Hello and welcome to the Constellation Brands Q4 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 turn the call over to Patty Yahn-Urlaub, Senior Vice President of Investor Relations. You may begin.

Thanks, Joanna. Good morning and welcome to Constellation's year-end fiscal '21 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 year-end call. It's now been a little more than a year since the onset of the pandemic and for many it's been one of the most challenging years in recent memory. At this time last year, we outlined our philosophy for managing the business and navigating through this period of uncertainty. We committed to making decisions that prioritize the physical and economic safety, health and well-being of our employees. We committed to remaining consumer obsessed, relentlessly focused on doing all we can to meet consumer needs. We pledged to continue managing our business with discipline ensuring appropriate balance between short-term needs and positioning Constellation for sustainable long-term success and we pledged to continue making decisions aligned with our long-term strategic vision. This is what best of class companies do in periods of uncertainty and I'm extremely proud to say that is exactly what our team delivered over the course of the physical year and then some. Working together with our distributor and retail partners, we overcame numerous headwinds posed by the pandemic to achieve strong earnings growth and record free cash flow, while significantly reducing debt. This strong performance was led by our beer business, which delivered double-digit operating income and organic net sales growth for the fiscal year. Looking forward, we not only have an exciting innovation lineup for the coming year, but we expect our core portfolio to generate robust growth well into the foreseeable future, and therefore have plans in place to execute our next increment of capacity expansion in Mexico. Our Wine and Spirits premiumization strategy gained significant traction during the fiscal year and the divestiture of several lower end wine brands positioned this business for enhanced growth and profitability going forward. In addition to the strong…

Thank you, Bill, and hello, everyone. Despite a volatile environment and various headwinds experienced throughout the year due to COVID-19, fiscal '21 marked another great year for Constellation brands demonstrated by a robust financial results and solid business performance with pretty strong beer operating performance and cash flow results, with our Wine and Spirits premiumization strategy continues to gain momentum and is well positioned to execute growth now that the Gallo transaction is finally closed. Specifically, in fiscal '21, we achieved strong EPS growth and delivered comparable basis EPS excluding Canopy growth of $10.44. In addition, we generated record operating cash flow and free cash flow of 2.8 billion and 1.9 billion respectively, which enables significant debt reduction of $1.7 billion and reduction of our net leverage, excluding Canopy equity earnings as we ended the year at 3.1x. And lastly, we returned 575 million of cash to shareholders in dividends. Now let's review full year fiscal '21 performance in more detail, where I'll generally focus on comparable basis financial results. Starting with beer, net sales increased 8% on shipment volume growth of approximately 7%. Excluding the impact of the Ballast Point divesture, organic net sales increased 10% driven by organic shipment volume growth of 8% in favorable price and mix. Our full year organic net sales slightly outperformed our previously communicated expectations primarily due to incremental shipments made during the fourth quarter in order to return to normal levels of distributor inventory at fiscal year end. Depletion volume growth for the year came in above 7% driven by the continued strength of the Modelo and Corona brand families. As throughout the year, strong performance continued in the off premise channel and more than offset the impact of the 51% year-over-year reduction in the on-premise channel due to COVID-19. When adjusting…

[Operator Instructions] Our first question comes from the line of Lauren Lieberman with Barclays. Your line is open. Check to see if you are on mute Lauren, your line is open. I don't think we have her here. Our next question comes from the line of Dara Mohsenian with Morgan Stanley.

So on the beer demand side, I guess short-term, we've now cycled COVID. Maybe you could just give us an update on March depletion trends and what you're seeing in April so far? And then longer term, can you touch on the growth opportunity from here on Modelo Especial, it seems to be defined the growth slowdown that happens to a lot of other brands as they get much larger. So it would just be helpful to take a look forward at the key drivers from here in terms of incremental distribution, expansion, innovation, contribution, demographics, et cetera, some of the key drivers that happened in fiscal '21 and your thought process going forward in terms of the growth drivers with that brand? Thanks.

