Welcome to the Constellation Brands Q3 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 would now like to turn the call over to Patty Yahn-Urlaub, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Jonathan. Good morning and welcome to Constellation's third 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 schedule. Thanks in advance, and now here's Bill.

Thank you, Patty. Good morning and happy new year, everyone. Welcome to our third quarter call. I hope you enjoyed the holidays and had an opportunity to enjoy some of our fine products in whatever form your celebrations took. Before I jump into my prepared remarks, let me first acknowledge the disheartening and tragic events that unfolded in our nation’s capital yesterday. I join other leaders across the country in condemning the violence that occurred, instead calling for a peaceful transfer of power that upholds our democracy and calling for peace, unity and stability as we move forward as a nation. Now, let’s move on to a discussion of our business performance. 2020 was certainly a challenging year, and like many of you, we are happy to turn the page. As we do so, are mindful of the words of American novelist, James Lane Allen who said, “Adversity does not build character, it reveals it.” This is certainly the case for us. Our team rose to meet many challenges that surfaced in 2020. This included overcoming many negative impacts from COVID, most notably a significant volume reduction in the on-premise, a slowdown in production of our Mexican beer portfolio heading into our busiest selling season, and threats to the safety, health and wellbeing of our team members. Despite all that, we continued to build momentum for our high-performing beer brands and launched Corona Hard Seltzer just as the pandemic started to gain steam in the U.S. Impressively, this remains one of the most successful new product launches in our company’s history. We continue to transform our Wine and Spirits business, leveraging innovation to drive higher growth and margin performance, while investing in capabilities needed to win long-term, such as DTC and 3 Tier e-commerce and successfully working through the complexities…

Thank you, Bill, and hello, everyone. Constellation Brands continues to demonstrate its resiliency by generating robust financial results and continuing to focus on debt paydown despite a volatile environment and various headwinds driven by COVID-19. Specifically, during our third quarter, we generated comparable basis EPS, excluding Canopy Growth of $3.16, an increase of 32% versus prior year, delivered strong operating margin and accelerating double-digit depletion growth for our beer business and increased operating cash flow and free cash flow by 14% and 23% respectively, resulting in ongoing debt repayment and achievement of target net leverage, excluding Canopy equity earnings as we ended the quarter at 3.3x. As Bill mentioned, we are very pleased to have closed the transaction to sell a portion of our Wine and Spirits business to Gallo, including the Nobilo wine brand, as well as closing the transaction to sell our concentrate business to Vie-Del. As an update, we expect to close the Paul Masson Grande Amber Brandy transaction within the next several weeks. Post transaction closing, we are left with a more focused and premium portfolio which nicely positions our Wine and Spirits business to produce low-to-mid single-digit topline growth, while migrating to an operating margin of 30% in the medium-term. In total, at transaction close, Constellation received cash of approximately $560 million and the opportunity to receive up to $250 million in earnouts if brand performance targets are met over a three-year period after closing. We also received approximately $130 million related to the closing of the Nobilo deal and expect to receive approximately $265 million from Sazerac upon closing the Paul Masson Grande Amber Brandy deal. In total, from all transactions, we expect to receive approximately $955 million before tax and we expect the overall tax payments related to the transactions to be approximately…

[Operator Instructions] Our first question comes from the line of Dara Mohsenian from Morgan Stanley. Your question, please.

Hey, guys. So beer depletion growth was obviously strong in the quarter even ex the retailer inventory rebuild on an underlying basis also. Just looking going forward to beer depletions, can you discuss your level of comfort that once we cycle COVID in March, you're back to sustained high single-digit beer revenue growth going forward, in line with the long-term goals, do you expect to return to historical levels of share gains? Also, basically just wanted to get an update on your visibility there on beer depletions and market share, particularly given the comments on high single-digit beer revenue growth in the foreseeable future. And then also, maybe can you just touch on if there is any risk specifically in fiscal Q4, with the rising COVID case counts and weaker on-premise trends before we cycle the COVID impact from last year in March? Thanks.

You bet. So let me try to unpack that a bit. Yes, one of the benefits that we've seen as our business has been moving through the year is that we are getting back to our long-term trends that we have previously announced. And that's driven quite frankly by the strength of our brands. Modelo in this quarter was nearly 20% depletion growth, Pacifico was the same. These brands are resonating with consumers. And keep in mind that's all being done – which relates to your second question, with on-premise trends that are really not very good. Year-to-date, on-premise for our beer business is off 53%. So I think the fact that we have produced these kinds of results with that environment speaks to the strength of our beer portfolio and the long-term positioning that we have for those brands. You then throw in the fact that we are more than doubling our capability in seltzer next year, and I think we should expect to see – consistent with our long-term trends, the growth profile we previously stated.

