Q1 2020 Earnings Call
Following the prepared remarks, the call will be opened for your questions instructions will be given at that time.
I will now turn the call over to Patti gone or LOPT Senior Vice President of Investor Relations. Please go ahead.
Thanks Daniel.
Good morning, and welcome to constellations first quarter 2020 conference call I'm here. This morning, with Bill Newlands, our CEO and David Klein, our CFO as a reminder, reconciliations between the most directly comparable GAAP measures in any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www Dot C. brands dotcom.
Please refer to the news release and constellations SEC filings for risk factors, which may impact forward looking statements. We make on this call before turning the call over to bill similar to prior quarters I would like to ask that we limit everyone to one question per person, which will help us to end our call on time, thanks in advance and now here so.
Thank you Patti and good morning, everyone welcome to our discussion of constellations first quarter sales and earnings results, which reflect an excellent start to our new fiscal year.
Before I get started with our business review I would like to emphasize three key takeaways on this morning's call number one.
We are confident in our ability to close the wine and spirits transaction with Gallo, which we expect will occur in the second half of calendar 2019.
For now we have updated our fiscal 2020 EPS guidance to assume that we close at the end of the second quarter, but we will adjust accordingly, as we get more clarity on the exact timing. Meanwhile, we are fully committed to supporting our entire portfolio throughout the transition.
Number two.
The transformation strategy for our wine and spirits business is working led by the power brands in our portfolio, which achieved over 4% depletion growth in the first quarter.
This collection of faster growing high margin brands is expected to drive the growth of the business going forward.
And number three we posted strong net sales and margin results for our beer business in the first quarter driven by continued outstanding performance by our growth engine that is modelo especial.
In addition, we are pleased with the nearly 7% overall depletion growth, even with Corona extra seeing some impact from favorable weather in several of our largest markets during the quarter, while overlapping last years highly successful launches of Corona Premier and Corona familiar.
Bottom line, we remain confident in our ability to achieve 7% to 9% net sales and EBIT growth for our beer business in fiscal 20.
Speaking of beer during the first quarter, the constellation beer business continued to gain share with growth across all channels driving one third of the growth of the high end us beer market.
Modelo Especial 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 gainer in the us beer category with depletion growth of more than 17%, a sequential acceleration compared to our fourth quarter trend.
We continue to reap the benefits of our modelo advertising investments, which are resonating with both our core and new consumers. We recently launched the Modelo 32 ounce bottle as we continued to take advantage of the single serve and distribution trade up opportunities we have in the off premise.
We also made excellent progress in the on premise with the Modelo draft format, increasing more than 20% for the quarter.
Corona Premier continues to drive the Corona brand family performance, the National TV advertising campaign as well as the draft rollout are propelling the momentum of this brand, which was a top share gainer in IRI channels, while also posting double digit depletion growth during the quarter.
This summer Corona Premier began a multiyear sponsorship deal with the United States Golf Association to be a proud supporter of the us open.
And the newest innovation in the Corona brand family Corona refresh, which launched nationally at the end of May has already gained gained all commodity volume or HCV distribution of more than 30 since its introduction.
Pacific Go also produced strong double digit depletion growth this past quarter, driven by the national advertising campaign, and retail promotions, which are increasing Pacific coast in store presence.
Overall, I believe we are well positioned throughout the remainder of the summer selling season with a great lineup of marketing and promotional activities to support the ongoing growth momentum of our entire beer portfolio.
Moving now to wine and spirits as you know Robert Hanson was recently hired as our new president of the wine and spirits business.
Robert was previously a six year valued member of our board of directors and has extensive consumer product experience from his prior senior management roles at John Hardy American Eagle Outfitters, and Levi Strauss.
Robert shares the constellation passion for developing brands that consumers love and we're thrilled that he has joined our executive management team welcome to Robert.
The wine and spirits business delivered first quarter results that exceeded our previously communicated expectations as I mentioned, our power brands posted industry, leading depletion growth of over 4% for the first quarter.
This portfolio includes key brands like Kim Crawford May Ami SVEDKA vodka, the prisoner and high west, which continue to outperform the market and gain share.
Overall, we expect these brands to be the key drivers of the business long term and we're extremely bullish on the future runway for these higher growth higher margin brands.
In addition, our wine and spirits innovation agenda has been successful with a focus on fast growing categories emerging formats and new flavor combinations.
We will continue to expand our Bourbon barrel, aged innovation program, which has been a resounding success selling over 1 million cases in its first two years.
A great example includes the new Robert Mondavi private selection right barrel, aged red blend, which is the first right barrel aged wine introduced at a super premium price point.
In July we will begin shipping internally silenced, which is the first pino into our addition to the prisoner portfolio. This premium product introduction will be sold in the over $50 price segment.
We will continue to support our innovation and brand building efforts throughout the remainder of the year with impactful marketing campaigns to strengthen and build the portfolio.
We have solid programming in place for our key power brands. This summer, including the launch of a new TV advertising campaign for the Woodbridge portfolio.
In addition, we have forged a relationship with the NFL to not only promote and sell our Woodbridge brand, but to introduce our new Crafters Union wind in a can which is the perfect format for football games and tailgating.
Kim Crawford continues to align with consumers through its partnership with the US open and other major tenants events and recently launched a new TV and digital advertising campaign that will be featured this summer.
These campaigns and sponsorships are just a few examples of the initiatives we have planned to strengthen the portfolio drive consumer awareness and incremental growth.
