Q2 2021 Constellation Brands Inc Earnings Call
Following the prepared remarks, the call will be open for your questions.
Instructions will be given at that time.
Now I'd like to turn the call over to Patty Allen you Garland Senior Vice President of Investor Relations. Please go ahead.
[music]. Thanks, Jonathan Good morning, and welcome to Constellation's second quarter 21 conference call I'm here. This morning, with Bill Newlands, our CEO and guar tickets and our CFO.
<unk> 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 company's website <unk> tea brand 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 build similar to prior quarters I would like to ask that we limit every lunch one question per person, which will help us to end our call a time, thanks in advance and now here so.
Thank you Barry good morning, and welcome to our second quarter Conference call.
Before I begin with a discussion of our performance in the quarter I'd be remiss if I didn't acknowledge the continued an unprecedented challenges of this year marked by the ongoing impact of the cobot 19 pandemic.
Going social unrest rooted in a long history of racial injustice in this country and the most recent string of natural disasters, including wildfire across the western part of the United States.
As it relates to the fighters Fortunately all constellation employees are safe and accounted for and there have been no direct impact to any of our facilities.
That said our hearts go out to those who have been adversely affected by the fires and we send our sincere thanks to the brave firefighters and other emergency personnel working tirelessly to battle, the fires and keep people safe.
I'd also like to thank the members of our constellation team, who continue to pull together despite adverse circumstances to drive the success of our business, including excellent second quarter results.
As Garth when I review these results we'd like.
We'd like you to focus on three key takeaways first and what was it.
And what was expected to be our most challenging quarter of the year, our team overcame cold weather related headwinds to deliver solid business performance in Q2.
This performance was led by our beer business, which grew depletions by almost 5% as we continue to see incredible consumer demand for our portfolio brands.
Well the Cobra related slowdown of our beer production in Mexico earlier in the year impacted shipments and net sales in Q2 and created some temporary out of stocks at retail we are quickly recovering and expect inventory to return to normal levels by the end of Q3.
And we're beginning to see accelerating consumer takeaway trends in Iraq channels.
As we work to ensure that consumers can find their favorite constellation products on the shelf at retail.
Second our way.
Our wine and spirits Premiumization strategy continues to gain traction.
As our higher end wind power brands outpaced the U.S. high end wine category and I are right.
Regarding the gallery transaction, both constellation and go remain committed to completing this transaction and we're very encouraged by the progress that we've been making.
We continue to receive positive feedback from the FTC step in addressing the concerns that they raised related to the transaction.
Based on our interactions with the FTC, we expect a consent decree will be submitted to the commissioners for review and approval in the coming weeks.
We're happy to say that this marks the final stage in this process.
Once final approval is received closing can happen quickly, which allows us to forge ahead with the strategy for our wine and spirits business.
And third the.
The strong performance delivered by our beer and wine and spirits businesses drove strong cash generation, allowing us to further reduce our debt and progress towards our desired leverage range as a result.
As a result, we are well positioned to deliver a solid year of organic growth in fiscal 21.
Let's move to a more fulsome discussion of our beer business performance in the quarter.
Despite the challenges posed like open 19, including the continued partial closure of the on premise, which was down 50% in the quarter year on year comp.
Constellations beer business continues to be one of the largest contributors to U.S. beer industry growth.
During the second quarter, our beer business delivered 11% growth in <unk> right channels overall and more than 15% growth for our priority skews.
This performance was driven by 12% higher right growth for Modelo especial as the brand solidified its position as the number three beer brand in the U.S. beer market and the brand family is on track to deliver its 35th consecutive year of growth.
The Corona brand family also grew double digits and I are right channels with the most significant contributions coming from Corona hard Seltzer Corona Premier and Corona extra.
We continue to be thrilled with the performance of Corona hard Seltzer.
Despite launching this new brand in the midst of a pandemic.
Which presented us with an prevented us from engaging in a number of the activities conducive to introducing a new brand.
No hard Seltzer has become one of the most successful new product launches in our company's history.
With the launch of only one skew to date the brand continues to exceed our expectations and has already achieved the number four position in the category.
To put this in perspective Corona hard seltzer, it's the second fastest moving hard seltzer.
Repeat that.
Corona hard Seltzer is the second fastest moving hard seltzer for those seltzer brands with significant distribution and velocity.
And it remains strong as we continue to pick up distribution.
These ongoing distribution gains have led to our eye ACB distribution approaching 70% since product launch in March and today. The brand has maintained incrementality levels at the 90% rate significantly outpacing our expectations.
Corona hard seltzer over indexes to the span of consumer relative to its competitors, which unlocks an untapped opportunity for this category with the fastest growing demographic in the country.
Currently 15%, 20% of brand volume is estimated to come from Hispanic consumers, while other seltzer brands are closer to 10 to 15.
Our expectations for the hard Seltzer category growth are extremely high and our intention is to become a top three player in the hard seltzer market. As we believe there is a natural and compelling connection between what the Corona brand stands for and what consumers want and the seltzer.
