasing about 30, some odd percent of consumers are actually increasing their consumption.
Of those brands that they are traditionally using and given the strong representation of our brands Corona Modelo in particular.
It's not surprising that you've seen an increase in do take out demand.
During this timeframe it goes back to what I said earlier about tried and true brands. The same would apply to many of our our wine and spirits brands as well.
But certainly the.
The consumers interested buying brands in which they have a lot of faith and comfort.
Is working to our advantage.
Thank you. Our next question comes from Vivian user with Cowen Your line is open.
Hi, Thank you.
I got I was wondering thanks for the color in terms of the marketing spend outlook I was wondering if you could offer any color on how you're thinking about saving that and winter we might expect something deeper in that you kind of lean into opposed because it recovery, perhaps and then a quick follow up on Bill I really appreciate your comments at the top of the call. It Im curious whether.
You guys are assessing any teams tier social media advertising spend thanks.
Yes, maybe and thanks for the question as it relates to marketing spend in the phasing that I'd say, it's still too early to tell exactly what that will be.
As we sort of come out of Cobot 19, and we don't know exactly when some of these sponsorships in a sporting events might make it we rescheduled so other than we still believe that we're going to spend in at 9.5% to 10% of net sales for the full year. The phasing the phasing is still a little bit up in the year.
So Vince relative to social media Theres, obviously been a lot of discussion around social media I would say, let me reiterate what I said earlier, we think it's very important to protect users from misinformation and hate speech.
Those things run directly counter to our commitment to social justice interracial equality.
We have decided that we are going to do a comprehensive review of our social media work.
And along with that for the month of July we are pausing, our Facebook engagement.
Until we are able to do a thorough review and to make sure that all of our social media efforts match up with what I, just said, which is the commitment to social Justice and racial equality.
[music].
Thank you. Our next question comes from Robert Dunn with Evercore. Your line is open.
Great. Thank you very much just one one point of clarification and then my question just can you just break out.
The price mix in the quarter.
And it may be separate out headline pricing from promos.
And then my main my main question really is.
Unbelievable growth right in the Seltzer category.
You are now in the mix Big time, with Corona, Seltzer, which I think you said is 90% incremental.
What what have you learned about the category now year to date and how how big do you think it can be as a percentage of overall beer sales and what is your latest thoughts in terms of incrementality to the entire beer category.
At this point thank you.
So relative to those two or three questions in there we continue to to have our long term algorithm, particularly as it relates to beer.
Of expecting the price will grow 1% to 2% annually, we've done that consistently over time or we expected that algorithm is going to continue.
The relative to Seltzer earlier. This year, we said we thought the category, which was roughly 60 million cases last year, our could double and probably tripled in the long run if anything that's starting to look conservative.
The consumer certainly enjoys the refreshment characteristics.
Of this particular category and I think our introduction of Corona hard Seltzer is a great example of leveraging a tremendously strong brand into a new category I think it would be important to not simply lump seltzer in with beer.
Given the Incrementality that we've seen at roughly 90%, which again is more than we frankly expected.
Suggest to us that it is not necessarily a direct trade off with beer and I think that it has.
It has category dynamics that are free and understanding of the wrong. So.
So our view is that this continues to have a lot of longevity and we are certainly planning to be a critical part of it as you know we've already guidance number four in the category with roughly 6% share and that as you also know we're just warming up.
[music].
Thanks.
Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is open.
Great. Thanks.
And then.
It could give us a little bit and help on the gross margin brands this quarter.
Particularly in beer Im curious approach for thank you said they may you mentioned that we'll see some expense going into Q below production volumes and I think maybe just a little bit of visibility on the drivers of gross margins quarter and thinking about how that's about in Colombia.
Well thanks.
Yes, so so so gross margins for beer, we had some drag there as it relates to to materials and to fixed overhead absorption.
That drag was was offset by by the ballast point divestiture as well as by pricing.
Going forward into Q2, we expected there'll be further downward margin pressure as it relates to fixed overhead absorption.
As as we work through the inventory or does the the slowdown that we had it in Q1 at the very beginning in Q2.
