Q3 2021 Constellation Brands Inc Earnings Call
Vice President of Investor Relations. Please go ahead.
Thanks, Jonathan Good morning, and welcome to constellation third quarter 2020 on conference calls and.
Good morning, Bill Newlands, our CEO and car tank and fit our CFO and.
Reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www Dot tea brands dotcom.
Please refer to the news release and constellation and SEC filings from me sectors, which may impact forward looking statements, we make on this call before.
Before turning the call over to Bill similar to prior quarters I would like to ask that we limit everyone. Just one question per person, which will help us to and our call on schedule. Thanks in advance and now here so.
Thank you Barry good morning, and happy New year, everyone welcome to our third quarter call.
I hope you enjoyed the holidays and had an opportunity to enjoy some of our fine products and whatever form your celebrations truck.
Before I jump into my prepared remarks, let me first acknowledge the disheartening and tragic events that unfolded and our nation's capital yesterday.
I join other leaders across the country and condemning the violence that occurred.
Instead of calling for a peaceful transfer and power that upholds, our democracy and calling for peace unity and stability as we go forward as a nation now.
Let's move on to a discussion of our business performance.
2020 were certainly a challenging year. Unlike many of you we are happy to turn the page.
As we do so and mindful of the words of American novelist, James laying out on who said adversity does not build character and reveals.
This is certainly the case for us.
Our team rose to meet many challenges that surfaced and 2020.
This included overcoming many negative impacts from cold and most notably a significant volume reduction and the on premise.
Low down in production of our Mexican beer portfolio heading into our busiest selling season and threats to the safety health and wellbeing of our team members.
Despite all that we continued to build momentum for our high performing beer brands and launched Corona hard Seltzer, just as the pandemic started to gain steam and the U.S.
Impressively. This remains one of the most successful new product launches and our company's history.
We continue to transform our wine and spirits business, leveraging innovation to drive higher growth and margin performance, while investing and capabilities needed to win long term such as DTC and three tier ecommerce and successfully working through the complexities of our transaction with Dell, which.
Now that it is complete positions, our wine and spirits business to become a more meaningful contributor to our overall growth profile.
And we've also supported our communities by providing much needed assistance to those impacted by cobot and west coast fires like.
By taking steps to achieve greater racial equity within our company our industry and our ceramic communities like.
Once again, earning recognition from the corporate equality index as a great place to work for members of the LGBTQ community and by improving our carbon disclosure project ratings for climate and water stewardship.
Well 2020 will be remembered from many things what I will remember most is the character that was revealed by our leaders and team.
Preventative measures implemented across our business helped mitigate impacts related to cobot, while maintaining full employment resource levels.
I continue to be impressed by the inspired by their resilience focus and determination for driving the success of our business and this bodes extremely well for our future.
Thanks to the tireless efforts of our team our business partners, we delivered excellent third quarter results.
As Garth and I run through the highlights of the quarter. There are three things that I ask you to keep in mind.
Number one.
Our beer business the biggest catalyst of our growth remains extremely strong with accelerating trends and I are right.
Consumer demand for our core beer brands continues to be robust the.
The introduction of Parana hard Seltzer has exceeded our expectations and we're back to gaining share and I are right as we continue to recover from the slow down and production earlier this year due to cope with.
Number two the completion of our transaction would go to divest a number of our lower end wine brands price at $11 and below and retail and set the stage for accelerated growth and profitability driving focus more fully on a tighter set of powerful brands that already have traction with cash.
Schumer's.
And number three despite the challenges faced in 2020, we're on track to deliver another strong year of growth consistent with our long term goals and.
Proud to say that our business remains healthy, allowing us to provide fiscal 21 guidance there and I'm sure you will agree reinforces our strategic growth priorities and strong cash generation capabilities.
This is truly a testament to the strength of our team and our brands.
So, let's dig a little deeper and with a more fulsome discussion of our beer business performance in the quarter.
Despite the challenges posed by COVID-19, including the continued partial closure of the on premise, which was down about 35% year over year constellations beer business continues to be one of the largest contributors to us beer industry growth delivering depletion trends of plus 12%.
Net.
In the quarter.
And while some depletion growth we saw this quarter included benefits from inventory restocking the portfolio delivered accelerating underlying trends that align with our sales growth projection of 7% to 9% for the foreseeable future as consumer demand remains exceptionally strong for our products.
Across the majority of the portfolio.
And fat constellations beer portfolio posted on <unk> ri consumer takeaway dollar growth of more than 15% from the third quarter.
As you know the covert related slowdown of our beer production and Mexico earlier. This year has impacted this year shipment and volume net sales trends. The good news is that we have returned to a position of gaining share and I are right track channels as we continue to replenish inventories to more normal levels, which.
We expect to accomplish by fiscal year and a process, that's actually taken a little longer than originally planned due to continued strong consumer demand for our brands.
So, let's take a deeper dive into the key brands that drove these excellent trends for our beer business there.
The kroner brand family grew nearly 12% and I are right channels led by particularly strong contributions from Corona premier per on a hard seltzer and Corona extra.
With the launch of only one.
One skew to date Corona hard seltzer continues to exceed our expectations and remains and a strong number four position and the hard seltzer category.
It also has the distinction of being the second fastest moving hard seltzer among major seltzer brands, while continuing to maintain strong incrementality levels and nearly 90%.
Early next fiscal year, we plan to launch Corona hard Seltzer variety pack number two which will offer consumers the same great Corona taste, and refreshment attributes, while expanding to new flavors, including pineapple, Strawberry raspberry and passion fruit.
Variety pack number two will be followed shortly thereafter by the introduction of another exciting new hard Seltzer initiative.
We believe these product line. This will help further strengthen our competitive position and the fast growing hard seltzer category.
