Q4 2021 Constellation Brands Inc Earnings Call

Senate listen-only mode following the prepared remarks. The call will be open for your questions instructions will be given that their time or now turn the call over to Patty on a locksmith vice president of investor relations. You may begin. Thanks to Wanda good morning and welcome to constellations year-end fiscal 21 conference call. I'm here this morning with Bill Newlands r c e and Garth hankinson our CFO as a 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 our website at www.sedar.com. 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 turn off all 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's Bill. Thank you Betty. Good morning and Welcome to our page.

Trying to call it's now been a little more than a year since the onset of a pandemic and for many it's been one of the most challenging years in recent memory at this time last year. We outline a philosophy for managing the business and navigating through this period of uncertainty we committed to making decisions that prioritize the physical and economic safety health and well-being of our employees. We committed to remaining consumer obsessed relentlessly focused on doing all we can to meet consumer needs. We pledged to continue managing our business with discipline ensuring appropriate balance between short-term needs and positioning constellation for sustainable long-term success and we pledge to continue to continue making decisions align with our long-term strategic Vision. This is what best-of-class companies do in periods of uncertainty and I'm extremely proud to say Thursday.

that is exactly what our team delivered over the course of the fiscal year and then some

working together with our distributor and Retail Partners. We overcame numerous headwinds posed by the pandemic to achieve strong earnings growth and record free cash flow boss only reducing death. This strong performance was led by our beer business which delivered double-digit operating income and organic net sales growth for the fiscal year walking forward. We not only have an exciting Innovation lineup for the coming year, but we expect our core portfolio to generate robust growth well into the foreseeable future and therefore I have plans in place to execute our next increment of capacity expansion in Mexico.

Or wine and spirits premiumization strategy gained significant traction during the fiscal year and the divestiture of several lower-end wine Brands position this business for in a growth and profitability going forward.

In addition to the strong performance of our business units our company also stepped up to help industry Partners in communities impacted by COVID-19 and natural disasters and took our voice and support in combating social injustice in the US.

It continues through our additional 1.75 million contribution to the National restaurants association's Education Foundation announced earlier this week to schedule work on premise recovery efforts as well as our recent ten million contribution to the Clear Vision fund designed to invest in minority-owned businesses, primarily those operating in underserved black and Latin communities and through our most recent efforts to address the disturbing trend of violence against people of Asian descent across the country with this regard. Let me once again extend our deepest sympathies to victims of these deplorable acts and our continued support of members of the Asian community in this difficult time.

Our our strong business performance coupled with learnings from the past year and plan Investments to enable growth along with our continued commitment to making a positive impact on the world around us positions constellation for continued success and fiscal 22 and Beyond.

Now, let's move to a more detailed discussion of our results and our plans for this year.

Fiscal 21 Mark the 11th consecutive year of growth for our beer business and reinforced our leadership position in the high end of the Bier Markt. We drove exceptional performance across our beer portfolio led by our customer Delran family including Modelo Especial El Modelo Negra Modelo Chelada, which I am one of the biggest forces in the USB or industry delivering more than thirteen million cases of growth to the Beer category last year.

Modelo Especial achieved yet another year of double-digit growth and now stands as the number three selling beer in the US in dollar sales rep more than $145 million cases sold last year. The only imported beer to ever surpass ten million barrels and biome.

achieved double-digit growth and Remains the number one Chelada brand in iri channels

Modelo Brands family is on sway go but we're far from done. We have a tremendous amount of momentum with Tessa Modelo. And we continue to have huge growth opportunities in front of us are core Hispanic Drinker Remains the foundation of our business representing more than half of our volume yet. We're still growing volume penetration rate with them.

We're also making great progress with the non-hispanic consumer where we've grown penetration by 25% over the last two years.

And while we continue to grow simple distribution are effective distribution levels, remain below industry leaders all this represents a massive opportunity to continue our momentum package double digit growth, but this brand family well into the future during fiscal 22, we will continue to focus on making Modelo more top of mind with all consumers long as we execute more high-profile activations to further engage are Drinkers and expand portfolio options to appeal to new consumers and unlock new occasions.

These efforts will be supported by a fifty percent increase in digital social and e-commerce. Media Modelo will once again be an official sponsor of the Gold Cup soccer turn off and will be a major Advertiser for the brand throughout the high-profile. 2021. Summer Olympic Games will also be delivering high-profile activations to our biggest sponsorship as the official beer of the UFC UFC's increasing popularity is allowing us to reach more young Multicultural drinkers than ever dispatched UFC reached over forty 1 million viewers on TV through their social following by 70% and became the number two largest Sports property on YouTube.

Modelo Chelada has been an extremely successful platform for us as well. And in fiscal 22, we will take our next step on the path to growth by launching our newest flame Modelo Chelada Pina picante.