Our spirits portfolio has recently gained momentum with increases in growth and velocity across the sped co portfolio bolstered by the new bring your own spirit National advertising campaign.
Plus the new innovation in the product lineup spread to Rosie is already exceeding expectations.
During the quarter constellation ventures acquired a majority stake in Nelson's Green Briar, which is an iconic Tennessee whiskey that plays well in emerging categories of American whiskey and craft.
It is the first ventures investment that will be fully integrated into the constellation sales and distribution network, which provides a significant opportunity for growth of this brand.
With our market reach distributor partnerships and consumer insights, we are especially excited about the introduction of Nelson's Green Briar unique Tennessee whiskey to consumers. This fall, while the award winning Bellamy Bourbon brand continues its rapid market growth.
As we begin the transformation journey for our wine and spirits business I would like to reiterate our long term goal for this business as we intend to grow net sales in the mid single digit range with operating margins migrating to 30%.
This quarter, we have made progress toward that goal and we look forward to shaping our wine and spirits business to be a best of class consumer goods portfolio with a market leading sales and margin profile.
Now a few comments about our investment in canopy growth.
Which continues to be the global leader in total cannabis sales.
During the quarter cannot be growth in acreage holdings entered into an agreement to grant the grants cannot be the right to acquire acreage and enter the use cannabis market. Once federally permissible. We're excited about this opportunity as it provides a path for canopy to have a leading position in the us upon federal cannabis reform.
Recently canopy and acreage shareholders overwhelmingly approved this transaction, which will provide the opportunity for constellation to extend the duration of canopy warrants, which provides long term financial flexibility for cash deployment to our shareholders. David will provide additional details on that later in the call.
And while we remain happy with our investment in the cannabis space and its long term potential we were not pleased with canopies recently reported yearend results. However, we continue to aggressively support canopy on a more focused long term strategy to wind markets and form factors that matter, while paving a clear path to profitability.
We believe some of these branded form factors include Veight.
Beverages and at levels that will command higher margins. These products in Canada as well as CBD products in the US are expected to come online during the fourth quarter of this calendar year.
In closing I am pleased with our strong start to the year.
Excellent execution of our first quarter results demonstrates that we continue to deliver on our key strategic imperatives across our beer wine and spirits businesses and I'm excited about the prospects across the business for the remainder of this year.
With that I would like to turn the call now over to David who will review our financial results from the quarter.
Thanks, Bill and good morning, everyone.
Fiscal 2000 is off to a great start core business results exceeded expectations with operating cash flow up 18% and free cash flow up 30%.
These strong results were primarily driven by our beer business, which generated 12% operating income growth.
We've increased our full year comparable basis diluted EPS range to $8.65 through $8.95.
This range excludes canopy equity earnings impact and now assumes revised transaction timing.
To sell a portion of our wine and spirits business to bill outlined.
The 15% increase in EPS guidance represents one additional quarter of EBIT from the portion of the wine and spirits business that we've agreed to sell partially offset by a delay in cost savings realization now expected to be at the low end of our fiscal 20 range of $35 million to $55 million.
And incremental interest expense due to debt Paydown now targeted for the second half of fiscal 2000.
After the transaction closes we continue to expect to eliminate a total of $130 million of stranded costs from our wine and spirits business by the end of fiscal 21.
Now, let's review Q1 performance in more detail World generally focus on comparable basis financial results.
Starting with beer net sales increased 7% on shipment volume growth of 5%.
Shipment volume was higher than expected primarily due to additional shipments made at the end of the quarter as part of efforts to mitigate potential tariff risks.
As a result, the beer shipment timing benefit at the end of fiscal 19 is now expected to reverse during the remote remainder of fiscal 2020 since it didnt occur in Q1.
Depletion growth came in at 7% continuing our streak of excellent portfolio performance during the key Cinco and memorial day holidays.
This growth is compared to strong depletion growth in the prior year up 9% driven by new product launches generating two year average growth of 8%.
Beer operating margin increased 150 basis points to 39.3% as favorability in pricing and FX were partially offset by higher transportation and logistics costs.
Marketing as a percentage of net sales increased 20 basis points to 11% driven by planned upfront marketing investments to support our brands leading into the summer selling season as outlined by Bill earlier.
For fiscal 20, we continue to expect net sales and operating income growth of 7% to 9% and our full year operating margin to approximate 39%.
This includes 1% to 2% of pricing within our Mexican portfolio.
As a reminder, we're facing a 10% depletion growth compare for Q2.
In addition, we expect some of the shipment timing benefit mentioned earlier to reverse in Q2.
And as a result, we expect Q2 net sales and EBIT growth to be in the mid single digits range.
We continue to expect our gross margin to be flattish for the year as cost inflation headwinds in growth investments are expected to be mostly offset from product pricing and productivity initiatives.
Gross margin will also be impacted by the reversal of the shipment timing benefit in the remainder of fiscal 2000.
We continue to expect fiscal 20 marketing as a percent of net sales to increase around 20 basis points to 9.5% in support of our innovation and growth initiatives.
Q1 fiscal 20 wine and spirits net sales and operating income decreased 8% and 4% respectively.
Q1 fiscal 2000 shipment volume declined 8% due to the fiscal 19 shipment timing benefit mentioned last quarter.
This mostly reversed in Q1, we expect the remaining fiscal 19 shipment timing benefit to reverse in Q2.