Broaden our distribution reach and enhance our market share and the high end of the U.S. beer market.
These initiatives will be supported with impactful marketing campaigns to strengthen and build upon our hard seltzer portfolio.
2020 marked the thirtyth consecutive year of corona's iconic OTN and Bob Paul commercial.
And that it was the hearing on TV during the holiday season.
As the longest running beer commercial of all time, low Tan and palm demonstrates the strength and resilience of the Corona brands, including run a hard seltzer, which continues to resonate with consumers and remains one of the most beloved consumer brands and the world.
Modelo Especial GL was the most significant growth contributor within our portfolio for the quarter. This exceptional brand has excellent marketplace momentum and achieved the number one spot as the top share gaining imported beer in the U.S. beer category with depletion growth.
Almost 20%.
But delos continues to gain traction with general market consumers, while sustaining momentum with its core Hispanic consumer driven by the authenticity of the brand and our marketing efforts.
The success of Modelo has been driven in part by impactful marketing initiatives that include high profile sports programming with the NFL and BA and CA football Spanish language soccer as well as an ongoing presence on Facebook and Instagram.
Finally Pacific goal was also a top share gainer within the import segment during the quarter continuing its strong momentum with depletion growth of nearly 20%.
We remain excited about the future growth prospects for this brand as we continue to increase awareness and expand distribution beyond its core markets of southern California.
As we've said before specific though has all the makings of the next big brand and our beer portfolio.
From an operational perspective, we plan to complete the 5 million hectoliter expansion of our overhead on facility in early fiscal 22, which is a slight delay versus our original plans due to pandemic related construction slowdowns for this project last year.
After the completion of the Opregen capacity expansion. We believe we will have ample capacity at the Nava and Opregen breweries to meet consumer demand over the medium term, which includes more than doubling our celtra production capacity heading into the next fiscal year.
Overall, our excellent year to date results provide confidence and our ability to achieve 7% to 9% net sales growth fiscal 21. In addition, we have increased our operating income growth target to 8% to 10% for the year.
Now, let's move on to the quarterly results for our wine and spirits business.
As I mentioned earlier, the closure of the Gallo deal and other pending transactions will include a series of actions, which positions our wine and spirits business for accelerated revenue growth and operating margin performance going forward.
We are grateful for the dedication of our constellation team and the support and collaboration from Gallo and our business partners as we ensure a smooth transition.
With the completion of the divestitures, we believe the wine and spirits business is positioned to grow net sales low to mid single digits, while producing operating income growth ahead of net sales growth as the business works to take out stranded costs and execute against other costs.
Nice mix and efficiency improvements to achieve a 30% operating margin over the medium term.
And the near term, we expect the remaining portfolio post the Gallo deal to generate fiscal 21 net sales growth in the 2% to 4% range.
With these transactions now behind us our team to more fully concentrate resources and focus behind a smaller set of more premium brands to better align with consumer led premiumization trends.
During the quarter, we continued to see the staying power of these trends as Premiumization continues to drive elevated from across the total beverage alcohol segment.
Further reinforcing the transformation strategy for our business.
Our higher end wind power brands at the greater than $11 retail price point outpaced the U.S. high end wine category IRI channels, driven by me on me Kim Crawford the prisoner wine company portfolio, all of which posted double digit growth.
And I are right channels for the quarter.
Overall, we expect these brands to be key growth drivers of the business long term and we are extremely bullish on the future runway for these higher growth higher margin brands.
During the quarter successful new innovation initiatives also contributed to top line growth with power brand introductions like the prisoner Cabernet Sauvignon and Chardan neighbor items, along with May on me Cabernet Sauvignon, which has become this year's biggest ultra premium wine.
Brian and I are right channels based on dollar sales.
In addition, several other innovation initiatives launched earlier this year continued to gain traction and drive growth, Inc, including brands like unshackled from the prisoner wine portfolio, Kim Crawford, ILLUMENATE and Woodbridge spirits barrel, aged varietals just to name a few.
And let's not forget Woodbridge wine, Gopac's, which became the number two innovation this year and IRA channels based on dollar sales.
We are also successfully driving our digital commerce initiatives, which are gaining momentum.
Since our acquisition of empathy wines, we have continued to make significant progress and leveraging their unique platform and capabilities across our portfolio within the DTC and three tier ecommerce space.
We have launched several new DTC sites, leveraging the empathy platform, including the prisoner wine company doubled diamond and seeming.
We believe this category will be a meaningful pillar of growth for constellation and the future.
In fact, our wind power brands competing and the ecommerce space are outpacing the overall wine category as our early investment in the category has providing us with a meaningful first mover advantage.
During the quarter, we became the first CPG company to partner with Instacart to feature our products on Facebook ads propelling constellation to the next level of Threeq tier ecommerce media by enabling us to refine and optimize our AD creative and targeting based on real time data.
Furthermore, it is important to our growth and margin profile, but we continue to invest in this space since DTC is heavily weighted toward the higher end of the wine category as wines price $20 and up make up nearly 90% of total DTC sales.
Now moving on to a discussion of our investment and cannot be growth.
We're pleased with the progress the canopy growth team has made and defining and strategically positioning themselves in the U.S. CBD and legal THC cannabis markets, which will be beneficial upon us federal permissibility.
Which was probably enhanced with the change in the Senate that's occurred and the last 48 hours.
Canopies core bio steel beverages are now the official sports drink of the Dallas Mavericks, The Philadelphia, 70, Sixers and the Toronto Raptors and.
And has several standout athlete and influence or partners, including the reigning NFL and Super Bowl MVP Patrick from homes.
In fact canopy predicts that CBD beverages can grow at a 35% CAGR through 2025, as consumer realized and realize the compelling benefits from CBD beverages.
