Welcome to the Constellation Brands First Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the prepared remarks, the call will be open for your questions. Instructions will be given at that time. I will now turn the call over to Patty Yahn-Urlaub, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Shannon. Good morning, and welcome to Constellation’s First Quarter 2021 Conference Call. I’m here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company’s website at www.cbrands.com. Please refer to the news release and Constellation’s 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’s Bill.

Thank you, Patty. Good morning, and welcome to our first quarter call, everyone. Before getting into a discussion of our quarterly results, I'd like to address two topics that have become extremely relevant to our business and our society in large. First, our thoughts and prayers go out to all those who have been impacted by racial injustice and associated acts of violence in both this most recent time period and throughout the years. We stand in solidarity with the black community, and our belief that black lives do, in fact, and have always mattered. We categorically denounce bigotry, racism, social injustice and acts of senseless violence in all forms. They are clearly inconsistent with our company values and our commitment to embracing diversity and creating an inclusive environment for all employees feel safe, respected and valued. Earlier this week, we announced our commitment to invest $100 million to support African-American black and minority-owned startups in the beverage alcohol space and related categories over the next 10 years. These small businesses serve as the fabric of their respective communities. And we must make it more equitable for them to access the capital needed to have a fighting chance at success. In addition, we've made a $1 million commitment over five years to the Equal Justice Initiative and their efforts to educate the public about the history of racial and justice in this country and to support their quest for equity in the criminal justice system. Furthermore, we've made a commitment within our company to enhance representation and access to opportunity for black team members at Constellation by strengthening our recruiting, hiring and development programs. The conditions that have allowed systemic racial injustice to persist have existed far too long. We all have a role to play in creating a more…

Thank you, Bill and hello everyone. Well, the start with our fiscal year marked the beginning of a global pandemic, resulting in rapidly changing market conditions, Constellation Brands delivered solid performance in Q1, driven by our ability to remain agile and prudently navigate through these uncertain and volatile times. During Q1, we improve margins and both our Beer, Wine & Spirits segments delivered solid Beer and Wine & Spirits Power Brand depletion volume trends, due to strong brand performance despite closures in the on-premise channel and shelter-in-place guidelines that impacted a majority of the quarter and increased operating cash flow and free cash flow by 16% and 24%, respectively. These strong cash flow results provide us with the financial flexibility needed to continue to focus on debt pay-down and liquidity. During the quarter, we were able to issue debt at very favorable rates and use the proceeds to satisfy $700 million of debt coming due in November, and pay down other near term maturities. Now, let's review Q1 performance in more detail. We're all generally focused on capital basis, financial results, starting with Beer. Net sales declined 6%, excluding the impact of the Ballast Point divestiture, organic net sales declined at 4% and organic shipment volume down 6% partially offset by favorable pricing. Q1 shipment volume was negatively impacted by reduced production levels at our breweries in Mexico, as part of COVID-19 safety measures. Depletion volume growth for the quarter came in at 5.6%, driven by Modelo Especial, and the successful launch of Corona Hard Seltzer a strong performance in the off-premise channel, more than offset the impact of the reduction in the on-premise channel, due to COVID-19 related shutdowns. When adjusted for one less selling day in the quarter, the Beer business generated nearly 7% of depletion volume growth…

[Operator Instructions] Our first question comes from Bryan Spillane with Bank of America. Your line is open.

Hey good morning everyone.

Hey Bryan.

So, I guess a question on the wine business and maybe just two related. One was -- I think you took some price increases earlier this year on Woodbridge and be some other brands. So, I just wanted to see how the market reacted to that? Whether you feel like you were able to successfully get those price increases through? And then maybe related, there was some repositioning that you were planning to do in the wine business this year from a brand positioning and marketing increases. And I just want to understand if that's actually happening, if you can still do that in this current environment? Thanks.