Beyond chiladas, we also have an opportunity to expand into the rapidly growing consumer Trend A Better Man by launching Modelo Ansari tow style cerveza refreshing better for you white or lager made with a hint of real grapefruit orange and lime juice with only a hundred calories. It delivers lower-calorie beer but with the flavorful and authentic experience as it was inspired by the traditional cantarito cocktail from Jalisco Mexico and on and to top it off consumers loved the idea. This is the highest scoring Modelo new product concept we've ever had as you can see Modelo is poised for another great year in fiscal 22 months.

moving on to our next powerful brand

The corona Brand family is thriving and embracing a new year full of possibilities our Flagship Corona Extra brand Remains. The number 6 USB or Brand New Jersey, iri dollar sales by 11% and surpassing two billion in retail sales last year.

In fiscal 22, you'll see a refresh Corona which will be enabled through a master brand strategy where Corona equities unite the entire family and he'd sub-brand delivers unique benefits the plate two distinct occasions consumers and motivations while staying true to Corona's DNA.

We have a full year of masterbrand retail initiatives on-premise programs ready to go as markets reopen and experiential plans to play to Consumers passion points like music off of sports.

For Corona Light. Our focus is on General market consumers particularly females who seek important taste with fewer calories.

For familiar. Our focus is on on acculturated Hispanics who shop in Hispanic dominant accounts.

to ignite our Corona Originals, we will invest in National media spending across digital and social channels as well as National English and Spanish language t with a significant presence can major live sports properties such as March Madness NBA Finals Gold Club soccer and the NFL

the hotline will return to support our Sports programs with Kenny Smith and Tony Romo covering the lines last year Coronas. New La Vita must be a pain was a smashing success and brought Corona back to the center of cultural conversation with its new Bad Bunny content generating an impressive 1 billion Impressions walk across TV digital and social Snoop and Bad Bunny will be back this year to share their fine life wisdom along with new friends. This brings us to correct a premier Coronas answer to capturing growth in the exploding betterment segment.

In fiscal Twenty One Corona Premier Cru depletions volume almost 20% and increased its penetration at a faster rate than its major competitor and other domestic lights off demonstrating. We are successfully trading up consumers.

Our Golf and active lifestyle platforms for this brand will be supported by a retail program continued strong media investments in key tournaments and our distinguished sponsorship of the US Open cup Torrey Pines in June moving onto refresca, which is Coronas answer for flavor Seekers because of refreshes unique flavor experience. It has been incremental constellation and the category bringing in a different consumer from beer and hard Seltzer with a Hispanic index of 205 vs. The FMV category are happy to be able to bring the coronavirus refresca variety pack back in physical 22 after a Hiatus last year during the pandemic.

We will also build.

On the initial success of refresca by extending the brand into the growing High ABV FMV space with the launch of refresca mas, 24-ounce single-serve cans with 8 plus TV and mango a citrus flavor and this brings us to constellations most successful Innovation yet Corona hard Seltzer month with only one skew the corona hard Seltzer became the number for Brand family in a very short period of time while consumers have flocked to this category Coronas icon image Multicultural consumer base and reputation as the number one. Most refreshing beer has allowed Corona hard Seltzer to recruit new Drinkers and expand the segment.

In fact, Corona hard Seltzer ZR1 volume delivered approx 90% incrementality to our portfolio and continues to be the second fastest moving hard Seltzer for Brands was significant distribution.

With no signs of slowing down the Corona beer and family expects to be a significant component in its future growth by expanding its face Seltzer proposition and launching a mental Innovation. We will continue to focus on growing Distribution on variety pack. Number one while introducing new skus to satisfy different tastes occasions off channels are second variety pack is now in Market with pineapple strawberry raspberry and passion fruit flavors. We tested a variety of flavors month and consumers told us they wanted familiar great-tasting flavors that pair well with a lime from Corona.

In keeping with this theme of authenticity Amplified flavor and natural betterment attributes were excited to announce Corona hard Seltzer limonada, which is launching June and a 12-pack variety pack and will be line price with Corona hard Seltzer inspired by traditional Mexican recipes. Limonada will break the mold by delivering off Fanta flavor with a splash of real lemon and lime from Mexico juice at only a hundred calories.

To support the expansion of all Corona hard Seltzer's including limonada. We plan to invest approximately sixty million across all marketing touch points to maintain phone number one share of voice in Seltzer's during the critical summer months and will include investment and premium Sports properties like March Madness and the NBA

the plan also includes significant levels of Spanish language support to lean into Corona strength with Hispanics last year nearly 20% of Corona hard Seltzer came from Hispanics and index 136 versus the Seltzer category while we're on the topic. Let me address the recent lawsuit filed by one of our competitors and opposition to our use of the corona trademark for Corona hard Seltzer earlier this week. We filed a motion to dismiss this lawsuit as we find these claims to be completely without Merit a blatant attempt to restrain a strong and well established competitor in a high-growth segment of the market. We have fully complied with the terms of our subject agreement and we will vigorously defend our rights under our sub license agreement and applicable law.

we expect it will take several months for

Rolling on our motion to dismiss Us. In the meantime, we continue to operate business as usual as we expect our plans in the ABA and hard Seltzer space.