In addition, Bios deal and now has two exclusive partnerships with Manhattan beer and the re US beer division two key constellation distributors, which will give cannot be the ability to gain traction in the us market well ahead of its competitors and the emerging CBD space.
And September cannot be launched a month to Stewart branded CBD product line, which is available on shop cannot be dot com and several other outlets, including its new national distribution agreement with the vitamin Shoppe retail locations just in time for the holidays.
Canopy will continue to seek strategic partnerships like the one with Martha Stewart to drive consumer awareness and these products.
Overall, we believe that cannot be will be a significant long term growth opportunity for constellation and we believe they remain best positioned to win long term and the emerging cannabis space.
In closing I want to take you back to the key takeaways mentioned earlier.
I'm extremely proud of the results of our team and what they have driven in the face of continued adversity.
Our beer business the biggest catalyst of our growth remains extremely strong with accelerating trends and IRA.
The completion of our transaction with Gallo to divest a number of lower end brands price did $11 and below at retail has set the stage for accelerated growth and profitability.
Despite the challenges faced in 2020, we are on track to deliver on another strong year of growth consistent with our long term goals.
Our excellent third quarter performance drove strong cash generation, which coupled with the finalization of the Gallo deal enhances the financial profile of our business enables further debt reduction and allows us to continue to execute our commitment to return 5 billion and value.
To our shareholders through fiscal 2003.
Our business remains extremely healthy and these strong results are truly a testament to the strength of our team and our brands.
And with that I would now like to turn the call over to Garth who will review our financial results for the quarter Garth.
Thank you Bill and Hello, everyone.
Constellation brands continues to demonstrate its resiliency by generating robust financial results and continuing to focus on debt paydown, Despite a volatile environment and various headwinds driven by COVID-19.
Specifically during our third quarter, we generated comparable comparable basis EPS, excluding canopy growth of $3.16, an increase of 32% versus prior year.
Delivered strong operating margin and accelerating double digit depletion growth for our beer business and increased operating cash flow and free cash flow by 14% and 23%, respectively, resulting an ongoing debt repayment.
And achievement of targeted net leverage exclude and can't be equity earnings as we ended the quarter at 3.3 times.
As Bill mentioned, we are very pleased to have closed the transaction to sell a portion of our wine and spirits business together, including the Novela wine brands as well as closing the transaction to sell our concentrate business to Vidal.
As an update we expect to close the palms on Grand and rebranding transaction within the next several weeks.
Post transaction closing, we're left with a more focused and premium portfolio, which nicely positions, our wine and spirits business to produce low to mid single digit top line growth, while migrating to an operating margin of 30% and the medium term.
In total and transaction close constellation received cash of approximately $560 million and the opportunity to receive up to $250 million in earn outs. If brand performance targets are met over a three year period after closing.
We also received approximately $130 million related to the closing of the novel low deal and expect to receive approximately $265 million from SaaS or act upon closing the palms on Grand and for Brandy deal.
In total from all transactions, we expect to receive approximately $955 million before tax and we expect the overall tax payments related to the transactions to be approximately $50 million, which are expected to be paid in fiscal 2002.
The cash proceeds from these transactions will facilitate further debt reduction. So we can continue to execute on our commitment to lower our leverage ratio and to return $5 billion in value to shareholders through dividends and share repurchases through fiscal 2023.
The cash proceeds received from Gal reflect a significant inventory adjustment due.
Due to the prolonged timing of the Gallo deal, we were able to sell through a significant amount of finished goods inventory that was originally slated to go to gal.
Also as indicated last quarter, we have flexibility and how we source grapes to mitigate any shortages due to the wildfires as a result, we decided to retain a portion of bulk wine inventory as we had a higher and better use for it as a replacement for smoke tainted bulk resulting from the wildfires those two factors result.
And substantial cash flow for constellation throughout the fiscal year.
Before we jump into the quarterly financial results I'd like to provide an update on guidance.
Due to the continued resiliency of our business and further clarity.
The operating environment and.
We have issued fiscal 2021, EPS guidance and are projecting our comparable basis diluted EPS to range between $9.80 and $10.05.
This range excludes future cannot be equity and earnings impact and accounts for the respective timing on the previous mentioned deal closures.
Now, let's review Q3 performance and our full year outlook in more detail.
We're all generally focus on comparable basis financial results.
Starting with beer.
Net sales increased 28% on shipment volume growth of 27%, excluding the impact from the balance point divestiture organic net sales increased 30% driven by organic shipment volume growth of 28% and favorable price and mix.
Depletion volume for the quarter accelerated and achieve 12% growth as inventory levels improved and strong performance continued in the off premise channel, which more than offset the impact of approximately 35% year over year reduction and the on premise channel due to COVID-19.
Depletions in the quarter benefited by approximately three to four points driven by inventory restocking.
Well underlying consumer demand for our products remained strong the robust shipment and depletion volume growth experienced during the quarter was enhanced by inventory replenishment at both the distributor and retailer level.
As product inventories begin to rebuild from a coded related slowdown of Mexican beer production earlier in the fiscal year. Despite.
This resulted in Q3 year to date organic shipment and depletion volume growth of approximately 6% to 7%.
Which is in line with our medium term goals and accounts for volume timing between quarters.
Due to continued robust consumer demand product inventories are now expected to return to historical normal levels during the fourth quarter fiscal 21 and.
Shipment volume is expected to continue to outpace depletion volume for the remainder of the fiscal year.
Moving on to beer margins.
Operating margin increased 330 basis points versus prior year to 42.6%.
Benefits from marketing and ESG as a percent of net sales foreign exchange and the balance point divestiture more than offset unfavorable operational and logistics costs.
