Welcome to the Constellation Brands Fiscal Year Fourth Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the prepared remarks, the call will be opened for your questions. Instructions will be given at that time. I will now turn the call over to Patty Yahn-Urlaub, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Shannon. Good morning, everyone, and welcome to Constellation’s year-end fiscal 2019 conference call. I’m here this morning with Bill Newlands, our CEO; and David Klein, our CFO. As a reminder, reconciliations between the most directly comparable GAAP 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, and good morning, everyone, and welcome to our fiscal year 2019 year-end call. I’m sure you’ve all seen the announcement we made last evening, indicating that we have signed an agreement with Gallo, to sell a portion of our wine and spirit business for $1.7 billion. This strategic action is a result of our ongoing efforts to identify value-enhancing opportunities to better align our portfolio with consumer trade-up trends and to strengthen the financial profile of this business. Our remaining wine and spirits business will primarily consist of wines at a greater than $11 price point and will include fast-growing, high-margin power brands, like Kim Crawford, the number one Sauvignon Blanc in the U.S.; Meiomi, the number one U.S. Pinot Noir; SVEDKA Vodka, the number one imported vodka in the U.S. Meiomi, I already mentioned, the Prisoner, Robert Mondavi, Ruffino as well as iconic brands like Schrader. With the tighter focus on this powerful collection of consumer-loved brands, we will be able to accelerate growth while increasing brand awareness, consumer demand and household penetration. I’m confident that this optimized portfolio of wine and spirits brands will enable us to consistently deliver growth, exceeding the trends of the U.S. wine market, while migrating to an operating margin profile of 30%, a significant improvement from the 26% margin achieved for this business in fiscal 2019. In a minute, I’ll get into some of the exciting marketing initiatives we have planned for this year, but first, I’d like to highlight that several of these key brands achieved significant milestones and accomplishments this past year. We received Impact’s 2018 Hot Brand awards for Kim Crawford, Meiomi, Ruffino Prosecco and Robert Mondavi Private Selection. Our portfolio was also called out in the Beverage Information Group’s 2018 awards, where four of our brands…

Thanks, Bill, and good morning, everyone. In fiscal 2019, we grew net sales and comparable basis EPS by 7% and produced a three-year comparable basis EPS CAGR of 20%. In addition, we generated over $2.2 billion of operating cash flow, returned over $1 billion of cash to shareholders in dividends and share repurchases, and completed our incremental investments in Canopy Growth. Let’s look at full-year fiscal 2019 performance in more detail where I’ll generally focus on comparable basis financial results, starting with beer. Net sales grew 12%, primarily due to volume growth of 10% and favorable pricing. Depletion growth for the year came in at 9%, depletion growth was lower than shipment growth, primarily due to year-end timing as poor weather conditions, especially on the West Coast, muted our February depletion result, after experiencing strong depletion trends during the winter holiday months of December and January. As a result, distributor inventory levels finished the year higher than expected. Beer gross margin increased 10 basis points to 54.4% as favorability in pricing was essentially offset by higher COGS, which were primarily related to transportation cost headwinds. Given the challenging cost environment, I’m pleased with this result, as our operational cost and efficiency initiatives helped offset the impact of other cost increases, like depreciation. Marketing, as a percent of net sales, increased 30 basis points to 9.3%, reflecting incremental investment in support of successful innovation activities. This result came in 20 basis points lower than our previous 9.5% target as we tactically balanced our marketing investments. As a result of the above mentioned factors, operating margin decreased 20 basis points to 39.3%, which is best-in-class amongst North American brewers. Moving to wine and spirits. Shipment volumes were down 1% and net sales were flat, reflecting a slight pricing benefit. Shipment volume ran…

Thank you. [Operator Instructions] Our first question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Hey. Good morning, guys. So, clearly, a lot of areas in the beer depletion growth within fiscal Q4 with the great start that you mentioned, and then the weaker end of the quarter dampened, I guess literally by weather. So, I’d love to get more detail on if you think the softness in February was just weather-related or is there any other factors that may linger and any update on march, if you’re expecting sort of if you’re now back with that full -year trajectory that you’re expecting? And then, just second on Premier on the beer depletion front. I guess, what level of growth are you expecting out of that brand in fiscal 2020, and what gives you confidence that it can build and grow in year two? Thanks.