Threshing, great taste, and flavor and ours and zero carbs zero sugars and only 90 calories.
In the future you will see us expand with new flavors, new packages and even new platforms. So stay tuned.
From an operational perspective, we continue to engage in constructive conversations with the Mexican government as it relates to our future plans for production in Mexico.
Meanwhile, we are progressing with the 5 million hectoliter expansion of our Overgaard facility, which is expected to be completed by the end of this fiscal year.
As a reminder, after the completion of the overhang on capacity expansion. We believe we will have ample capacity at the Nava and overgaard breweries to meet consumer demand over the medium term.
This includes more than doubling of our seltzer production capacity heading into our next fiscal year.
Let's now move to the quarterly results for our wine and spirits business.
I'm pleased that we're nearing the finish line with the gala transaction, which paves the way for accelerated growth and margin performance for our wine and spirits business going forward.
It also aligns with the vision for our business to be a bold and innovative higher end wine spirits company with distinctive brands and products delivering exceptional consumer experiences.
During the quarter, we continued to see the staying power of the consumer led premiumization trend with premium price point segments, continuing to outpace value price segments further reinforcing the strategy of our business.
In fact, our higher and wind power brands at the greater than $11 retail price point outpaced the U.S. high end wine category and I are right channels, driven by me Kim Crawford and the prisoner portfolio, all of which posted double digit growth in IRA channels.
For the quarter.
These trends drove excellent margin performance for the business as price and mix benefits for this higher end stable of brands drove significant margin enhancement.
Throughout the remainder of the year, we plan to continue to invest in capabilities that position, our wine and spirits business for long term success.
The wine spirits innovation pipeline is playing with impactful product introductions as we entered the peak seasonal period for the business.
These initiatives are aligned with the key consumer macro trends, a betterment convenience and sustainability that we believe can drive scale going forward.
Key product launches include the prisoner, Cabernet Sauvignon and Chardan neighbor Islands.
FATCA and high west ready to drink cocktails Rick.
Ruffino widespread Sir and May all me Cabernet Sauvignon.
These initiatives will be supported throughout the remainder of the year with impactful marketing campaigns to strengthen and build the portfolio.
And while we're already a leading player in three tier ecommerce. We're excited about our renewed focus on the direct to consumer space with our acquisition of empathy and our minority investment in the Booker vineyards business as we believe E commerce, including DTC can become a key.
Both driver for our business.
Ecommerce for beverage alcohol has exploded due to the pandemic, increasing three to four times in volume versus prior year.
We were focused on E. Commerce is a growing channel even before coven and have further accelerated our strategy with increased resources and focus on digital shelf management and redeploying marketing dollars to support our digital commerce channels.
Now I'd like to take a minute to address the unfortunate wildfire situation in the <unk> in the west in a bit more detail.
As mentioned and thankfully all of our employees are accounted for and safe and no constellation properties have been impacted by the fighters.
While were more than 70% through harvest. It is still too early to determine the overall impact the fires and resulting smoke might have on this year's vintage. However, we continued to perform extensive testing and evaluation and we have considered a number of potential contingencies and options.
As we progress through harvest based on our perspective at this point.
That said, we are committed to providing consumers with the same high quality wine they've come to expect from our higher end brands and despite potential impacts from the fibers, we fully expect to be able to meet consumer demand for our excellent portfolio of products.
Chris will provide some additional details in a few minutes on that topic.
Now moving to our ventures portfolio last.
Last year, we announced our commitment to invest 100 million to support African American Black and minority on start ups in the beverage alcohol space as part of our efforts to enhance diversity and access to opportunity within our industry.
We're happy to say we've received significant interest in this program to date.
We've also made good progress over the past several years with our focus on female founders initiative as female funded and or female led businesses now account for more than half of our ventures portfolio.
We see an opportunity to make similar progress in supporting African American Black and minority businesses in the coming years and look forward to updating you on our progress.
We've recently acquired a minority stake in the Booker vineyards business.
Super luxury direct to consumer focused wind portfolio to further align our wine and spirits business to changing consumer preferences.
We believe this relationships strengthens our fine wine portfolio and our long term aspiration to build a strong omni channel business that includes category leadership in DTC and three tier E commerce.
Additionally, we recently acquired the remaining interest in copper and Kings American branded company, which marks our first full ventures acquisition.
Copper and kings is a cutting edge distillery.
Primarily produces highly differentiated American brandy with a tasting room and restaurant located in the heart of Bourbon country in Louisville, Kentucky.
This acquisition allows us to play in the rapidly emerging craft spirits market, we're premiumization trends remain robust.
Finally, we're pleased with the progress that the canopy growth team has made in prioritizing their strategic direction to focus on what's needed to become a world class CPG company.
They've identified goals for their core markets right sized their footprint balance supply and demand needs improved execution and made progress in reducing operating expenses and cash burn.
I'm, especially excited about the successful launch of the record 2.0 cannabis beverage products in the Canadian cannabis market. We're canopy has a 75% market share in the top four skews in the category shipping more than 1.6 million cans since launch in March.