The increase and operational cost was driven primarily by higher material cost very compensation and benefits and depreciation while the increased logistics costs resulted from strategic actions taken to expedite beer shipments from our breweries in order to accelerate inventory replenishment across the network.
These headwinds were partially offset by favorable fixed cost absorption.
On an absolute dollar basis marketing dollar spent during the quarter increase versus prior year. However, due to favorable leverage driven by increased throughput on our breweries marketing as a percent and net sales decreased 170 basis points to 9.3%.
We now expect full year fiscal 21 marketing as a percentage net sales to be in the 9% to 9.5% range.
Now lets discuss balance of your expectations and full year fiscal 21 for your guidance.
We expect net sales growth of 79%, which includes a one to two points of pricing within our Mexican product portfolio.
Excluding the impact of ballast point, we expect organic net sales to land and the higher end of the 7% to 9% range.
We now expect fiscal 2000, and operating income growth of 8% to 10%, which is an increase versus our prior guidance provided during the quarter.
Furthermore, we expect full year operating margin to range between 40, and 41% achieving margin expansion versus.
Prior year operating margin of 40%.
Looking ahead to Q4, a couple of items to touch on from a margin perspective as the beer segment will experience some headwinds during the quarter.
First as a reminder, we took selective price increases this fall as we decided to stagger our annual price increases and in some instances these increases will shift and the beginning of our fiscal 2002.
As a result, we saw favorable price result.
Pricing favorability muted in Q3, which will continue in Q4.
Second.
From a cost perspective, we will continue to incur incremental shipping costs.
Due to actions, we're taking to accelerate the replenishment of inventory across the network.
We also expect margin headwinds related to incremental head count driven by the 5 million hectoliter expansion and over going on which is now expected to be completed in early fiscal 2002.
Lastly, we expect increased marketing spend to be the largest headwind to margins in the fourth quarter driven by the shift and spend from the first half to the second half of the fiscal year.
Our Q4 investment will focus on incremental media and both the NFL and and BA.
Incremental digital media and continued support behind Corona hard Seltzer, which includes a holiday spot leveraging the equity of the iconic Corona extra 10 and Palm AD.
These incremental investments made during the holiday season and into the beginning of the calendar year will provide continued momentum as we head into fiscal 22, and the spring selling season.
Moving to wine and spirits.
Q3 power brands depletion volume accelerated and achieve nearly 4% growth as these brands continue to win in the higher end and across the majority of price segments and the U.S. wine category.
Overall depletion volume declined 1%, which reflect the brands recently divested.
Wine and spirits net sales increased 10% on shipment volume up 3% driven by our power brands as well as strong innovation contributions.
Excluding the impact of the black Velvet divestiture organic net sales increased 13%, reflecting shipment volume growth of approximately 7%.
Q3, net sales results outperformed our previously communicated expectations, primarily due to incremental shipments from the brands recently divested driven by the timing of the Gallo deal.
Operating margin decreased 200 basis points to 24% as benefits from price and mix were more than offset by higher Cogs and increased marketing driven by the shift and spend from the first half.
Higher Cogs was mostly driven by unfavorable fixed cost absorption of $20 million, resulting from decreased production levels as a result of the wildfires.
This came in slightly favorable versus what we originally anticipated and guided for the quarter. However, we still expect to incur approximately $10 million of costs in Q4 associated with unfavorable fixed cost absorption due to the wildfires.
During the quarter, we also recognized a $26.5 million loss in connection with the write down of certain groups. As a result of smoke damage sustained during the wildfires. However, these costs were excluded from Q3 comparable basis results.
We have insurance coverage that partially covers losses from grapes.
From our own vineyards, and we're actively pursuing reimbursement from our insurance carriers.
As we continue to work through our processes additional write downs of certain bulk wine inventory may be needed for the fourth quarter of fiscal 2001, which would be excluded from comparable basis.
Results as well.
As a reminder, we do not expect a material impact to our ability to meet consumer demand for our excellent portfolio of products.
Even though margins for that segment took a step back during Q3, the underlying fundamentals of our consumer led Premiumization strategy continued to shine through a significant mix and price regenerated during the quarter.
Strong shipment volume mix was driven by some of our fastest moving power brands such as Kim Crawford Neomi, the prisoner brand family and we're continuing to see benefits from the pricing actions, we took on balance Woodbridge and said at the beginning of the fiscal year.
Moving on to balance of the year expectations and full year fiscal 21 wine and spirits guidance.
We now expect fiscal 221 wine and spirits net sales and operating income to decline, 9% to 11% and 16% to 18%, respectively, which reflects the closing of the gala transaction, including knob, low and the concentrate transaction as well as though Paul Miss on divestiture.
In addition, we expect the retained portfolio post divestitures to grow net sales in the 2% to 4% range. This year.
Looking ahead to Q4, a couple of items to touch on from a wine and spirits segment perspective.
For Q4, we expect power brand depletion volumes to be muted due to the following.
First we are lapping strong Q4 fiscal 20 Woodbridge volume buying ahead of the price increases that went into effect on March onest.
Second.
We are also lapping solid Q4 fiscal 20 innovation driven by the rollout of unshackled.
And finally, we are continuing our efforts to right size inventory on hand at several chain retailers and key states to allow for better inventory management going forward.
Also let me provide an update on marketing cadence for the remainder of the fiscal year.
In the first half of the fiscal year reduced marketing spend provided margin benefits due to timing as we shifted spend from the first half into the second half from the fiscal year.
Originally we expected a majority of the shift to impact Q3.
However, we now expect the shift and spend to be more equally distributed between Q3 and Q4.
We're also expecting incremental investment in Q4, creating strong support for our power brands as we propel our momentum into fiscal 22. This.