At gross margins they were flat flattish gross margin in beer that that has resulted in about 240 basis points of improvement.
At the operating line because of primarily the the timing of the marketing spend that we talked about earlier.
Our next question comes from Sean King.
John.
Hi, Thanks, My question I apologize I missed this but a deep fried any update on Mexicali, and I guess that potential options you're exploring there.
We continued to be in discussions with the Mexican government about what our long range plans are for Mexico as you know and as we've stated based on the expansions that we already have in play.
Our medium term is already is already set.
We believe there's going to be plenty of opportunity. We've spent more than 30 years, working very well with the Mexican governments of both local and federally and we expect that to continue and we expect to have a strong long range solution.
For our continuing supply.
For the long run so.
I don't have anything new to report on Mexicali other than to say, we fully expect to be able to service on needs for the long run.
Our next question comes from Daryl.
Good morning, <unk> Your line is open.
Hey, good afternoon guys.
So.
First just a clarification you mentioned depletion levels in Q2 in beer. So far consistent with Q1 is that versus the reported 5.6% depletion result, or is that more 7% on a day's adjusted basis.
And then just come Corona parts Seltzer with the strong repeat rates you mention can you give us a sense for what's your level you think that brand can ultimately reach within the hard seltzer category.
Also with distribution level would be reasonable to expect that brand to get too. Thanks.
Sure.
Let's let's start with the heart Seltzer question.
We already are seeing ACB distribution and IRA channels of approximately 65, which which is very strong.
Especially given the fact that as I said earlier, many retailers are not doing the resets.
But they had planned for the earlier part of this year.
It remains to be seeing what are what our long term scenario looks like we're already about 6%.
As you know we've only introduced so far in variety pack, we would expect to extend beyond just variety pack later this year and into the following years. So we're very optimistic there we're going to have a an important part of the seltzer category.
And certainly would expect to be in the top three overall within that category.
Going forward.
Our next question comes from Kevin Grundy with Jefferies. Your line is open.
Hey, Thanks, good afternoon, and congrats on the strong quarter.
A follow up on the on the last question Bill I'm not sure there was there's clarity on where.
Depletions were running for Q2, if it was closer to 7% on a selling day adjusted basis. It's a clarity there I think would be helpful for folks and Ben more broadly maybe you can just comment on the biggest variables impacting your decision to withhold guidance and the contact being particularly strong start to the year sounds like.
June is off to good start Bill you commented the portfolio has never been stronger we're seeing that in India and really strong Nielsen data production is ramping it breweries you've had a strong start to the second quarter commodity still relatively benign enough confidence to deploy some kasper small wind deal you kind of putting sold together and then in addition to the company's obviously.
Very definitely managing through this very sharp and unprecedented channel shift so with all of that said comment on the biggest swing factors here that that the lead the company a little bit reluctant to provide guidance at this point. So thanks for all that.
Okay. Thank you I might that quote some of your some of those things that you just said that was quite nice.
Realm, and the first of all I need to apologize for derived not answer the same question a minute ago and I apologize for that relative to depletions.
Our view is that that the second quarter, specifically starting in June is looking fairly consistent with what the non adjusted amount would be.
And.
The takeout continues to be strongly up to do is look at iron Nielsen every week and you see that the takeout is strong.
Look here's the issue around guidance.
If anybody would have said February that we would have gone through what we just went through over the course of a quarter you wouldn't have believed us.
And while off excuse me on premise was up 75% in the first quarter, a little more actually in wine and spirits.
You started to see some openings, which saw the a decrease to an off sort of 40% plus for a brief period of time now we're turning around and we're seeing closures again in Arizona, and Texas and Florida. So it is very difficult in this particular environment to be able to predict.
While we are anxiously looking for and I would suggest that all of you would want to look for is how our brands performing given there are going to be spent some experts in the marketplace and our brands continued to perform extremely well theres going to be a lot of volatility this year and ability to predict is very challenging admittedly, but.
I think those brands that are tried and true that have strong consumer pull in demand as I stated earlier, we're seeing a significant portion of our existing consumer base buying more than they had done historically that speaks to strong brands and I think that when we are through this pandemic scenario.
