Q1 2021 Constellation Brands Inc Earnings Call
[music].
Welcome to the constellation brands, the first quarter fiscal year 2021 earnings conference call.
At this time, all participants had been placed in listen only mode. Following the prepared remarks, the Colby open for your question.
[laughter] given at that time.
Now kinda falling over the Patti on or 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 Bill Newlands, our CEO and guar tickets in 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 that.
But he'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 call on time, thanks in advance and now here's bill.
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 that have become extremely relevant to our business and our society at large.
First our thoughts and prayers throughout all of 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 in solidarity with the black community and our belief that black why it's doing fact and have always mattered.
We categorically denounce bigotry racism, social and justice and packs of senseless violence in all forms.
They 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 invest $100 million to support African American Black and minority owned startups in the beverage alcohol space and related categories over the next 10 years.
These small businesses serve as 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 in 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 worked 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 out at 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 and 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 Garth 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.
And our wine and spirit power brands continued to gain traction.
Number two.
The 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 the 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 madella, 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.
5% 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 have 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.
We're on a hard seltzer is already the number for hard Seltzer brand and recently achieved I ROI market share of almost 6% of the us seltzer market.
Ongoing distribution gains have led to IR right 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 Selzer's, 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 a 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 enjoyed our great brands in Cinco celebrations at home.
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 especial as the top shared gaining non seltzer beer brand Corona hard Seltzer Pacific.
And Modelo Chelada pneumoniae style.
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 cobot 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 of over 25% for our power brands.
The IR 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 Naomi CECA, the prisoner brand family and Woodbridge by Robert Mondavi.
We continue to invest in additional ways to fueled portfolio growth through innovation capitalizing on priority consumer trends with successful product introductions like the prisoner unshackled for Pheno organic for 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 and 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 wrong barrel aged Charlotte.
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'll see SVEDKA.
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 cobot 19 E commerce for beverage alcohol has exploded increasing three to seven times and volume versus prior year, depending on the channel consumer awareness for E commerce and beverage alcohol has.
Significantly increased and accelerated changing consumer behaviors by several years.
With two thirds of consumer saying, they're planning to continue their ecommerce habits post kogut 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 ecommerce channel, where we'll utilize empathy digitally native platform to reach new as well as thousands of existing loyal consumers.
In addition, empathy focused on producing high quality sustainably made wines sold direct to consumer from its winery via its ecommerce platform at the 20 dollar price point in 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 Bell 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 on New Zealand Savi on block and Parmesan right.
Randy.
As you will recall last December we entered into a separate but related agreement with Gallo to divest our novel brand for 130 million.
This fits with gallows 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 Brandy to SaaS rack for $255 million. As a reminder, last December we announced the parmesan had been excluded from the original transaction due to FCC 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 canopy 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 canopy remains best positioned to win long term in the emerging cannabis space and 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 remained 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, Duvet coat due to coven 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 the 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 Garth who will review our financial results for the first quarter.
<unk>.
During Q1, we improve margins in both our beer and wine in spirit segments.
Delivered solid beer and wine and spirits power brand depletion volume trends do too strong brand performance, despite closures and the on premise channel and shelter in place 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 that pay down and liquidity.
During the quarter, we were able to issue that and very favorable rates and use the proceeds to satisfy $700 million of that coming due on November and Paydown other near term maturities.
Now, let's review Q1 performance in more detail, we're all generally focus on comparable basis financial results.
Starting with beer net sales declined 6%, excluding the impact of the vows point divestiture organic net sales decline a 4% on organic shipment volume down 6%.
Partially offset by favorable pricing.
Q1 shipment volume was negative negatively impacted by reduced production levels at our breweries in Mexico as part of Covid 19 safety measures.
Depletion volume growth for the quarter came in at five 6% driven by Modelo, especially yell and it's successful launch of Corona hard Seltzer as strong performance and the off premise channel more than offset the impact of the reduction in the on premise channel due to Covid 19 related shutdowns.