Sure, you bet. So we did in fact, take price increase on Woodbridge and I must say one of the things that has been a benefit of COVID is that if there are any, is that consumers have continued to buy tried and true brands of which Woodbridge is one. And it was certainly helpful that we put our price through concurrently with that and Woodbridge has actually been outperforming our expectations around the pricing increase throughout the first quarter. So, so far, so good. We’re going to continue to watch that as you would expect, but so far that's gone very well. I would also say that some of the new product introductions that we have put into Woodbridge have performed and we're expecting to continue to perform very well. That's a very important brand for us. A lot of the work that we're doing more broadly around our brands is continuing. We've seen a tremendous increase in direct-to-consumer and three Tier commerce, which goes very well to strong brands like the prisoner and may owe me and brands of that elk. So we’re going to continue to put focus on those brands. We think they're very well positioned and those brands are tried and true brands in the mind of the consumer, which at the moment is where the consumer is spending their dollars.

Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is open.

All right. Thank you. Good morning everyone. I had a question on out of stocks. It's a key summer holiday this week with the force, so hoping you guys could share with us how you feel specifically about the holiday and your supply? Also, maybe love to hear some more color on what you're doing to minimize the disruption for out of stocks? For instance, I've heard from some of the distributors that you're doing drop loads. So, I guess I'm trying to get a sense from you how flexible you can be on the production side with all of this and then maybe finally can you touch on how big of a drag some of these shortages and may be any initiatives you might be taking to minimize the situation. How big of a drag it might be on your margins, if at all? Thanks.

Sure. Let's start with -- our belief is that our operations team is best-in-class. And we are doing everything we can do at the moment to expedite shipments from our breweries, true our distribution facilities and through our distributors to consumers. Certainly, because of the reduced production that occurred during about 70 plus days, mostly in the first quarter, it’s certainly reduced our ability to ship to normal levels. But let's keep in mind, the demand for our brands for Modelo and Corona have never been stronger. We were up almost 20% in the off-premise channel during the quarter. And we're seeing consistent depletion levels as we start Q2 as well. So we are in a very strong position. Keep also in mind that during the mandated COVID-19 reduction in production, we produced the SKUs primarily that led to 75% of our sales. So, while a consumer may or may not be able to buy a particular SKU, in all likelihood, we would expect that a person who wants to buy Modelo or Corona and the brand families associated with those will be able to buy those during the holidays.

Thank you. Our next question comes from Nik Modi with RBC. Your line is open.

Yes. Good afternoon, everyone. So Bill, I know that, obviously, there's a lot of noise in the numbers. The question is -- I think, the top question most investors have is -- how long what the growth curve for the beer business will look like -- not only next six months, but next two, three years? So, I was hoping maybe you can provide some context on the following three points, right? One is -- number of new households or trial surge that you've seen and repeat rates on those new trials that you've seen since this whole pandemic started? The second point would be -- I understand the out of stock situation you are able actually provide products and maybe some packages weren't found, but I'm sure that out of stocks did cost you some sale. So I am just curious, maybe you can help -- can provide some context on how much the business would have grown on depletion had there been no issue in out of stocks at all. And then the third point is, obviously, retailers are thinking -- rethinking how they think about the shelf, something you guys have been doing for the last two to three years now. And so how you think this environment might shape or accelerate some of your Shopper-First initiatives and more spacing for your brands and retail longer term?

Sure. So let's take it in reverse order. Relative to the shelf, obviously, the one thing that's occurred during this particular timeframe is some of the resets that would normally occur have been pushed back as many retailers are focusing their attention on throughput from their existing shelf sets. We think that as they come into the fall season and do fall resets that this will continue to increase the probability of Shopper-First. Because I think it’s became more and more clear that brands that are -- that have strong demand behind them and ours are two great examples with the Modelo and Corona franchises are far demanding more space, and they're demanding more space because the takeout is there against them. It's kind of difficult to give you a specific example about what we could have grown because you had so many different factors involved in the quarter. You know our quarter of course, started almost concurrent with the pandemic, which was a little different than if you were on the calendar quarter, admittedly. But when you look at the fact that on-premise was effectively closed, but off-premise was up almost 20%, you know, you've got a lot of different dynamics in play there. As I said earlier, we sincerely believe that the consumer wanting to buy our brands will be able to buy Corona and Modelo. And certainly, the start of Corona Hard Seltzer has also been a real success. We have already shipped in access of 3 million cases of Corona Hard Seltzer. And as I said in my prepared remarks, the takeaway and repeat has been exceptional. So one of the things we are seeing relative to your first question in terms of consumer purchasing. About 30-some-odd percent of consumers are actually increasing their consumption of those brands that they are traditionally using. And given the strong representation of our brands, Corona, Modelo, in particular, it's not surprising that you've seen an increase in the takeout demand during this time frame. It goes back to what I said earlier about tried and true brands. The same would apply to many of our Wine & Spirits brands as well. But certainly the consumer's interest in buying brands in which they have a lot of faith and comfort is working to our advantage.