This will result in an increase in year over year spend for Q4.
Now lets proceed with the rest of the PNM.
Fiscal year to date corporate expenses came in at approximately $171 million up 15% vs Q3 year to date last year. The increase was primarily driven by increased compensation and benefits unfavorable foreign currency losses, and an increase in charitable contributions primarily driven by COVID-19 supply.
And efforts.
Partially offset by reduced teeny spend.
We now expect full year corporate expense to approximate $240 million.
This is a good spot to provide an update on our Sep esport on implementation on.
Excited to announce that the final phase of our SAP ERP implementation is scheduled to go live on March Onest 2021.
We have various business continuity processes and resources in place to ensure this transition goes as smoothly as possible and look forward to updating everybody on our efforts during our Q4 call.
As a reminder, we expect corporate expenses as a percent of net sales to decrease by the end of fiscal 2002 once our digital enablement activities are fully implemented and we begin to eliminate redundant costs, allowing us to realize benefits of the new platform.
Comparable basis interest expense for the quarter decreased 7% to approximately $96 million, primarily due to lower average borrowings as we continue to decrease our leverage ratio.
Fiscal 21 interest expense is now expected to approximate $390 million.
Our Q3 comparable basis effective tax rate, excluding canopy equity earnings came in at 17.7 versus 17.5 in Q3 last year, primarily driven by higher effective tax rates on our foreign businesses part.
Partially offset by increased benefit from stock based compensation.
As indicated last quarter, we expect our full year fiscal 21 comparable effective tax rate, excluding canopy equity and earnings impact to approximately 19%.
Which would imply an increase in the Q4 tax rate driven by the timing of stock based compensation benefits.
Moving to free cash flow, which we define as net cash provided by operating activities less capex, we generated free cash flow of 1.9 billion for the first nine months of fiscal 21. This represents an impressive 23% increase and reflects strong operating cash flow and lower capex.
We are projecting full year fiscal 21, capex spend to be in the range of $800 million to 900 million, which includes $650 million to $750 million of beer Capex as we expect and acceleration of spend during Q4, driven by the 5 million hectoliter expansion and over again.
Furthermore, we expect fiscal 21 free cash flow to be in the range of 1.7 billion to 1.8 billion and operating cash flow to be in the range of $2.5 billion to $2.7 billion.
Moving to canopy.
In Q3, we recognized $770 million increase in fair value of our cannot be investments. These were excluded from comparable basis results. The.
The total pretax net gain recognized since our initial canopy investment in November of 2017 is $834 million, which increased significantly from Q2, driven by canopies robust share price movement during the quarter.
In closing I'd like to reiterate our capital allocation priorities.
As we've navigated through a challenging and volatile economic environment throughout the first nine months of our fiscal year. We believed it was financially prudent to focus on paying down debt and further reducing our leverage ratio.
As a result of our strong cash.
Generation profile, we've reduced our net debt by $1.2 billion since the end of fiscal 2000, which has led to further reduction of our leverage ratio to our targeted range.
These financial strides coupled with the fact that our business has continued to remain resilient through this economic environment.
And now provides us with the flexibility to be opportunistic and resume share repurchase activity in the near term as we remain fully committed to our goal of returning $5 billion to shareholders through dividends and share repurchases through fiscal 2003.
We're also pleased that the board of directors recently authorized.
And additional $2 billion for share repurchases.
And with that Bill and I are happy to take your questions.
And 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 remove yourself from the queue. Please press the pound key our first question comes from the line of Dara Mohsenian from Morgan Stanley. Your question. Please.
Hey, guys.
So your depletion growth was obviously strong in the quarter, even ex the retailer inventory rebuild on and on an underlying basis also just looking going forward and beer Depletions can you discuss your level of comfort that that once we cycle Kobe and March you're back to sustain high single digit beer revenue.
Growth going forward in line with the long term goals do you expect to return to historical levels of share gains also.
Basically just wanted to get an update on your visibility there.
On beer Depletions and market share, particularly given the comments on high single digit beer revenue growth and the foreseeable future and then also maybe can you just touch on if there is any risk specifically in fiscal Q4 with the rising koby case counts and weaker on premise trends before we cycle the covance impact from from last year.
On March thanks.
You bet, So let me try to unpack that a bit.
Yes, one of the one of the benefits that we've seen as our business has been moving through the year is that we are getting back to our long term trends that.
We have previously announced and.
And Thats driven quite frankly by the strength of our brands.
But daallo and this quarter was nearly 20% depletion growth Pacific, though was the same.
These brands are resonating with consumers and keep in mind Thats, all being done which relates to your second question.
And with the on premise trends that are really not very good year to date on premise for our beer business is up 53%.
So I think the fact that we have produced these kinds of results with that environment speaks to the strength of our beer portfolio and the long term positioning that we have for those brands. You then throw and the fact that we are more than doubling our capability and Seltzer next year and I think we should expect to see.
Consistent with our long term trends there.
The growth profile that we've previously stated.
Thank you. Our next question comes from the line of Bonnie Herzog from Goldman Sachs. Your question. Please.
All right. Thank you, hi, guys and I'm happy to share.
Oh on quest.
Question on your full year beer operating income growth guidance from 8% to 10%, although you revised and higher and actually still implies a pretty big hits tier b on.
Margins in Q Force I, just really wanted to better understand why this is the case, especially now as I look at the easy year on year margin on comp and even.
Even factoring in the <unk> the year over year increase you just called out in terms of marketing spend so I guess I'm really wondering.
Wondering if you're simply being net ultra conservative on the upside and operating income gross or b share or or is there something else.
Thanks.
Yes, Thanks, Bob Yes.
So we did we did we did increase the range a little bit there as you said, 8% to 10% and and we did increase our March and outlook.