When adjusted for one less selling being the quarter the beer business generated nearly 7% of depletion volume growth and impressive result in this operating environment.
The large gap between shipment in depletion volume transfer 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.
I'm happy to report an 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 ship it volume shifts from Q1 and Q too into Q3.
Pier gross margin at 55, 6% was flat the prior year is favorable pricing and the benefit of the balance point divestiture was offset by increased operational costs, driven primarily by higher material costs and reduced throughput at our breweries, resulting in unfavourable fixed cost absorption.
Marketing as a percent of net sales decreased 220 basis points to eight 8% is marketing spend decreased due to the implications of Kobe 19, essentially canceling <unk> postponing most sporting in sponsorship events.
With most sports programming on hold during Q1 and big events, such as the NCWA basketball term it cancelled and the short term, where reallocating marketing dollars to lower cost digital marketing efforts and T. V programming the consumers are engaging with and this current environment.
We are recalibrating, our marketing spend and strategy for the remainder of the fiscal year.
However, currently still expect to spend in the range of nine 5% to 10% of net sales on a full year basis.
As such the marketing related margin benefit and Q1 is mostly related to timing.
As a result of the abovementioned factors beer operating margins increased 240 basis points to 41, 7%.
Looking ahead to cue to we expect shipping volume to be negatively impacted as we ran back to normal production levels in June.
Keep in mind that we expect to see some residual margin compression in Q2 is the reduced production levels and Q1 and the start of Q2 will create unfavorable fixed cost absorption.
Which is expected to continue to work its way through the Bureau business results during Q too.
Moving to whine and spirits.
Power power brand depletion volume accelerated and achieved 5% growth is these brands continue to wind and the higher and and across the majority of price segments and 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%.
Klein and net sales was driven by the following.
Lower volume an unfavorable comparison to Q1 prior year due to a very strong quarter last year for the branch to be divested.
On premise and retail tasting room closures throughout most of the quarter as a result of Covid 19.
And net sales of the Black Velvet brands are not included in this year's Q1 as a result of its divestiture late last year.
The decline in net sales as an improvement from our Q1 pre covid targets, we provided for the line 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, Naomi and sped Coca.
And an improvement and some of them in some of the branch to be divested such as black box and Palm Hassan, 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 mixed benefits and the quarter.
Operating margin increased 240 basis points to 28, 3% is benefits from price and mix, along with favorable SG&A, where partially offset by the black Velvet divestiture and higher Cox.
And Q1, we saw the benefits of shipment volume mix, driven by Mayo me and Kim Crawford and favorable pricing for Woodbridge and sped Cup.
In addition, we saw lower promotion expense is scheduled incentive programming activities did not occur due to the current operating environment and Covid 19 related closures for the on premise.
While we expect to continue to see positive price and mixed benefits the remainder of our fiscal year, they should temper versus the very strong price and mix results, we saw it and Q1.
The police and shipment volume for our power brands is expected to temper in Q too as we do not plan to replicate some lower return incentive programs that work that ran during our Q2 fiscal 20.
However, we plan to ship some programming resources for these Brant brands to the back half of the year to better aligned with timing for our key selling season for our wine and spirits business.
In addition, we're assuming a Q too close for the Gallo and other divestiture transactions, which will negatively impact the quarter.
Therefore, we're expecting a decline of 25% to 30% and reported wine in spirit sales and operating income for cute too.
Q1, corporate expenses came in and approximately $51 million up 16% versus last fiscal year.
The increase was primarily driven by unfavourable foreign currency losses, and an increase in charitable contributions primarily driven by Covid 19 support efforts.
Couple of basis interest expense for the quarter decreased approximately 13% to 100 million, primarily due to lower average borrowings.
Are comparable comparable basis effective tax rate, excluding canopy equity in 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 of fiscal 21.
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 Hektoliter expansion project at our Oregon Brewery.
While Covid 19 safety precautions slowed expansion activities at our Oregon brewery. During Q1 construction activities are ramping back up and we expect the 5 million. Hektoliter addition to be click to be completed by the end of fiscal 2021.