And this along with a difficult year over year comparison are expected to result in wine and spirits net sales and EBIT for Q2 fiscal 2000.
To decrease 5% to 10% and 10% to 15% respectively.
Our fast growing high margin power brands like Kim Crawford Mayumi SVEDKA vodka, the prisoner high west and Schrader generated depletions of greater than 4%.
Overall depletion trends of minus 1% were muted by lower end brands.
Wine and spirits operating margin increased 90 basis points to 25.9%, primarily due to favorable pricing along with lower marketing NSG and egg costs, partially offset by unfavorable mix.
The lower marketing and Sta benefits were due in part to a shift in timing of spend into Q2 as we have a significant ramp in spend to support the power brands during the summer selling season.
This shift helped us outperform our original Q1 EBIT guidance.
We now expect fiscal 20 wine and spirits net sales to decrease 20% to 25% and operating income decreased 25% to 30%.
Due to the revised timing of the wine and spirits transaction discussed earlier.
I'd like to Echo bills confidence that the wine and spirits transformation strategy is already working.
And as a result in fiscal 20, we're targeting mid single digit power brand depletion growth.
Longer term, we expect the business to produce mid single digit net sales growth, while migrating to an operating margin of 30%.
In Q1, we recognized $72 million of charges in connection with ongoing efforts to gain efficiencies and reduce the cost structure of the business.
These charges, which are primarily weight related to the wine and spirits business were excluded from comparable basis results.
The charges include costs associated with certain write downs of excess inventory contract terminations and organizational structure changes.
Roughly half of these charges are related to cash outlays expected to occur in fiscal 2020.
Which have been factored into our operating cash flow guidance.
Interest expense for the quarter increased 31%, which reflects interest expense of approximately $40 million related to the funding for our incremental canopy growth investment in November 2018.
Fiscal 20 interest expense is now expected to be in the range of $425 million to $435 million.
Which reflects incremental interest related to revised timing of the wine and spirits transaction, partially offset by anticipated rate favorability.
Our comparable basis effective tax rate for the quarter came in at 17.6% versus 21.4% for Q1 last year.
Primarily driven by the overlap of unfavorable onetime items and a lower rate on foreign earnings partially offset by lower stock based compensation benefit.
We anticipate that our Q2 fiscal 20 effective tax rate will be similar to the Q1 rate.
In the 18% range.
However, we continue to forecast our full year fiscal 20 effective tax rate to approximate 17% with stock based compensation benefits expected to be weighted toward the second half of the year.
Moving to free cash flow, which we define as net cash provided by operating activities less capex.
For Q1, we generated $437 million of free cash flow compared to 336 million last year. This impressive 30% growth was primarily driven by strong beer operating cash flow results and lower capex.
We now expect fiscal 2000 free cash flow to be in the range of $1.2 billion to $1.3 billion and operating cash flow to be in the range of $2 billion to $2.2 billion.
This reflects revised timing of the wine and spirits transaction.
We continue to expect Capex of eight to 900 million. This includes approximately $600 million of Capex for our Mexico beer operations expansion, including investments in the Oregon in Mexicali breweries and the fifth glass furnace at the Nava glass plant.
Shifting to our investment in canopy growth.
But total pretax net gain recognized since our initial canopy investment into in November of 2017 is $1.6 billion.
In Q1, we recognized an $828 million decrease in the fair value of the canopy growth investment, which was excluded from comparable basis results.
As Bill mentioned canopy growth in acreage shareholders approved canopy growth proposed acquisition of acreage.
As a result, certain constellation warrants were modified to include longer duration and revised pricing.
We expect to recognize a material gain on our modified canopy warrants in Q2 to reflect these changes and will exclude that gain from comparable basis results.
These warrant modifications allow constellation more time to assess how the cannabis landscape is progressing before the warrants expire.
Coupling, our new weren't structure with our businesses strong cash generation provides incremental long term flexibility for cash deployment to shareholders.
So we remain committed to returning $4.5 billion to shareholders in the form of share repurchases and dividends from fiscal 20 to fiscal 2002.
As summarized in the earnings release first quarter fiscal 2000 comparable basis diluted EPS, excluding canopy equity earnings impact totaled $2.40 per share representing growth of 9%.
Canopies businesses rapidly evolving and their financial results will likely be volatile as they invest in growth opportunities.
Similar to this quarter, we plan to release, an 8-K after canopy reports earnings to disclose canopies impact on our quarterly results.
I'd like to remind everyone canopy equity earnings recognized in our income statement are noncash and we've not factored canopy equity earnings into our fiscal 20 comparable basis EPS guidance range of 65 to 895.
This will allow us and our investors to focus on the underlying performance of our core business.
In closing we're off to a strong start for fiscal 2000, and as we continue to benefit from secular trends like premiumization in favorable demographics.
We believe the investments, we're making in support of growth opportunities today position us to generate industry, leading growth, while we deliver on our fiscal 2000 commitments.
With that Bill and I are happy to take your questions.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your touched on telephone. If your question has been answered or you wish for we recently on the queue. Please press the pound key again, that's star then one to ask a question.
In the interest of time, we ask that you please limit yourselves to one question.
Our first question comes from Judy Hong with Goldman Sachs. Your line is now open.
Thank you good morning.
Hi, Jerry.
So I guess I wanted.
Zero in on the beer depletion growth.
Particularly around the Corona brand family clearly the weather was.
A factor, but sort of how much.
