Q2 2020 Earnings Call
Q2 fiscal year 20 earnings conference call at this time, all participants have been placed and not listen only mode. Following the prepared remarks, the call will be opened for your questions <unk>.
Instructions will be given at that time I'll now turn the call over to Paddy on a lot senior Vice President of Investor Relations. Please go ahead.
Thanks to well.
Good morning, welcome to constellation second quarter 2020 conference call I'm here. This morning, with Dell Newlinks, our CEO and data Klein our CFO .
As a reminder, reconciliations between the most directly comparable GAAP measure in any other non-GAAP financial measures.
This call are included in our news release or otherwise available on the company's website at www dot cheap brands dotcom.
Please refer to the news release the calculations at 55.
Factors, which may impact forward looking statements, we make on this call before turning the call over to bail similar to prior quarters I would like asset we limit every one to one question per person.
Which will help and their call on time, thanks in advance and now for yourself.
Thank you Patti and good morning, everyone welcome to our discussion of constellation second quarter sales and earnings results.
We delivered an excellent quarter driven by strong performance of our beer business and while our wine and spirits portfolio continues to be impacted by transition activities related to the Gallo transaction I am pleased with the pace of progress in the strategic transformation of this business.
Now that we're at the halfway point in the year I'd like you to focus on two key points as the second half of the year unfolds number one.
Constellation and Gal are working and full cooperation with the FTC well. They continue to review our wine and spirits deal. We are confident in our ability to close the transaction, which we now expect will occur like fiscal yearend 2020.
For now we have updated our fiscal 2020 U.P.S. guidance to assume that we close at the end of the third quarter, but we will adjust accordingly, as we get more clarity on exact timing.
Meanwhile, we are fully committed to supporting our entire portfolio throughout the transition.
Number two.
During the second quarter constellations beer business remains the number one market share leader in the high end of the U.S. their market, representing 25% of high end growth with constellation growing share in every summer holiday.
This is up 38 consecutive quarter of growth for our beer business and I remain confident in the prospects. So this collection of iconic consumer loved brands well into the future.
Why or David and I, so confident.
Several reasons.
Hi, and trade up is a continuing trend for the entire U.S. totaled beverage alcohol market.
Premiumization is becoming more prevalent and U.S. middle market States like Ohio in Michigan, where a significant amount of beer consumption occurs.
Legal drinking age. Hispanic population growth is expected to continue at a CAGR of roughly 3%.
We have ample distribution runway with traction from key initiatives like shopper for shell, which is a compelling opportunity for our retail partners.
We have significant opportunities to increase household penetration with key brands and our beer innovation pipeline is strong and we'll continue to complement the other growth opportunities we have for the portfolio.
As most of you know the Madella when Corona brand families are the powerhouse brands that represent the foundation of our business. So lets drill down and discuss some details of the opportunities. We have four specific brands within these brand families.
Let's start with Modelo, especial, which generated the most dollar sales growth in the entire U.S. beer category during the quarter.
Hello, especially out continues to be on SWACO.
Recently achieved a significant new milestone, becoming the number one import beer and the number five overall beer in the U.S. beer market.
But dello, especially out alone contributed almost 30% of the total category growth during the second quarter with double digit depletion growth and 44 out of 50 states.
Modelo is growing with non Hispanic acculturated Hispanic and multicultural consumers and there remains significant upside to grow both penetration and buy rate with these consumers.
As a matter of fact in calendar 2018, we estimate that only 5% to 6% of non Hispanic veered consuming households, Frank Modelo especial.
For reference that's roughly half the penetration the Corona extra has in non Hispanic deer households.
Cosma Dello has great broke momentum and excellent velocity it should command more shelf space at retail compared to other top beer brands.
And then the on premise Modelo Especial currently has distribution in just over 50% of the account the carry Corona extra.
We've already had excellent success this year with the launches of Modelo especial 32 ounce bottles.
Deloatch a lot of the Mone, you sell and Magellan Negra 24 ounce cans.
Bottom line, we have significant runway for growth would this brand well into the future.
Now moving onto Corona, which is the number one high end brand family in the U.S. beer market.
This spring the Corona brand family grew shelf space at retail almost 15%.
One of the key drivers of this trend, what's corona premier, which experienced accelerating depletion growth throughout the summer months, while posting double digit sales and distribution trends and I are right channels during the quarter.
With our increased focus on Corona premiere in the on premise. This summer it has become the fastest growing beer in this channel a key channel to drive consumer trial.