Thank you. Our next question comes from Vivien Azer with Cowen. Your line is open.

Hi. Thank you. Garth, I was wondering -- thanks for the color in terms of the marketing spend outlook. I was wondering if you could offer any color on how you're thinking about phasing that and whether we might expect something different as you kind of lean into a post-COVID recovery perhaps? And then, a quick follow-up. Bill, I really appreciated your comments at the start of the call and I'm curious whether you guys are accessing any change to your social media advertising spend? Thanks.

Yes, Vivien. Thanks for the question. As it relates to marketing spend and the phasing of that, I'd say, it's still too early to tell exactly what that will know, as we sort of come out of COVID-19 and we don’t know exactly when some of these sponsorships and sporting events might get rescheduled. So other that we still believe that we’re going to spend in that 9.5% to 10% of net sales for the full year, the phasing is still a little bit up in the air.

So relative to social media, there's obviously been a lot of discussion around social media. I would say and let me reiterate what I said earlier. We think it's very important to protect users for disinformation and hate-speech. Those things run directly counter to our commitment to social justice and to racial equality. We have decided that we are going to do a comprehensive review of our social media work and along with that for the month of July we are pausing our Facebook engagement until we are able to do a thorough review and to make sure that all of our social media efforts match up with what I just said, which is the commitment to social justice and racial equality.

Thank you. Our next question comes from Robert Ottenstein with Evercore. Your line is open.

Great. Thank you very much. Just one point of clarification and then my question. Just can you just break out the price/mix in the quarter and maybe separate out headline pricing from promos? And then, my main question really is unbelievable growth, right, in the seltzer category. You're now in the mix, big time with Corona Seltzer which, I think, you said is 90% incremental. What have you learned about the category now year-to-date and how big do you think it can be as a percentage of overall beer sales? And is your latest thought in terms incrementality to the entire beer category at this point? Thank you.

So, relative to those two or three questions in that, we continue to have our long-term algorithm, particularly as it relates to beer, of expecting that price will grow 1% to 2% annually. We've done that consistently over time and we expect that that algorithm is going to continue. The relative to seltzer, earlier this year, we said we thought the category, which was roughly 60 million cases last year, could double and probably triple in the long run. If anything, that's starting to look conservative. The consumer certainly enjoys the refreshment characteristics of this particular category. And I think our introduction of Corona Hard Seltzer is a great example of leveraging a tremendously strong brand, into a new category. I think it would be important to not simply lump seltzer in with beer. Given the incrementality that we've seen is roughly 90%, which again is more than we frankly expected, suggests to us that it is not necessarily a direct trade-off with beer. And I think that it has category dynamics that are free and understanding of the role. So, our view is that this continues to have a lot of longevity. And we are certainly planning to be a critical part of it. As you know, we've already gotten to number four in the category with a roughly 6% share. And as you also know, we've just warming up.

Got it.

Thank you. Our next question comes from Lauren Lieberman with Barclays. Your line is open.

Great, thanks. I was hoping that you guys could give us a little bit of help on the gross margin range of this quarter. And particularly in beer I am curious across those businesses. I know you mentioned that, you'll see some of start going into Q2 of the lower production volumes. And anything maybe just a little bit of visibility on the drivers of gross margin quarter and thinking about how that develops into 2Q it could be really helpful. Thanks.

Bill, you?