Does your analytics kind of point to whether being a factor versus madelle, obviously accelerating and you talked about the cannibalization impact from the Modelo and then clearly the spike both the category kind of blew me how much is that also cutting into into the kroner brand family and kind of Dovetailing that if you think about the mid single digit depletion guidance for second quarter.
Can you just talk about the drivers of that other than just the comparison.
How much is really the shipment of underperformance or is there a little bit more caution around depletion just given we're poor start to the to the summary, given the weather. Thank you.
Alright, Judy will try to wrap that into one thought so here we go.
The look we are.
We are comfortable with where our Corona is as a brand. If you look at the most recent IRI trends through 616.
Corona extra is up admittedly against very tough overlaps with the weather challenges that we had during the first quarter. It's also appropriate to recognize that with the the accelerating modelo trends of 17% growth.
That certainly has some impact within the overall portfolio as well and certainly it's worth noting that that seltzer business has become a larger factor in the high end than it had been.
In prior years, so all of those things certainly have some impact.
On on the overall business with all of that said the overall family is roughly flattish we are comfortable with with the with where that business is looking and as you noted our overall depletion profile across our entire business.
It was up just under 7% in the first quarter. If you in fact look at June .
While taking out the the single day, which happened to be a Friday that we lose in this quarter versus comparable quarter, a year ago. The actual depletion rate in the month of June would be above the year to date depletion rate.
Yes, I want to I want to just to expand on that last point that bill made so.
In Q2, when we report our results we lose a day of Depletions, which doesn't come back until Q4. So it's a it's an anomaly that that's you guys should factor into your into your models.
Thank you and our next question comes from Bonnie Herzog with Wells Fargo. Your line is now open.
All right. Thank you good morning.
I guess as Anil Ambani.
Hi, just a few more questions on Corona first on Premier I, just want to hear from you guys with the results in the quarter balance.
You expect given if so why and then on Corona light.
Julie still not where you want it to be so maybe drill down a little bit further on any initiatives you might have.
Thanks, Brian and then fine.
Yes, how much further do you think you can extend the Corona brand for instance, you're missing an opportunity right now in South Jersey, just kind of touched on that.
Is there a way to leverage one of your existing brands, possibly corona and what could be the timing of that thanks.
Sure. So so let's talk first about Premier I believe we're very pleased with the results of Premier in the first quarter keeping in mind. It was it was going against a year ago.
When we introduced it which automatically has the normal stock up scenario when when a brand is introduced with all that said it was up double digits and as you know we have raised the advertising profile of that brand.
And we'll be doing so for the remainder of this fiscal year.
Relative to the overall family of Corona as you know, we're very excited about Corona refresh go we're off to an excellent start against that and by the way if any of you haven't had it I would strongly encourage you to do so.
They are really delicious and very refreshing. So that is certainly the focus of our.
Approach for this for this fiscal year and the summer selling season is to make sure that we maximize the potential.
Of both premier as well as refresh Scott.
In the overall mix of the Corona brand family.
With all of that said.
We continue to be excited about the opportunity that we have with corona going forward.
We do recognize that relative to your question about.
Shelters that soldiers have taken a larger piece of the growth profile in the high end of May had in previous quarters and years.
And certainly our view is this we explore all options, where we have the ability to profitably participate in categories and we will continue to do that that's a standard way. We operate we will do that again going forward.
Thank you and our next question comes from Nik Modi with RBC capital markets. Your line is now open.
Yes, thanks, good morning, everyone.
The question is on wine and spirits.
So I guess this new.
Dobie Woodbridge add AD campaign is hitting the.
The airwaves now can you just talk a little bit about how.
So the process here that's different now again is kind of take taken over the CMO role and do you have plans to do similar types of of campaigns on other of your our power brands.
In the near term.
Yes, as you know Nick.
The the Woodbridge brand is a critical brand for us just because of its if its sheer size and profitability.
The advertising campaign that Jim and the rest of the marketing team have put together, we're very excited about I don't know if you've seen it yet if you havent I think it's highly compelling.
We showed it to our board yesterday, and we are just launched this week and we're very excited about the potential because it really speaks to Robert Mondavi. His original goal of to put great wine at every price point on every table and I think the advertising that was developed is does an exceptional job UBS, suggesting just that but we're not limiting our advertising efforts to that brand.
As you've seen we've spent and raised our profile and spectra vodka and the brand has responded the spread to our growth profile has accelerated versus prior year.
We will also be spending during the course of the summer months on both May Ami and Kim Crawford Kim Crawford in particular with the with its lead solving a blog.
As a terrific wind for the summer season, and and both that and me on me. In addition to the others that I mentioned, we will all be supported.
During the coming selling season.
Yes, I would add to that bill that we've.
I mentioned in my script that we had favorable price in our wine and spirits portfolio and that was primarily driven by our ability to get higher realized pricing for Woodbridge instead get two brands that were in that we're investing behind and it's it's that kind of approach to really nurturing us CPG brands, where we're going to.
Be able to charge appropriately for the equity that exist in the brand, but then we're going to spend back to help the consumers understand the.
Value proposition that we're offering that's why we're all really excited about our new approach to.
Two our power brands.
Thank you and our next question comes from Lauren Lieberman with Barclays. Your line is now.
Thanks, Good morning.
We definitely got asked so many times to the quarter.
Our view on the discounting on Corona cans that within some of the industry trade practices you guys just comment a little bit on pricing strategy for the kroner brand family overall and to what degree that.