For comparison in the calendar year 2019, a total of 4 million cans of cannabis beverages were sold in the entire U.S. market over the course of that year, So great progress to date.
We believe that beverages and other record 2.0 products will attract new consumers to the market and further drive conversion from the illicit market.
And earlier today cannot be growth announced plans to bring its line cannabis beverages to the U.S. next summer through its revised agreement with acreage holdings.
Overall canopy remains the best position to win long term and the emerging cannabis space and is well capitalized to face the challenges associated with this current economic environment.
In closing I want to take you back to the three key takeaways mentioned at the top.
I'm extremely proud of the results our team has driven in the face of continued adversity and what was expected to be our most challenging quarter of the year our team overcame covert related headwinds to deliver solid business performance in Q2.
Our beer business continues to be a top growth driver within the industry and we're seeing accelerating consumer takeaway trends in IRA channels as we work to rebuild our inventory position.
Our wine and spirits Premiumization strategy continues to gain traction and we are in the final stages of completing our transaction with Gol, which paves the way for accelerated growth in margin performance for our wine and spirits business going forward.
And our performance in the quarter drove strong cash generation, allowing us to further reduce our debt and progress towards our desired leverage range. As a result, we are well positioned to deliver a solid year of organic growth in fiscal 21.
This year also marks our company 70, Fiveth anniversary, we have a strong legacy of success that we're extremely proud of our.
Our continued growth and resilience will help ensure the future of our company remains extremely bright and as they.
And as I, often like to say to our team. We firmly believe the very best is yet to come and we.
And with that I would like to now turn it over to Garth who will review our financial results for the second quarter.
Thank you Bill and Hello, everyone.
Despite an uncertain economic environment and headwinds related to covert 19 constellation brands continues to generate strong financial results.
During our second quarter, we generated comparable basis EPS, excluding canopy growth of $2.91.
Continued to deliver strong margins in both our beer and wine and spirits segments.
And increased free cash flow by 10%.
Resulting in ongoing debt repayment and progress in achieving targeted leverage.
Now, let's review Q2 performance in more detail, we are all generally focus on comparable basis financial results.
Starting with beer.
Despite reduced shipment volume in Q2 related to covert 19, net sales were flat to prior year excuse.
Excluding the impact of the ballast point Divesture organic net sales increased 1% on organic shipment volume down, 1%, which was partially offset by favorable pricing.
Depletion volume growth for the quarter can nearly 5% driven by Modelo especial and the successful launch of Corona hard Seltzer strong performance continued in the off premise channel and more than offset the impact of the nearly 50% year over year reduction in the on premise channel due to covert 19.
In Q2, we benefit benefited from one extra selling day when adjusted for the extra sell they impact the beer business generated approximately 4% depletion volume growth.
In Q3 depletion selling days are flat year over year.
What depletion trends tempered in Q2 versus Q1 due to some out of stocks, resulting from the slowdown in production earlier in the fiscal year, we remain confident in the strength of our business as underlying consumer demand remains quite robust.
We are making good progress in rebuilding inventory supply across our network both at our distribution centers and with distributors. Following the production slowdown for nearly for roughly two thirds of our Q1 and the beginning of Q2 that created out of stocks at retail and negatively impacted depletions during the quarter.
We expect distributor inventory levels to return to more normal levels by the end of Q3 shipment volume is expected to outpace depletion volume during the quarter.
Moving on to beer margins beer gross margin of 55.7% was flat to prior year as favorable pricing and the benefit of the ballast point Divesture was offset by unfavorable mix and increased operational costs, driven primarily by higher material costs and reduced throughput at our breweries, resulting in another.
Favorable fixed cost absorption.
Marketing as a percent of net sales decreased 70 basis points to 8.4% as marketing spend decrease resulting from covered 19 related sporting and sponsorship event cancellations and or postponements.
As a result of the above mentioned factors beer operating margins increased 70 basis points to 42.5%.
Looking ahead to the balance of the year, a couple of items to touch on from a beer segment perspective.
First we plan on taking selective price increases this fall for our pricing strategy, we implement price increases annually on a market by market and SKU by SKU basis, depending on the dynamics within a given market. This year, our pricing approach remains intact. However, the timing of the price increases could be more.
Our staggered throughout the back half of the fiscal year and in some instances may shift into the beginning of our fiscal year 2020 with.
With that said for fiscal 21, we still expect 1% to 2% of pricing within our Mexican portfolio.
Second our mark.
Our marketing spend in the first half of our fiscal year was significantly muted as a percentage of net sales.
Decreased to 8.6% due to the lack of sporting and sponsorship events.
However, during the back half of the fiscal year, we are committed to an increase in spending behind our brands.
Especially by leveraging the return to sports as such.
As such we expect marketing spend in the range of 9% to 10% of net sales on a full year basis.
Moving to wine and spirits.
Our wine spirits power brand strategy continues to gain momentum as marketplace performance for our higher end power brands continues to outpace the higher end segment.