Sure. Yes. The entire scenario around the slight weakening at the end of the fourth quarter was driven by weather. The last two weeks in state of California, which as we all know is our biggest market, was literally wet, soaking wet. In fact, only 1% of the state of California today is in drought conditions and just a few years ago that number was in 90 plus range. So, we literally saw everything dampen in the last couple of weeks. You combine that with the polar vortex that we had in the northern tier of states, and it was a literal weather mess for the last couple of weeks of our fiscal. We are, though, very pleased with the start of our march and we feel that it’s consistent with the guidance that we just provided. Relative to your question on Premier, we expect Premier growth to be in the 30% to 45% range this coming year. So, we see significant upside in that brand beyond the results that we saw this past year. As most of you know, Premier virtually doubled what our expectations were in its first year and we expect that acceleration to continue.

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

Great, thanks. I wanted to talk a little bit about innovation. So, a lot of activity in the ABA space broadly. So, first, could you talk a little Refresca from test markets, is it largely incremental? But how big those FMBs when they launched as they hit -- they can hit really big, but sort of trajectory generally speaking for a lot of these brands has been year two or year three is a real struggle. So, as you look for planning out the future of Refresca, how do you manage that kind of boom-bust scenario and what are your general expectations for year one? Then secondarily, you mentioned Alera. So, how does that intersect with Corona Refresca in terms of positioning and marketing, knowing that’s still just in test market? Thanks.

Sure. Let me cover those. Refresca, in our test markets, had tremendous incrementality. In fact, it was even better than Premier was. So, we are very excited about the opportunity to put a strong recognized brand, like Corona packaged as Refresca into a separate area of the store, both on your retail shelves and in the cold box. It appeals to a much broader demographic than what our core beer business does. And we think it opens up a wonderful vehicle with the strength of the carefree lifestyle that Corona represents for our business. Alera, on the other hand is much more focused to Hispanic women, also multicultural women, but Hispanic women specifically. And that will be somewhat different than what we see as the demographic profile around Refresca. As you know Alera will only be in test market. We have a very defined approach to innovation where we test and learn in year one; and as we see success, we expand. Much like we did with Premier, we’re doing the same thing with Refresca and we will do that assessment with Alera and El Grito [ph] and things of that nature as well, so that we have a focused approach and disciplined approach to our innovation agenda.

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

Hi. This is Gerald Pascarelli on for Vivien. Thanks very much for taking the question. So, just kind of building on Refresca, the national rollout, obviously encouraging and bringing a sale to the market. As you guys look to build out your portfolio, are there any gaps that you see that you might want to invest in and kind of enter, not just across beer but across spirits as well?

Sure. We obviously do a lot in our -- through our Chief Growth Officer, and assessing what consumer opportunities and segments are available to us. That’s frankly how we got to Premier, that’s frankly how we got to Refresca and how we’ve gotten to Alera and other things that we are testing. We certainly see an opportunity in higher-end sessionable domestic beer. That’s why Western Standard is being tested in five western states this year. I personally am very excited about the opportunity around that. And it’s a bit of one of those, what I would describe as, category blurring. It is a lager that stand has time in high west barrels. So, it has the benefits and it’s really what we’re calling a Saloon Lager. It’s a great opportunity to leverage existing capabilities that we have but also put us into a new area as consumers continue to trade up. We’re also evaluating and will continue to evaluate new things. I used the example of our Bourbon Barrel-Aged wine programs, which as I mentioned in my remarks, have generated over 1 million cases from zero and under two years. So, we will continue to find those niche opportunities that we believe are big, impactful and sustainable, whether it’d be in our beer business or in our wine and spirits business.

Thank you. Our next question comes from Bonnie Herzog with Wells Fargo. Your line is open.

Thank you. Good morning. I actually had a question on your update -- or your FY2020 EPS guidance. It excludes the expected dilution from Canopy and I think it appears a bit low, so possibly conservative. So, I guess I was hoping you could touch on that and your level of conviction. Then, I was hoping to get a sense of your level of visibility with Canopy and if you have any sense of when equity earnings from Canopy will inflect positive. And then, I think earlier, you have mentioned that you were expecting that to happen by the end of this year. So, I just wanted to confirm that. And I also wanted to understand, you mentioned that you’re not going to include Canopy in your FY guidance. So, just wanted to confirm that that continues through this year, and how you think about it in the out years, such that Canopy is no longer a drag on earnings, will you possibly start to include it then? Thanks.