Where we fully expect to further build on our momentum for many years to come.

Bottom line the corona family growth roadmap is focused on three strategic priorities and fiscal 22 first. We will reignite the core with the refreshed Corona with new packaging best-in-class advertising leadership levels of media and marketing investment and culturally-relevant activations. Number two. We will exit key breakthrough Innovation, which includes accelerating growth and betterment beer and third we will establish a beachhead in the AV a category.

But let's not forget Pacifico. Let me repeat that. Let's not forget Pacifico, which is the fastest growing major Mexican import beer Brandenburg us on a dollar sales basis and it's on its way to becoming the next scalable national beer brand in the constellation portfolio.

We're doing things differently this year with the Civic go with a focus on gen Z consumers whose attitudes over-index with pacifico's independent Spirit are action sports and cause an issue resonates strongly with their passions and values for the first time will have National coverage on major gen Z relevant digital and social platforms including Hulu in a gram Snapchat Twitter and twitch.

This will be your for a Pacifico being the official beer of the X Games both summer and winter 2021 is also an Olympic trials here and we'll continue our strong partnership with the US Ski and Snowboard teams with activations at competitions across the and robust media support on NBC.

I'm also excited to introduce Pacifico The first-ever Innovation created for Gen Z consumers with a thirst for new flavors Pacifico Citrus. Agave lager is behind fired and made with a hint of agave sea salt and lime flavor. We're launching this month in to test Market San Diego and Dallas with three skus. We look forward to sharing the results and showing how Innovation can grow the entire Pacifico Port four wheel from an operational perspective. I'm pleased to announce that we recently completed the 5 million am the leader expansion of our Obregon facility which when added to our existing capacity provide incremental flexibility as is typical, it will take someone's to fully optimized this operation over the coming months.

Because our beer business continues to significantly outperform the market driven by ongoing robust consumer demand. We are absolutely committed to satisfying this growing consumer demand for our iconic Brands including Corona Modelo Pacifico and Victoria as such we have developed plans to invest off next incremental capacity in Mexico that will provide long-term flexibility to equip us with the next necessary production to capture the continued momentum and growth opportunity that we see in the high-end segment of the US Beer Market which has consistently grown and mid-to-high single-digit range and is expected to continue to grow at these levels into the future.

It will also provide.

Mental flexible capacity that will allow our breweries to operate and sensible utilization rates and deal with unplanned challenges from things like weather related issues that impact of business during our recent fiscal year round. These have been keeping things from the pandemic. Our investments will not only support the expected future growth of our core portfolio. What's the emerging ABA or Alternative Beverage alcohol space and hard Seltzer's meanwhile in addition to these initiatives. We continue to engage in constructive conversations with the Mexican Government as it relates to our long-term plans for production in Mexico.

Together with government officials were exploring options that include finding an alternative location in the south east of Mexico that has adequate water supply and a skilled Workforce Garth will provide additional Financial details in just a few minutes.

To sum it up the US. Category is healthy and exhibiting strong growth led by the high-end segment last year off-premise channels within the beer category grew 15% with a high and growing more than 25% the velocity of our portfolio as well as the growth and margin profile of our high-end beer business is best-in-class. We're deliberate about our Innovation efforts to ensure they're focused and disciplined and we're well positioned against where the consumer is going and the future of this industry Thursday. We have significant distribution runway for our healthy core portfolio. We will continue to capitalize on the growth of the Hispanic population and the premiumization of the Page Middle markets.

And we are focused on a v a growth leveraging our core brand equities because we see this as a significant growth opportunity as well as a reminder our fifth year started March one and our first quarter runs through the end of May as most of you know last year this coincided with the beginning of the pandemic when we experience robust consumer demand for our products that led to record Trends in off-premise track tracked channels as consumers were in the pantry loading phase of the pandemic in addition during the Spring of 2020. We slowed production in Mexico do to COVID-19 which led to some out of stocks in the US market place during summer months as a result should expect to see muted iri and Neil Young trans growing our fiscal year due to the year-over-year unfavorable overlap until we start to overcome last year's out of stock issue when we expect our scan and theater to improve

Significantly, however, recent four-week, iri Trends show the constellations beer business is significantly outpacing the beer industry wage and is outperforming the high end of the Beer Market.

Let's now.

I'll move on to results of our Wine and Spirits business fiscal twenty one was a year of significant progress for a wine and spirits business the Gallo deal and related divestitures off allowed us to sell several lower-end Brands. We established category meaning digital capabilities. We optimized our route to Market to accelerate performance and build a robust Innovation pipeline while driving solid results in the face of a very challenging external environment. In fact are retained Wine and Spirits portfolio wage, looting divested Brands delivered net sales growth a 5% for the year driven by double-digit volume growth for meiomi Kim Crawford, and the Prisoner Brand family these name brands also achieved double-digit distribution gains in off-premise channels last year.