Let me remind you that with the completion of the overdone capacity expansion. We believe we will have ample capacity at Nava and over a gun to meet consumer needs over the medium term.
Moving to Canada.
In Q1, we recognized of $197 million decrease in the fair value of canopy investments.
These impacts were excluded from our comparable basis results.
The total pretax net gain recognize since our initial canopy investment in November of 2017.
Is $112 million.
On may 1st we exercise the original warrants with canopy for $174 million and increased or ownership position by approximately 3% to 38, 6%.
The warrants we're in the money in the amount was manageable from illiquidity and leverage standpoint.
We continue to believe in the long term and substantial opportunity and the emerging cannabis market and will remain confident that canopy as best position to win in this space.
As a reminder.
The expiration of future and much larger warrant tranches, we're extended the calendar years 2023 and 2026.
We will evaluate the exercise of each of these warrants prior to exploration as we continue to see how the cannabis industry unfolds, and both Canada and the U S.
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 covid 19 events that began to abruptly and dramatically impact consumers and the marketplace almost concurrently with the start of our fiscal year.
And given the related uncertainty volatility and fast moving developments that have evolved during the first part 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 normalised environment are medium term growth algorithm remains unchanged for both our beer and wine in spirit segments.
This is a good spot to discuss our capital allocation strategy.
While we remain focused on our goal of returning four 5 billion to shareholders and 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 $5 million commitment longer term.
As a result, we're moving this go out to cover the fiscal.
20 to 23 timeframe and the total cash returned in the form of dividends and share repurchases to approximately 5 billion as we add another year of dividends into the mix.
And closing I want to reiterate that our cash generation profile remains strong are quarterly dividend rate has been maintained and we remained focused on actively imprudently navigating through the challenging environment presented by Covid 19.
And we look to provide updates is more factors become known.
That bill and I are happy to take your questions.
Thank you gentlemen, can I ask a question you let me start wandering your telephone.
What's your all your questions.
Thank you. Please let me just ask you one question.
We can how did you want me last time.
First question comes from Brian Listen to America, you line is open.
Good morning, everyone.
Hey, Brian.
So.
I guess a question on the wide.
And maybe two related one was.
Thank you took the price increases earlier this year on Woodbridge and maybe some other brands so.
Just wanted to see 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 claiming to do with a wine business this year.
Brand positioning and marketing increases and just want to understand if that's actually happening still do that in this current environment.
Sure you bet. So we didn't fact take price increase.
Woodbridge and I must say one of the things that has been a benefit of Kobe is that if there are any.
That consumers have continued to buy tried and true brands of which Woodbridge as 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.
Oh, good we're going to continue to watch that as you would expect but so far that's that's gone very well.
I would also say that some of the new product introductions that we have put into.
Woodbridge have performed and we're expecting to continue to perform very well.
That's 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 and direct to consumer and three tier E Commerce, which goes very well too strong brands like the prisoner and Mayo me.
And brands of that Elk so.
Going to continue to to put focused on those brands <unk>.
We think they are very well positioned and those brands are tried and true brand brands in the minds of the consumer which at the moment is where the consumer spending their dollars.
Our next question comes from Bonnie Herzog with Goldman Sachs. Okay.
Alright. Thank you good morning, everyone.
Hi.
I had a question on stock.
Keith Summer holiday sneak with of course, so hoping you guys could share with us how you feel specifically about the holiday and your supply also maybe love to hear some more color on what you're doing to minimize the destruction proud of stocks for instance, I've I've heard from some of the distributors that youre doing dropped load.
I guess I'm trying to get a sense.
You how flexible you can be on the production side.
With all of this and then maybe finally can you touch on how big of a drag some of these shortages and maybe any initiatives you might be taking to minimize the.
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 is best to class and we are doing everything we can do at the moment to expedite shipments.
Our breweries through our distribution facilities and out.
Through our distributors to consumers.
Certainly.
Because of their reduced production that occurred.
During about 70 plus days.
Mostly in the first quarter.