Absolutely. We're very pleased to say that March has gotten off to an excellent start. And March was certainly ahead of what our trend line was coming in. So we're very pleased with the start of the New Year, April, obviously, it's a little early to judge. Relative to Modelo, there's really no end in sight for its double digit growth profile. It continues to grow with the Hispanic community and obviously, it is a nice tailwind because of the growth in the Hispanic community. But we still have great distribution opportunities. We continue to grow our velocities on that brand. And when you think about the penetration increasing in the non-Hispanic community 25% over the last couple of years, we're barely scratching the surface. As you probably know, we really only started to advertise outside the Hispanic community over the last few years. So the upside within that community we think is tremendous. And as you also know, we nearly never done any innovation in that other than watching the Chelada line, which of course is quickly become the number one Chelada. We think there's just a tremendous opportunity for Modelo to continue to grow for a long time to come. It's only number three at this point. There's plenty of room still to go up.

Our next question comes from the line of Kaumil Gajrawala with Credit Suisse.

If I may just ask about buybacks and you reiterated your $5 billion commitment, but it wasn't included in the release, I guess in terms of what buybacks are going to be for fiscal '22. Can you just talk about how you're thinking about that?

Sure. Thanks, Kaumil. We are absolutely committed to meeting our $5 billion commitment over the course of the next two years. And as you know, that includes a significant amount of share repurchases $2.5 billion worth of share repurchases. As we entered this year, we said we were going to have two real commitments as it relates to capital allocation, one was paying down debt and then second was making significant progress on that return of capital. Throughout the year, as we noted, we did pay down debt quite a bit. We started the year at about 3.92x and we've ended at about 3.1x. And, we paid down the -- the Gallo transaction closed in early January, we didn't pay down the last tranche of debt, the $5 million redemption in early February. And at that point, we had some things that we were doing that we had to clear up most notably, finalizing our analysis on Mexicali, and then the subsequent, further investment in capacity. So that's why we didn't make any progress in fiscal '21. But we fully expect to make meaningful progress this year.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

I guess I had a question on your guidance. I understand the headwinds you guys called out that are going to pressure your operating income this year, but I guess I'm trying to think through some of the levers you might have to offset these pressures, beer pricing for one comes to mind, as you called out, your pricing was softer last year, it was under 1% for the fiscal year, which is below your typical 1% to 2% range. So how should we think about your willingness to take more pricing this fiscal year to offset some of these incremental cost pressures? Would you be willing to go above your typical range? And then, finally, how much visibility do you have with some of the commodity and transportation headwinds that you're facing? Curious, are you fully hedged, for instance, on some of these commodities?

Sure. Bonnie, I will take the first half of that. We believe the 1% to 2% pricing actions that we take pretty much on an annual basis is the smart way to approach it, it balances the opportunity to get improved revenue scenarios with the recognition that, you do have some price sensitivity within certain consumer groups that consume our brands. So you always walk that delicate balance of where you go. And our view is 1% to 2% is a good amount that allows us to continue to maintain the strong momentum within our business that we have. As you know, we continue also to aggressively increase our spend overall against our marketing platforms. And that will only be expanded when you think about some of the innovation agenda. So we're very optimistic about the whole platform. But we're getting much beyond that, I think in any one year, it is probably not the best way to approach that question. And Garth, you might answer her second please.

Sure. Just on the opportunities on the hedging, Bonnie, so first of all, every year, our ops teams and our production teams are looking for ways to take costs out of the business, still continue to look for those as we go through the year. So those are possible levers as we move forward. But quite candidly, those cost savings get harder and harder as time goes on. As it relates to our hedging position. As you know, we have a fairly robust and sophisticated hedging policy that allows us to layer in hedges on both commodities and on currencies over the course of many years to take advantage of favorable rates. So we've done that in order to mitigate what otherwise may have been higher inflation this year. That being said, we're not fully hedged in any one thing, whether that's currency or commodities. And so to the extent that there are any improvements as rates, we could benefit from those as well.