Grown over Fresca has quickly become a top five share gainer in the high end of the U.S. beer category with ever fresco variety pack, becoming the number three new item and I are right channels during the second quarter based on dollar sales.
Interestingly grown over Fresca has higher velocity trends the one of its key competitors in this space the mikes brand family.
We're very excited to announce that our new Seltzer launch planned for next spring will be the next big innovation for.
The Corona brand family.
Now admittedly this has been one of the worst kept secret, but as you all know Corona carries unbelievably strong brand equity as the number one most loved brand among both Hispanic and total population drinkers age 21 to 54, and that's why we've decided to put the Corona brand name on our new.
Seltzer and of course, the fresh the refreshment characteristics of Selzer's perfectly match for Rona refreshment DNA.
We believe that sensors are here to stay and will therefore accelerate the volume shipped into category from the low end to the high end, where we are the market share leader.
Corona hard seltzer will be introduced in four flavors, including tropical line.
Mango, Jerry and Blackberry line.
Brand will weigh in at 90 calories with a 4.5 HBV with zero carbs and zero sugars.
So, let's now move onto Corona extra which is the number six beer brand in the U.S. market and boast velocity trends that are two times the entire category.
There continues to be runway for future Corona extra growth with the incremental contributions coming from draft and can't formats as well as the core I need a product.
And we plan to increase our marketing investments throughout the remainder of our fiscal year for this brand.
Last but certainly not least Pacific, though produced double digit depletion growth this past quarter, driven by the national advertising campaign and retail promotions as we will continue to support the independent spirit of this brand with the live life anchors up marketing campaign.
As you can see we have tremendous opportunities to grow the beer business through a combination of enhance distribution innovation and executional opportunities across the portfolio for years to come.
Considering these factors we remain confident in our ability to achieve 7% to 9% net sales and EBIT growth for our beer business in fiscal 20 and beyond.
Moving now to wine and spirits as I mentioned, we continue to work with the FTC to finalize our wine and spirits transaction would go. Meanwhile, business performance continues to be impacted my transition activities with distributors, who have begun to reposition their portfolios for the change in ownership.
Brands upon the close of the pending transaction.
In addition, we're overlapping a very strong second quarter last year at that time, we executed select promotional activities for keep power brands that we didnt repeat this year as they did not meet the returns and the target returns for the business.
Why you might ask.
The wine and spirits business transformation strategy is evolving under a new set of strategic imperatives that have a higher return target for these types of promotional activities based on a more disciplined revenue modeling tools that we've implemented similar to what we do in beer.
While our year to date depletion trends for our power brands are flat, we're confident in our ability to deliver depletion growth for this portfolio brands in the mid single digit range for fiscal 2000 and September has reflected that expectation.
We're also pleased with the consumer takeaway trends for the power brands, which grew dollar sales, 6% and I are right channels during the quarter outperforming total us wind growth of 3%.
This demonstrates that the brands that will fuel our growth going forward have significant consumer led momentum, which we believe we'll continue on the second half.
One of the reasons to believe as I mentioned, we are experiencing strong consumer takeaway trends for these power brands. In addition, we have an impactful innovation pipeline primed with new products launching for the key holiday selling season, which begins this month.
We're especially excited about our wine and it can launches, which will capitalize on one of the fastest growing trends in the U.S. wine industry.
We believe that art can format is the most attractive in this segment in terms of both taste and appearance and we have a successful proof point with Crafters Union, which was Arne inaugural launch of wind in a can earlier this year.
It has since become the number one growth brand in canned wine and a top five share gainer in the Super premium priced segment.
In addition to launching the number one sobbing on block in the us that being Kim Crawford in a can't format. We will also introduce Kim Crawford Rose eight can.
That being the fastest growing skew in this format.
And we will not only planned to launch Woodbridge wine and it can but then a tetra pak format as well.
In addition to our efforts in cans and Tetra, Robert Mondavi private selection buttery Chardan nay slotted for release this fall as well as the right barrel, aged red blend, which was recently introduced into the market.
As you would expect 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.
On the spirits front spectra vodka continued to post robust consumer takeaway sales growth trends of 6% in IR right channels during the quarter bolstered by our marketing campaign bring your own spirit.
Spectra Rosy continues to outpace our expectations, while the core offerings in the portfolio remain extremely healthy as well.
