Welcome to the Constellation Brands Q4 Full Year FY20 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, Josh. Good morning and welcome to Constellation's year-end fiscal ‘2020 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 any other 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 what we’ve done in 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. Let me add my welcome as well. Let me quickly frame up the key themes you're going to hear from Garth and me today. First, we delivered strong performance in fiscal ‘20, led by our beer business which generated double-digit operating income for the year with accelerating IRI trends as Q4 progressed, and that momentum has continued in the early stages of fiscal ‘21. We have ample brewing capacity to continue fueling the growth of our beer business in the medium term, and we're working with local authorities and government officials in Mexico to ensure we have ample long-term capacity as our business continues to grow and evolve. Second, our high-end power brands and successful new product launches fueled performance in fiscal ‘20 that drove accelerating depletion trends in Q4 for our wine and spirit business as our premiumization strategy continues to take hold. And third, our strong performance and fit financial discipline generated record cash flow, reduced our outstanding debt, and built solid momentum heading into fiscal ‘21. We'll talk in more detail about each of these areas, but before we go any further, I'd like to take a minute to address current circumstances related to the COVID-19 outbreak. First and foremost, our thoughts and prayers go out to those affected by this terrible virus and to the first responders and healthcare professionals working to help those in need. We sincerely hope the increased efforts to more fully contain this virus gain strong traction soon. With this in mind, we operate with a customer-focused mindset, a genuine concern for people and a desire to make a positive difference in our communities that is core to our DNA, even more important today as our industry and communities face substantial hardships. As such, constellation along with a number…

Thank you, Bill, and hello everyone. Fiscal ‘20 marked another great year for Constellation brands. We produced strong beer operating performance and cash flow results, while our wine and spirits power brand strategy continued to gain momentum as marketplace performance for these brands outpaced the overall U.S. wine and spirits category for fiscal ‘20. Specifically, in fiscal ‘20, we grew comparable basis diluted EPS, excluding Canopy equity earnings by 6%. In addition, we generated record operating cash flow of almost $2.6 billion and record free cash flow of $1.8 billion. We also reduced debt by more than $1.4 billion and came within our target leverage range. And we returned over $600 million of cash to shareholders in dividends and share repurchases. Before going into further detail on fiscal ‘20 results, I want to take a moment to discuss the rapidly changing market conditions due to the impact of COVID-19. To echo Bill, while the COVID-19 outbreak and situation is unprecedented and creates a lot of uncertainty and volatility, one thing remains clear, we will continue to be agile in the marketplace and actively manage and responsibly navigate our way through this crisis. Constellation is a strong cash flow generator, has ample liquidity, financial flexibility, and significant capacity under our $2 billion revolving credit facility. Additionally, we remain committed to maintaining our investment grade credit rating, which allows for flexible access to capital markets and more favorable rates. Furthermore, as Bill mentioned, we continue to work in collaboration with Gallo to satisfy all FTC obligations and both companies remain fully committed to finalizing this transaction. As such, upon close of the Gallo transaction, we expect to receive approximately $850 million in cash, which we plan to use for debt pay down to further advance and progress -- to further advance the…

[Operator Instructions] Our first question comes from Bonnie Herzog with Goldman Sachs.

So, I wanted to get some clarification on the Mexican government's decision, which determined that alcohol is non-essential. And I just wanted to make sure I understand what you're sharing with us today that if I heard you correctly, you are not suspending your production. But, what I'm hearing is, a lot of the other brewers are suspending. So, I just wanted to make sure I heard you correctly. And then, curious to hear how you see this situation evolving and maybe what your contingency plans are. You did share with us some of the, I think,, finished inventory that you have on hand to meet the U.S. demand. But I just kind of wanted to understand where you're at with that specific situation. Thanks.

Sure. So, as we stand today, we are currently operating. We also have, as I noted in my script, roughly 70 days through the system at either -- and that does not include at retail. That is purely that we have or our distributors have. So, we are fairly confident that we will see no disruption at retail from our operations, and we'll be able to meet consumer demand as it continues.

Our next question comes from Kaumil Gajrawala with Credit Suisse.

Bill, I think you mentioned that you're working through a series of options on what's going to happen with Mexicali. Obviously, we don't know which of those options you'll take. But, could you at least give some insight on what your options are from this stage?