Mr. You. These plans on what went on during the quarter was already part of the full year plan and within that 1% to 2% pricing expectations for the portfolio or with something kind of newer that came up with.
The poor weather in that line. Thanks.
Well as you know.
A lot of individual programming occurs with local retailers are happens all the time on particular formats and sizes.
While that was said we achieved strong pricing in the quarter up 1% to 2% and.
And we certainly have no uniform discussion of pricing and price promoting again as I said, a moment ago price promotion occurs on a local level a lot and it occurs.
Usually on particular formats to get particular price points during key selling seasons. So we have not moved away from our our normal expectation of 1% to 2% pricing and in fact, we were quite successful at achieving price promotion during the quarter.
Thank you and our next question comes from Vivien Azer with Cowen and company. Your line is now.
Hi, good morning.
Bill I really appreciate your candor and your prepared remarks about.
Your view of canopies. Most recent earnings results I just wanted to dig in on that in terms of your disappointment in the quarter I mean, certainly the expanded EBITDA losses stands out but yes.
Was there any concern around the top line so any more color around just that that specific comment and then as a follow up to that can you talk about your expectations relative to previous public commentary from cagney around the financial results for Kandi going forward. Thank you.
Sure. We continue to expect that the run rate topline profile by the end of the next fiscal year will be in the $1 billion run rate range.
With that said.
And we need to all recognized they are going to be spits and starts around a business like this when various form factors and products.
Either have.
That our acceleration or weaker acceleration of what everybody had anticipated.
As you know, Ontario, which ultimately should be the biggest province has been a little behind some of the other provinces in terms of opening stores, which always impacts things. So there's going to be some spits and starts in this thing I think what we are what we remain excited about is that this is going to be a big long term business and we are working with canopy almost on a daily basis to ensure that we are all focused on the right things the things that are going to drive the business the things and the form factors that are going to matter of and a way that gets to ultimate profitability for that business in appropriate timeframe.
Yen in Vivien I'll comment on our previously made.
Commentary around the business being accretive to our results in 21.
The those comments were predicated on.
Canopies performance in Canada.
Their performance in their existing rest of world medical markets.
Return from our 4 billion dollar investment and.
They assumed we wouldn't have legalization in the us because of course, we know legalization in the us would drive.
Large PNM investments, which we'd all be happy to make to to be able to participate in that large market. So let me just pick through those and talk about the current state.
So in Canada.
We know that this business is volatile as bill outlined but we think it's it's mostly on track with all of our expectations.
We know that as it relates to F y 21.
That the slight delay in edibles, including beverages in Canada will likely impact RF why 21, because it's unlikely that canopy will have the broadest the broad array of products in the market by calendar one Kevin.
The quarter, one calendar 20, which will affect our first quarter of next year because of the two month.
Lag on which we.
A consolidate canopy are we.
The recognize income on canopy.
So Canada is on track, but we expect it to be volatile in the team at canopy is quite good and really working their way through any execution issues that they may have had in the past.
From a.
Existing rest of World Medical markets. We think those markets are on track again real strong performance in those spaces by the by the canopy team that we're pleased with in terms of investment returns were very happy with the investment in stores and vehicle, which you saw in their results last quarter.
And we're extremely excited about the agreement with acreage, which while expected to be a profitable company won't be consolidated and reported through the canopy results.
In a way that would affect our numbers in the foreseeable future until there is though.
Triggering event in the U.S.
And then the last point is really on the unexpected.
Legalization of CBD in the us which.
I will require a significant amount of investment, which canopy has already announced.
And we think that Thats, a good place for them.
To focus there.
Their money and their resources to really take advantage of what could be a very large and profitable market in the U.S.
And we're we're really happy with how they're positioning themselves. There. So look we still are very bullish on our canopy investment.
And.
We're very happy we made the investment when we did into this space, which.
More and more people are starting to weaken.
Wake up too.
As it relates to.
Its effect on our.
Financial results.
We're going to continue to assess as we go through F y 20.
As to how we will adjust our statements on.
The accretion or dilution effects on constellation.
Thank you and our next question comes from Dara Mohsenian with Morgan Stanley . Your line is now.
Hey, guys.
Good morning, Hi, Dara.
Clearly beer margins came in better than expected in the quarter versus your flat implied expectation.
I get some of that was less of a Q1 inventory drawdown that expect that but.
That would appear to be only a modest portion to be so just curious to the lack of a full year margin raise in the beer business. Despite Q1 being is that more we're just still early in the year or are there other factors in the remainder of the year.
That might.
Reverse some of that Q1 upside how should we think about that.
Yes, there I think we still have concerns about the wage rate inflation in Mexico in.
Increased costs of glass and other forms of packaging, we still have.
Freight and logistics headwinds in the business that we continue to see in Q1, we had.
Some some really good benefits from primarily pricing and FX.
And some productivity improvements that were offset by the by the things that that I just listed out.
So.
And as you said, we have a bit of a.
A benefit from over shipments in Q1, which works its way down to the.
The growth in.
Bottom line operating margin.
In a comment on Q2, we expect that our marketing spend will be up slightly year over year from Q.
In Q2.
Which will.
How does come in probably a little lower than the 41.2% margin that we achieved in Q2, we tend to kind of Max out our margins in Q2, So we'll run a little bit lower than that this year.
And then I think any further.
A growth in margins away from that 39%.
Target that we put out which we feel is the right number.
For us for this year I will really be driven by.
Maybe outsized gains in pricing or.