Our next question comes from the line of Bryan Spillane with Bank of America.

My question for you just related to Mexicali and I guess, just trying to think through, of the -- I guess roughly $800 million that we've spent there, in terms of just cash back -- what are the sort of opportunities to maybe recapture some of that cash, whether it's repurposing the equipment, the land – maybe selling land? Also, will there be any cash tax benefit? You basically wrote that off as a loss and then there's a cash tax benefit, just trying to understand how much of that cash we could think about you recouping over the next year or two?

So obviously, Bryan, we continue to work to mitigate that impairment, but obviously we felt it was time to take that impairment. We have repurposed a number of the equipment things that we have there into other facilities as part of our expansion of the other facilities. And we're going to -- we're continuing discussions with the government as well, relative to mitigating the impairment for the future as well. But I do think it's important to note one thing, though, we're not going to let this setback and admittedly, we're not happy about it. We're not going to let this get in the way of focusing on our growth and meeting the growth and high demand that we have for our brands over the long-term. The reason where we're doing the capacity expansion that Garth talked about previously, is because our demand continues to be aggressive, A, on our core business, and B, we're going to get after the ABA/seltzer space, in an even more aggressive way than we have up to this point. So we're not going to let this get in the way of us meeting consumer demand for our brands in the future. Garth, do you want to comment on that one?

Yes. Just as it relates to further recovery. So first of all, the impairment kind of is net of what we think we've recovered to-date, right. So we have been moving equipment out of Mexicali and over to Obregon, in support of the 5 million hectoliters that just went live. We continue to do that to support further expansion at Obregon. And really taking the impairment is -- and making the decision to move on is the first step in further evaluating what our next options are, which, as you indicated, could include things like selling the land and whatnot. And then, just further as it relates to any the negotiation of the conversations, I should say that the Bill referenced, we do expect that there will be some additional recovery in that --recovery could come in many different forms, it could come in cash payments, it could come in tax credits, it could come in infrastructure credits, things of that nature. So, we're certainly not done, as it relates to trying to recover any lost costs.

Our next question comes from the line of Vivien Azer with Cowen.

My question is on your margins, understanding that there some very clear structural headwinds that you're contending with and even to offset with cost savings. I am a little bit surprised that your E&P guidance is not a little bit higher, given the substantial amount of new product activity. So I was hoping you could just elaborate on kind of what informed the range in order of magnitude how you're thinking about prioritizing that spend.

I'm sorry, Vivien, I was trying to understand the question. So I think what I heard you say you're asking the question around what's driving the, or trying to get a sense for that the scale of what's driving the margin dilution. So as we said, about a third of the dilution is driven by the inflation, which we discussed, about a third of that is coming from the increase in depreciation. And then, a third of that is from the mix impact moving towards seltzers and ABAs.

Well, advertising is going to be consistent going forward with what our historical trends have been in that sort of mid nine's range. We're obviously in a growth business like ours, that's still a significant increase year-on-year on what the total spend is, because it's coming off a very much higher top-line than it was in the prior year. So we're actually spending a lot more in our marketing spend than we had in prior years.

Our next question comes from the line of Kevin Grundy with Jefferies.

I wanted to drill down on your views for the hard seltzer category, if I could. Three part question. So one, has the category slowdown that we're seeing in the Nielsen data in the first quarter? Is that in line with your expectations, obviously, very difficult year-over-year comparisons, but that being said, still moderating. Two, what are you forecasting for the seltzer category this year? What's embedded in your outlook? And then, the last piece is maybe touch on your level of satisfaction with your market share at this point, understandably, you're leaning in now, you talked about the $60 million ad campaign. That being said, as we look at the Nielsen data your market share is hovering in the 3% area. How is that relative to your expectations? Where do you expect that to go here over the next 12 months?