Our American Whiskey high West has been growing double digits and I are right for the three years that we have owned the brand.
Driven by an award winning taste brand authenticity and strong distribution gains we continue to expect high west to remain a solid growth contributor to our portfolio going forward.
During the quarter, we signed an agreement to sell Black Velvet Canadian Whiskey to Heaven Hill for 266 million.
This action aligns with our consumer led Premiumization strategy to deliver accelerated growth as we continue to execute the transformation strategy for our business.
Our ventures team was quite active during the quarter as we made two new minority investments. The first as men tenure Distillers, Colorado based award winning American Crap Ramaker.
10 years Roms are currently distributed and more than 40 states and seven countries overseas and can be purchased online.
Second is Durham distillery craft Gen vodka core and ready to drink can cut tail producer that was recently recognized as the number one craft Gen distillery in the us.
Lets say today.
Additionally, Durham has earned more than 50 National and International Awards.
Both these investments are part of our female founders initiative, which makes meaningful investments in female led businesses doing disruptive and innovative work across beverage alcohol.
Overall, we will continue to maintain our focus on Premiumization innovation and brand building as the transformation strategy evolves for our wine and spirits business.
Now a few comments about our investment and cannot be growth, which continues to be the global leader in total Canada sales.
During the quarter canopy growth and acreage holdings received overwhelming shareholder approval for the agreement the grants canopy, the right to acquire acreage and entered the U.S. cannabis market once federally permissible.
As you know this opportunity provides a path for canopy to have a leading position in the U.S. upon federal cannabis reform.
And speaking of that reform I was excited to see that the U.S. House of Representatives recently passed the safe backed by a wide majority.
Well this bill also need centered approval it would deliver access to traditional banking services for thousands of legal cannabis businesses in the U.S. and shows positive momentum in the legalization debate moving forward.
We're also looking forward to the launch of 2.0 in Canada, when canopy, well unveiled our portfolio of value added higher margin products in various form factors, including drinks edibles and bake.
In the U.S. canopy team has been actively developing a range of high quality CBD products and related marketing plans as well as securing the production resources necessary to bring these products to the U.S. market by the end of their fiscal year.
New CBD product offerings include skincare, and cosmetics therapeutic creams beverages, edibles oils and soft gels.
Overall, we're pleased with the progress of the cannot be team and what they have done in the last few months.
In closing I am extremely pleased with the progress of our business at the halfway mark in the year.
Our beer business continues to deliver industry, leading results and our wine and spirits business is successfully executing their transformation strategy.
We continue to demonstrate our commitment to returning cash to shareholders with the share repurchases, we made during the second quarter.
And I'm bullish about our prospects across the business for the remainder of this year.
With that I would now like to turn the call over to David who will review our financial results for the second quarter.
Thanks, Bill and good morning, everyone.
In Q2, we continued to produce strong beer operating performance and we delivered superior cash flow results.
Our wine business delivered results inline with our expectations as we execute this transition year.
Share repurchases during the quarter reflect confidence in our ability to produce top tier growth well into the future and our commitment to generate returns for shareholders.
We've increased the narrowed our full year comparable basis diluted EPS range to $9 through $9 in 20 cents.
This range excludes cannot be equity earnings impact.
Our increased guidance now assumes the transaction with Gallo closes at the end of Q3, and the divestiture of Black Velvet Canadian Whiskey closes on November Onest.
Now, let's review Q2 performance and our full year outlook in more detail world generally focus on comparable basis financial results.
Starting with beer.
Net sales increased 7% on volume growth of 5%.
The reversal of the shipment timing benefit in Q2 was less than expected. This helped Q2 net sales coming in ahead of our mid single digit growth guidance, which we provided last quarter.
Depletion growth showed continued strength and more than 6%.
When adjusted for one less selling day in the quarter the business generated 7.5% depletion growth, reflecting accelerating trends for some of our key brands during the summer selling season.
We expect this acceleration to continue into the second half of the year when we're no longer lapping the Corona premier and familiar launches as a note in Q3 selling days are flat year over year.
Beer operating margin increased 50 basis points to a record 41.8%.
Benefits from pricing and foreign currency were partially offset by higher Cogs.
The higher Cogs, primarily reflect materials inflation, mostly driven by contractual increases in glass and cartons.
I'm pleased with the success of our first half productivity initiatives.
These productivity savings were achieved earlier in the year than originally anticipated and helped us offset other cost inflation headwinds in the business.