Yes. So, gross margins per beer is what we had some drags there, as it relates to materials and to fixed overhead absorption. That drag was offset by finding balance point divestiture, as well as by pricing. Going forward into Q2, we expect that there will be further downward margin pressure as it relates to fixed overhead absorption as we work through the inventory or the slowdown that we had in Q1 at the very beginning of Q2. At gross margin, they were flattish gross margin and beer. That resulted in about 240 basis points of improvement at the operating line because of primarily the timing of the marketing spend that we talk about earlier.

Our next question comes from Sean King with UBS. Your line is open.

Thanks for the question. I apologize if I missed this. But do you provide any update on Mexicali? And, I guess, the potential options you're exploring there?

We continue to be in discussions with the Mexican government about what our long-range plans are for Mexico. As you know, and as we've stated, based on the expansions that we already have in play our medium-term is already set. We believe there's going to be plenty of opportunity. And we spend more than 30 years working very well with the Mexican governments, both local and federally. And we expect that to continue and we expect to have a strong long-range solution for our continuing supply for the long run. So I don't have anything new to report on Mexicali other than to say, we fully expect to be able to service our needs for the long run.

Our next question comes from Dara Mohsenian with Morgan Stanley. Your mind is open.

Hey, good afternoon guys.

Thank you, Dara.

First, just a clarification, you mentioned depletion levels in Q2 in beer so far consistent with Q1. Is that versus the reported 5.6% depletion result or is that more 7% on a days adjusted basis? And then just on Corona Hard Seltzer, with the strong repeat rates you mentioned, can you give us a sense for what share level you think that brand can ultimately reach within the Hard Seltzer category and also what distribution level, it'd be reasonable to expect that brand to get to? Thanks.

Sure. Let's, let's start with the hard Seltzer question. We already are seeing ACV distribution IRI channels of approximately 65, which, which is very strong, especially given the fact that as I said earlier, many retailers are not doing the resets that they had planned for the earlier part of this year. It remains to be seen what our -- what our long-term, scenario looks like. We're already about 6%. As you know, we've only introduced so far in variety pack. We would expect to extend beyond just variety pack, later this year and into the following years. So we're very optimistic that we're going to have a -- an important part of the Seltzer category, and certainly would expect to be in the top three, overall within that category, going forward.

Our next question comes from Kevin Grundy with Jefferies. Your line is open.

Hey, thanks. Good afternoon and congrats on the strong quarter. Just to follow up on the last question, I'm not sure there was there's clarity on where depletions were running for Q2, if it was close to the 7% on a selling day adjusted basis. So clarity there I think would be helpful for folks? And then more broadly, maybe you can just comment on the biggest variables impacting your decision to withhold guidance and the context being particularly strong starts at a year, sounds like June is off to a good start. Bill, you commented the portfolio has never been stronger. We're seeing that in really strong Nielsen data, production is ramping it breweries. You've had the strong start to the second quarter, commodity is still relatively benign, enough competence to deploy some cash towards small wine deal. We are kind of putting this all together. And then in addition, the company is obviously very definitely managing through this very sharp and unprecedented channel shift. So with all of that said, comment on the biggest swing factors here that, leave the company a little bit reluctant to provide guidance at this point? So thanks for all that.

Okay. Thank you. I might quote some of you. Some of those things that you just said that was quite nice. Relevant, you know first of all, I need to apologize for Dara, I did not answer the same question a minute ago and I apologize for that. Relative to depletions, our view is, is that -- that the second quarter specifically starting in June is looking fairly consistent with what the non-adjusted amount would be. And the takeout continues to be strong. All you have to do is look at IRI and Nielsen every week and you see that the take out is strong. Here's the issue around guidance, if anybody would have said in February that we would have gone through what we just went through over the course of a quarter, you wouldn't have believed us. And while -- excuse me, on-premise was off 75% in the first quarter, a little more actually in wine and spirits. You started to see some openings, which saw a decrease to an off sort of 40% plus for a brief period of time. Now, we're turning around and we're seeing closures, again, in Arizona and Texas and Florida. So it is very difficult in this particular environment to be able to predict. What we are anxiously looking for, and I would suggest that all of you would want to look for is, how are brands performing, given there are going to be spits and spurts in the marketplace. And our brands continue to perform extremely well. There's going to be a lot of volatility this year, and ability to predict is very challenging admittedly. But I think those brands that are try and true that have strong consumer pull and demand. As I stated earlier, we are seeing a significant portion of our existing consumer base buying more than they had done historically. That speaks to strong brands. And I think that when we are through this pandemic scenario that has been very hard to predict, we believe we will be right back on our longer-term beer sales trends of 7% to 9% growth, which is what I'm sure many of you are interested in, and certainly, every all saying, point to the fact that our long-term algorithm is unchanged.