Sure, two or three of those things, we'll try to get them all. It's not unexpected in a category that's continuing to bring in new consumers that you have some seasonality effects. We certainly saw greater seasonality effect over this recent period than we saw a year ago as an example. Our view is, that's likely because you have a significant higher percentage of either early or less consistent user. So it wasn't really a surprise, it still remains a growth sector within the beer industry. Our forecast it's going to continue to grow and continue to be a very important part, which is why we're more than doubling our capabilities against hard seltzer for this particular year coming, that we're just starting. We believe this is going to be an important part. And it also provides an interesting entree for people into the overall beer category. Relative to the market share, as you know, as we expanded our capabilities that allowed us to do additional SKUs, we did almost 10 million cases this past year with one SKU, which is kind of an outstanding launch, if you will. But the expansion that we are putting in place is going to allow us to more than double that we've already introduced SKU number two and number two variety pack, and we have Limonada coming online, here this coming June. So our expectations is, you'll see a significant increase in our share proposition, in part because we'll have more available to the consumer. And we'll have more shelf space on the warm shelf and more cold back space in the cold box as well. So we're very optimistic about what our profile will look like as the year goes on.

Yes, Kevin, just to follow up on that really quickly, so that the growth that you're seeing so far is, fairly well, in line with what we're expecting. We're expecting growth in the category this year to be in that 40% to 50% range.

Thank you. Our next question comes from the line of Sean King with UBS.

I guess with your fiscal year ending, since then, seems like the market has opened up quite a bit, I guess, I'd love to know a bit more about what you're seeing in the on-premise. And also within that any change in distributor inventory level, then the more markets reopen?

You're starting to see difference and obviously, it varies by state. So for instance, it got a little tighter in California in the early part of this calendar year than we had anticipated, but overall, we're starting to see some increase in the on-premises, you would expect recalling that sort of it's going against the time last year when it was off more than 50%. So we certainly would expect some of that. I think that the open question, it's very difficult to predict, quite frankly, is where the all the whole channel mix ends up going. It's an open question. As you know, we are somewhat less susceptible to the on-premise channel than some of our competitors, because our overall profile is SKUs more to the off-premise anyway. But certainly, we're optimistic and as more of the U.S. population gets vaccinated, we're hopeful that in the summer months, it begins to look a little bit more like what a typical year would be. But it's still a little early to make that call.

Our next question comes from the line of Rob Ottenstein with Evercore.

Just two follow ups, one for each of you. Bill, can you talk a little bit more about Pacifico, on every call, you get progressively more excited about it, which is great. Can you talk maybe, sort of the reasons to believe that it's going to be a major national brand? And then, Garth maybe touch on how you're thinking about the mix between share buybacks and dividends? It seems evident from the release just a 1% dividend increase. Why so little and is that just, the way you're looking at things is that you'd much rather prefer share buybacks particularly at the depressed valuation of the equity.

Well, Robert, Patty always warns me about being too giddy, but I must say it's tough not to be giddy when you look at some of the results around Pacifico. Consistently you're seeing four week trends in IRI that are up in the 30 plus percent range. That the core business in Southern California continues to do extremely well and it's developing across the country. Again, we really just are scratching the surface of building out with this brand to be. But my old friend Bill Hackett always said Pacifico, starting to look a lot like Modelo looked about 15 to 20 years ago in terms of the development and how it really started out in the California bases. Modelo is now the number one brand in the state of California. I'm not making a prediction that Pacifico will be the number one brand, but it wouldn't be the worst thing that ever happened. So I certainly -- there's just a lot to be excited about you, you then add in that we're starting to do some innovation and some innovation testing in that brand with Gen Z consumers. This brand very much over indexed with Gen Z consumers. So we're bringing in a somewhat different audience than what we have with some of our other franchises. So, again, it's early days, but there's just so much to be excited about with Pacifico. We really think this could easily be the next big franchise within our overall portfolio. Garth, over to you.

