Q2 2021 Constellation Brands Inc Earnings Call

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Welcome to the cancellation of brands Q2 fiscal year 2021 earnings conference call. At this time, all participants have been placed in a listen only mode. Following the prepared remarks, the call will be open for your questions.

Instructions will be given at that time I would now like to turn the call over to Patty beyond Garland Senior Vice President of Investor Relations. Please go ahead.

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 car tank and Sinn Our CFO.

Under 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 at steep ramp 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 everyone to one question per person, which will help us to end our call on time. Thanks in advance and now here is Seth.

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 didnt acknowledge the continued an unprecedented challenges of this year marked by the ongoing impact of the Cobas 19 pandemic ongoing social unrest rooted.

In a long history of racial injustice in this country and the most recent string of natural disasters, including wildfires 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 players 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 Garland I review these results were.

We'd like you to focus on three key takeaways first and what was expected to be our most challenging quarter of the year our team overcame cobot related headwinds to deliver solid business performance in Q2. This.

This performance was led by our beer business, which grew depletions by almost 5% as we continued to see incredible consumer demand for our portfolio of brands.

While the cobot 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 IRA channels as we work to ensure that consumers can find their favorite constellation products on the shelf at retail.

Second.

Our wine and spirit Premiumization strategy continues to gain traction.

As our higher end wind power brands outpaced the us high end wine category and IRA.

Regarding the Gallo transaction, both constellation and Gal 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 staff and 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 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, we are well positioned to deliver a solid year of organic growth.

In fiscal 2001.

Let's move to a more fulsome discussion of our beer business performance in the quarter.

Despite the challenges posed by cobot 19, including the continued partial closure of the on premise, which was down 50% in the quarter year on year constellations beer business continues to be one of the largest contributors to you as beer industry growth.

During the second quarter, our beer business delivered 11% growth in IRI channels overall and more than 15% growth for our priority skews.

This performance was driven by 12% high ROI growth from adult, especially out as the brand solidified its position as the number three beer brand in the us beer market and the brand family is on track to deliver its 30 fiveth consecutive year of growth.

The Corona brand family also grew double digits in IRI 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.

Despite launching this new brand in the midst of a pandemic.

Which presented us with and prevented us from engaging in a number of the activities conducive to introducing a new brand Corona 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 is the second fastest moving hard seltzer bye.

Let me 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 alright, HCV 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 Hispanic consumer relative to its competitors, which unlocks an untapped opportunity for this category with the fastest growing demographic in the country.

Currently 15% to 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 Rick.

Crushing great taste, hence the flavor and ours had zero carbs zero shutters 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 over gone 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 over gone 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 points 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 us high end wine category in IRI channels, driven by Naomi Kim Crawford and the prisoner portfolio, all of which posted double digit growth in IRI 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 primed with impactful product introductions as we enter the peak seasonal period for the business.

These initiatives are aligned with the key consumer macro trends of betterment convenience and sustainability that we believe can drive scale going forward.

Key product launches include the prisoner, Cabernet Sauvignon, and short neighbor idols spreads and high west ready to drink cocktails Refenes ill wind Spritzer 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 growth.

Lever 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 coded 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 and a bit more detail as.

As mentioned and thankfully all of our employees are accounted for and safe and no constellation properties have been impacted by the fires.

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.

Yes 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 fires, we fully expect to be able to meet consumer demand for our excellent portfolio of products start.

Darren 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 owned startups 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 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 stuff funded and or female led businesses now account for more.