Impactful Innovations were also a driving force for growth and included meiomi Cabernet Sauvignon Kim Crawford illuminate and the Prisoner Unshackled which became the number one thousand a new brand in iri channels in fiscal 21.

The wine and spirits business is well positioned to consistently grow net sales low to mid-single digits and produce operating income growth ahead of net sales to achieve a 30% operating margin over the medium-term. This will be achieved by the business delivering a margin of creative mix implementing disciplined pricing actions taken out stranded costs and executing other cost and efficiency improvements in the near-term. We expect fiscal 22 organic net sales growth in the two to four percent range. And what is this confidence in these goals? We have solid plans in place to assure that our Wine and Spirits transformation focused on premiumization continues to gain tracker. Our high-end brands are well-positioned to drive mix in margin expansion and we plan to continue to take price on select products within select markets throughout the

A year will never judge the strong Equity of these Ki Kore Brands while building momentum through fully integrated marketing campaigns and Partnerships to drive distinctive inconsistent messaging that creates demand for these Brands including Kim meiomi Woodbridge Ruffino The Prisoner. Hi West and Svedka.

We remain committed to driving mix in margin accretive scalable Innovation by successfully addressing consumer Trends including the convenience RTD and betterment catalog. We have a strong Innovation pipeline plans for the coming year that includes the introduction of Woodbridge wine Seltzer the expansion of Svedka after a successful first year launched and new prisoner family Innovation that includes the launch of the prisoner Pinot Noir sell do red blend and Unshackled solving home bloxburg.

we also

To benefit in here to from this past year successful Innovation launches of mayo me kab Kim Crawford illuminate and the Prisoner Chardonnay and Cabernet Sauvignon our wine spirits brand continue to outpace the e-commerce category fueled by our outstanding performance in instacart, drizzly and Amazon and our wine TTC growth in use to outpace the market by close to 2 x. In fact Svedka has become the number one mainstream vodka on Amazon while Kim Crawford Sauvignon blanc M A Pinot Noir claim number one positions and their respective categories on drizly one of the largest online marketplaces for beverage alcohol.

The early Investments we made in this space has given us a key first-mover advantage and will continue to invest in DTC any Commerce initiatives as consumer ships where and how they purchase average alcohol the evolution of our Wine and Spirits strategy includes a critical next step to build category leading page located fine wine and craft Spirits business, which will strengthen our portfolio and capabilities in this space to meaningfully inflect our business towards the high end. We believe that dedicating the proper focus and attention to our fine wine and craft Spirits business will complement our leadership in our mainstream and premium businesses and will accelerate our goal to drive in Chrome profitable sales growth.

As we pursue industry-leading growth for our Wine and Spirits portfolio. We are constantly assessing a route to Market strategies to ensure. We stay ahead of consumer Trends and maximum our growth opportunities our distributor Partners play a significant role in achieving our goals and creating value for the market.

To that end. We recently announced the evolution of our Wine and Spirits wholesale structure whereby Southern Glazer's Wine and Spirits assume distribution responsibilities across approx, 70% of our Wine and Spirits brand portfolio effective. April one Southern is a proven brand Builder with Advanced capabilities and growing consumer segments, including didja Commerce buying wine and craft spirits and ready to drink and they have category leading sales capabilities across on and off premise channels. We plan to leverage their own strength in these areas to help accelerate our category leadership. We are confident. They are the best partner to help us achieve our strategic Ambitions and we believe this move best positions month for long-term success and accelerated growth.

Moving on briefly to canopy growth over the past year canopy has made significant progress in strengthening their position in core markets and taking steps to prepare for the inevitable ization of cannabis in the US cannot be successful roll roll out of cannabis beverages as well as other wreck Point 2.0 products has helped the company gain momentum currently canopy has the top three beverages in the Canadian recreational market and they recently introduced they're popular Quattro beverages in the news.

Over the coming year. We look forward to benefit.

Thing from canopies continued March toward profitability the rollout of canopy branded products in the US through canopies arrangement with acreage and the improving legal landscape for cannabis affect us in closing. Let me reiterate how proud I am of the performance delivered by our constellation team along with our distributor and Retail Partners during a tumultuous year because of their great passion and determination were operating from a position of strength as we head into the new fiscal year and we're poised deliver a solid year of performance again in fiscal 22

We will continue to invest aggressively to accelerate growth for our strong portfolio of industry-leading Brands. We have exciting innovation in store for the coming year off building capabilities in emerging channels such as three t r e Commerce while adding production capacity to fuel our growth over the long term.