Marketing as a percentage net sales increased 20 basis points to 9.1%.
Marketing spend came in lower than planned as we revised the cadence in magnitude of marketing spend for the year, which I'll discuss in a minute.
For fiscal 2000, we continue to expect net sales and operating income growth of 7% to 9%.
This includes one to two percentage points of pricing within our Mexican portfolio.
We now expect our full year operating margin to be flattish compared to the prior year result of 39.3%, which is an improvement compared to our original guidance of 39%.
We continue to expect our gross margin to be flattish for the year as cost inflation headwinds and growth investments are expected to be mostly offset by product pricing and productivity initiatives.
Some of the cost headwinds that we originally projected are not materializing through the levels we anticipated.
However, operating margin will be impacted in the back half by the reversal of the remaining shipment timing benefit from fiscal 19.
And our implementation of Sep S. Four Honda ERP system in Mexico.
In addition, we now expect fiscal 20 marketing as a percent of net sales to be closer to the top of our nine and a hat to 10% range.
We believe it's prudent to reinvest some of the margin upside from our first half success to support our brands in the second half.
Our increased investment will mostly focused on the Corona brand family.
As mentioned earlier the shipment timing benefit at the end of fiscal 19, partially reversed in Q2.
We expect the remaining shipment timing benefit to reverse in Q3 over.
Over the last two years Q3 has been our lowest margin quarter, primarily driven by lower seasonal plant throughput.
And marketing investments.
We expect Q3 marketing as a presented net sales to be greater than 11%.
As a result of these factors, we expect Q3 operating margin to be just over 36%.
Moving to wine and spirits net sales declined 9% on shipments down 10% Depletions declined 13%.
These trends were largely driven by our lower end brands and transition activities associated with the transaction.
Wine and spirits operating margin decreased 330 basis points to 22.8%.
This decline was primarily driven by higher Cogs and marketing investment.
Higher Cogs, primarily reflect grape cost headwinds lower volume throughput and increased transportation costs.
We now expect fiscal 20 wine and spirits net sales to decline, 15% to 20% and operating income to decline approximately 25%.
Our revised guidance reflects the transaction close assumptions discussed earlier.
As a result of the Q3 closed guidance assumption for the wine and spirits transaction. We now expect our fiscal 20 stranded cost removal to approximate $20 million compared to the $35 million to $55 million previously disclosed.
However, we remain committed to the total stranded costs removal of approximately $130 million by the end of fiscal 21.
I remain confident that the wine and spirits transformation strategy is working.
Howard brand performance continues to benefit from our increased focus and marketing investments, which is reflected in the solid consumer takeaway trends for these brands and I are right channels.
In fiscal 2000, we continue to target mid single digit power brand depletion growth.
Longer term, we expect the business to produce produce mid single digit net sales growth.
Well migrating to an operating margin of 30%.
As we work through the process to close the transaction with Gallo the business continues to be impacted by transition activities.
Therefore, we expect Q3 wine and spirits net sales and EBIT to declined 15% to 20%.
To finalize this discussion I have one other point to note.
We now believe it's likely that a portion of the wine and spirits transaction purchase price will be in the form of contingent consideration based on future performance of the brands targeted for sale.
Accounting rules govern our election to record the contingent consideration when it when it's determined to be realizable.
Therefore in the third quarter, we expect to recognize a loss of up to $300 million on the write down of the assets held for sale.
Now let's proceed with the rest of the piano.
Fiscal.
Fiscal year to date corporate expense came in at $97 million, we expect full year corporate expense to approximate 250 million.
Reflecting a second half ramp in IP spend which includes our Sep esfour hundred implementation.
In Q2 interest expense increased 27%.
This reflects interest expense of approximately $39 million related to the funding for incremental canopy growth investment in November of 2018.
Fiscal 2000 interest expense is now expected to be in the range of for 32 $440 million.
This reflects incremental interest due to the wine and spirits transaction timing.
Our Q2 comparable basis effective tax rate, including canopy equity earnings came in at 13.9% versus 18.4% last year.
The decrease reflects a lower rate on foreign earnings and higher stock based compensation benefits.
Our fiscal year to date comparable basis tax rate, excluding canopy equity in earnings is 16.8%.
We continue to forecast our full year fiscal 2000, a comparable effective tax rate excluding cannot be equity earnings impact to approximate 17%.
Moving to free cash flow, which we defined as net cash provided by operating activities less capex.