Yes. So, let me take it kind of in two parts. So, on our base level guidance, Bonnie, our guidance is really out there for beer, in line with our medium-term growth algorithm, in the 7 to 9% range kind of centering on that 39% operating margin which we think is aggressive but achievable, and again, in line with our medium-term expectations. For wine and spirits, once we have closed on our transaction, we have a base underlying business that we think, as a result of more focus from ourselves internally where we can apply our ability to drive connectivity with our consumers, better performance in our operations, maybe some pricing along the way that we’ll be able to deliver over time mid-single digit growth and achieve the 30% operating margins that Bill talked about. The headwind there really for FY20 for us is the stranded cost removal. And so, we’ve baked into our guidance between $35 million and $55 million of cost take out of the total of $130 million. Maybe the reason why we couldn’t be more aggressive with that number is related to timing in the year when the costs come out -- for some of the costs. And the fact that some of the costs will be coming out of COGS and COGS overhead which will take time to come through our P&L and won’t likely show up until next year. So, we think the story stays completely on our medium term guidance. We’d just have to work through some of the near-term work. Shifting to Canopy, we still are confident, as Bill called out that the Canopy business will be generating over $1 billion in run rate net sales at the end of their upcoming fiscal year. We expect to be able to see profitability…

Thank you. Our next question comes from Judy Hong from Goldman Sachs. Your line is open.

Thank you. Good morning. So, I guess, my first question is just one clarification. David, your comment about the mid-single digit sales growth in beer in Q1, can you just clarify how much under shipment you are expecting in Q1 specifically? And then, my broader question is really on your marketing investment. So, throughout fiscal 2019, it seems like that number has come down a little bit. You talked about tactically balancing the investment. I just want to get a little bit more color on what you meant by that. And then, when you look at fiscal 2020, obviously a lot of innovations and a lot of activities even on the core. So, I guess, I’m just wondering if you are looking to grow efficiencies in terms of marketing. Are you looking at that in sort of the different ways or is sort of the return you’re getting, perhaps sort of influencing how much you are spending on some of these brands at this point.

Okay. So, in terms of Q1, Judy, let me just kind of step back a little and talk about the ships and depletion growth rate in balances over the last couple of years. So, in FY18 depletes grew faster than ships and in FY19 ships grew faster than the depletes. We would expect in FY20 that we’ll end up with a year where the depletes grow little bit faster than ships, just as a general comment. And by the way, the actual volume deltas between these, really is in -- is small number of cases, call it 1 million or 2 million cases a year. And so, we just have different growth rates as a result of different numerators between ships and depletes. So, in the first quarter, we have an imbalance to unwind. That gets us to the mid single digits even while we are on target -- mid single digit growth in ships in the first quarter even while we are on target for our full-year depletion growth rate. So, again, just timing. And as Bill mentioned that imbalance really happened because of the way we plan out our shipments versus our depletions, happens within a 10-day to 2week sort of window. And the last couple of weeks, the February depletions just slowed down for reasons Bill described. Shifting to the marketing question, our philosophy really hasn’t changed. I would say that our marketing team headed by Jim Sabia does an outstanding job of both getting really good returns on our marketing investment while they’re squeezing as hard as they can on the dollars that are applied to non-working marketing. Our returns haven’t diminished. And so, we remain committed to driving the real value add marketing spend. What really happens is, we believe that we should be spending about 9.5% on marketing. And just as a result of timing of ad placement and that sort of thing, we ended up a little bit light in FY19 but we expect to be that in 9.5% range in FY20.

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

Hey, guys. Good morning, thanks. So, I guess, first, just -- I wanted to just confirm that you’re still holding to your CAGNY comments of roughly 10% EPS CAGR off the reported by 9.28 base that you just finished in 2019, just a clarification there. And my real question is on the wine sale, and how -- just a question on how you’re thinking about the valuation. On a trailing basis, it looks like the transaction was done at about 6 times EBITDA, which is more or less in line with some of your prior comments. I guess, I was a little surprised in that context with the magnitude of the strength of overheads, because on a contribution margin basis, it looks like Gallo is paying closer to 4 times. So, just a little bit more color around how you thought about that. And just one last, just clarification, the restructuring charge is in not in your outlook, but I’m assuming that any cash outlays related to that effort are in your free cash outlook and just hoping you could confirm that. Thanks.