Closer to 41%. So we feel really good about that margin profile by the way.
But you're right that does imply some some bit of dilution. If you will in Q4. So let me just give you some of the elements that make up that.
As we said the biggest driver of that is going to be.
Marketing because we you know we we think it's important that we continue to spend behind the brands and support the brands, particularly krona hard seltzer.
And so theres going to be a significant increase in marketing spend in Q4.
Additionally.
We have a couple of Cogs related headwinds and in Q4.
One is as we've had even in Q3, which is.
Freedom logistics as we're doing things to expedite shipments into the us to ensure that we were increasing our inventory levels to more historical levels and then Furthermore, under Cogs. We also have increased head count in in Oregon, as we get ready to turn on the next 5 million Hectoliters.
Of capacity at and over again.
And we also in Q4 have some brewery on maintenance that we shifted out of Q3 and into Q4.
And then finally the last thing is just as we talked about the staggered pricing increases that we've taken this year and which we staggered through Q3 and Q4 and some will flow into the first quarter of next year. So all of those together is what's leading to.
Bit of and get back on margins and Q4.
Thank you. Our next question comes from the line of Brian Skorney from Bank of America. Your question. Please.
Hey, good morning, everyone and happy new year.
Thanks, Brian.
So a couple questions first one just on on.
Question related to Seltzer, and and I guess.
Question is really just as you look at it going forward and again and thinking about an aspiration to be a top three player and.
Can you can you just give us your thinking now in terms of how we should think about it that could include launching new brands and also just thinking about top and Chico and co working with both and core to be open to be partnering with some other other other companies brands in order to sort.
To put more lines in the water I guess and filters.
Sure.
Obviously, the Seltzer category continues to remain strong as as Weve said, we plan to more than double our capability and.
In the interest Seltzer area for Corona hard sell during the coming year I mean, the fact that we've done as well as we have with one skew. This share one variety pack. We think is pretty impressive and certainly ahead of what our expectations were but keep in mind. We also have our toe in the water and some other things.
Funky Buddha, and Florida has performed extraordinarily well and.
In this healthcare category and that particular market and we are extending that some in the coming year.
We have a minority investment and press, which has done and also done extremely well and.
And in.
And the sales or category. So we have our toes in the water and a number of ways certainly on Corona hard seltzer is going to be our lead play and and we think that is where the majority of our growth in that category will come from as we said we have a second variety pack that we're introducing it to begin.
And the fiscal year and then we have a couple of other things we might be doing which you'll hear more about as we go forward.
Thank you. Our next question comes from the line Nik Modi from RBC capital markets. Your question. Please.
Yes, good morning, everyone, good afternoon, and happy new year.
Two questions from me ill.
Bill there's been some obviously controversy around current and seltzer.
And given what some of the data has said in terms of deteriorating share trends. So I was hoping you could just provide some context around what everyone seemed versus what you guys are seeing in terms of that brands from a supply demand balance perspective.
And then just as the brand continues to grow are you going to have enough capacity to to effectively execute the hard sell to eliminate launch later on the year Rob.
On the my kind of secondary question is on Corona light obviously the brands is no struggled.
Struggled relative to the other Corona franchise and just.
Just curious what the plan and care.
Over the next one to two years.
Sure as it relates as it relates to Corona hard seltzer.
We are more than doubling our capacity and that particular franchise for the coming year and as you know and you commented, we're extending that and two additional pack opportunities. We've sold everything we could make this year and we were very pleased with the performance and frankly that was as I said earlier that was a bit.
Better than we expected to do so we're quite pleased with where we stand and the overall seltzer market and certainly with the more than doubling of capacity next year we.
We expect to remain a very strong player and a top three player in that particular segment keeping in mind, Nick we have the second best velocity in the category with that particular brands with one skew. So I think as we're able to broaden our distribution reach on the shelf I think we'll be very pleased with where.
Seltzer is when were sitting here a year from now.
As it relates to light obviously, a lot of our work and a lot of our time and energy has been spent on premier which were which were very excited about continues to be a big growth profile for us.
I think we need to think about that particular like business in conjunction with.
What we are doing across the overall light category and our Premier Corona light et cetera, and I think obviously light has been hurt. Some however, it trends actually have been quite good during this during this call that timeframe.
Thank you. Our next question comes from the line Vivien Azer from Cowen Your question. Please.
Hi, Thanks.
And.
It seems pretty clear you guys.
A lot of your fleet and on the hard Seltzer, Brian with clear.
Clear market share gain aspirations, but I was wondering whether you can comment at all on the deceleration that we've seen in the hearts alter and scanner data over the last six or seven months and how that informs what you think is kind of and better and normalized on growth rates.
The category going from here. Thanks.
Yes, I think the one thing that we've probably seen a bit of is some seasonality this year.
And it's not unusual I don't think as you get more and more people into the category you get more consumers who are either less frequent users on our experimenting and the category and often times.
There is some movement around and within categories. When that occurs you couple that with there is a bit more seasonality that we've seen this year than what we had seen in prior years. So I still think it it remains a very strong growth category. It grew if you remember on our call last year, we anticipated or I made the comment that I thought.
It would at least double.
In 2020 calendar year and in fact, it did more than that as a category and we still see strong trends. So we think this is going to continue to be a growth category. Although it's obviously and like any other category. It's difficult to continue to grow at the pace that had been growing.
Thank you. Our next question comes from the line of come and go well from credit Suisse. Your question. Please.
Hey, good afternoon.
And maybe housekeeping on the do share buyback, it's 2 billion on top of the remaining 1.9 is this on the same timeline and your original four and a half billion cash return to shareholders, who and as the additional 2 billion stretched on over some.
In a more extended period, given it's been a little bit of time.