Thank you. Our next question comes from the line of Bonnie Herzog from Goldman Sachs. Your question, please.

Hi. Thank you. Hi guys and happy new year.

Hi, Bonnie.

I have a question on your full-year beer operating income growth guidance of 8% to 10%. Although you revised it higher, it actually still implies a pretty big hit to your beer margins in Q4. So I just really wanted to better understand why this is the case, especially as I look at the easy year-over-year margin comp and even factoring in the year-over-year increase you just called out in terms of marketing spend. So I guess I'm really wondering if you're simply being ultra conservative on the upside in operating income growth for beer or is there something else? Thanks.

Yes. Thanks Bonnie. Yes, so we did increase the range a little bit there as you said 8% to 10%, and we did increase our margin outlook closer to 41%. So we feel really good about that margin profile by the way. But you're right, that does imply some bit of dilution if you will in Q4, so let me just give you some of the elements that make up that. As we said, the biggest driver of that is going to be marketing because we think it's important that we continue to spend behind the brands and support the brands, particularly Corona Hard Seltzer. And so there's going to be significant increase in marketing spend in Q4. Additionally, we have a couple of COGS-related headwinds in Q4. One is, as we've had even in Q3, which is freight and logistics, as we're doing things to expedite shipments into the U.S. to ensure that we're increasing our inventory levels to more historical levels. And then furthermore, under COGS, we also have increased headcount in Obregon as we get ready to turn on the next 5 million hectoliters of capacity at Obregon. And we also in Q4 have some brewery maintenance that we shifted out of Q3 and into Q4. And then finally, the last thing is just as we talked about, the staggered pricing increases that we've taken this year and we staggered them through Q3 and Q4 and some will flow into the first quarter of next year. So all of those together is what's leading to a bit of a giveback on margins in Q4.

Thank you. Our next question comes from the line of Bryan Spillane from Bank of America. Your question, please.

Hey. Good morning, everyone and happy new year.

Thanks, Bryan.

So couple of questions. First one just on – question related to Seltzer. And I guess question is really just, as you look at it going forward and again thinking about an aspiration to be a top three player, can you just give us your thinking now in terms of how we should think about, is that going to include launching new brands and also just thinking about Topo Chico and co-working with Molson Coors, would you be open to maybe partnering with some other companies brands in order to sort of put more lines in the water I guess in seltzers?

Sure. Obviously, the seltzer category continues to remain strong. As we've said, we plan to more than double our capability in the seltzer area for Corona Hard Seltzer in the coming year. I mean the fact that we've done as well as we have with one SKU, this year one variety pack, we think is pretty impressive and certainly ahead of what our expectations were. But keep in mind we also have our toe in the water on some other things. Funky Buddha in Florida has performed extraordinarily well in the seltzer category, in that particular market, and we are extending that some in the coming year. We have a minority investment in PRESS, which has done – also done extremely well in the seltzer category. So we have our toes in the water in a number of ways. Certainly, our Corona Hard Seltzer is going to be our lead play and we think that is where the majority of our growth in that category will come from. As we said, we have a second variety pack that we're introducing at the beginning of the fiscal year, and then we have a couple of other things we might be doing which you'll hear more about as we go forward.

Thank you. Our next question comes from the line of Nik Modi from RBC Capital Markets. Your question, please.

Yes. Good morning, everyone, or good afternoon, and happy New Year. Just two questions from me. Bill, there's been some, obviously, controversy around Corona Seltzer given what some of the data has said in terms of deteriorating share trend. So I was hoping you could just provide some context around what everyone has seen versus what you guys are seeing in terms of that brand from a supply-demand and balance perspective? And then just as the brand continues to grow, are you going to have enough capacity to effectively execute the hard seltzer lemonade launch later in the year? And then my kind of secondary question is on Corona Light. Obviously, the brand has struggled relative to the other Corona franchises, and just curious what the plan is there over the next one to two years?