Yes. So, I’ll start with that one because that’s easy. Yes, anticipated restructuring cash cost we have include in our cash outlook. However, as you highlighted, we excluded that from our numbers from a P&L standpoint. And so, now, I’ll go back to your first question. Yes. We are still on track for a 10% EPS growth. Remember that that guidance was really on a three to five-year basis. But our models, even as we roll our plan into it and have final FY19 numbers, we continue to support 10% EPS growth using FY19 as a base. So, now, let’s talk about the transaction value itself. So, I think we called out in our release some of the details about the contribution after marketing spend. If you look at the brands on a trailing basis, yes, you’re in the 6ish range, between 6 and 7 on a trailing basis. These brands are declining mid to high single digits. So, on forward basis, you’re more in line with 7 or slightly above 7. We also have a fair amount -- most of the can that we sold is branded can. We also have a couple of ancillary businesses such as our concentrate business and our polyphenolics business that were included in the sale as well because they actually reside at the Mission Bell facility. So, when we look at the transaction on a multiple basis, we're comfortable with it. When we look at the transaction on a DCF basis, we're comfortable with it. And on an accounting basis, we are comfortable as well. So, I think the important thing though, the takeaway from the transaction is the strategic merit for Constellation and being able to direct to their attention to these higher margin brands that remain in our portfolio. We believe that if we put the sort of thinking and maybe discipline that we've applied to our very-focused portfolio in beer to this portfolio, and wine and spirits, we can have some pretty impressive results. And that's really the point of the transaction. It's more the strategic merits than the economic merits, but we think it was a fair deal all around.

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

Just one quick point of clarification. Have you finished the sales in the wine and spirits business, is this what you had intended, is it done? And then, my real question, can you talk a little bit more about the potential for Pacifico, how you are sizing, how big that brand could be? And what you're seeing in terms of incrementality on that brand?

We view this as the optimization effort in its entirety, for your first question. The second question about Pacifico, we were very excited around Pacifico, it has grown double -- grew double digits this past year outside of the core California base as the advertising campaign that we had associated with it kicked in and worked very well. I think we're going to continue to see this brand be a double-digit growth driver for us going forward as it extends itself. As I said in my prepared remarks, we have extended some of our sponsorship opportunities with this brand, and we'll continue to do sort of the edgy ex-gain type of approaches that we think Pacifico has become known for, and we think it's got some continued success to come.

Thank you. Our next question comes from Andrea Teixeira with JP Morgan. Your line is open.

Hi. Thank you. Hello, everybody. So, my question is on beer. So Bill mentioned -- Bill, you mentioned that you expect a mere to have about 35% growth embedded in fiscal '20 guide. So what is the total assumption for the Corona family as a whole and for Modelo insight guidance?

Our expectations is that the Corona family after growing 7% during this past year will probably be in the mid-single-digit range for this coming year. Premier, we do expect, as I said earlier, to be a significant growth driver as part of that and we expect the overall brand family to be in the mid-single-digit range.

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

A quick housekeeping question for Dave and then one for Bill. So David, housekeeping after-tax proceeds in the $1.7 billion sale of wine assets and then whether you had any flexibility to buy back the stock as opposed to paying down debt? And then Bill for you on pricing, just given the protracted volume declines in the industry over long period of time, do you see any potential that the big domestic brewers become less rational at some point? How do you sort of handicap the possibility of that and potential implications for your portfolio? Thanks for both of those.

So, Kevin, we are not prepared to really talk about the after-tax proceeds, but it will be a fairly efficient transaction for us from that perspective. We do intend to repurchase stock, as we've said before as soon as we are comfortably within our targeted leverage ratio range of three to four times. We haven't built anything into our guidance. We'll see how the year unfolds, but we would very much like to be buying our stock at this point and we'll do so as quickly as we can.

Relative to your question on pricing, I mean, we continue to feel as we have that there is 1% to 2% pricing within our beer business on an ongoing basis. As you know our brands have strong consumer demand attached to those and we continue to feel that opportunity is going to be there for us as we continue into the foreseeable future. Relative to -- and I don't know if that was uniquely to beer I would say, we are putting some of the same capabilities on our remaining wine and spirit business that we have put on our beer through revenue management and we expect to see both mix and pricing benefits coming out of our wine and spirit business, which quite frankly we had been relatively unable to get in the recent past with our remaining portfolio, which we think is much more conducive to pricing and mix benefits.

Thank you. Our next question comes from Bryan Spillane with Bank of America. Your line is open.

Just two quick ones. David, do you've any sense on what depreciation and amortization is sort of ongoing asset divestitures?

I don't have that off the top of my head, but clearly that's something that we can provide at some point.

Thank you. Our next question comes from...

I think, Bryan -- sorry, she didn't give you chance for your second question.