Make no mistake. We have bold Ambitions for the future and look forward to delivering on a long-term Vision which includes generating industry-leading returns for our shareholders over that time frame. And with that I would like now to turn the call over to Garth who will review our financial results for fiscal 21 and our Financial Focus for fiscal 22

Thank you, Bill. And hello, everyone despite on volatile environment and various had one's experience throughout the year due to COVID-19. Fiscal Twenty One marked another great year for constellation Brands demonstrated by a robust Financial results in solid business performance. We produce strong beer operating performance and cash flow results while our Wine and Spirits premiumization strategy continues to gain momentum and is well-positioned to execute growth now that the Gallo transaction is finally closed specifically in fiscal 21, we achieve strong EPS growth and delivery, or basis EPS excluding canopy growth of $10.44.

In addition, we generated record operating cash flow and free cash and free cash flow of 2.8 billion and 1.9 billion respectively which enables significant debt reduction of one point seven billion dollars and reduction of our net leverage excluding canopy Equity earnings as we ended the year at 3.1 times and lastly we returned 7575 million of cash to shareholders in dividends.

Now, let's review full year fiscal Twenty-One performance in more detail. We're all generally focus on comparable basis Financial results.

Starting with beer net sales increased 8% on shipment volume growth of approximately 7% excluding the impact of the Ballast Point divestiture organic net sales increased 10% driven by organic shipment volume growth of 8% in favorable price and mix are full full year organic net sales slightly out performed previously communicated expectations primarily due to incremental statements made during the fourth quarter in order to return to normal levels of distributor inventory and fiscal year end.

Depletion volume growth for the year came in above 7% driven by the continued strength of the Modelo and Corona brand families as throughout the year strong performance continued in the off-premise channel and more than offset the impact of the 51% year-over-year reduction in the on-premise channel due to COVID-19 when adjusting for one less selling Day in the year the beer business generated 7.5% depletion volume growth.

moving on to bigger margins beer operating margin increased 110 basis points versus prior year to 41.1% benefits from marketing and sg&a percent of net sales pricing the Ballast Point divestiture and foreign currency more than offset, unfavorable operational and logistic costs and mix

The increase in operational costs was driven primarily by higher material costs and Brewery compensation and benefits while the increased Logistics costs predominantly resulted from strategic actions taken to expedite beer shipments in order to accelerate inventory replenishment across the network.

These headwinds were partially offset by favorable fixed cost absorption who related to increased production in fiscal 21.

What marketing is a percent of net sales decreased 3.6 to 9.7 vs prior-year this result landed above our previous guidance in the ninety nine and a half percent range driven by a mental strategic Investments made during the fourth quarter to provide continued momentum as we head into fiscal twenty-two and the spring selling season.

Moving to Wine and Spirits net sales decline 7% on shipment volume down 16% will I retain portfolio for the year achieve net sales growth of 5% durable digit volume growth and robust mix benefits for Mayo me Kim Crawford The Prisoner Brand family as well as pricing benefits from Woodbridge and Svedka.

Full year net sales results outperform our previous expectations primarily due to Stronger mix benefits and some incremental shipments of our retained brands in the fourth quarter.

Depletion volume decline approximately 3% mainly driven by the brands recently divested well depletion volume for our retained portfolio declined approximately 1% off the slight decline in our retained portfolio depletion volume was largely driven by strong fiscal twenty Woodbridge volume by in ahead of the price increases that went into effect on March 1st of 2020 as well as the Strategic efforts made throughout the year to right-size inventory on hand at several chain retailers in key states often resulted in negative impact a depletion trends for the fiscal year. This will allow for better inventory management going forward.

moving on to

Wine spirits margins operating margin decreased a hundred fifty basis points to 24.5% as benefits from price and mix or more than offset by higher cogs Wine and Spirits the best years and increased marketing and sg&a spend higher cogs was mostly driven by unfavorable fixed cost absorption of approximately $29 off from decreased production levels as the result of the wildfires.

Now let's proceed with the rest of the piano corporate expenses came in slightly better than our previous guides finishing at approximately $229 up 2% versus last fiscal year wage. The increase was primarily driven by higher compensation and benefits unfair will foreign currency losses and an increase in charitable contributions primarily driven by COVID-19 support all of which would be offset by decreased and insurance related costs and reduced TNT spent.

Couple of the bases interest expense for the year decreased 10% by approximately to approximately $386 primarily due to lower average borrowings long as we continue to decrease our leverage ratio.

Are comparable basis effective tax rate excluding canopy Equity earnings impact came in at 18.2% versus 16.1% last year primarily driven by a lower level of stock-based compensation benefit and higher effective tax rates on our foreign businesses stock-based compensation benefits came in slightly better-than-expected during Q4 and addition. We realize some small miscellaneous benefits as a result this drove tax rate favorability versus our previous guidance.

Moving to Canada in fiscal twenty one. We recognized an 802 million dollar increase in the fair value of our canopy Investments of which $270 would recognize in Q4. These were excluded from comparable basis results. The total pre-tax net gained recognize since our initial canopy investment in November of 2017, is one point 1 billion dollars, which increased significantly during the fiscal year driven by canopies robust share price movement.