Sure. As it relates to Corona Hard Seltzer, we are more than doubling our capacity in that particular franchise for the coming year. And as you know and you commented, we're extending that into additional pack opportunities. We've sold everything we could make this year and we were very pleased with the performance. And frankly, that was – as I said earlier, that was a bit better than we expected to do. So we're quite pleased with where we stand in the overall seltzer market, and certainly with the more than doubling of capacity next year, we expect to remain a very strong player and a top three player in that particular segment. Keeping in mind, Nik, we have the second-best velocity in the category with that particular brand with one SKU. So I think as we're able to broaden our distribution reach on the shelf, I think we'll be very pleased with where seltzer is when we're sitting here a year from now. As it relates to Light, obviously a lot of our work and a lot of our time and energy has been spent on Premier, which we're very excited about, continues to be a big growth profile for us. So I think we need to think about that, particularly the Light business in conjunction with what we are doing across the overall Light category and our Premier, Corona Light et cetera. And I think, obviously, Light has been hurt some. However, the trends actually been quite good during this COVID timeframe.

Thank you. Our next question comes from the line of Vivien Azer from Cowen. Your question, please.

Hi. Thanks. Good afternoon. Bill, it seems pretty clear you guys have a lot of your sleeve on the hard seltzer front with clear market share gain aspiration. But I was wondering whether you could comment at all on the deceleration that we've seen in the hard seltzer in scanner data over the last six or seven months? And how that informs what you think is kind of a better normalized growth rate for the category going from here? Thanks.

Yes. I think the one thing that we've probably seen a bit of is some seasonality this year. And it's not unusual, I don't think. As you get more and more people into the category, you get more consumers who are either less frequent users or experimenting in the category. And oftentimes, there is some movement around within categories when that occurs. You couple that when there is a bit more seasonality that we've seen this year than what we have seen in prior years. So I still think it remains a very strong growth category. It grew, if you remember on our call last year, we anticipated, or I made the comment that I thought it would at least double in 2020 calendar year. In fact, it did more than that as a category and we still see strong trends. So we think this is going to continue to be a growth category, although it's obviously, like any other category, it's difficult to continue to grow at the pace it has been growing.

Thank you. Our next question comes from the line of Kaumil Gajrawala from Credit Suisse. Your question, please.

Hey. Good afternoon. A question, maybe housekeeping on this new share buyback. It's $2 billion on top of the remaining $1.9 billion. Is this on the same timeline as your original $4.5 billion kind of cash return to shareholders, or is the additional $2 billion stretched out over some more extended period given there's been a little bit of time? And then secondarily, could you maybe comment a bit on your distribution trends during the period in which you were supply constrained versus now that supply is starting to come back, if there was an ebb and flow there in any particular direction in terms of what we're seeing? Thanks.

Yes. So I'll answer the first question there. So in terms of – you're right that the one point or that the $2 billion we just announced is in addition to the $1.9 billion. The additional $2 billion is to give us further flexibility around share repurchases and we're still committed to the $5 billion return to shareholders, half of which is share repurchases through the end of fiscal 2023.

And relative to distribution trends, we were actually quite pleased with our ability to hold shelf presence. As you know and we said in prior calls, we focused our attention on the 20-ish SKUs that represented more than 75% of our total portfolio during the time when we had a slowdown in production. So that allowed us to expand and extend some of those SKUs on shelf and allowed us to maintain our position. Obviously, now that we have been able to raise our production rates and we are filling in some of those scenarios that had occurred, we're quite pleased that we're maintaining and in fact growing our distribution platform going forward. Keeping in mind, in many instances, retailers did not do shelf reset during the COVID timeframe just because of the pandemic. So we're very comfortable with our distribution platform. We think that given some of the things we have coming down the path, we'll be able to extend that going forward as we have every other year.

Thank you. Our next question comes from the line of Lauren Lieberman from Barclays. Your question, please.

Great. Thank you. And I just want to talk a little bit about wine. It was really nice improvement in the Power Brands depletion versus the first half of the year. So was curious if you could talk a little bit about what drove that? Maybe there were some pull forward given the net sales outlook kind two to four. So curious what those dynamics. And then also, just the pricing and promotional environment in wine, the space where Kim and Meiomi play is certainly premium priced, but it feels like there's been kind of a bit more discounting activity out there. And so just kind of curious in your perspective on pricing at that price point where you play. Thanks.