We're not prepared to go through what the exact options are. What I would say is this. We had a very productive meeting with the President and his team. I think there is mutual agreement that we have been a strong player in Mexico for 30 plus years, and that that strong relationship is going to continue, and that we will have solutions for the long-term to make sure that we are able to meet the strong consumer demand that we continue to have for our brands. So, while I'm not prepared to talk about the specificity of that, we are very comfortable that our discussions will yield strong, medium and long-term benefits for our business.

Thank you. Our next question comes from Vivien Azer with Cowen. You may proceed with your question.

Thank you. Good morning. I was just hoping to the on-premise off-premise mix, Bill, very helpful in terms of contextualizing the revenue mix. But, Garth, I was wondering, whether you could offer any insight into the margin differential, given the presence of kegs in the on-premise. And then, as a follow-up to that, is it possible for you guys to move cans and bottles that are no longer being sold in the on-premise into the off-premise with the distributors? Thanks.

Thanks for the question, Vivien. So, to your first question, the margin differential, there's no margin differential for us between on and off-premise, because that goes through -- that all goes through distributors. So, same margin for us. As it relates to the question, can we move product out of the on-premise to the off-premise?

Let me touch on that Vivien. In many instances, distributors will pick up and redistribute supply where necessary or where a particular channel, like on-premise has effectively closed in many markets. So, yes, that in fact often does occur. Obviously, there's some format differences in terms of what people use in particular channels. But yes, it does occur. Just to reiterate a piece of your question as well. We are multiple points across both, beer, wine and spirits, less reliant in on-premise than the industry overall. So our business has been skewed historically and still is to the off-premise channel, which in an instance like this is very valuable. But, that's not to say, as you've heard, we haven't recognized the many challenges that our friends in the on-premise are having at moment. And we as a company and many of us as individuals have made significant contributions to help those who are in need at the moment and who have run into very challenging times, for those who are in the on-premise.

Thank you. Our next question comes from Bryan Spillane with Bank of America. You may proceed with your question.

Hey .Good morning, everyone. Garth, maybe just two quick modeling questions for you. One, in terms of the on, off-premise split for spirits and -- wine and spirit for the year. Could you give us a sense, in the fiscal '21 plan that was unaffected by COVID, what was the growth expectation in those two channels? What were you expecting [indiscernible] home versus growth at home? And then second, if you could give us a sense within both segments of just fixed and variable costs, as we kind of want to run through sensitivity to be able to get a rough sense of fixed and variable costs. Thank you.

Bryan, would you mind repeating the first part of that question around the margins? I just -- I didn't quite catch that.

So, the second part is just trying to get an understanding of what is fixed versus variable costs in both, the beer, and wine and spirits segments?

Yes. Okay. So, fixed versus variable cost is -- for both businesses is they skew highly towards variable, call it somewhere in the neighborhood of two-thirds variable and one-third fixed, maybe a little bit higher in some cases. On the beer side, the variable costs really are around freight and packaging. And in wine it's [freight] [ph] costs and packaging. Then, I believe the first part of your question was around the on-premise versus off-premise growth rates. And for on-premise growth rates, we were modeling in flat and for off-premise it was mid single digits.

Thank you. Our next question comes from Nik Modi with RBC Capital Markets. You may proceed with your question.

Thanks. Good morning, everyone. Bill, just a question on retail. I mean, we are hearing that resets are being pushed back -- resets are being pushed back. And I just wanted to gain an understanding of impacting you guys, because obviously there's a lot of new products coming in the marketplace. Corona Seltzer has gotten into the market but not at full distribution. So, if you could just give it some of the puts and takes in terms of how that's going, are you getting just more space of your A level SKUs in the place of some of the new products that were going to come out in the market? Any thoughts on that would be helpful.

Sure. You bet. We're seeing -- first of all, obviously there was -- particularly in March, there was a lot of heavy-up pantry loading, people buying particularly those brands where they have a lot of comfort. And of course many, many of our brands across beer, wine and spirits all fit into that. So, that was obviously very helpful. Keeping in mind that the Seltzer, much like Refresca did, goes into different space, and Seltzer has obviously been a very hot category. You see a lot of that product on the floor with us and with competitors as well. And we've already in just the first month, our team and our distributors have done an outstanding job of getting the product out to market. We've almost achieved 50%, ACV in the first month, which is again record speed. So, we think as time goes forward, you're going to continue to see core SKUs, critical SKUs being very important. And in fact, we have made some adjustments in our production footprint to make sure that those core SKUs are fully available throughout the supply chain because that's something that we think will occur in the near term, until consumers spend more time in stores. We've also seen a very rapid uptick in click, things like 3-tier e-commerce, click and collect. Our Company had its single biggest -- in wine, had our single biggest direct-to-consumer week we've ever had last week as consumers again found alternate ways to continue to buy our products. So, I think, just to summarize that, you're going to continue to see critical SKUs, be in stronger distribution positions. But we've been very pleased with our distributors’ ability to continue to get critical new products. Remember, most of the new things that we're doing this year are master brand extensions. So, they are consistent and part of strong brand families. That particularly at a time like this, I think is important because the consumer often during recession or recessionary type behavior, seeks out those core brands that they have a lot of personal comfort with. And again, our brands fortunately are part of that set.