That has been very hard to predict we believe we will be right back on our longer term beer sales trends of 7% to 9% growth, which is when im sure. Many of you were interested in.
And certainly every all signs point to the fact that our long term algorithm is unchanged.
Your next question comes from Andrea Teixeira with JP Morgan Your line is open.
Hi, Thank you good afternoon, I have a question and a clarification on the question can you give us an idea the cadence of the near the patients who the quarter, especially as you add fitting me in now in June I think you do you said.
Kind of this five to stick with.
The the I did not just the number for Jim.
But it was wondering what happened in the in the previous scores and then that situation in June is probably because you ran out and just walk out that you mentioned before.
And if you can give us an idea of the 75% decline in terms of the cadence that you had on something that would be much worse in need then utilizing in the beginning of the quarter that would be helpful and the clarification on the wine guidance for the second quarter. You said there was an EBIT down.
Oh gosh, its head down 25 to 10 on a year over year basis is that an organic number or incorporate some of things like the divestitures closing during the quarter. Thank you.
Yes, so I think I'll take the second part I think a wine and spirits one of that first so that the down 25% to 30% really does take into account.
Largely the wind divestiture.
We didn't expect to since its since we're now anticipating are expected to close that in our Q2, we're not expecting to ship much of the divested brands. During our Q2 and then Furthermore, we are expecting on our power brands to have depletions slightly down as we don't.
As we as we don't replicate.
Promotional and shipping activity.
It really was non productive.
And going back to your question about how we think about the month I think your question is a perfect example of why we have not given guidance because it is very very difficult to predict I mean in beginning of March on premise looked fairly normal but the time, we got to the end of the quarter. The first quarter it was up 75%.
Yeah.
I mean, there's good as current these are predicting he couldn't predictive I'd answer so.
And and now we are seeing some marketplaces going back to closure or to significantly reduce volume.
In restaurant and pubs scenarios. So it is just very challenging for us to put an exact number and on.
And how it's going to flow if you could tell me how the pandemic would play out we could give you a much better answer, but as we see and almost the daily basis on on the news, it's impossible to predict exactly with depends on what's going to do which is why we continue to go back to the scenario that says we have extremely strong brand.
And our brands are outperforming in that marketplace and in the channels that are open to us and Thats, how we will continue to judge our success.
Our next question comes from builds a ball with Suntrust. Your line is open.
Thanks. Good afternoon. He just it's just a follow up on the marketing spend.
Trying to understand how you're looking at it you said some events like the into double a.
Turning that have been canceled there could be a case, where your advertising at the world series and the it'd be a chairmanship at the same time.
Yes, so how did you look at it.
Ben for the back half the year, especially around sports spending when a lot of its going to concur and you know and it seems like be very duplicative to advertise all over the place.
Well, you're right, it's more challenging than would usually be and as mark pointed out in his remarks.
The first quarter is a great example, as the weren't a lot of live events and many of the things on which we normally advertise like using the MBA as an example, just didnt exist. So.
We are going to be.
Focused in real time on where we can implement our marketing spend what I think is most important overall as Carl noted, we still expect to spend between nine and 10% on our marketing.
Of our brands up when you look at historical results of companies that continued to spend in recessions and admittedly were in one or we're about to be in one.
Those companies that continued to support their brands came out the back end, even stronger we believe in that and we're going to continue to spend with as you point out that remains in real time adjustments as we go because admittedly it's been very tough to predict what will in fact occur and when it will occur as you're seeing.
Being with things like the baseball schedule, which has moved all over the place add in terms of number of games and how they're actually going to exercise. Those same is true and basketball same is true on many of the the live activity. So the reality is we will be doing this in real time, but it doesn't change our intent which is we.
Going to spend against our brands to make sure. They are top of mind in the consumers in the consumers deal.
Our next question comes from Steve Powers with Deutsche Bank. Your line is open.
Hey, Thanks, actually I wanted to pick up on on that but that that train of thought in terms of just an update on how you're assessing assessing any implications of recessionary economic conditions on your categories and brands I mean, so far as you highlighted the premiumization trends have continued and nicely so but do you see any risk coming.