Shannon, can you let Bryan back on the line, please?

Sure, one moment. Bryan, your line is open.

And just a question on beer margins, David, can you just walk through a little bit more color on some of the pressure points on cost, on headwinds and cost of goods. I guess like glass and labor inflation that type of thing? And just how fixed that is, as you're kind of through the course of this year, meaning is there up chance or how much volatility could there be in that cost basket?

So, Bryan, if I knew you we're going to ask a beer margin question, we wouldn't have got you back on line. So yes, I think I've said this before that we're seeing labor inflation in Mexico in the 4% to 6% range, we're seeing cost contractual cost of glass increasing in the 4% to 6% range, in particular, coming out of our joint venture, which is producing about 55% to 60% of the glass that we use. We expect to see transportation headwinds in likely the high single digit range. We do expect to have some benefit clearly from pricing. But in order to hold our gross margins, not only do we have to get benefits from pricing and possibly FX, we have to also deliver on productivity improvements, which the team is diligently working toward. So I think all in all, given the sorts of headwinds that we're seeing and the pricing environment that we're anticipating with this 1% to 2%, price increase activity we feel pretty good about being able to have flattish gross margins during the year.

Thank you. Our next question comes from Tim Ramey with Pivotal Research Group. Your line is open.

Good morning. About the wine portfolio in 2021 kind of skip ahead and take this transition year out, have you modeled what net revenue per case might look like versus the current portfolio? Can you help us to understand where that was and where that's going?

We are obviously running models as we speak about what we expect our remainco portfolio. As you would expect in a transaction of the size, the final dimension of what was going to be sold has just been recently completed. So, a lot of work is now being done on our forward looking wine piece. What I would say is this. I think, you should expect it to be significantly higher than what it has been, because as you know, the vast weighting of the portfolio that has been sold is that reflecting under $11 on a retail price basis. So, the overall average out-the-door price point for our remainco brands will be significantly higher than it was. And we'll be able to give you a more concrete answer to that as we get the work done.

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

Hi. Thanks for the question. Yes. The $0.75 dividend came in lower than at least our expectation. Are you thinking any differently about the, I guess the cadence or composition of the $4.5 billion return to shareholders over the next three years?

No, not at all. We feel really bullish about that, Sean, what -- we've been targeting a 30% payout rate at our business and as a result of the disposition of some of the wine brands as our net income came down are actual at that 30% number, our payout would have come down. We wanted to keep it in line with where it was last year. And quite honestly, show a slight increase, so that's what we offered up. It really is more in keeping on track at that 30% target, more than it is any kind of indication around comfort level with being able to return the $4.5 billion we remain absolutely committed to that.

Thank you. And our last question is from Brett Cooper with Consumer Edge. Your line is open.

Thanks. Two questions. What do you guys expect to get in terms of incremental placement, as you go into the spring with the new products that you're rolling out? And then as you're putting more products, more packages in there, how do you guys think about driving velocity growth for the total beer business and the importance of doing that?

Sure. As we've shared it at prior discussions, we believe that as our algorithm for growth that roughly 50% of our growth profile will come out of increased distribution with an increase of the innovation agenda to 30% and then various other miscellaneous things. So, we continue to feel that there remains a lot of opportunity in distribution as well as in formats like cans and draft and so forth that we alluded to earlier on the call. Relative to velocity, as you know, a lot of work has been done by our -- in our space management approach, that we have definitively proven improves the overall results in a beer section when our shopper first approach is undertaken. We are radically increasing the number of retailers that are engaged with this particular program, which we expect to have a significant and helpful velocity improvement, based on improving the overall space in the beer section. So, we believe with that particular element will be helpful not only for us but for the overall category, and we're excited about the opportunity around it.

Thank you. This concludes the question-and-answer session. I'd like to turn the call back over to Bill Newlands for closing remarks.

Great. Thanks very much, much appreciate all of you joining Patty, David and me today. Obviously, we're excited about our organic growth prospects for the coming year, and we're already hard at work, as you would expect to deliver these opportunities while continuing to invest in our brands and in our operations. We look forward to speaking with all of you again in late June, when we share the results of our first quarter for our new fiscal year. Before then, we certainly hope that you will choose some of our fine products for your spring celebrations including Cinco and Memorial Day weekend. Speaking of Cinco, look for us at the New York Stock Exchange, as we will officially kick off the summer selling season by ringing that closing bell. So, thanks again everyone, much appreciate your time. And have a good day.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.