However, as expected power brand depletion volume decelerated during the quarter, resulting in a 1% decline while overall depletion volume for Q2 declined 3%, reflecting the brands to be divested.
To better align with our strategy for the business going forward, we did not replicate some lower return incentive programs and pricing initiatives that ran during our Q2 fiscal 20.
During the quarter, we also work to rightsize inventory on hand, several chain retailers in key states well this drove a negative impact to depletion trends in the quarter. This will allow us to better manage inventories on a go forward basis.
Wine and spirits net sales declined 11% on shipment volumes down 19%.
Excluding the impact of the black Velvet divestiture organic net sales declined 9%, reflecting shipment volume to decline approximately 17%, partially offset by robust price and mix benefits in the quarter.
Q2, net sales results outperformed our previously communicated expectations, primarily due to incremental shipments from the brands to be divested driven by the timing of the gala transaction.
Operating margin increased 310 basis points to 25.9% as benefits from price and mix along with lower marketing spend were partially offset by higher Cogs and SGN as a percentage of net sales.
Higher Cogs, mostly reflect increased packaging cost, including glass and labels, partially offset by lower freight costs.
In Q2, we experienced continued margin expansion driven by shipment volume mix, resulting from some of our fast moving power brands, such as Kim Crawford Mayo me and the prisoner brand family and favorable pricing for with Woodbridge Inspector.
In addition, we saw lower promotions as some incentive programming activities did not occur due to the current operating environment and cobot 19 related closures for the on premise.
The marketing benefit to margin in the quarter is mostly related to timing as we plan to shift marketing dollars from the first half into the second half of the fiscal year to support key marketing and advertising initiatives for our power brands and innovation launches as we enter our peak selling season.
Let me point out that a majority of the shift will occur in Q3, resulting in an increase in year over year spend for the quarter.
As Bill discussed during August significant wildfires broke out in California, Oregon, and Washington State we are.
We are currently monitoring and assessing the impact of the smoke damage from these wildfires as we progress through the August to October harvest season.
At this time, we do not expect a material impact to our ability to meet consumer demand.
However, we expect our margins to be impacted as we recognize costs in the remainder of the fiscal year due to due to decreased production levels driving unfavorable fixed cost absorption.
Currently we are estimating these costs.
About 25 to 35 million in Q3, and 10 to 50 15 million in Q4 fiscal 21.
As Bill mentioned, we expect a consent decree will be submitted to the commissioners for review and approval in the coming weeks and therefore expect the Gallo and other ancillary deals to close by the end of Q3.
Therefore, we are expecting reported net sales for wine and spirits to be flattish to prior year in Q3, while expecting a decline of 20% to 25% in reported wine and spirits operating income, reflecting the negative impact of the wildfires and increased marketing expense during the quarter.
Now lets proceed with the rest of the piano.
Fiscal year to date corporate expenses came in at approximately $110 million up 13% versus fiscal versus last fiscal year.
The increase was primarily driven by increased compensation and benefits unfavorable foreign currency losses, and an increase in charitable contributions primarily driven by cobot 19 support efforts, partially offset by reduced team. He spent.
Couple of a comparable basis interest expense for the quarter decreased 10% to approximately $100 million, primarily due to lower average borrowings as we continue to decrease our leverage ratio.
Our Q2 comparable comparable basis effective tax rate, excluding cap cannot be equity earnings impact came in at 16.9% versus 15.2% in Q2 last year, primarily driven by higher effective tax rate on our four businesses, partially offset by increased benefit from stock based compensation.
Yeah.
Well, our pre cobot estimated full year EPS, why 21 comparable basis effective tax rate excluding cannot be equity earnings impact was 18%. We now expect the rate to approximate 19%. The one percentage point rate increase versus our pre cobot estimate primarily reflects an estimate.
At higher marginal rate on foreign earnings.
Moving to free cash flow, which we define as net cash provided by operating activities less capex, we generated free cash flow of 1.2 billion for the first half of fiscal 21.
This represents an impressive 10% increase.
Free cash flow improvement reflects strong operating cash flow and lower capex.
Fiscal year to date, Capex totaled $278 million or approximately 22% below last year's spend.
This included approximately $200 million of beer Capex, primarily driven by the 5 million hectoliter expansion project.
At our Overground brewery, which we expect to be to be completed by the end of fiscal 2021.
Moving to Canada in Q2, we recognized a $48 million decrease in the fair fair value of canopy investments.
These impacts were excluded from comparable basis results the tone.
The total pretax net gain recognized since our initial canopy investment in November of 2017 is $64 million.
In August canopy reported first quarter fiscal 21 results. We're pleased with the progress has been made since David Klein took over as CEO and Rightsizing the business, reducing the company's cash burn and improving free cash flow.
We are bullish on the growth prospects for canopy growth as they continue to execute execute against our strategic plan.
Now, let's shift the discussion to outlook and guidance.