We generated free cash flow of $1.1 billion for the first half of fiscal 2000.
This represents an impressive 10% increase.
Free cash flow improvement, primarily reflects strong operating cash flow and lower capex.
The lower Capex is primarily due to timing we continue to expect full year capex spend of $800 million to $900 million.
This includes approximately $600 million of Capex for our Mexico beer operations expansion, including investments in the Opregen and Mexicali brewery is as well as the fifth blast furnace at the Nava glass plant.
We now expect fiscal 20 free cash flow to be in the range of 1.3 billion to 1.4 billion and operating cash flow to be in the range of 2.1 billion to 2.3 billion.
This increase reflects an additional quarter of EBIT from the wine and spirits brands targeted for sale as well as cash tax benefits.
Shifting to our investment and cannot be growth.
Total pre tax net gain recognized since our initial canopy investment in November of 2017 is $757 million.
In Q2, we recognize the $1.2 billion gain on our modified canopy warrants, partially offset by approximately $400 million.
Loss in equity in earnings, which reflects CBTI share of additional loss on the modification.
This net gain resulted from shareholder approval of the can't of canopy growth proposed acquisition of acreage and was more than offset by the decrease in fair value of canopy investments for the quarter.
These impacts were excluded from comparable basis results.
As summarized in the earnings release second quarter fiscal 2000 comparable basis diluted EPS, excluding canopy equity earnings impact.
Total $2 in 91 cents per share.
Canopies business is rapidly evolving in their financial results will likely to be volatile as they continue to focus on their path to profitability.
I'd like to remind everyone cannot be equity earnings recognizing our income statement are noncash and weve not factored cannot be equity earnings into our fiscal 2000, a comparable basis EPS guidance range of $9 to $9 in 20 cents. This.
This allows us and our investors to focus on the performance of our core business.
In July we issued $800 million.
Senior notes at an attractive fixed rate and use the proceeds to redeem higher interest rate debt.
We're pleased with the progress, we're making toward our de leveraging goals excluding cannot be equity earnings in fact, we've reduced our net debt level by more than $650 million since the end of fiscal 19.
This allowed us to opportunistic opportunistically repurchased $50 million worth of stock during the quarter.
In closing I'd like to reiterate we're committed to returning four and a half billion dollars to shareholders from fiscal 2000 through fiscal 2002.
The share repurchases, we've made during the quarter reflect the confidence we haven't our long term business model.
We believe our combination of strong cash flow and future growth prospects creates a best in class opportunity within the CPG space.
That bill and I are happy to take your questions.
Thank you as a reminder to ask a question you need to press star one on your telephone.
Withdraw your question press the pound Keith please standby, while we compile the Q Monday roster.
Our first question comes from Bernstein with Bank of America. Your line is now open Hey, good morning, everyone.
Right.
So I guess my question is.
Given the pipeline of innovation that you'll have.
Going into next year and.
Kind of the spending levels that you had this year behind the beer business. This is to support.
Innovation and initiatives yet this year is that 10% or so of revenue still a good sort of basis baseline to use in terms of marketing investment to support to support the business going forward or if innovation is going to step up well it potentially have to step up more.
Brian we're still in the process and finalizing our are all of our spend plans for next year, but we do expect it to be consistent with the range that weve that we've done in this fiscal year, so somewhere in that nine to 10 range.
Thank you and our next question comes from come out of casual Allah with credit Suisse. Your line is now open.
Hey, guys good afternoon.
The can we talk a little bit about the contribution from some of these innovations over the last couple of years to your Depletions at the moment and then and then maybe if you want to give some some insight on how you expected to contribute going forward.
The certainly.
The Premier introduction has been everything we expected.
Its appeal to a new consumer sub segment, which is those individuals who are looking for a low carb offering and as we noted.
We continue to see acceleration, particularly in the on premise during this quarter. So we're very pleased with that.
We've seen the addition of the bottled format for familiar to smaller bottle format has been very good for us as well as David noted we overlaps all of those early introductions during this quarter, which which I think shows the strength of our overall beer business with our depletion growth on it.
On a day's adjusted basis of roughly 7.5% is pretty powerful given.
The.
The lapping that we had from last year of those two introductions. You then edra fresca, which has exceeded our expectations as well as I noted in my script. The velocity of that is better than one of our key competitors in the FNB space Mikes.
And and we expect strong things from that the future as well it shows that the strength of the Corona franchise.
And it's refreshment DNA.