It certainly reduced our ability to ship to normal levels, but let's keep in mind that 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 Q too as well. So we are in a very strong physician keep also in mind that during the mandated cove at 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 modelo or Corona and the brand families associated with those will be able to.
<unk> during the holidays.
Thank you. Our next question comes from Nick Modi with RBC. Your line is open.
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 habit how long.
What the growth curb for the beer business will look like.
Not only next six months, but the next two three years. So I was hoping maybe you can provide some content on the following three.
One is <unk>.
Number of new household or <unk>.
<unk> 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 hottest stopped situation and you were able to actually provide products and maybe some packages work.
But I'm sure that honest thoughts did costs do some sale. So I'm just curious maybe you can help <unk> how much business would have grown on depletion had there been no issue and add a stops at all and then the third pointed obviously retailers are.
Thinking rethinking how do you think about the shelves 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 space and for your brands of retail longer term.
Sure.
Let's take it reverse order.
<unk> to the shelf obviously, the one thing that's occurred during this particular timeframe has some of the resets that would normally occur.
Have been pushed back as many retailers are focusing their attention on throughput from your existing shelf set we think that NSA.
Come into the fall season, they're dewfall reset.
That this will continue to increase the probability of shopper, one because I think it's become more and more clear that brands that that have strong demand behind them in order to great examples with them in Delaware Corona franchises.
Part demanding more space and they're demanding more space because to take out is there against them.
It's kind of difficult to give you a specific example, about what we could have grown because I had so many different factors involved in the quarter.
Our quarter of course started almost concurrent with the pandemic, which was a little different than if you were on the 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 got a lot of different dynamics and play though.
As I said earlier, we sincerely believed that.
The consumer wanting to buy our brands, we'll be able to buy Corona modelo.
And certainly.
The start of Corona hard Seltzer has also been a real a real success.
We have already shipped in excess of three many cases.
Corona hard shelter and as I said my prepared remarks.
Takeaway and repeat has been exceptional so what other things we are seeing relative to your first question in terms of <unk>.
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 takeout demand.
During this time frame it goes back to what I said earlier about tried and true brands. The same would apply to many of our our wyman spirits brands as well.
But certainly the.
The consumers interested buying brands in which they have a lot of faith in comfort.
Is working to our advantage.
Thank you. Our next question comes from Vivian either with Kelly Your line is open.
Hi, Thank you.
Alright, I was wondering thanks for the color in terms of the marketing.
And outlook I was wondering if you could offer any color.
Taking it out.
Not in winter.
Different kind of lean into the post because they've recovery, perhaps and then quick follow up.
We appreciate your comment at the top of the call and I'm curious whether you guys are attempting any teams to your social media advertising. Thanks.
Yeah, maybe and thanks for the question.
As it relates to marketing spending 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 Kobe 19, and we don't know exactly when some of these sponsorships and a sporting events might might get rescheduled so.
Other than we still believe that we're going to spend at nine 5% to 10% of net sales for the full year. The phasing phasing is still open up in the air.
So.
Relative to social media.
There's obviously been a lot of discussion around social media.
I would say and 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 into racial equality.
We have decided that we're going to do a comprehensive review.
Social media work.
And along with that for the month of July we are pausing or Facebook engagement.
Until we were 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 ratio with quality.
Thank you. Our next question comes from Robert.
With Evercore your line is open.
Great. Thank you very much just one point of clarification and then my question just can you just break out.
The price mix and 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.
Now in the mix Big time, with Corona, Seltzer, which I think you said, it's 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 thought in terms of instrumentality to the entire beer category.
At this point thank you.
So relative to those two or three questions. In there we continue to have our long term algorithm, particularly as it relates to beer.
Expecting the price will grow 1% to 2% annually, we have done that consistently over time or we expect that 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 could double and probably triple in the long run if anything that's starting to look conservative.
Consumers certainly enjoys the refreshment characteristics.
Of this particular category and I think our introduction 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.
Even the instrumentality that we've seen that roughly 90%, which again, it's more than we frankly expected.