Thank you. Our next question comes from Dara Mohsenian with Morgan Stanley. You may proceed with your question.

So, I wanted to ask more of a longer term question. In past cycles, we've seen some trade down occur in the beer category in a recessionary environment, including back in 2008, 2009. Could you just spend some time discussing how your product portfolio might be more or less at risk from a macro slowdown versus past cycles on a theoretical basis, sort of ex the COVID situation, due to much higher share level today, your brand mix has changed over time. So, just curious for your perspective on the degree of trade down risk or macro sensitivity may be versus what you see in the past cycles?

Yes. And I joked with Garth earlier today, I guess if you're old enough, you've been through a couple of these cycles. So, I have. What we expect to see is this. Brands are even more important at a time like this, because many people are seeing the opportunity -- and our category is one of those, for simple pleasures in life. Let's face it. The more people are sheltering in place, the more that they look for those small pleasures in life and our category is one of those that addresses that. But, you often see even stronger brand behavior that occurs during this time. So, let's take our Woodbridge wine brand example. We have seen significant pickup in the month of March for that brand because as I said in my script, it's a tried and true brand. People know it, they appreciate the quality for the price value relationship that exists there, and we've seen quite a bit of an uptick against that brand. We've seen the same thing with Kim Crawford, Meiomi and The Prisoner, brands that the consumer appreciates, and likes. Similarly, in beer, when you have a brand like Modelo that’s the number four brand now in the entire U.S. beer business, you've got a brand that has a great deal of trust, and you're seeing the trends that support that. Fortunately, Modelo and Corona are two of the most trusted brands in the consumers’ mind. And therefore, we feel very comfortable that we will actually get a disproportionate amount of benefit that occurs when people go to the more tried and true brands. That's what we saw in 2008, that's what we saw in the previous recession before that that those tried and true brands end up winning. And we think our brands are well-positioned across beer, wine and spirits to take advantage of that, just a little less experimentation during a recession environment, and that's why those core brands like ours will do very well.

Thank you. Our next question comes from Lauren Lieberman with Barclays. You may proceed with your question.

My question was just continuing to going back to the conversation about Mexico production. If we do, in fact, get to place where you need to curtail production, even though there's no [Technical Difficulty], how should we think about [Technical Difficulty] margins, right? So you shut down the plant for a month, I would think you get a good amount of pressure on margins, but does that even out, when you ramp back up as you come out of this? So, just kind of thinking about very, very short-term question, but just trying to understand how we should think about that net impact on profitability? Thanks.

Well, again, I'm going to repeat myself, but I hope you'll bear with me on it. We continue to operate in Mexico. And as long as that is a consistent statement and we expect that it will be, we wouldn't expect that there would be any significant issues around our margin structure. Obviously, a lot of things factor into that, not the least of which is, the peso and various other things that occur during times like this. But, I think the best way to think about it is, we have 70 plus days in the pipeline for our beer business and we expect to have no disruption in our ability to produce product and deliver it to retail.

Thank you. Our next question comes from Kevin Grundy with Jefferies. You may proceed with your question.

Thanks. Good morning, everyone.

Good morning.

Bill, I wanted to pick up on the on-premise, off-premise dynamic. I know, this is a difficult question to answer and I appreciate that you don't want to give guidance. But maybe even qualitatively, I think what a lot of investors are kind of wrestling with is how much of the unprecedented weakness in the on-premise channel is potentially going to be captured in the off-premise. And we've seen big pantry loading at this point, but really harder to make conclusions on what's going on in terms of how quickly consumers are going to -- will destock their pantries. So, any comments you have potentially on how much of the on-premise weakness will potentially be offset by the off-premise? Thank you.