Unexpected benefits from FX so.
I think the 39% represents a pretty balanced view of our remainder of our full year.
Thank you and our next question comes from Robert Ottenstein with Evercore ISI. Your line is now open.
Great. Thank you very much I, just wanted to get a little bit better feel for.
Kind of the underlying consumer demand, it's it's a tricky quarter to do that given given some of the comps and I was just wondering perhaps you could give your best guess.
Of the impact of weather.
We're thinking it could be maybe a 100 200 basis points.
Is that too high and also we're also hearing that.
You got quite a credit.
Nice amount of incremental shelf space.
In the quarter finally.
Can you talk about that in terms of if thats right.
Roughly the kind the timing of that in any way to quantify it. Thank you.
Yes ill take a shot at it and then bill can fill in the hole. So I think from a from a consumer demand perspective, we've seen we've seen this volatility over the past.
Few years.
We're.
We had a we had a.
US a very strong April .
As as a as you sit you've seen in our results and.
I think theres, some theres clearly a large effect from weather across the country in particular in markets, where we over index.
I can't really comment on the on on on your range our numbers.
Wouldn't get us to that level of detail across across the entire industry, but.
You know we are the biggest competition the biggest change in consumer demand in the market that we've seen has been as the result of the acceleration of of smelters it hasn't really been.
Anything outside of weather and.
The result of other factors say affecting our portfolio of brands.
The only thing I would add to that David is in that we've touched on this a bit before is that we are overlapping a very strong growth profile from last year in the same quarter with both premier and familiar so to show the kind of overall depletion growth that we had in the quarter of just under 7%.
We are quite pleased by.
Any time, you have two major overlaps and they were both very successful and as you can see premier continues to be very successful overlapping the introduction.
You will have some impact on your business would that said with almost 7% growth in the quarter.
We're quite pleased with how the year is setting up and just one other point Robert you mentioned.
A growing shelf space and you know that that's a that's a and important.
Component that our sales team is laser focused on we've also seen in particular.
Corona premieres 12 week basis volume velocity increased by almost 25%. So we're seeing some some really good signs in the marketplace as it relates to our brands.
Thank you and our next question comes from Kevin Grundy with Jefferies. Your line is now open.
Thanks, Good morning, everyone.
Quick questions for David housekeeping on the guidance and then one on returning capital so quickly on the EPS guidance. Despite the strong margin performance. It sounds like the upward revision to your EPS outlook is entirely due to the timing of the wind of divestiture. If you could just confirm that and then with respect to the return of capital you're maintaining the prior guidance of $4.5 billion dividends and repurchases over the next few years, but that was prior to the more favorable terms of the canopy warrants as part of the Aker transaction. Maybe you can just comment on the greater flexibility that you have to potentially see that guidance. Thank you.
Yes, thanks, Kevin So, yes, our guidance revision really rough.
It reflects one additional quarter of the brands that are to be sold.
Offset by.
But in any increase in interest expense, because we won't be receiving the cash from the sale in the same timeframe as we had anticipated as well as.
Because our.
The transaction closes later in the year, our ability to get.
To the high end of that $35 million to $55 million stranded cost takeout range is.
It was significantly hindered which is why we said, we're more likely to be at $35 million for the year.
But for clarity still on track to hit $130 million total stranded cost takeout Im. So the guidance change was was really solely focused on the wine and spirits divestiture.
As I said, we remain.
Have a belief that we will end the year at 39% operating margins in our beer business and in terms of cash return.
Cash returns, Kevin, Yes, we're really happy with the incremental flexibility that we get.
From.
The revisions to the warrants and.
We are just continuing to focus on the four and a half a billion dollars of return to shareholders I guess.
That.
So we we want to as quickly as possible returned $4.5 billion and then we will decide what we do after that but again.
We we simply remained focused on.
Getting as much as we can out of our canopy investment and returning cash to our shareholders.
Thank you and our next question comes from Bryan Spillane of Bank of America. Your line is now open.
Hey, good morning, everyone.
Alright, and one of the I wanted to follow up on the the focus brands within wine and spirits and.
I guess you know there is some more advertising and marketing that you mentioned in response to Nick's question earlier can you talk about maybe just over the next year or two kind of a longer timeframe.
Are there like distribution opportunities or merchandising opportunities that.
Like aren't optimize today that that might give you kind of a runway of growth in those brands that are maybe similar to what you saw in beer over the last couple of years.
Sure you bet, we are doing a lot of.
Analytical work around what is the best way to present, our brands to the public as an example, much like we have done in beer on space assessment. We are doing the same kind of space assessment work in our wind business as to whether or not.
More facings are better than something else as an example, so.
We do believe that there are there is interesting and six significant upside for that set of brands. They produce first of all there they're growing brands. They participate in growing categories, and we're going to support those and many of them with consumer advertising at the same time, while we are increasing our analytical capability to leverage things like you note, which is where do we focus our incremental time and attention of our distributors and our sales organization. So that they maximize the potential for those brands. So.
The short answer is yes, all of those things are being done and that should give us.
Significant upside opportunity within our.
The brands that are in the power sector of our business.
Thank you and our next question comes from Camel I was wrong.
Credit Suisse. Your line is now open.
Hey, good afternoon everybody.
First one just a quick one how much of your 6.6% Depletions came from new products collectively.
And then the second question on the wind deal is structured as a as all or none or are you able to carve out certain certain brands and and effectively you have to keep them is if it ends up going that route and the reason I ask is if you look at the market shares at certain price points turns out they can be quite high.