Suggest to us that it is not necessarily direct trade off with beer and I think it has.
It has category dynamics that are free and understanding of the room. 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 is you know we've already gotten some number four in the category with a roughly 6% sure and.
As you also know we're just warming up.
Thanks.
Thank you. Our next question comes from the line Bergerman with Barclays. Your line is open.
Great. Thanks.
And then hopefully you guys could give us a little bit of help on Nicole small getting branch this quarter.
Particularly and beer.
They may you mentioned that you will see sandwich.
And can see below production mountain Lions.
And I think maybe just a little bit invincibility on the drivers gross margin quarter and thinking about how that develops.
Yeah.
Thanks.
Yeah, So so gross margins for beer.
Had some drags there as it relates to to materials and to fixed overhead absorption.
That drag was was offset by by the balance point divestiture as well as by pricing.
Going forward into Q too, we expect that there'll be further downward margin pressure as it relates to fixed overhead absorption.
As as we work through the inventory or the slow down that we had it in Q1 at the very beginning Q too.
At gross margin.
Flattish gross margin in fear that resulted in about 240 basis points of improvement at at the operating line.
Because of primarily the timing of the marketing spend that we talked about earlier.
Our next question comes from Sean King with UBS.
Hi, Thanks, My question I apologize, but I missed this but deep red any update on Mexicali, and I guess that potential options you're exploring there.
We continued to me in discussions with the Mexican government about what our long range of plans are from Mexico as you know and that's <unk> stated.
Based on the expansions that we already have an play.
Our medium term is already has already set.
We believe there's going to be plenty of opportunity spend more than 30 years, working very well with the Mexican governments, both local and federally and we expect that to continue with we expect to have a strong long range solution.
Four are continuing supply.
For the long run so I.
I don't have anything noodle 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 Darren.
Good morning, you line is open.
Okay. Good afternoon guys.
Okay. So.
First just to clarification, you mentioned depletion levels and Q2, one beer so far consistent with Q1 is that versus the reported five 6% depletion result, or is that more 7% on the days adjusted basis.
And then just from Carota poured seltzer with the strong repeat rates you mentioned can you give us a sense for what's your level you think that brand can ultimately reach within the heart Seltzer category and also with distribution level would be reasonable to expect that branch because.
Thanks.
Sure.
Let's let's start with the heart Seltzer question, we already are seeing ACB distribution and IRI channels of approximately 65, which is very strong.
Especially given the fact that as I said earlier, many retailers are not doing the resets.
But they had planned earlier part of this year.
It remains to be seen what are what are long term scenario looks like we're already about 6%.
No. We've only introduced so far and variety Act, we would expect to extend beyond just variety pack later this year and into the following years. So we're very optimistic that we're going to have a.
Portland part of the shelter category.
And certainly would expect to be in the top three overall within that category.
Going forward.
Our next question comes from Kevin Glen Me with Jeffrey.
Hey, Thanks, good afternoon, and congrats on the strong quarter.
I can follow up on the on the last question I'm not sure. There is there's clarity on where to.
Please and for running for Q too if it was closer to 7% on selling day adjusted basis. So clarity there I think we'd be helpful for folks and then more broadly maybe you can just comment on the biggest variables impacting your decision to withhold guidance and contact being particularly strong starting to the year sounds like <unk>.
Unions off to a good start Bill you commented the portfolio has never been stronger, we're seeing that and and and really strong Nielsen data production is ramping breweries you've had a strong starting to the second quarter commodities still relatively benign enough confidence to the point in Casper small wind deal I'm kind of putting this all together and then in addition to the company is obviously.
Very definitely managing through this very sharp an unprecedented channels shift so with all of that said comment on the biggest swing factors here that leave the company a little bit reluctant to provide guidance at this point. So thanks for all that.
Okay. Thank you I might get a quote some of your some of those things that you just said that was quite nice.
And the first of all I need to apologize for not answer the same question a minute ago and I apologize for that relative to depletion.