That that we're able to extend that brand into other sub categories.
Yeah, and all I would add to that cold mill that said in our algorithm. We say that said, we're going to grow net sales in our beer business high single digits over the next few years and 25% of that growth is really made up of a of innovation and clearly that includes premier and.
The concept the new Corona Seltzer that we're talking about now the other thing I just want to point out too as it relates to.
To to our overall growth in the business.
We called out the loss sell day in Q2, which really drives our.
Our depletion growth to that 7.5% range.
That has us continuing to grow significant share in the beer business.
And you know a big driver of that as the innovation work within your business.
Thank you.
Next question comes from Kevin Grundy with Jefferies. Your line is now open.
Hey, good afternoon guys.
Hello.
A question Bill on the on the Spike Seltzer rollout for next year. So a handful of questions all related to that based on your internal models, how how big do you think the category can become over say the next three to five years. How are you defining success for the Corona Spike Seltzer rollout and then how do you think this product.
She added in what is a fairly undifferentiated product category at this point BBB calories and sugar content, all sounded pretty similar to the existing brands of course taste will be paramount, but any comments you have there would be helpful. Thank you.
Sure.
I think that's an evolving answer I think everyone has been somewhat surprised by the aggressive growth.
That we've seen in the seltzer business, particularly over the course of this selling season, what I would say is this I think corona brings a unique refreshment profile to this particular category.
We would expect to gain a significant amount of share in the high end as we have with anything else that we introduce.
Amongst our franchises relative to the product.
I would look very carefully and what we said this is a zero car zero sugar.
Product.
I don't think you'll find that with any of the other products that have been been introduced into the market and I'd add one more point, we said on on our prior quarter discussions that we would not be entering this category unless we felt we could do it with a superior product with superior margins and profitability structure.
I can assure you that this will be a superior product with superior margins and profitability structure versus other competitors in the marketplace.
Thank you and our next question comes from Duck with MKM partners your.
Your line is now open.
Hey, Thank you for taking the question. So just one for me on the transition of the divested wine brands.
It seems you're saying the loss cases or that negative growth is the result of distributors, maybe not giving those brands as much attention since they may be leaving their houses.
One is that fair and two is there an additional aspect of maybe you're not putting as many.
Hey dollars are putting as much spending into those brands since there are leaving your system.
Yes, So bill look we continue to support the brands but.
When distributors.
I understand that brands won't be in their houses you said.
It's it's difficult to get them to continue to drive the brands the way, we would like them to in general.
To switch back to our portfolio, we've called out full year Depletions for our power brands of mid single digits, a year to date were below that but we remain confident that we'll get to that number.
Over the course of the year as a result of the more disciplined execution strategy that bill talked about in his comments.
Thank you and our next question comes from Angiotech Shah with JP Morgan Your line is open.
Thank you. So I was just hoping to be able to.
Kind of we quantify I know, there's definitely a difference between.
The tracked channel and and obviously was to deplete, but you know obviously when you when you still look at out. So I was just hoping to see if you can you quantify some of the comments on the on premise enough from us and granted that you know you've been making a lot of the roads on the on premise on cans and also on.
So I was hoping to see if you are saying, obviously I had to try channels skew more into California, where you why and then I'd always going to fail your numbers, but if you can clarify I think it will be helpful for for investors. Thank you.
So Andrea that thank you for that question because you know there that we normally operate with the two to 300 basis points disconnect between Depletions, our depletions and IRA, meaning our depletions run lower than Iraq, when you adjust for the cell day and remember that the.
The market data the IR Rite aid is just 12 rolling weeks.
We're back within that two to 300 basis points.
Delta right. So there's there's not really.
A disconnect us anymore.
Unusual than we normally experience. So then when you look at individual channels you know when when we look at the on premise in aggregate, we continue to grow share in the on premise being up we were up in the quarter a low single digits I think the industry was down low single digits or somewhere in that area. So.
You know, we continue to perform well across all channels.
For our beer business.
Thank you and our next question comes from a mid Sharma with BMO. Your line is now open.
Hey, good morning, everyone.
Morning.
Just one clarification one.
Yeah, Bill you talked about south so having a superior margin to competitors.
Is it all supposed to per year to your beer margins as you think about it and then second for Dave Dave you. So if that's 200 to 300 basis point Delta do I right is that right metric I mean, I try and show a pretty meaningful acceleration in August and September So what does.