And so as we go through this kind of second requested information process and curious if you. If you have to sell the whole thing or if you have the options to sell pieces of it or not.
Good.
Yes, so comment ill start on that one look we remain committed to the transaction that we've agreed to with Gallo.
We're working our way through the FTC process and <unk>.
We expect that we will.
We will reach a successful conclusion. We've we've also stated for clarity that while we've extended our guidance through the end of Q2.
We want to be clear that as stated in the 8-K when we the 8-K when we.
Announce the the additional work that we needed to do with the FTC that we would close we expected the transaction to close in the second half of the year. So we'll provide a little more clarity when we win.
As we get closer to two to a final resolution and as to your piece. Your question about the depletion growth, obviously with 17% growth in Modelo especial and the sheer size of that business that was actually the single biggest driver of our of our depletion growth profile.
Coupled with double digit growth in both Corona Premier and Pacific go so.
And at this point, we view Corona Premier as part of the franchise, we don't necessarily view that as a quote new product at this point.
Obviously refresh it had some benefit during the quarter, but it was relatively minimal compared to the sheer growth that existed on those mega brands of Modelo.
And.
And the Corona Premier Slash Pacific Bell groups.
Thank you and our next question comes from Amit Sharma with BMO capital markets. Your line is now open.
Hi, good morning, everyone.
Good morning.
Bill can you can you talk about your on premise trends for the beer business.
I mean lots of us focus on the data and that data showed your depletions, maybe a little bit. He could then where you came out to be.
Is that the run rate going forward or should we think about that and then on on innovation.
The question is as you focus on the south side of the business.
Do you believe you have the brand extensions already in the marketplace to go into that category or would you like to extend one of your brand.
As you think about defensive kind of going forward.
Sure Let me let me start with your question about on premise.
Our on premise business.
We see as being up mid single digits.
For our for our overall beer portfolio compared to a an industry, that's probably off low single digits. So we certainly are outperforming and as I think I noted in my original remarks.
We're seeing a an excellent uptick of 20 plus percent and Madella draft as an example, which obviously occurs entirely.
Through the on premise arena.
Our focus and admittedly as I have said, we are watching the selzer category very carefully but I'll also say this.
Arbor Fresca business is where we are focusing our attention. This year, we think it's critically important when you introduce.
A new product in a new brand that you put the intensity of focus on that to get that into the miles of consumers who are interested and as I said earlier as good as they are.
Getting into their miles is a critically important element because they are just delicious. So our focus and intention is entirely around refresh for this season, but as we said earlier, we will continue to explore all options, where we can profitably participate in all of the areas of the business, where we think it makes sense for us to do so.
Thank you and our next question comes from Andre Michel Jpmorgan. Your line is now open.
Hi, Thank you.
So hi, Bill Dave Haven Patty.
How are you.
Just wanted to go back to the comment on the krona CAMMO, leaving the quarter and one less day in the quarter on a family we accelerating and then most recently to from a depreciation standpoint, I appreciate that comment, but removing the noise from the EUV employees there one last day.
If you think of the final consumer demand all channels, including the commentary that you gave on the on premise do you think the family can go back to that sweet spot and we accelerate from flat to low single and or even mid single digits from a consumer takeaway standpoint, I know you're comping. The plus eight that you had the last year from the plus four to the plus eight but just to give us some perspective of the final demand.
And how we can put everything together all channels.
Yes, we expect that the Corona family is going to have a very solid year with.
With growth across the family.
And again that would include the entire family that would been Corona extra that would include.
A premier familiar et cetera. So we are continuing to expect that that business will perform well as you know.
Our advertising.
Has been increased against the Corona franchise for this year, while while many others actually are doing the opposite so our share of voice within the.
Within the beer category will be up during this summer selling season, and we are very optimistic that corona is going to be an important part of our growth profile acknowledging that we are 30 years and counting on our double digit growth with modelo and we're off to an amazing start this year.
Thank you and our next question comes from Tim Ramey Pivotal Research Group. Your line is now.
Maybe a quick one and then a different when the any early thoughts on Capex for 2021.
And.
The one in Cannes Initiative is this really interesting it's been a super hot growth category.
Any expectations on what that might look like.
Yes, so I'll hit the Capex question, yet if we look at our Capex over.
A three year horizon, so far in 2021 and 22, we expect that we'll be in that $7 million to $900 million range, and where we're headed toward that and that's inclusive of two to 400 million of kind of.
Maintenance.
Capex within our within our business so.
I think even though this year's guidance is eight to 900 total capex, which is going to be in that range for the next couple of years.
And relative to the question around wind in a can.
As I commented in my in my previous remarks.
Our crafters Union brand.
Which which we are.
Very excited about as big as part of our tie in with the NFL and we think it's a great format.
We're also looking at the idea of other can opportunities I'll give you. An example, Kim Crawford we're looking at.
At single serve Kim Crawford and it can as well it is a great packaged for on the go and four.
Certainly summer event and it seems like the consumer based on our research the consumer consumers are comfortable where they can format for wine and therefore, we will participate with the brands that we feel are appropriate and where there is going to be real consumer demand of within our portfolio.
Thank you and our next question comes from Steve Powers with Deutsche Bank. Your line is now open.
Hey, great. Thanks.
So just a follow up on your on your guidance I guess questions for David.