Given the unprecedented cobot 19 events that began to abruptly and dramatically impact consumers in 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 half 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 reiterate that in a normalized environment, our medium term growth algorithm remained unchanged for both our beer and wine and spirits segments.
In closing I'd like to reiterate our capital allocation priorities, while we remain focused on our goal of returning $5 billion to shareholders in the form of dividends and share repurchases through fiscal 2003.
In the short term given the volatile environment, we remain focused on paying down debt and further reducing our leverage ratio in fact.
In fact, we've reduced our net debt by nearly $600 million since the end of fiscal 2000, resulting from our strong cash flow generation.
While continuing to maintain our quarterly dividend rate.
And with that Bill and I are happy to take your questions.
Certainly ladies and gentlemen, if you have any questions. At this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the queue. Please press the pound key and we just ask once again that you. Please limit yourself to one question. Your first question comes in line.
From Goldman Sachs. Your question. Please.
All right. Thank you Hello, everyone.
Right.
Hi, I wanted to ask a little bit about the spending that guide can you just kind of touched on.
A key driver of our strong operating margins in the quarter really has been a result of lower marketing spend and now you talked about your outlook for spending for the full year being between nine and 10% as a percentage of sales, which is about 50 bips lower than your previous guidance, So I kind of.
To better understand if this is mainly a function of the ongoing pressures from coal bed.
Or do you see this maybe more.
More as a realistic run rate going forward in terms of what you're seeing with beer depletions and demand for your brands I guess I'm trying to get a sense of how you guys are balancing same isn't really how important. It is for you to drive continued margin expansion. Thanks.
Sure Bonnie let me take the first part of that growth.
Our expected run rate is no different going forward than it's ever been at the same point because so much of our live events and sports were delayed in the area. We think about the MBA finals hockey baseball playoffs. Many football many of the things that we advertised on were pushed back.
Later in the year and therefore into our third quarter. Some of our spend was also pushed back into those time frames as well. So our intention is to have a consistent run rate of spend and that nine to 10 range as we always have.
And you will expect to see a little bit more in the third quarter because many of those.
Pre bought scenarios will take place during that quarter, rather than in the second quarter. When we had originally anticipated they would occur.
And the only thing that I would add to that Bonnie is from a margin perspective, right. We continue to think that fit the right range to think about in terms of our beer margins are at that 39% to 40%.
Obviously in any given year, we're going to face headwinds or tailwinds that are going to fluctuate a little bit, but those are best in class margins and and Thats. The right way to think about the business on a go forward basis.
Okay. Thank you.
Thank you. Our next question comes from the line of Nik Modi from our.
RBC your question please.
Yes, good afternoon, everyone.
So bill I just wanted to have a chat on shelf space right. So you guys have obviously been very active with the shopper first initiative.
Ran into a little bit of a hick up with supply demand. So maybe you could just kind of give us a state of the union on.
Our have you lost any spacing as a result of the out of stocks because that that has happened in a few categories. So if you could just give us an update there.
And number two how do you think the retail psychology is evolving.
The last six months have done on clearly constellation and under space for a very long time. So I'm just curious like where the returns from universe is right now in terms of your actual slot in the cooler.
Sure. The certainly the space issue has been somewhat challenging over the very most recent past simply because of the reduction in production that we had around.
Around cobot 19 with that said, we have seen very little reduction of our overall space as we have spread out our.
Our product mix in our product offering into the existing space that we already had we're also fortunate that many retailers have moved their their reset and their timing back in the air for the same reason is because of the cobot 19 pandemic, which now matches up with the time when we're expecting to have our inventory levels back into more normalized fashion.
During this quarter. So we don't see any long term issue around that we've been very straightforward with our re.
With our retail partners about where we are and as you well state our business if anything demands more space given the great acceleration that our brands have in the marketplace and we expect that over time, we will continue to gain in the distribution area as much as we have over the last several years.
Thank you. Our next question comes from the line of Camille Good unit lift from credit Suisse. Your question. Please.
Hi, everybody.
As it relates to inventories it looks like kind of year to date, you are running with shipments down about 4% Depletions up about five and Thats during a seasonal peak period to get inventories back to where you want them by the end of Q3, what should we be thinking about in terms of the spread between shipments and depletions.
Yes so.
Well. Thanks for the question I'd say that the spread between Depletions and shipments is going to be tough to gauge as we move through the quarter because it will largely be dependent upon what depletions looked like and and we've actually seen is as bill noted we've actually seen very strong continued consumer takeaway in IR I and.
Depletion growth rate.
It's a very robust.
Suffice it to say, even though we do know that there will be an.
Dislocation that never the dislocation, but difference in between shipments and depletions for the quarter, how much remains to be seen it will be driven by consumer takeaway. Let me just add to that I'm sure that you have seen in the most recent four week share data that our brands are accelerating as we bring more and more of them.
Back to the table I think it took us Garth points out that's going to be a big factor in terms of what the balance is of that.
Lesions are certainly accelerating we're very pleased with that.
It's very tough to give you an exact answer without knowing how that will land during the course of the quarter.