Sure. Lauren, we're seeing two or three things in the wine space. First of all, given there has been some change in how the consumer purchases, more DTC, more 3 Tier e-commerce. Consumers are going with brands that are tried and true and we're fortunate to have some that are extremely well received. You noted a couple of – Meiomi has done extremely well, Kim, The Prisoner Wine Company. These are brands that are trusted by consumers, loved by consumers. And that certainly helped the process, particularly as peoples shopping patterns changed some. Secondly, our innovation agenda has worked extremely well. Things that we did earlier in the year, like Unshackled has done very well, as well as some of the newer things that we've done. We noted in my brief prepared remarks that Meiomi Cabernet Sauvignon is one of the strongest individual entries that occurred in the entire industry this past year, and you add into that The Prisoner Cabernet and The Prisoner Chardonnay. We did very well with our innovation agenda as well. And I don't think we have seen – I would slightly disagree with your comment that there has been a more aggressive environment or aggressive promotional environment. Fortunately, the robust demand that we've seen in many of our Power Brands above $11 where we had lots of double-digit growers, our demand has been very strong and that has been the single biggest driver of our improved wine results is the sheer demand for our products and the fact that the consumer is looking for brands and products that they have great faith in, especially as their shopping patterns have changed some.

Thank you. Our next question comes from the line of Robert Ottenstein from Evercore. Your question, please.

Great. Thank you very much. I just want to drill down a little bit more into the accelerating depletion trends that you saw in the quarter, which were quite marketed. I mean, do you think this is just purely a function of the greater availability of your brands on the shelf or increase in media spend against them, the timing of your price increases and improving consumer? Just trying to get a little feel for those different drivers. And then tied into that, how do you see the distribution gains looking in terms of calendar 2021? Thank you.

Sure. I mean, there were a number of factors that weighed in on the improved performance. It starts and always will start with the strength of the brands. And certainly, as we were able to get our inventory position into a much better place during the quarter, it was reflected in our results and then it is reflected in the demand consumers had. Remember, we had roughly 15% growth across the beer portfolio and in IRI during the quarter, extremely robust growth, especially given the fact that on-premise was a drag to say the least. Fortunately again, we are a little less susceptible to the on-premise and some of the overall marketplace. But the sheer strength of our brands was a critical factor. No question, some of the depletion pieces Garth noted in his remarks were driven by our replacing some of the inventory that had decreased during the time when we were not able to produce. But I think we do need to keep in mind, the end of the day, it's all about consumer takeout, and consumers are strongly demanding our critical brands.

Thank you. Our next question comes from the line of Kevin Grundy from Jefferies. Your question, please.

Great. Thanks. Good afternoon, everyone. Happy new year and congratulations on the strong results.

Thank you.

Bill, question relates to the competitive outlook. Building on Lauren's question from wine, but I'm going to kind of ask you from a beer and seltzer angle for the upcoming year. So the context for the question, given the obvious challenges from the pandemic this past year on-premise, out of stock this past summer, et cetera, many in the industry, including you guys, were really unable to support your brand sufficiently with marketing budget cut rather sharply. So my question is, what is your outlook? How are you guys thinking about the next 12 months in terms of the competitive backdrop, specifically around pricing and brand support as the industry returns to health? Do you foresee a more competitive backdrop than we've seen in the past as companies try to reinvigorate the top line, or do you expect a generally rational environment? Thanks.

I think it's tough to tell what others will do. What I'll tell you is what we plan to do, is we plan to continue to spend in that 9% to 10% range of our marketing spend in our beer business, and we've got a lot of good things to talk about. We're extending our investment against Modelo. We'll be reintroducing Refresco this year. Despite the tremendous performance, we have things like Refresco that we just stopped producing, and we're going to reintroduce even though it had a tremendous start before the pandemic hit. So we expect it to certainly be a competitive marketplace, but demand remain strong, and that's certainly to our advantage because our brands have performed very well in that mix. As we've said, we are going to continue to invest behind our brand. Our brands respond extremely well. Jim Sabia does an outstanding job with his team about making sure that we get tremendous returns against the dollars that we spend against our brands. And we expect that that sort of intelligent approach to investment behind our business will continue, and then when you add on the fact that we will be adding additional products into the mix that we will invest behind, I think we're going to have a very robust and aggressive year in building our brands for the future.

Thank you. Our next question comes from the line of Andrea Teixeira from JPMorgan Your question, please. You may have your phone on mute.

The COVID new issue.

Still not hearing you. Should I move on to the next questioner?

Yes, please.

Certainly. Our next question comes from the line of Sean King from UBS. Your question, please.