I understand the puts and takes that you ran through specific to the year and the quarter, but just stepping back at the risk of getting lost the numbers if I take what you've said at the mid point. So beer profits up eight up 19 base wine profits down say 27 and a half.
430 million for interest expense and then I had.
30 million or so for opus takeaway 200 million or so for corporate costs and tax effect at all 17%, but the math that I'm running through just seems to point to something closer to like 920 bps $9.20. So well above your current range.
So just.
I missing something either in the math or in the in my logic or just can you can you bridge that gap for me. Thanks.
Yeah, I think it comes back to the things I pointed out earlier, Steve which is which is really the we take our previous guidance, we add one quarter of wine EBIT for.
The brands that are going to be sold and there is there are a couple of things to consider with that first of all.
Those.
Those those brands and we put in our earnings release their performance last year those Blair brands are declining.
There are stranded costs that.
We won't be able to take out because weve.
We have we used to have nine months to take costs out of the business will now have six months to take cost out of the business we have incremental.
And we have the intra incremental interest expense.
On that so.
I think when you factor all of those in our guidance range.
Our guidance range.
Makes sense.
Maybe maybe one other thing to to think through is that if you look at last year's numbers I think we were in the maybe 20 ish million dollars of.
NCR high this year.
The number is going to be in the $30 million to $40 million range.
Thank you and our next question comes from Sean King with FBR. Your line is now open.
Hi, guys good morning.
I apologize if I missed this one but are you holding to your full year expectation for premier growth I know with the tracked channels decelerating somewhat.
But or is this more sort of offset by the accelerating strength and.
The Dallas Nutshell.
The answer Im not sure if it's yes or no. The answer is we're expecting that it will be the previously expected debt growth profile. We're very pleased with the start to premier's off too and as David alluded to a little bit before we are seeing accelerating velocities against the premier at the Premier franchise. So yes, we're comfortable with where we expect that to go.
Thank you and our next question comes from long Cronto with Guggenheim. Your line is now open.
Yes, good morning, everyone.
Two quick questions. So one on a one on Sperry guidance. So in previous communications for Q, you guys need to wait in street organic sense grows between loose again did you touch on mid single digits.
At high single digits.
Organic operating income growth. So you are not providing any more any guidance this quarter.
So how should we read.
And my second question is about to refresh Scott I mean, I know, we still very early on but.
Could you share any feedback you receiving from her center, we tenders on Monday, I mean that the first let me try owners Wi Fi with consumers. So.
That would be very helpful. Thank you.
Yes, so what you're referring to I think is in organic sort of guidance or.
For wine and spirits in so.
We would expect that to be flat to slightly down.
Now both topline and bottom line based upon the incremental the incremental quarter.
And relative to your question on refreshing. It's it's early days and it's always dangerous to make too many projections on 30 days worth of selling with that said, we are very pleased with where our HCV distribution has gotten too after the first month and we've noticed that the variety pack has been particularly successful.
In the early days now whether or not that continues I think remains to be seen.
It could very well be consumer sampling and deciding which of those they happened to prefer but certainly the the early response and the variety pack has been has exceeded our expectations.
Thank you and our next question comes from Bill Chappell with Suntrust. Your line is now open.
Good morning, Thanks for taking the question.
Just want to go back to Woodbridge and Im just trying to understand with a sub $10.
Brand, which is still part of the portfolio and your kind of thoughts of these the power wine spirits brands growing at a much faster rate.
Both next year and going forward, just trying to couple that with what you've seen in the category for that kind of price points and with the competition appears down years, and how confident I mean.
Woodbridge doesn't pull that growth down or that it can actually contribute is part of that.
Yes. So you know we said in the past that when you when you look at our portfolio.
Woodbridge is is.
Woodbridge is required for us to we feel retaining appropriate critical mass in our production facilities and with with with.
And to retain clout with retailers.
And as a result, we needed in our portfolio understanding that just the category of plays in and even if it continues to grow share in its category. It will be a drag on the total portfolio and it's about.
Woodbridge represents about one third of the remaining business kind of post sale, but we think this is a very important brand for our portfolio in a gym savion. Robert Hanson are very focused on driving this brand's growth and and as evidenced by the new spots that we're seeing.
Come.
Come on to TV over the last week.
Because we need this brand to be healthy and we think that we can get to.
We can get some outsize share growth in its category.
And at the same time be able to give ourselves a little bit of pricing power with the brand. So we see a lot of upside to Woodbridge and we're we're pretty excited about.
Having it as part of our power brand portfolio and Bill the other thing that I would purely add is keep in mind. The one five which is the larger.
Size no pun intended it's the larger size within the portfolio.
Sales for 12 99, so it gets into a a plus $10 price point when the consumer is pulling out their wallet too to pay for our brands. So I Echo what David said is.
Woodbridge has done an excellent job of outperforming the category in which it competes and with the additional support and investment they were going to make against it. We expect that that will continue on and be a an important piece of our of our remainco as we go forward.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over one bill Newlands for closing remarks.
Thanks, very much Daniel so thank you all for joining our call today. The excellent start to fiscal 20 has nicely positioned our business from another very successful year. The summer selling season is now in full swing and our team plans to capitalize on the momentum we have underway as we are well positioned with outstanding advertising and marketing initiatives across our entire portfolio and as July 4th holiday is just around the corner I Hope Youre responsible celebrations with family and friends will include our fantastic beer wine and spirit products. So thanks again, everyone for joining the call and have a great summer.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect everyone have a wonderful day.