Thank you. Our next question comes from the line of Vivien Azer from Cowen Your question. Please.
Hi, good afternoon. Thanks for the question so I'm sure.
Bill It sounds like you're very.
Constructive on the momentum that you've established early days on the Corona Hearts helps our offerings.
Stickier, how you're thinking about.
Decisioning, a new hotels are offering and taking a portfolio approach.
Thanks.
Well, we have shipped about five and a half million cases year to date, which which is ahead of what we had expected and we're very excited about as I already said our velocity against literally one skew is second in the category. So everything that that's occurring around Corona hard seltzer has been.
Sure positive to what our initial expectations are as we already also stated we're going to be in a position to put additional skews into the market place next year.
We would we have already said also that our capacity would more than double next year and keep.
And keep in mind, we have a minority investment in press, which we're very excited about press has has performed exceedingly well and as we've said in prior calls we do expect some price stratification to recur over time in the cells are category. So press is very positive. We've also done some very limited regional things like Funky Buddha.
In Florida, and Florida that particular brand is in the top five of all sell throughs in the state of Florida. So we've got our toes in the water on a number of areas Corona hard Seltzer will continue to be our lead but we certainly have other opportunities to continue to gain share in what is becoming a very important.
Sub segment of the beer business.
Thank you. Our next question comes from the line of Bryan Spillane from Bank of America. Your question. Please pay good morning, everyone.
Got it but just wanted to follow up on that the incremental costs in the in the wine segment. So I guess two questions related to it first started the cost that you have.
You highlighted are they.
Relevant to the or related to the ongoing business. So separate from the piece thats going off in the divestiture to Gallo and then second I guess kind of.
Trying to understand if it's at all impact.
Kind of the timing or the cadence of supply chain for the wind business going into next year, and I guess, what I'm trying to I'm thinking of it.
Are you is there a delay in terms of pricing grapes, and putting do what's in the tank.
Is there a delay in pulling product out of the tank and bottling I'm just really just trying to understand if there is going to be any kind of disruption in the flow the supply chain in wind that might leak into next year.
Yes, Brian Thanks for the question. So so the that the cost as I outlined them are for the remaining business for the the business that we are retaining not for what we're divesting to go and.
And as it relates to the consumer to the question on supply chain.
We don't expect there to be any material impact on our ability to meet consumer demand as we go forward, we have lots of flexibility in how we source.
Grapes and fruit, whether that's through the bulk wine market bulk wine that we have on hand, our own vineyards relationships. We have with other growers. We don't see we don't see any any impact on our ability to meet consumer takeaway.
Thank you. Our next question comes from the line of Gary Mohsenian from Morgan Stanley. Your question. Please.
Hey, good afternoon guys.
Okay. So.
You mentioned your aspiration to be a top three player in the filter category heard seltzer category longer term.
You just touched on some of the new skews that you have planned but can you also give us a sense for how important new platforms will be in that aspiration long term in terms of becoming a top three player. It is.
Is that more of a longer term focus or could we see a big push behind new entries of brands and the heart cells are more near term.
Well said.
Certainly corona hard seltzer will be our primary approach to this category.
As we stated given our roughly 10 million capability for this year Weve.
We've relied on one literally one skew so as we go forward and we expand and finished the over got expansion that I discussed earlier that gives us the opportunity to extend our our reach within the Corona hard Seltzer franchise.
We are a big believer that Corona is the perfect brand to maintain our lead focus for seltzer, because it meets up exactly with the whole brand essence of refreshment relaxation and finding your beach so it.
That will continue to be the lead play for us.
But we're always exploring.
What consumers are interested in going forward and yes, we do have some additional things that we will be talking to you about it.
In future conference calls as to what we expect to do during the next fiscal year.
Thank you. Our next question comes from the line of Sean King from UBI EPS. Your question. Please.
Hi, good afternoon.
Yes, I want to dig a little bit more into what you're seeing in the month September.
You mentioned like based on the IRI data that we're seeing a Greg.
Gradual acceleration as you're getting more on the shelves, but in terms of the on premise, maybe what you're seeing there would be helpful. If what I'm hearing is that there is fewer taps.
At most it outlets that are open if thats, a potential headwind or benefit for your portfolio.
Sure as you know we are somewhat less susceptible to the on premise versus much of the competition with our brands.
With that said, there's we had 50% closure in the second quarter. We had 75 in the first and it's looking more and more like that will also reduce another 15% to 20% during the third quarter. If things continue as they are going with.
With that said and admittedly the quarter I mean excuse me the month literally ended yesterday, so we're still adding it up but it certainly looks like we're going to have a significantly better depletion month in September than we'd have year to date in fact, it could quite well be our best month of the year so far.
That matches up entirely with the acceleration that you've seen.
IRI data over the last four weeks, which as it has been accelerating and returned to us to gaining share position, which is something we've normally seen in our business over the course of time.
Thank you. Our next question comes from the line of Kevin Grundy from Jefferies. Your question. Please.