Hi, great. Thank you. First off – and apologies if I missed this, but is there any color you can provide on the quarter-to-date completions, now that we're five weeks in, are you still reloading shelves? And then secondly, sort of looking longer-term at the on-premise. Your historic exposure, I guess, under indexed of the industry in like a pre-COVID world. As we think about the reopening, will that continue to be a case based on the way you're brands are positioned around occasions or could there be incremental shelves or incremental share gains in that channel as that trade focuses on higher velocity brands?

So as it relates to our current depletions through the first month of the quarter, depletions continue to perform in line with where they are so far through the fiscal year-to-date and the expectation is that they'll continue like that through the remainder of our quarter. And then on the – I'm sorry, could you repeat the second part of your question?

Which channel – we missed it. Which channel are you referring to? I'm sorry.

Sorry, I was just referring to the on-premise, that you historically under indexed the industry, and if there is an opportunity going forward that that mix could actually have incremental share gains with the portfolio?

Well, certainly, historically, as you said, we have under indexed in that. And we're seeing wide variability depending on what month, what state, what market, what city as to what's going on in the on-premise. That's been, frankly, the most difficult thing for any of us in the industry to project as to where it's going to go and how it's going to go there. What I would say is, we have very focused business plans against each channel. We plan by channel, as you would expect, and by customer; and we would certainly expect to have a strong showing in the on-premise once we get back to something resembling normalcy, acknowledging that the general consensus within the industry is that we are going to have a smaller on-premise coming out of the pandemic than we had going in, just because of the challenges that unfortunately many of our important accounts have had during the pandemic.

Thank you. Our final question for today comes from the line of Chris Carey from Wells Fargo. Your question, please.

Hi, good afternoon. So I guess – I just wanted to talk about capital allocation, just to end things, but from a bit different perspective maybe than how it's been addressed so far. So I guess in July, Constellation had noted that after exercising that last batch of Canopy warrants that it was going to see how things unfolded in the U.S. and Canada. I mean, I'd argue that Tuesday's Senate results made the U.S. a much more tangible opportunity for cannabis much sooner. And I wouldn't expect maybe Canopy's spending to be as inefficient as it was in Canada, but certainly U.S. expansion requires money. And I just – I wonder if your thought process on these warrants has changed at all in the medium-term, because I think it'd certainly pick up a bit sooner, and how that factors into this renewed commitment to buybacks and just any perspective there? And I guess just on top of that – apologies for the long question at the end of the call – but that can also impact Canopy's profitability, is that an acceptable outcome? And so just any color there? Thanks so much.

Sure. So just on capital allocation in general, our capital allocation priorities remain consistent with what we said earlier this year, which is continuing to pay down debt and getting into and maintaining levels inside our targeted leverage ratio that we're comfortable with. And we've made good progress on that this year. So far, we've brought our leverage ratio down about 59 basis points from where we started the year, about 39 basis points since the end of Q2, and we announced earlier this week that the early redemption of another $500 million in notes. So we're going to – that continues to be priority number one. And then, we are fully committed to the share repurchase program that we've previously announced, which is to return to shareholders $2.5 billion worth of capital through share repurchases by the end of our fiscal 2023, as well as dividends to make up the balance. As it relates specifically to the Canopy warrants, there is still – on the next batch of warrants, there's still two years left on those. So we don't need to make a decision anytime soon. Even with the performance of Canopy's share price, they're still not in the money. So we'll make the decision on those warrants much more closely to when they mature or to their termination date.

I would also just add to that, what Garth said, that keep in mind, Canopy has already had – is already well prepared for the U.S. market relative to their investments or their prepared investments in both acreage and terrace land, plus their cash position. So we would certainly expect that if there is any speed up in the federal legalization, that Canopy is well positioned to be a winner in the U.S. market going forward.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to Bill Newlands for any further remarks.

Well, I'd like to thank everybody for joining our call today. Despite the challenges faced in 2020, we're again on-track to deliver a strong year of growth, which is consistent with our long-term goals. We're confident in the resiliency of our business. Our beer business remained strong as demand continues to be robust, while our Wine and Spirits premiumization strategy continues to gain momentum and is further enhanced by the completion of the Gallo deal. The health of our business has allowed us to provide fiscal 2021 guidance that reinforces our strategic growth priorities and strong cash generation capabilities. This, coupled with the closure of the Gallo transaction, allows us to continue to execute on our commitment to return $5 billion in value to our shareholders through fiscal 2023. As a reminder, during our next quarterly call, we will be providing our guidance for the upcoming fiscal year. Thanks again, everyone, for joining the call and I wish you all a safe, happy and prosperous New Year. Thank you.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.