Our view is that the second quarter, specifically starting in June is looking fairly consistent with what the non adjusted amount would be.
And.
Take out continues to be strongly have to do is look at iron Nielsen every week and you'll see that to take out a strong.
Look here's the issue around guidance.
If anybody would've 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% and the first quarter, a little more actually in wine and spirits.
You started to see some openings, which saw that a decrease two and off sort of 40% plus for a brief period of time now returning around and we're seeing closures again in Arizona, and Texas and Florida.
It is very difficult in this particular environment to be able to predict.
We are anxiously looking for and I would suggest that all of you would want to look for.
How are brands performing given there are going to be spits in spurts in the marketplace and our branch continuing to perform extremely well, there's going to be a lot of volatility this year and the ability to predict is very challenging admittedly, but I think those brands that are tried and true that have strong consumer Poland demand as I.
Standard earlier, we are seeing a significant portion of our existing consumer base buying more and they had done historically that speaks to try and 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 what I'm sure many of you're interested in.
And certainly every all signs point to the fact that are long term algorithm is unchanged.
Our next question comes from Indiana.
P. Moggy your line is open.
Thank you good afternoon I have a question clarification on the question can you give us an idea of the cadence of the near the patients who the quarter, especially Andrew as saving me and knowing June I. Thank you Bill you said.
Kind of the five to six.
Would be the just the number for June.
But I was wondering what happened in the in the previous card and then that situation in June is probably because you ran out and this lockouts that you mentioned before.
And if you can give us an idea of the 75% decline in terms of the key then said you had not something that would be much worse in knee then utilizing in the beginning of.
The quarter that'll be helpful. In the clarification on the wine guidance for the second quarter, you said figures and EBIT now gotcha.
25 to 10.
Year over year basis is that an organic number or incorporate some of the type of the divestitures closing during the quarter. Thank you.
Yeah, So I'll take I'll take a second part I think a wine experienced one of that first so the down 25, 30% really does take into account.
Largely the wind divestiture.
Yeah, we didn't expect to since it's since we're now anticipating are expecting to close that in our Q2, we're not expecting to ship much of the divested brands during our Q too and then Furthermore, we are expecting on our power brands to have depletions slightly down as we don't.
Because we don't replicate.
Some promotional and shipping activity.
That really was nonproductive.
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 giving guidance because it is very very difficult to predict.
Beginning of March on premise looked fairly normal, but the time, we got to the end of the quarter. The first quarter it was off 75%.
I mean, there's good as Carthage predicting he couldnt predicted that answering so.
And and now we are seeing some marketplaces going back to closure or to significantly reduced volume.
In restaurant and pumped 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 daily basis on on the news it's impossible to predict exactly what depends on what is going to do which is why we continue to go back to the scenario of it says we have extremely strong bread.
And our brands are outperforming in the marketplace and and the channels that are open to us and that's how we will continue to judge our success.
Our next question comes from Dallas.
Suntrust's your line is okay.
Thanks. Good afternoon. He just just a follow up on the marketing spend may.
Stand how you're looking at it as you said some events like the NCAA.
Tournament have been cancelled there could be a case, where your advertising at the world series and the NVA chairmanship at the same time.
So how did you look at.
The spin for the back half of the year, especially around sports spending when a lot of it is going to concur and.
And it seems like be very duplicative to advertise all over the place.
Well you are right, it's more challenging that would usually be and <unk> pointed out in his remarks.
First quarter was a great example is the word a lot of life events and many of the things on which we normally advertised like using the MBA. As an example, just didn't exist so we're going to be.
Focused in real time on where we can implement or marketing spend what I think is most important overall is garlic noted, we still expect to spend between nine and 10% on our marketing.
Of our branch.
When you look at historical results up companies that continued to spend and recessions.
Admittedly, we're in one or we're about to be in one.
Those companies to continue 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 would mean, some 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.
With things like the baseball schedule, which is moved all over the place.
In terms of number of games and how they're actually going to exercise those same as true basketball same as children. Many of the live activities. So.