Great Good afternoon guys.
This is a building going on Nicks question earlier. This is for you Bill just the outlook for for the Modelo brand looking out over the next few years and kind of pass some of the near term volatility related to cobot.
Comes up frequently with investors understandably given the importance of the of the Brent Your outlook. So could you comment on your ability to grow volumes in that business double digits over the next few years as we look at the Nielsen channels.
He is less of an opportunity, but but as was pointed out shelf space is an opportunity to maybe comment on that a bit like a little bit about the interplay and your ability to drive that kind of growth the interplay between the madella with the Corona brand and then just lastly, perhaps touch on is it.
In the consideration set for that you would extend the modelo brand into Selzer's as well. Thanks, so much.
Sure.
As Weve said Modelo is one of the chief growth drivers of our beer business.
Modelo Especial has become the number three beer brand in the us market and it continues to accelerate part it does that for a number of reasons. One is it continues to have a disproportionate skew in the Hispanic community, which is a growing demographic in the United States, but we've also radically extended that into.
To the non Hispanic community GYMCL has been advertising to the non Hispanic community only for the last few years.
So this is relatively new that we've been expanding the reach particularly in one day.
Particularly of one dollar, especially out as you know our chelada introductions have gone extremely well one after the next and certainly just continued to see growth in integra as well. So the overall family is very healthy as I said in my prepared remarks, we're looking at the 35th consecutive year of growth for that brand and quite honestly.
I don't know how high is up I think there is there remains tremendous opportunity to extend that franchise, both with its core Hispanic community as well as as well as the non Hispanic marketplace into which we started to advertise I highly doubt that we will do a seltzer under that brand we believe that the key.
Core essence of that brand focus is much more on a full flavored beer.
And any innovation that we might approach on that particular brand will follow more of the brand essence of the modelo brands rather than what we have done with running where we feel the whole refreshment platform matches up perfectly with the hard sell through or sub segment.
Thank you. Our next question comes in line of Andrea to Shader from JP Morgan Your question. Please.
Thank you and good afternoon, everyone. So I wanted to go back to the Depletions commentary I understand there are obviously a lot of puts and takes but you sounded optimistic. So feel are you running in the mid single digits as you alluded to before or even at the high single digits for beer Depletions in September. Thank you.
Well.
I said earlier and I'll maintain that thought given we have not even gotten all the numbers in yet and therefore Garth has not added them all up.
But it appears that to September will be significantly better than what our year to date has been and as I said, it very likely will be our single best month of the year. So.
So we continue to be optimistic that what we've seen on take out and I are I trends that have occurred over the last four weeks is currently being reflected in our increased.
Depletion trend that we're seeing in September, which again matches up with our expectation given we have been back operating at normal levels within the plant now for a significant period of time so.
Again, it's a little difficult to put an exact number on it right right at this point.
But it certainly looks like September was a very very positive.
And if I can squeeze that's helpful. If I can squeeze it just on a margin question you know.
It's like you just quoted some of the expenses that are X. I mean, obviously the corporate expenses.
Other than those like which may or may not recur as we lap next year.
We were looking at obviously, a better outlook now that production is when it's where you should be annual reaching back to the production and you're getting obviously economies of scale and you're getting your thoughts there.
Volumes like as as you could it better than anticipated should we see a progression and Mike long term outlook for margins to continue to build all you're going to have to invest more into.
Into the pricing the pricing commentary, obviously, you're going to lap that youre going increase the pricing through.
True.
Through the beginning of fiscal we could go into fiscal but Im just thinking are the puts and takes of you know FX and and volumes coming back how we should be thinking about margins going forward.
Yes, the margins for our beer business going forward as we said earlier you know the right range to think about them is as Weve said as we said previously which is that 39% to 40% range right again best in class margins and in any given year, we're going to have puts and takes as it relates to margins, we're going to get the benefits of our pricing, but we're also going to face headwinds around things like.
Incremental depreciation that flows through.
Cost of goods as well as as we build and add capacity will have periods, where we have lower utilization rates will which can which will have a drag.
And so you know as we as we say you know theres always going to be these puts and takes in any given year, but 39% to 40% is the right way to think about our margin profile over the over the medium term and and under Seltzer.
Point that you raised smelters currently is a drag given the additional flavors and some of the co packing them it needs to be done there as we progress and as we get to be.
Have more scale in seltzer, they will definitely be margin improvement there and then we'll start to.
You get closer in line with Corona extra class.
Glass.
But but again, even as margins improve on seltzer that there will be other puts and takes so 39% to 40% is the right way to think about it.
Thank you. Our next question comes from the line of Robert from Evercore. Your question. Please.
Great. Thank you.
Thank you very much bill just wanted to kind of step back and ask you a.
A big picture question data that you are probably in a better position to answer than anybody else.
And that is.
At least based on the data, we get and for spirits, it's not that good but even even with the tremendous boost that the beer industry, it's gotten from hard sensors.
Looks like.
Spirit.
Our gaining share of throat.