Now let's briefly review Q4 results.

Beer net sales increased 16% primarily due to shipment volume growth of nearly 16% excluding the impact of the Ballast Point divestiture organic net sales increased 18% during by or just shipment volume growth of approximately 70% and favorable mix

the police volume growth for the quarter came and above 6% However, when adjusting for one less selling day in the quarter the beer business generated 7.5% depletion volume growth, which is in line with four-year Trends and our medium-term growth algorithm.

As you are all aware inclement weather affected the South predominantly Texas during the last few weeks of February these abnormal and severe conditions did have a slight impact to our Q4 depletion track is we're estimating that we lost approximately fifty to one hundred basis points of depletion volume growth in the quarter.

as

Personally guided shipment volume continued to significantly outpaced depletion volume during the quarter and as mentioned earlier this resulted in distributor inventories returning to more normal levels at fiscal year end as expected beer operating margin decreased two hundred fifty basis points that 36.8% as higher marketing spend and increased cogsworth upset by benefits from favorable sg&a, as a percent of net sales the Ballast Point divestiture and foreign currency marketing is a percent of net sales was 12.5% or three hundred fifty basis points higher than cute for last year driven by the shifter spend from the first half the second half of the fiscal year and incremental marketing Investments.

Wine and Spirits net sales were down 19% for the quarter. Well shift volume was down approximately 33% reflecting the brands divested during the quarter are retained folio. Net sales were up 7% driven by strong shipment makes benefits as discussed earlier.

Operating margin decreased nine hundred basis points to 19.9% primarily reflecting the negative impact of the wildfires on cogs increased marketing and sg&a spend money and wine spirits the best years partially offset by benefits from favorable mix.

Keep in mind that for approximately two-thirds of the quarter. We had a smaller business posted investitures that was burdened by the full impact of stranded costs on that smaller business.

During the quarter. We also recognized a net loss of approximately 46 million in connection with smoke damage sustained during the wildfires, which was excluded from our comparable basis results. I'm moving to fiscal twenty one free cash flow, which we Define is net cash provided by operating activities less capex. We generated a record 1.95 billion of free cash flow which reflects strong operating cash flow.

CAD fax total 865 million and was in line with our most recent guidance this included approximately 700 million of capex for a Mexico beer operations expansion primarily to support the Obregon five million hectoliter expansion.

Moving to our full year fiscal twenty two p and out and cash flow targets for fiscal 22. We expect comparable basis diluted EPS to be in the range of $9.95 to $10.25 which excludes canopy Equity earnings impact for our beer business in fiscal 22. We are targeting net same growth of 79% which includes one to two points of pricing within our Mexican product portfolio and operating income growth of 3 to 5% disinfect operating margin migrating to the low to middle end of our range of $39 40% driven by several cost headwinds. We expect to encounter in fiscal 22 months due to the following.

first we are

Estimating a significant Step Up in depreciation expense driven by primarily by the incremental five million hectoliters at Obregon that was recently completed for fiscal 22. We are talking Total Beer segment depreciation expense to approximate 260 million dollars or an increase of approximately 65 million dollars second similar to previous years work. We're expecting substantial inflation head winds in the low-to-mid single-digit increase range largely related to Glass and other packaging materials raw materials transportation and labor costs in Mexico third as the growth of hard Seltzer and Alternative Beverage alcohol categories continue to rapidly expand we expect to to continue to experience unfavorable mix impacts is their margins are deluded from like gross profit perspective due to the incremental packaging costs and flavor additives.

Furthermore, we also anticipate a negative mix impact during by incremental keg volume versus prior driven by the continued reopening and return of business to the on-premise channel. And lastly we expect Mark and headwinds related to The Brewery expansion costs which include increased head count and training expenses.

To help partially offset these headwinds we expect to execute against our aggressive cost-savings agenda and as stated earlier expect pricing benefits into one to 2% range result of Staggering our fiscal 21 Fall price increases throughout the back half of fiscal twenty one and in some instances into fiscal 22, we expect to shift more pricing from the fall to the spring in fiscal 22.

Lastly as it relates to beer marketing spend for fiscal 22, we expect marketing as a percent of net sales to be in the nine to 10% range. Keep in mind that marketing spend during the first half of fiscal twenty one was significantly muted resulting from COVID-19 related sporting and sponsorship event cancellations and or postponements for physical 22, we expect returned to our typical spending Cadence, which is weighted more heavily towards the first half of the fiscal year.