Let's see about Q3, Depletions certainly going to be a at least looking like at the date a much stronger than what you did in Q2.
Yes, so I think to take to the first question you know, we expect all up all into the overtime when were.
Fully at scale production in Seltzer that we will.
We'll deliver kind of a similar margin kids to the to the ones to the one that we have for the rest of our beer business.
And you know, we we without really commenting on September Depletions we.
ER expect our Depletions as I said in my comments too.
Continue to accelerate as we go through the year and we're past the the the launch of last year.
Last year of Corona premiering throughout a familiar.
Thank you and our next question comes from Nik Modi with RBC.
Line is open.
Thanks, Good morning, everyone.
So I had two quick good morning, two quick questions.
Have you guys tested the seltzer concept, yet I mean, I know you guys have been as is pretty fast and in terms of the turnaround here, but just curious if you have any any yet.
As you can share with us on the test market and then the bigger picture question is on the wine and spirits transaction Gallo I mean, it can this deal Beaver by you know is there potential to realize more value from some of the brands that maybe the FTC looking out with other other buyers I mean, any any context around that would be helpful.
Sure relative to the question of testing, we obviously have not done a market test, but we as we always do when we introduce any new product, we do a battery of consumer testing around it to make sure that we both have the right look and by that I mean packaging that we have.
Right flavor profiles.
That will perform at or better than the competition.
As I said in my prepared remarks.
We think this product is going to be a demonstrable winner in the category or we wouldn't have launched it David you want to answer yes, yes. So so Nick we remain confident that the Gallo transaction will get done we need to work our way through the process to.
To see kind of the final form that it takes.
As I called out in my script, and you'll see in the queue or we will recognize in the third quarter, a 300 million dollar loss on part of the.
Physician set right and what I mean by that is we have a a set of brands, including the Gallup brands that we listed out in the Black Velvet a brand that we've also talked about that.
We're disposing of as a result of the wine transformation that we're going through and we're pretty confident that when we're done with all of the work that's required around that portfolio that word that we're dealing with that will end up with a with neither a loss or gain will end up.
With about a push in that regard and then we'll have our business really well positioned to focus on the high end of the of the of the industry and a portfolio that can grow mid single digits and delivered 30% operating margins.
Thank you. Our next question comes from Rob Ottenstein with Evercore. Your line is now open.
Great. Thank you very much in my apologies, but a few more questions on krona Seltzer tried the product in Atlanta yesterday, it's a great product very exciting.
What what are your thoughts.
You know on cannibalization.
Both in terms of the you know your beers.
And then also in terms of the category.
You know how accretive visits to the beer category in your view.
You know as you kind of 50 50, cannibalizing beer 50, a wine and spirits are you thinking about it differently.
And then finally do you are you set up for automated lines to the variety pack. Thank you.
Sure.
Well I'm glad you liked it will add you to our consumer panel next time Robert So.
We'd like it as well.
Here's what I would say, we expect that this to be a heavily accretive to our overall beer franchise. Obviously, the the growth that we've all seen and Selzer's has has had some impact on our franchise and many other beer franchises.
During the summer months up, but if I will take you back to what we have done most recently, which is premier and familiar are both of which had.
Had more than 50%.
Accretion to our overall brand portfolio with premier being closer to 75%. So we would certainly expect that this is going to be very additive.
To our overall portfolio for the kroner brand franchise going forward and a big factor is gonna be just what you said these are delicious tasting products.
Thank you. Our next question comes from Lauren Lieberman of Barclays. Your line is now open.
Great. Thanks, good morning.
The learning.
You want your like a bunch of stuff on all of the.
Major brand franchises and trends, but when I was thinking about the depletion numbers in total.
Hello growing as strongly as it is if you like it medium size the rest of the portfolio in aggregate is sort of flattish.
I guess that.
Reasonable and if so what are the pieces.
We talk about today.
Corona extra correct me Corona light.
Thank you you cannibalized by Premier, but what do you think from Corona extra and as you think about stepping up spending from here outside the seltzer launch what are the areas in particular that you're targeting on Corona to accelerate performance. What do you think you can do differently. Thanks.
Sure.
We obviously are increasing our support for Corona extra for the remainder of this fiscal year and you are correct year to date Corona extra itself is roughly flattish.
Theres some obvious interaction between Modelo, which is as I noted on fire.
And Corona, So we would expect a little bit of that movement would that are on franchise, but overall the kroner brand family continues to grow.