And then secondarily could you maybe comment a bit on.
Your distribution trends during the period and what's your supply chain could supply constrained from.
This is now the supply starting to come back and.
There was an EBIT and flow there and in any particular direction in terms of what we are seeing thanks.
So I'll answer your first I'll answer the first question there. So in terms of you you are right that the one point.
The 2 billion, we just announced is an addition to the 1.9 the day.
And the additional two 2 billion is to give us further flexibility.
Around share repurchases and we're still committed to the the from the 5 billion.
Return to shareholders.
Debt to half of which is share per share repurchases through the end of fiscal 2003.
And and relative to distribution trends, we were actually quite pleased with our ability to hold shelf presence as you know and we said on prior calls we focused our attention on that 20 ish skews that represented more than 75% of our of our total portfolio. During the time, when we had a slow down.
On and production so that allowed us to expand and extend some of those skew.
Skews on on shelf and allowed us to maintain our position obviously now that we have been able to raise our production rates and we are filling in some of those.
Scenarios that had occurred.
I'm pleased that we're maintaining and in fact growing our distribution platform going forward keeping in mind in many instances retailers did not do shelf resets during the cold and timeframe just because of the pandemic. So.
We were very low we're very comfortable with our distribution.
Platform, and we think that given some of the things we have come and down the path, we will be able to extend that going forward as we have every other year.
Thank you. Our next question comes from the line of lowered and Lieberman from Barclays. Your question. Please great. Thank you and.
I do and what a little bit about wine and we really nice improvement and the power brands depletion versus the first half of the year. So was curious and you talk a little bit about what drove that and.
And maybe there was some pull forward given the net sales outlook kind of cute.
Two to four so.
Curious on those dynamics and then also on just the pricing and promotional environment in wine. This stays where it came in may on the play on.
You know certainly premium price, but it feels like theres been kind of a bit more on.
Discounting activity out there and does this kind of curious on your perspective on pricing and at that price point, where you play. Thanks.
Sure we've learned we've seen it two or three things and.
And the wine space first of all.
Given there's been some change and how the consumer purchases or DTC more three tier ecommerce.
Consumers are going with brands that are tried and true and we're fortunate to have some that are that are extremely well received you've noted a couple of may on me has done extremely well Kim.
And the prisoner wine company. This these are brands that are trusted by consumers and loved by consumers and that's that's certainly help the process.
Particularly as people shopping patterns change. Some secondly, our innovation agenda has worked extremely well things that we did earlier and the here like on shackled has done very well as well as some of the newer things that we've done and we noted and ice my brief prepared remarks that may on me Cabernet suddenly on and is one of the strongest individual.
Entries that occurred and the and the entire industry. This past year and you add into that the prisoner Cabernet and the prisoner Chardan eight we did very well with our innovation agenda as.
As well, so we and I don't think we have seen I would say slightly disagree with your comment that there has been a and more aggressive.
Environment from a gross aggressive promotional environment.
Fortunately the robust demand that we've seen and many of our of our power brands above $11, where we had lots of double digit growers.
Our day, our demand has been very strong and that that has been the single biggest driver of our improved wine results is the share demand for our products and the fact that the consumer is looking for.
Brands and products that they have great faith, and especially as their shopping patterns have changed from.
Thank you. Our next question comes on line rubber on from Evercore. Your question. Please.
Great. Thank you very much I, just wanted to drill down a little bit more.
And did the accelerating depletion trends that you saw on the quarter.
Which were quite marketed.
I mean, what do you think this is just purely a function of.
The greater availability of your brands on the shelf.
Or no.
Increased media spend against the.
The timing of your price increases and improving consumer.
Just trying to get a little feel for those.
Those different drivers and then you know tied into that.
How how do you see the distribution gains looking in terms of calendar 2021. Thank you.
Sure I mean, there were a number of factors that weighed in on the improved performance it starts and and always will start with the strength of the brands.
And certainly as we were able to get our inventory position into a much better place during the quarter. It was it was reflected in our results and that was reflected in the demand consumers had remember we had roughly 15% growth across the beer portfolio and higher items during the quarter extremely robust growth, especially given.
The fact that on premise was what was a drag to say the least Fortunately again, we are a little less susceptible to the on premise and and some of the overall marketplace, but.
Shear strength of our brands was a critical factor no question. Some of the depletion pieces. Garth noted in his remarks were driven by our replacing some of the inventory that had decreased during the time and we were not able to produce but I think we do need to keep in mind. The end of the day, it's all about consumer takeout.
And consumers are strongly demanding our critical brands.
Thank you. Our next question comes from the line of Kevin Grundy from Jefferies. Your question. Please.
Great. Thanks, Good afternoon, everyone happy new year and congratulations on the strong results.
Thank you Bill Bill question relates to the competitive outlook and building on Laurens question from wine, but I'm going to kind to ask it from from a beer and seltzer angle.
For the upcoming year and so you know the context of the question given the obvious challenges from the pandemic this past year on premise.
The out of stocks this past summer et cetera, many in the industry, including you guys were really on able to support your brands sufficiently with marketing budgets cut rather sharply. So my question is what is your outlook. How are you guys thinking about the next 12 months and.
And so the competitive backdrop, specifically around pricing and brands support as the industry returns to help do you foresee a more competitive backdrop spend and than we've seen in the past as companies try to reinvigorate the top line or do you expect a generally rational environment. Thanks.
I think it's tough to tell when others will do what I will tell you is what we plan to do is we plan to continue to spend and that nine to 10 range of our marketing spend in our beer business.
And we've got a lot of good things to talk about we're at we're extending our investment against Modelo will be reintroducing refresh later this year.
Despite the tremendous performance share we have things like refresh go that we just stop producing and we're going to reintroduce even though it had a tremendous start.