Our next question comes from Andrea Teixeira with JPMorgan. Your line is open.

Thank you. Good afternoon. I have a question and a clarification. On the question, can you give us an idea of the cadence of the beer depletions for the quarter? Especially U.S. in May and now in June, I think you, Bill you said, the kind of the 5% to 6% would be the -- the non-adjusted number for June, but I was wondering what happened in the previous quarter. And then that June is probably because you went out and the stock-outs that you mentioned before. And if you can give us an idea of the 75% decline in terms of the cadence that you had. I'm assuming that would be much worse in May than it was in the beginning of the quarter that would be helpful? And the clarification on the wine guidance for the second quarter, you said sales and EBIT down -- Garth said, down 25% on a year-over-year basis. Is that an organic number or you corporate some of the impact of the divestitures closing during the quarter? Thank you.

Yes. So, I will take the second part of the -- I will take the Wine & Spirits of that first. So, the down 25% to 30% really does take into account largely the wine divestiture. We didn't expect -- since we're now anticipating or expecting to flow that in our Q2, we're not expecting to shift much of the divested brands during our Q2, and then furthermore, we are expecting on our Power Brands to have depletions slightly down as we don't -- as we don't replicate some promotional and shipping activity that really was non-productive.

And going back to your question about, how we think about the month. I think your question is a perfect example of why we have not given guidance because it is very, very difficult to predict. I mean, in the beginning of March, on-premise looked fairly normal. But the time we’ve got to the end of the quarter, the first quarter, it was up 75%. I mean, as good as Garth is at predicting, he couldn't have predicted that. So -- and now we are seeing some market places going back to closures or to significantly reduce volume in restaurants and pub scenarios. So, it is just very challenging for us to put exact number and how it's going to follow, if you could tell me how the pandemic would play out, we could give you a much better answer. But as we see on almost a daily basis on -- on the news, it's impossible to predict exactly what the pandemic is going to do, which is why we continue to go back to the scenario that says, we have extremely strong brands, and our brands are outperforming in the marketplace and in the channels that are open to us, and that's how we will continue to judge our success.

Our next question comes from Bill Chappell with SunTrust. Your line is open.

Thanks. Good afternoon. Just a follow-up on the marketing spends and trying to understand how you're looking at it, as you said, some events like the NCAA tournament have been canceled. There could be a case where you're advertising at the World Series and the NBA Championship at the same time. So, how do you look at the spend for the back half of the year, especially around sports spending, when a lot of it's going to concur and it seems like it would be very duplicative to advertise all over the place?

Well, you're right. It's more challenging than it would usually be. And as Garth pointed out in his remarks, the first quarter was a great example as there were a lot of live events and many of the things on which we normally advertise, like using the NBA as an example, just didn't exist. So, we are going to be focused in real-time on where we can implement our marketing spend. What I think is most important overall, as Garth noted, we still expect to spend between 9% and 10% on our marketing of our brands. When you look at historical results of companies that continued to spend in recessions, and admittedly, we're in one, or we're about to be in one. Those companies that continued to support their brands came out the back end even stronger. We believe in that and we are going to continue to spend. As you pointed out, that will mean some real time adjustments as we go. Because, admittedly, it's been very tough to predict what will in fact occur and when it will occur as you’re seeing with things like the baseball schedule, which has moved all over the place in terms of number of games and how they're actually going to exercise those. Same is true in basketball; same is true in many of the live activity. So the reality is we will be doing this in real time. But it doesn't change our intent, which is we’re going to spend against our brands to make sure they are top of mind in the consumer's view.

Our next question comes from Steve Powers with Deutsche Bank. Your line is open.