Sure. And on the sort of capital allocation question regarding share buybacks and dividends. I mean, look in the construct of everything we're trying to do from a capital allocation standpoint is, we want to make sure that we maintain investment grade, we want to make sure that we return to shareholders what we previously said we would return to shareholders, which was about 2.5 billion of share buybacks and 2.5 billion of dividends. And we want to make sure that we have the flexibility to invest in our business, as we talked about investing significantly in Mexico to support the robust growth of our portfolio. So all of that goes into the mix when we're trying to decide where to spend the money. And as it relates, specifically to dividends, versus share buybacks, we feel pretty good about where we are in terms of our payout ratio right in the target of what we've set for ourselves. So that's why we didn't increase it more. And by keeping it where we are, we're able to do all those other things that I said, return a significant amount of money in share repurchases, invest behind the brand, maintain our investment grade rating.

Our next question comes from the line of Chris Carey with Wells Fargo Securities.

I just wanted to follow up on a couple of the prior answers. I guess, just one, I'm trying to understand what's embedded from an off-premise and on-premise standpoint for next year, it seems like, even if you get half of the on-premise back, you're looking for only low to mid [teen digitally] [ph] off-premise. And if on-premise comes back and full, off-premise basically, implies did not grow next year. And I guess what I'm trying to understand is, is that just a construct of difficult comps, in the off-premise? Or is there something else in play? Because clearly, commentary from the trade seems positive, Nielsen scanner was good even on, COVID comps, you get innovation coming through. So I'm just trying to understand that. And if I could sneak one and just on distributor inventory, you mentioned that inventory seemed back at the levels where you want to but at the same time, the trade would suggest that you're still trying to catch up. Can you just add a little bit more perspective around that?

Sure. So let's start with the inventory, our inventory levels came out last year at roughly a normal level. And we expect that it will stay roughly within that range, we have no major change in expectations about changing inventory. Relative to on-premise, remember, today, it's only 6% of our business as it currently stands, because of the significant decrease that's occurred based on COVID. So our expectation is, we're still going to see very robust growth in the off-premise, during this fiscal year. And as you've seen, we're consistent with our long-term growth algorithm that we've seen already stated March is off to an excellent start. So we're very optimistic about that algorithm. But with that said, it's also going to be difficult to exactly predict what will happen with the on-premise, because we've already seen as markets have opened and then closed a little bit and reopened, there's just a lot of variability that's hard to predict. Again, while there is an over expression in the off premise, that isn't the worst thing for us, our business is over skewed into that area. And we continue to expect robust growth within the off-premise channel for this for this fiscal year.

Thank you. Our next question comes from the line of Andrea Teixeira with JPMorgan.

So I wanted to just -- since we've covered a lot of grounds on beer, a bit on Wine and Spirits. What are you seeing with the reopening and also anything in terms of the switch between at home and on-premises, anything about promos and how you're going to position your focus brand?

Well, the biggest switching that we've seen is a significant increase in three tier ecommerce. As we said in my prepared remarks, we were quite pleased the fact that we got way ahead of that we were already investing against that capability. And we've accelerated that investment, which really in our view gives us a first mover advantage in this particular area. And you're seeing that change, I'm sure just as a shopper, we've all seen in-store a significant increase of Instacart, click and collect and some of those alternate ways of people buying considering how they used to buy. Direct to consumer is also up, we're pleased that we are performing at more than 2x the growth profile of DTC and we've also invested in that area, you'll recall earlier, last fiscal year, we bought Empathy, in part to radically improve our capabilities in the direct to consumer. And we are now leveraging that across many of our other brands. So we're very excited about those opportunities and that being an increasingly important part of the future of the Wine and Spirits business.

Our next question comes from the line of Steve Powers with DB.