Moving the white and Spirits for fiscal 22, the wine and spirits business is targeting net sales and operating income to declined 22 to 24% and 23 to 25% respectively this implies operating margins to approximately 24% which is flattish to Prior year on a reported basis which shows significant margin expansion on and off and organic basis, excluding the impact of the wine and spirits divestitures organic net sales is expected to grow into two to four percent range the transformation of our Wine and Spirits business office underway and over the next few fiscal years. We're committed to removing stranded costs and executing against other cost-savings mix and price and efficiency improvements and we expect to continue to achieve like an expansion as we migrate to operating margins of approximately 30%

other

Guidance assumptions include interest expense in the range of three hundred fifty to three hundred sixty million dollars corporate expenses to approximately $235 comparable tax rate, excluding canopy equity in earnings of approximately 19% Non-controlling interest is expected to be approximately forty million dollars and weighted average diluted shares outstanding are targeting approximately 196 million. This assumes no share repurchases for fiscal 22

We expect fiscal $22 free cash flow to be in the range of 1.4 to 1.5 billion dollars which reflects operating cash flow in the range of 2.4 to 2.6 billion dollars and off of one to one point 1 billion dollars which includes approximately $900 Target for Mexico beer operation expansions.

I think this is a good spot to elaborate on our Capital expansion initiatives for our beer business that bill touched on earlier as Bill outlined our beer business continues to significantly outperformed beer industry driven by robust consumer demand, as such is essential that we invest appropriately in order to support this growth for for our Core Beer portfolio as well as the surging ABA or Alternative Beverage alcohol space these Investments include a five million hectoliter expansion it Nava dedicated to a va's including hard Seltzer that supposed to be completed in early fiscal twenty-three and we are in the process of expanding Obregon 219 million hectoliters to be completed by the end of fiscal 25

As a result, you should expect our annual capex spend for the beer business to be in the $700 to $900 range to support this 15 million heck of Your Capacity expansions during fiscal years twenty-three fiscal year 25.

these projects are expected to generate solid returns as our beer business has a high operating roic and a best-in-class margin profile despite the incremental depreciation expected from our capex invest

Even with the capital expenditures associated with these initiatives are strong projected earnings and operating cash flow growth allows to remain focused on operating below our Target leverage range, which provides us with the the flexibility to execute our five billion dollar cash return commitment over the next two years.

Our Brewery operations in Nava and have long been part of the fabric of these communities as part of our expansion efforts and commitment to making a positive impact on the communities where we operate may continue working with local authorities and community-based organizations on sustainability initiatives that benefit local residents. For instance over the past several years constellation age as help support local infrastructure investments in Obregon that have enhanced water efficiency in the region more than offsetting. Our water used at this facility. This is in addition to other benefits. We provide including local job creation and fueling Economic Development. We are working with local Partners in Nava on similar initiatives.

lastly given the current state of

Activities in Mexicali, we will be unable to use or repurpose this site for future use therefore. We expect to take an impairment of approximately 650 to $680 in q1 of fiscal 22, which will be excluded from comparable basis results. However, as Bill mentioned we actively continue to work with Geico officials in Mexico to pursue various forms of recovery for the costs. We have incurred and constructing the brewery and determine next steps in Mexicali.

In closing I want to reiterate our expectation to continue to have significant Capital allocation flexibility as we head into fiscal 22, which will enable ongoing progress in returning cash to shareholders will making strategic Investments to support long-term growth initiatives.

Fiscal twenty one was a challenging year one that provided key learnings resulting from operating in a volatile environment due to the pandemic first and foremost the growth and margin profile off. Our high-end beer business is best in class and we expect it to remain as such well into the future in order to maintain this momentum. We are committed to an exciting Innovation agenda which includes Capital seeing on the robust growth in the ABA space while continuing to support the strong growth momentum of Arc or beer business. This requires us to expand and optimize our project footprint which not only sets us up for long-term growth but provides us with contingent capacity to operate it's sensible utilization rates or providing us with much-needed flexibility. We believe this is the the right strategy in order to support our beer business that continues to outperform the market driven by robust consumer demand, and we are absolutely committed to satisfying these demands dead.

With that bill and I are happy to take your question.

Ladies and gentlemen to ask the question you would need to press * then 1 on your telephone to withdraw your question and press the pound key again. That's all once asked the question.

Our first question comes from the line of Lauren Lieberman with Barclays. Jalan is open check to see if you all mute off.

Lauren your line is open.

I don't think we have her here.

Our next question comes from the line of Dora mohsenian with Morgan Stanley Yolanda's open.

Hey guys, can you hear me? Yes, okay. So on the beard demand-side, I guess short-term with mouse cycle and if you could just give us an update on March the police and trans and what you're seeing in April so far and then longer-term can you touch on the growth opportunity from here on Modelo Especial real it seems to be found the growth slowed down that happens to a lot of other brands as they get much larger. So it'd just be helpful to take a look forward at the key drivers from here in terms of incremental distribution expansion pack your contribution demographics Etc. Some of the key drivers that happen in fiscal Twenty-One. And you know your thought process going forward in terms of the growth drivers separate. Thanks. Absolutely. We're very pleased to say that March has gotten off to an excellent start and March was certainly ahead of what our trendline was coming in. So we're very pleased for the start of the new year.