Yes. Hey, thanks. Actually, I want to pick up on that train of thought, in terms of just an update on how you're assessing any implications of recessionary economic conditions on your categories and brands. I mean, so far, as you highlighted, the premiumization trends have continued nicely. So, but do you see any risk coming -- of that coming under pressure, even if temporary whether in beer or Wine & Spirits and just what are you watching most closely, keep tabs on that as conditions developed? Thanks.

Certainly. As you would expect, we watch things like unemployment rates. We are overdeveloped, as you know with the Hispanic community and the unemployment rates in the Hispanic community have been significantly higher than the average unemployment rates in the in the marketplace today, although all of its in double-digits. So, so that's something that we watch very carefully. Again, it's the same point, the brand awareness, brand loyalty of our brands within those communities are very strong. But we watch those things very, very carefully. Certainly, one of the other things that you see, and I think it's been exacerbated in the pandemic because of people sheltering is people look for those small moments of joy in their lives. And fortunately, our brands can often offer those to people. So, we think that the strength of our brands in conjunction with people engaging more at home than they would naturally and normally do, will be important to the continued success of our business, albeit, we're watching a lot of those characteristics like unemployment very carefully.

Our next question comes from Laurent Grandet with Guggenheim. Your line is open.

Good morning everyone and thanks for the opportunity for the questions. So, I'd like to come back to the wine divestiture to Gallo. It looks like, I mean, the $250 million earn-out is based on volume depletion performance in fiscal year 2020 and 2021 versus fiscal year 2019. And if I read it correctly in depletion orders between minus 10% from the payment to minus 2% for 100% payments, so could you please tell us, as we're kind of almost in the middle of it, the current volume depletion performance of the portfolio brands you’re applying to divest to Gallo? Thank you.

Yes. Thanks for the question. And what I would tell you is that the earn-out portion of that transaction is really based on the 24 months after we closed the transaction. So we'll measure how those brands performing at the end of year one, and then again, the end of year two. Those brands have benefited recently by what Bill has described, as the change in consumer behavior to shift consumer behavior toward these tried and true brands or back to tried and true brands. And so some of the brands that we are divesting to Gallo is actually recovered quite nicely in that portfolio of brands is performing much better than it was a year ago at this time. So we feel is that as we transition that portfolio brands to Gallo, that they're in a very good position, and they're in a good state of health that we've got a very good chance of getting into that [indiscernible] a meaningful way.

Our next question -- with MKM Partners. Your line is open.

Thank you. And you'll have to forgive me I'm still a bit confused. Did you say June beer's shipments are roughly minus 7% or are you saying June is down a bit more than minus 7% and July and August will help make up for to get the total quarter beer shipments to minus 7%?

We didn't comment on shipments at all. We talked about depletions. As we’ve said we have ramped up our production during June to normal levels, which will allow us as subsequent quarters. My personal suggestion would be that many of you think about the first quarter and the second the third, as in combination. Because as our production has ramped up, you will see some continuing stress on the shipment side of our business during Q2, and we would expect [depletes] to outperform ships during the quarter with a lot of that flipping as you go to the latter part of the year. Again, it still goes back to our long-range algorithm around beer being up 7% to 9% is very consistent. We expect that in the long run, and we view this short-term pandemic blip as being just that, a blip in our long-term success.

Thank you. And I'm showing no further questions. At this time, I would turn the call back over to Bill Newlands for closing remarks.

Great. Thank you. Thanks everybody for joining our call today. Despite the challenges and extremely volatile environment that were concurrent with the start of our fiscal year, we've delivered solid performance and strong cash flow generation during Q1, which provides us with great momentum, as we head into our key summer selling season. Let me reiterate that the short-term production disruption to our import beer business that we experienced during Q1 does not hinder our long-term outlook as consumer demand and takeaway for our brands remains extremely robust in the channels that remain open, and we remain optimistic about our outlook for the remainder of the fiscal year. In closing, I'd like to wish everyone a Happy Fourth of July and hope that your celebrations with your family and friends includes our fantastic beers, our wines, and our spirit products. Thanks again everyone and please have a healthy and safe summer season.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.