Maybe just to round out and build on the capacity expansion discussion. You start early with Bryn, if I think just out beyond the fiscal '23 to '25 plans at Nava and Obregon. Is it fair to assume that additional expansion would take shape outside those two facilities? Or is there more room to expand those locations? And I guess in terms of those new locations, Bill, I think you mentioned exploration of future sites in the southeastern part of Mexico, which I think is consistent with preferences that have been expressed by the Mexican government. But just can you elaborate on your considerations there because if does play out, you'd be shipping long distances to get to the southern border of the states. And just thinking -- just want to think through how you're thinking about overcoming those dynamics just to preserve overall efficiency?

Well, let's put a little bow on the whole scenario about building out our capabilities. One of the things that we've been quite good at over the last several years, is running our plants at hyper efficiency. But I think one thing is learning from the pandemic. And I think any good business should have an element of learning when something hits you in the face and the pandemic certainly did that across many, many, many industries. One of the things we learned is, well, our efficiency was tremendous; we didn't have a lot of flexibility in the event that something didn't go well. And so one of the pieces that we are doing with this expansion is not only to meet the hyper growth that we have within our business, but also to create some increasing flexibility and some redundancy within our business. So that if you have weather challenges, or God forbid, we had another pandemic, but if you had weather challenges, or some other curveballs that occurred, it would have minimal to no impact on our ongoing supply. So that was very important. Relative to the southeast, we are considering that it's critically important to have water supply, it's actually a lot of shipping capabilities to some of the areas that we are looking into. So we're pretty confident that could very well be a future location for a brewery for us. Admittedly, that's a bit out, it takes two to four years to even get that process going and underway. But we're certainly evaluating it because we think it could be a long-term very viable solution for our business.

Our next question comes from the line of Laurent Grandet with Guggenheim.

So like to actually follow-up on Kevin's question on the seltzer category. So last year, when you launched Corona seltzer, you said you will spend about [$40 million] [ph] to use the brand. So a year later Corona seltzer is about 2.5% of market share in the last four weeks and SCV is down 60%. So what makes you believe that with two new SKUs, one being launched late in the season just in June, and spending about $50 million, which by the way, we'd be happy share of voice of last year, you will be more successful. And actually what success would look like for you in the fiscal year 2021 in seltzer?

Sure. Well, let's keep in mind that 60 million, that'll be the number one share of voice in the seltzer category during the critical season. So, our view is that's a very important and loud efforts against that particular sector. Secondly, again, you got to keep in mind, we produced everything we could possibly produce last year and we sold it. It was probably the most successful introduction the company's ever had with the corona hard seltzer. So we were very pleased with our position. What we did see is there remained a lot of opportunity, it remains a growing sector in the beer business, we only have one SKU expanding our footprint to meet more consumer needs and occasions and flavor profiles was going to be very important. And it also gives us the chance to get expanded reach and velocity at both warm shelf and in the cold call box. So we think having the number one share of voice in this particular category, coupled with our new introductions that are coming this year, we're very excited about what our share profile will look like as the year goes on.

I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Bill Newlands for closing remarks.

Thanks very much. And thank you all for joining the call today. I know it was a bit longer than some of them. As a result of our continued robust performance and financial discipline this past year, Constellation Brands achieved strong earnings growth generated record cash flow and significantly reduced our debt providing solid momentum as we head into fiscal 22. Our beer business has an exciting innovation lineup for the coming year and we expect our core portfolio to continue to generate robust growth as well as we've talked earlier today. In order to satisfy this robust consumer demand, we have plans in place to execute our next increment of capacity expansion and we are pleased to be in the position to continue investing in Mexico and enhancing our operational platform. Our Wine and Spirits premiumization strategy gained significant traction during this past fiscal year and the divestiture of several lower end wine brands positions this business for enhanced growth and profitability going forward. We look forward to speaking with all of you again in late June when we will share the results of our first quarter of our new fiscal year. Before then, we hope you'll choose some of our fine products for your spring celebrations, including Cinco Se Mayo and Memorial Day and let us all hope they are a bit more normal. Thanks again and have a great day.

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