And a lot of that growth rate.
Remains and things like Premier refresh Scott.
With continued strong performance with Corona extra given theres a lot of other family members now than there was.
Not so long ago, but.
Specific though as I noted on the call was up double digits in depletions during the quarter and we continue to be happy.
With the acceleration in that area.
I realized Robert going back to Robert for Justice I can I apologize I did not answer your second question about automation.
We have an approach that we think is is ready to go to create efficiencies within how you pack for a variety pack, which is I'm sure. The real answer to your question. The real question that you have in your mind. So we're we're set up to do that within our current operation structure.
Thank you. Our next question comes from Vivien Azer with Cowen. Your line is now open.
Hi, This is Jerry will pass currently on for Vivien. Thanks, very much for taking my question you don't sell like Vivian.
So so bill mine is on Corona refresh Scott just based on some of the share gain commentary that you offered can you just provide some color on where you believe you're sourcing share and then maybe some color on specific consumer demographic trends around the brand. Thank you.
Sure we are still developing some of those answers as you can imagine we're still in the early stage one of the things that we have noted is that the Hispanic demographic had been generally less aggressive and their adoption of fnbs, but because of their strong affiliation with the Corona franchise, we have noted.
The strong uptick with our with our strong demographic base in the Hispanic community.
Around refresh go.
However, we're also seeing as you can imagine this product is largely shelved and largely placed in the cold box in a different.
Place and competes much more with the FNB categories, rather than competing with our core Corona offerings. So we're very pleased that we're broadening our audience and broadening our appeal to new use occasions with Rhopressa and are very bullish on the future for that sub.
And as well.
Thank you and our next question comes from Dara Mohsenian with Morgan Stanley . Your line is now open.
Hey, guys. So a follow up question on Krona Seltzer I guess can you help us understand why an existing beer brand, albeit one with incredible equity in Corona is the right choice for brand and the Seltzer category given it looks like card seltzer as more of a distinct segment versus traditional beer.
At a lot of the companies that have launched brands there have use new brand names instead of the traditional beer brands. So maybe you are seeking when others is asking but help me understand why that's the right decision and year mines and what your consumer research is telling you.
And then the second any concerns over longer term brand equity to the traditional krona beer business from a hard seltzer launch and how do you guys think through that thanks.
You bet.
As you can imagine we tested that question very very deeply.
The whole essence, and the whole DNA of Corona is all around refreshment.
When you discuss that across any of the sub brands. That's the first thing that comes back in the consumers' minds. As this is a refreshing here, it's a refreshing product the manner in which category falls follow it falls Similarly, as a response to refresh Scott.
One of the key elements that the consumers looking for in Seltzer is refreshment. Therefore, the match with that DNA is perfect to go along with Corona is core DNA and why we felt that if we were going to enter this category. We would do it with a brand that had deep trust with the consumer as we note.
It earlier it is the number one trusted brand.
With Hispanics and non Hispanics 21 to 54. Therefore, we believe this will be a very strong entry a in the seltzer space.
Thank you. Our next question comes from Bill Chappell with Suntrust. Your line is now open.
Thank you good morning.
Alright.
A follow up on the wine business.
Can you just give us a little more colour on the distribution changes.
How that's it sounds like there's some collateral damage at least in the near term tier two your existing brands from the divestiture and so trying to understand if more color on that and then how you then going forward.
Reduce the dis synergies you would seem like you would need to continue do have a fair amount of spending behind their personnel behind there to kind of keep their presence at the same.
We have focused our attention on continuing to deliver results against the entire business. There's no question that the the transition that is occurring has been distracting to.
To our distributors and to our internal population with that said we continue to remain excited by the power brand results of up 6% and I are right. During the most recent quarter and spread to falls into the exact same number 6% growth during the most recent quarter as well so.
So.
We remain very bullish that as we get this transaction completed that what will remain will be high margin high growth potential businesses and franchises and brands.
There are going to be a very strong consumer products play for a long time to come.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to build new wins for any further remarks.
Well. Thank you everyone. Appreciate your joining the call and levees and let me say as we close out the discussion of our quarterly results, David and I are both pleased with the strong start to the first half of this year and we remain very bullish on the future performance of our powerful collection of consumer connected brands.
Our next quarterly call is scheduled for early January please be sure to have a safe and happy holiday season, and remember to enjoy some of our great products. During your celebrations with family and friends. Thanks again for coming on the call and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.