Of that coming under pressure, even if temporary whether in beer or wine and spirits and just what are you watching most closely keep tabs on that as conditions develop thanks, Sir certainly as you would expect we watch things like unemployment rates.
We are over developed as you know with the Hispanic community and the unemployment rates in the Hispanic community has been significantly higher than the average unemployment rates.
In the in the marketplace today, although all of its in double digits. So thats something that we watch very carefully.
Again, it's the same point with the.
Brand awareness brand loyalty of our brands within those communities are very strong and but we watch those things very very carefully.
Certainly one of the other things that you see and I think it's been exacerbated in the pandemic because of people sheltering as people look for those small moments of join in their lives and Fortunately our brands can often offer those two people. So we think that the strength of our brands.
In conjunction with people engaging more at home than they would naturally and normally do well will be.
Important to that continued success of our business, albeit we're watching a lot of those characteristics like unemployment very carefully.
Our next question comes from.
With Guggenheim Your line is open.
Good good morning, everyone on same sort of you probably need for the question. So.
I'd like to come back to do the wind divestiture to its got to.
It looks like immune to the 250 million an out these based on the podium depletion.
Performance fees could you, a 20 and 21 versus fiscal year 19.
If I read it correctly in the tradition odors between minus 10% for the payments to minus 2% two for 100% payments. So could you. Please tell us.
As we are kind of almost emitted hobby.
The current volume depletion performance of to pull through of Brent you know praying to diamonds to kind of.
Thank you.
Yes. Thanks, Thanks for the question and and what I would tell you is that the the earnout portion of that transaction is really based on the 24 months. After we close the transaction. So we.
We will measure will measure the will measure how those brands performing it into your one and then again at the end of year to those brands have benefited recently bye bye bye what bill as described.
Is the.
Changing consumer behavior, the shifting consumer behavior towards these tried to brands are back to try to rebrand and so some of the brands. Some of the brands that we are divestiture gallons actually recovered quite nicely and that portfolio brands is.
Is.
Our performing.
Much better than it was a year ago at this time. So we feel is that the as we transition that portfolio brands.
To Gallo.
That they're in a very good position in their good good state health that.
We've got a very good chances of getting into that or not in a meaningful way.
Our next question.
And can partners your line.
Thank you and then you'll have to forgive me I'm still confused did you say June beer shipments are roughly minus seven or are you, saying June is down a bit more than minus seven and July and August will help make up or do you get to get the total quarter beer shipments to minus seven.
We didn't comment on shipments at all we've talked about Depletions.
As we've said we have ramped up our production.
During June to normal levels, which will allow us a subsequent quarters, Mike personal suggestion would be that many of you think about the first quarter and the second the third as as in combination because as as our production has ramped up you will see some continuing.
Stress on the shipments side of our business during Q2, and we would expect depletes to outperform ships during the quarter with a lot of that flipping as you go to the latter part of the year again, it still goes back to our long range algorithm around the are being up seven to nine is very.
And consistent we expect that in a long run and we feel this short term pandemic blip as being just that a blip in our long term success.
Thank you and I'm showing no further questions at this time I turn the call back over to Bill Miller for closing remarks.
Great. Thank you thanks, everybody for joining our call today, despite the challenges and extremely volatile environment. There were concurrent with the start of our fiscal year, we delivered solid performance and strong cash flow generation during Q1, which provides us with great momentum as we head into our key summer selling so.
Season.
Let me reiterate that the short term production disruption to our import beer business that we experienced during Q1 does not hinder our long term outlook as consumer demand and takeaway for our brands remains extremely robust in the channels that remain open and we remain optimistic.
Okay about our outlook for the remainder of the fiscal year in closing I'd like to wish everyone Happy fourth of July and hope that your celebrations with your family and friends includes are fantastic beers, our wise and our spirit products. Thanks, again, everyone and please have a healthy and say summer season.
Ladies and gentlemen. This concludes today's conference call. Thank you for participation you may now disconnect.
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