April obviously is a little early.

It up to judge relative to Modelo there. There's really no end in sight for its double-digit growth profile. It continues to grow the Hispanic community. And obviously there's a nice Tailwind because of the growth in the Hispanic Community, but we still have great distribution opportunities. We continue to grow our velocities on that brand and when you think about the penetration increasing in the non Hispanic Community 25% over the last couple of years, we're barely scratching the surface and as you probably know we we we really only started to advertise outside the Hispanic community over the last few years. So the upside within that Community we think is tremendous. And as you also know, we nearly never done any innovation in that other than watching the Chelada language of course is quickly become the number one chalata. So the we we think there's just a tremendous opportunity for Modelo to continue to grow for for a long time to come down.

It's only number three at this point. There's plenty of room still to go up.

Thank you.

Our next question comes from the line of Camille gajrawala with credits with the line is open.

If I may ask about BuyBacks and you know, you reiterated your $5 commitment, but it wasn't included in the release, I guess in terms of what BuyBacks were going to be for fiscal 22. He just talked about how you thinking about that.

Sure. Thanks for calling. So, you know, we're absolutely committed to to to to meeting our five billion dollar commitment over the course of the next two years. And as you know that includes a significant amount of share repurchases two and a half billion dollars for the share repurchases as we as we entered this year. We said that we were going to have you know to to to to real commitments as it as it relates to Capital allocation one was paying down that and then second was making significant progress on that return of capital throughout the year as we noted. We we did pay down debt quite a bit. We started the year about three point nine two thousand and we rented in about three point one and and you know, we paid down the the gala transaction closed in early January. We didn't pay down the last tranche of of death of five million dollars redemption in early February and and at that point, you know, we had some some things that we were doing that we had to clear out most notably final I guess finalizing our analysis on wage.

En Mexicali and then the subsequent further investment in in in capacity. So that's why we didn't make any progress in fiscal Twenty-One, but we fully expect to make meaningful progress. You know this year.

Thank you.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs salon is open. Thank you. Hi, everyone Hi, I guess I had a question on your birthday. I I understand, you know, the head ones you guys called out that they're going to press your your your beer offering income this year. But I guess I'm I'm trying to think through some of the levers you might have to offset the the pressures, you know, beer pricing for one comes to mind, you know, as you called out your pricing, you know was softer last year. It was under 1% for the fiscal year, which is below your typical to 2% range. So how should we think about you're willing willingness to take more pricing this fiscal year to offset some of these incremental cost pressures, you know, would you be willing to go above your typical range and then finally how much visibility do you have with some of the commodity and transportation headwinds that you're facing? You know curious are are you fully hedged for instance wage?

Some of these Commodities. Thanks.

Sure, allow me one that I take the the first half of that. We we believe the one to 2% pricing actions that we take pretty much on an annual basis is the smart way to approach it. The balance has the opportunity to to to get improved Revenue scenarios with with the recognition that you know, you do have some price sensitivity within certain consumer groups that consume our break so you always walked that delicate balance of where you go and our view is one to two percent is is a good amount that allows us to continue to maintain the strong momentum package within our business that we have is you know, we continue also to aggressively increase our spend overall against our our marketing platforms and I will only be expanded wage you think about some of the Innovation agenda. So we're we're very optimistic about the the whole platform but getting much beyond that I think in any one year is is probably not the best way to age.

Dutch that question regards you might answer her second piece. Sure just on the on the opportunities on the hedging Bonnie, you know, so first of all every year, you know, our our Ops teams in in our production team looking for ways to to take costs out of the business still continue to look for those as we as we go through the year. So those are possible letters as we move forward but you know quite candidly those cost savings get harder and harder as time as it relates to to our hedging position, as you know, we have a fairly robust and sophisticated hedging policy that allows us to layer in Hedges on both Commodities and on currency over the course of many years to take advantage of favorable rates that so so we we've done that in order to mitigate what otherwise may have been higher inflation this year that being said not fully edged in any in any one thing whether that's currency or Commodities and so to the extent that there are any improvements as rates we could benefit from those as well.

Thank you. Our next question comes from the line of Brian Spillane with Bank of America. Your line is open. Hey, good afternoon. Everyone wage. It's like my questions for you just related to to Mexicali and I get try to think through you know of the I guess roughly eight hundred million dollars that was spent in terms of just need cash back. What are the the sort of opportunities to maybe recapture some of that cash. So whether it's repurposing the equipment the lamb, you know selling land also is there any well there any cash cash benefit, you know, do you basically wrote that off as a loss and then there's a a cash tax benefit juice to understand how much of that cash we could think about you pooping over over the next, you know, the next year or two.

So obviously Brian we continue to to work to mitigate that impairment but obviously we felt it was time to take that impairment. We we have repurposed and the number of births number of the equipment things that we have there into other facilities is part of our expansion of the other facilities.