For the pandemic hit so we.
We expect it to be certainly be a competitive marketplace, but demand remains strong and thats certainly to our advantage because our brands.
Have performed very well and that in that mix.
As we've said we are going to continue to invest behind our brands and.
Our brands respond extremely well and Jim sales does an outstanding job with his team about making sure that we get tremendous returns against the dollars that we spend against our brands and we expect that that that's sort of intelligent approach to investment behind our business will continue and then when you add on.
The fact that we will be adding additional products into the mix that we will invest behind I think we're going to have a very robust and aggressive year and.
Building on our our brands for the future.
Thank you. Our next question comes from the line of Andrew a day Shader from JP Morgan Your question. Please.
You may have your phone on mute.
On the Covance mute issue.
Still not hearing you.
Should I move on to the next questioner.
Yes. Please.
Certainly our next question comes from the line of Sean King from UBI, Yes. Your question. Please.
Hi, great. Thank you first.
First off and apologies if I missed this but is there any color you from a ride on on the.
Quarter to date completions now and we're five weeks and are you still reloading sales and then secondly, sort of looking longer term and the on premise. Your historic exposure I guess under index and the industry and like a pre coded world and as we think about the reopening will that continue to be the case based on the way your brands are positioned around occasions or could there be inc.
From mental shelves or incremental share gains in that channel and that trade focuses on higher velocity brands.
So as it relates to our current Depletions.
Through the first month of the quarter Depletions continue to to to perform in line with where they are so far through the fiscal year fiscal year to date.
And the expectation is that they will continue like that through through the remainder of our quarter.
And then on the I am sorry could you repeat that second the second part of your question, which channel we missed that which channel you were referring to I'm sorry.
Oh, sorry, I was referring to the on premise net you historically under index the industry and if there is an opportunity going forward and that mix can you could actually had incremental share gains.
The portfolio.
Well certainly.
Historically as you said, we have under indexed and that and we're seeing wide variability depending on what month, what state what market what city as to what's going on and the on premise. That's been frankly, the most difficult thing for any of us and the industry to project as to where it's going to go and how it's going to go there.
What I would say is.
We have very focused business plans against each channel we plan by channel and as you would expect and by customer and and we would certainly expect to have a strong showing in the on premise once we get back to something resembling normalcy acknowledging that the general consensus within the industry is that.
We are going to have a smaller on premise coming out of the pandemic than we had going in just because of the challenges that unfortunately, many of our many of our important accounts have had during the pandemic.
Thank you our final question for today comes from the line of Chris cash from Wells Fargo. Your question. Please.
Hi, good afternoon.
So I guess I just wanted to talk about capital allocation and just and things.
But from a bit different perspective, maybe then and how it's been addressed so far.
Yes, I guess and July constellation had.
I had noted.
And that after exercising that last batch and cannot be warrants that.
It was going to see how things on folded in the us and Canada.
I mean, I'd argue that few days and it results made the us.
Much more tangible opportunity for candidates much sooner.
And I wouldn't expect on maybe.
And we began to be spending to be as efficient as.
It was in Canada, but certainly you asked expansion requires money on.
And I, just I wonder if Bob.
If your thought process on these wine.
Has changed at all in the medium term, we just think it's certainly pick up and have it sooner and how that factors into on.
You know this is renewed commitment to buybacks and just any perspective and I guess just on top of that apologies for the long question on the call but.
On that could also impact can be profitability is not an acceptable outcome and so just any color there. Thanks so much.
Sure. So so just on capital allocation in general.
Capital allocation priorities remain consistent with what we said earlier this year, which is continuing to be too to pay down debt and getting into and maintaining levels inside our targeted leverage ratio that we're comfortable with and we've made good progress on that this year.
So far we brought our leverage ratio down to about 59 basis points from where we started the year about 39 basis points since the end of Q2.
And we announced earlier this week that David the early redemption of another $500 million.
No. So so were going to thats that continues to be priority number one and.
And then I will say, we are fully committed to the share repurchase program that we that we've previously announced which is to return to shareholders. So two and a half billion dollars' worth of.
Capital through share repurchases by the end of our fiscal 23 as as well as dividends to make up the balance as it relates specifically to the canopy warrants. There's still on the next batch of warrants. There are still two years left on those so we don't need to make a decision anytime soon even with the performance can be share price. They are still not not in them.
Money, So we'll make the decision on those warrants and much more closely.
To win to win and then.
The baby mature or to their termination date.
And also just to add to that what cars said that keep in mind canopy has already had.
Is already well prepared for the us market relative to their investments further prepared investments and both acreage and tourists and plus their cash position. So we would certainly expect that if there is any.
Eat up in the federal legalization that cannot be is well positioned.
To be a winner in the us market going forward.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to build Newlands for any further remarks.
Well I'd like to thank everybody for joining our call today. Despite the challenges faced in 2020 were again on track to deliver a strong year of growth, which is consistent with our long term goals, we're confident and the resiliency of our business. Our beer business remains strong as demand continues to be robust, while our wine inside.
Sure. It's Premiumization strategy continues to gain momentum and is further enhanced by the completion of the Gallo deal. The health of our business has allowed us to provide fiscal 21 guidance that reinforces our strategic growth priorities and strong cash generation capabilities. This coupled with the closure of the gala track.
This action allows us to continue to execute on our commitment to return $5 billion and value to our shareholders through fiscal 2003 as a reminder, during our next quarterly call, we will be providing our guidance for the upcoming fiscal year. Thanks again, everyone for joining the call and I wish you all a say.
Happy and prosperous new year. Thank you.
Thank you, ladies and gentlemen for your participation on today's conference. This does conclude the program you may now disconnect good day.
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