Reality is we will be doing this in real time, but it doesn't change our intent, which is we're going to spend against our brands to make sure. They are top of mind and the consumers into consumers deal.
Hello next question welcome Steve Powers Deutsche Bank. Your line is open.
Yeah.
Actually I wanted to pick up on that.
Train of thought in terms of just an update on how you are assessing assessing any implications of recessionary economic conditions on your categories and brands. So far as you highlighted premeditation trends of continued and nicely. So but do you see any risks coming of that coming under pressure, even if temporary whether and beer or <unk>.
And spirits and just what are you watching most closely keep tabs on that is conditions development.
Certainly.
You would expect we watched things like unemployment rates.
We are overdevelop as you know with a Hispanic community and the unemployment rates and that Hispanic community have been significantly higher than the average unemployment rates.
And the marketplace today, although all of it as in double digits. So so that's something that we watch a very carefully.
Again, the same point the.
Brand awareness brand loyalty of our brands within those communities a very strong.
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 Joanne their lives. Unfortunately.
Brands can often offer those two people. So we think the strength of our brands.
In conjunction with people engaging more at home than they would naturally and normally do.
B.
Important to the continued success of our business, albeit we're watching a lot of those characteristics like unemployment very carefully.
Our next question comes from Alright, Grandad with Guggenheim Your line is open.
Good good morning, everyone thinks what are you able to any further questions. So.
I'd like to come back to the wind divestiture too it's going to.
It looks like give me the the $250 million now is based on the volume depletion.
Performance <unk> 2021 versus.
19.
If I really correctly and depression, others between minus 10% for the payments two minutes, 2% for 100% payment. So could you. Please tell us.
We're kind of put when was it.
Alright.
The current Voume depletion performance of the pull through our friends you upgrading to divert it's two two Kendall.
Thank you.
Yeah. Thanks, Thanks for the question.
What I would tell you is that.
You're not portion of that transaction is really based on the 24 months. After we close the transaction so.
Who will measure will measure the measure how those branch performing at the end of year, one and then again at the end of year to those brands have benefited recently bye Bye Bye what bill is described.
Is the <unk>.
Changing consumer bad behavior of the shifting consumer behavior towards these tried-and-true brands are back to tried and true brands and so some of the branch some of the branch that we are divesting topgallant actually recovered quite nicely and that portfolio brands is.
Performing.
Much better than it once a year ago at this time. So we feel is that as we transitioned that portfolio brands.
To Gallo, but they're very good position and they're a good good state of health that.
<unk> got very good chance of getting into it or not in a meaningful way.
Our next question.
Okay.
Partners.
Thank you and then you'll have to forgive me still a bit confused did you say June beers shipments are roughly minus seven or are you, saying June is down a bit more than minus seven in July and August will help make up for a ticket to get the total quarter beer shipments to minus seven.
We didn't comment on shipments at all we talked about depletion.
As we said we have ramped up our production.
During June to normal levels, which will allow us.
Subsequent quarters my personal suggestion would be that many of you think about the first quarter and the second and the third.
In combination because as our production is ramped up.
You will see some continuing.
Stress on the shipment side of our business during Q too and we would expect to police to outperform ships during the quarter.
Lot of that flipping as you go to the latter part of the year again, it's still goes back to our long range algorithm around there being up seven to nine is very consistent we expect that in the long run and we feel that 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'd like to turn the call back later Bilbaoans foreclosing remarks.
Great. Thank you.
Thanks, everybody for joining our call today.
Quite the challenges an extremely volatile environment that 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 have into our key somewhere selling season.
Let me reiterate that the short term production disruption to are important beer business that we experienced during Q1 does not hinder or long term outlook is consumer demand and take away for our brands remains extremely robust and the channels that remain open and we remain optimistic.
About our outlook for the remainder of the fiscal year.
In closing I'd like to wish everyone. A happy fourth of July and hope that you're celebrations with your family and friends includes are fantastic Bierce, our wives and our spirit products. Thanks again, everyone. Please have a healthy and say summer season.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may know disconnect.
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