And that's maybe even have accelerated this year.
In in based on what you see is that in fact true.
Right and what do you account for that is it's the out of stocks for beer or is there something you know due to the cobot environment that favors spirits and if these trends look like they're going to continue are you thinking just in terms of your long term capital allocation.
The pivot more towards spirits I know you just made a spirits acquisition, but just how are you thinking about that dynamic. Thank you.
Sure Robert.
It's very difficult and a co but year to make lots of predictions about what will be sustainable and what will maintain itself. Once we come out of the cobot scenario and what well I do think it's very fair to say there will be some fundamental change.
Some of that fundamental change will be about three tier ecommerce and direct to consumer things that we are investing a lot of our energy and focus on going forward. So.
So I wouldn't make a lot of prediction as to what the adjustments that could occur.
Between spirits or beer or wine, what I would say is we have worked aggressively as youve seen to make sure that our portfolio is positioned for where the consumer is going not where the consumer has been we've invested in craft spirits, which we think has tremendous upside our beer business plays in the high.
Again, which is where the growth in the category as we're extending our capabilities in seltzer to more than double what we have done in this fiscal year going forward and our wind business.
Tremendously positioned to continue to leverage the premiumization trend that's going on in addition to that we are doing the kinds of innovations that the consumers looking for and things like betterment and convenience.
Seeing that in some of the new products that we've talked about this year that's.
Thats, where our focus really lies and I think there's there's tremendous opportunity within our portfolio no matter, how it shakes out post covance.
As I said I do think there will be some fundamental change about how the consumer buys.
And to some degree there almost has to be because there has been a significant shift.
From the on premise to the off premise and I think that the long term trend of that I still think it's too early to predict.
Thank you. Our next question comes from the line of Bill Chappell from Securities. Your question. Please.
I was going on for Bill. Thanks for taking the question just had one on the wine and spirits.
Our brands depletion growth this quarter I was just hoping Boris you give a bridge on some of those impacts you walk through the inventory changes at the distributor level and promotional changes just trying to get an underlying growth number for that business. Thank you.
Yes, I'll build so the.
I think the question is is that you want to understand sort of like why a power brand growth wasn't was higher than you were expecting and that really is because we did do we didnt repeat.
Some some non return generating a promotional activity or take some not enhancing non value enhancing pricing actions and we also cleaned up.
Or reduce the number of days outstanding with some key retailer so.
The underlying brands are strong as you see in the IR right takeaway.
And and the reduction or a slowdown in Depletions really is just as doing a little bit house cleaning so to speak yeah keep in mind Bill if I could add just add the guards comment.
Our high end over $11 power brands continue to outpace their competition and that's led by me and the prisoner family.
Kim Crawford. These these brands are accelerating in the minds of consumer keep in mind going back to sort of Robert's question from a minute ago.
One of the things that we continue to see is people are attracted to tried and true brands and we are very fortunate and when you talk about our beer business or our wind business orders for business to have a lot of those brands that are inherently trusted and that has been extremely helpful for us during the pandemic.
Thank you. Our next question comes in line of gun that from Guggenheim. Your question. Please.
Hi, everyone and thanks for squeezing me in the lineup.
Another question on sensor.
With the launch of of took which equals to make sure they would be more competition to attractive spending consumers into the.
Into the Sunset Configurate the country from beer. So first I mean do you see took what chico's sensor as they reach for your core Mexican beer business and secondly, what are your loan we score in that sense, we increased spending and attrition that seems to be no by outcomes.
Well as I said earlier, we have been very pleased by the development of our run a hard seltzer business with the Hispanic community, it's indexing somewhere between five and 10 points greater than the overall category and we think that speaks very well to broadening the reach of the Seltzer sub segment.
With consumers so we're very positive about that.
I'm sure you've seen theres been a lot of introductions in the seltzer category, but consumers have a tendency to go with tried and true trusted brands and there is really no stronger brand is trusted in the minds of consumers and Corona and certainly drawn a hard seltzer will fall into.
That.
Code as well, so we always wish well for our competition, but will be quite happy to do our bit and we'll see how it all falls out.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to Bill Newlands for any further remarks.
Thanks, Jonathan So thank you everyone for joining our call today. Despite the continued unprecedented challenges that have occurred since the beginning of our fiscal year. Our team continues to remain agile and have overcome massive headwinds to deliver strong business performance in the first half of our fiscal year, we remain confident.
The resiliency of our business our beer business. If we use as we've discussed today continues to be a top growth driver within the industry, while our wine and spirit Premiumization strategy continues to gain momentum, especially as we enter the final stages of completing our transaction with Gal, we remain bullish on the future performance of our.
Powerful collection of consumer connected brands, and we are well positioned to deliver a solid year of organic growth in fiscal 2001.
Our next quarterly call is scheduled for early January so I'm wishing everyone. At this point, a safe and happy holiday season, and I'm also reminding you to enjoy some of our great products. During your socially distance celebrations with your family and friends. So thanks again for joining the call today and have a great day.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.