Sure. You bet. Admittedly, this is somewhat unprecedented. So, I think we need to all be careful with specificity of answers because in other recessionary periods, while you saw decreases in the on-premise, you didn't have shutdown in the on-premise. So, it is a little different. With that said, channel shift is not unusual during recessionary times. And you're obviously seeing that now in part because the on-premise is in many markets is largely closed. Again, if you are in the 85% to 90% range for us and the off-premise to start with, the need to see some increase in channel shift is less significant than it is for someone who is more weighted to the on premise. Let's take March as an example. Admittedly, there was some pantry loading that occurred during that month. It more than made up -- the off-premise more than made up for the on-premise loss that occurred during that timeframe. It was an excellent month. But, we're always reticent to project that forward because you don't know what the consumption profile will be. I'll repeat what I said a minute ago, because I think it's a very true comment. People look for small pleasures in their life when you were in situations of recession. Multiply that by the fact that most of us are now sheltering in home. Those small pleasures -- our business is one of those small pleasures and I think that will be advantageous for our business going forward.

As long as around the on and off-premise question, let me just go back to clarify, Bryan's question around the growth rates related to on versus off-premise. Bryan, I gave you a bit of incomplete answer. So, what I gave you is zero on-premise growth and mid single digits. That was really for wine and spirits, as you think about their total sales being in that 2 to 4 range. On beer, total sales were targeting to be 8% to 10% on an organic basis. So, the on-premise would be in the sort of low to mid single digits and off-premise would be the remainder.

Our next question comes from Rob Ottenstein with Evercore.

I was just wondering, if you could talk a little bit about how you may be adjusting your marketing spend, and what sort of flexibility you have on your contracts. Obviously, you do a lot with ESPN, a lot of sports, UFC and a lot of these events just aren't going to happen. So, is there -- maybe there's some kind of breakout that you can give us in terms of what is fixed for this year or let's say the calendar year, next 12 months, and what areas you can possibly save or redirect?

This is also, as you would expect, a bit of a moving answer. Some things you've seen have been postponed. Therefore, we are not -- well, we may not spend it in the first quarter, we might well spend it when the events do occur, assuming they do. What we have done is that we have adjusted, Jim Sabia and his team in both wine spirits and in beer, have done a fair amount to move to more digital and social media efforts, which is actually good. That's very consistent with where the consumer is going anyway. So, we do have quite a bit of flexibility to move things around. When you have cancellations, let's take the NCAAs. That is a cancellation. So, choices are then made as to whether or not we reproportion that type of spend that we have into other formats, or we don't. Those decisions are ongoing. It’d be difficult to give you a definitive answer at this point in time around that. We will try to do that going forward, as more thoroughly understand what is canceled versus what is delayed. Until we have a better handle on that, it’d be very difficult. Suffice it to say, one of the traits that we've seen with our marketing group is to be very nimble, and they are being very nimble, adjusting on the fly to more digital and social environments from things where we can't do live sports, as you know.

Our next question comes from Andrea Teixeira with JP Morgan.

As a follow-up on the comments about the production in the Mexico in your discussions, Bill, with the Mexican government. In order to stay open, could you prove that your production facilities are safe enough to be made operational through the end of April? And then as a follow-up to the margin commentary, how much of your Mexican peso dominated costs are hedged at this point in light of the devaluation of the Mexican pesos?

So, Garth, I'll take the first half of that. Let me just tell you some of the things we've done. And we've done this in the wine and spirits as well as beer. And I think it's important. As I said, our employees are our number one priority. We are testing for temperature as people enter our facilities. We are keeping social distancing in our facilities to make sure that people are safe. We have changed how we run shifts in our plants to make sure there are not overlaps of shifts, in case there are any issues that occur with people's health. So, we are doing everything humanly possible to make sure that we continue to operate in a safe and effective manner within all of our operating facilities. The same is true of that in New Zealand and Italy as well. So, first and foremost, we are taking great care to make sure we are operating correctly. I think that will likely be respected by the government of Mexico. They have obvious concerns for their entire economy, as our country has great concerns for our economy, to make sure that people are being protected. And I think the kind of steps that we're taking to make sure we're protecting our people, we believe is best in class. We're keeping track of everything possible to ensure the safety of our employees, and that effort will continue. Garth, do you want to touch on the second piece?

Sure, on the hedging piece. So, as it relates to both, commodities and on currency, we're -- for the current fiscal year, fiscal '21, we are hedged on both fronts, in excess of 80%. We are using this period of time as we see some movements on commodities and in currency to layer in additional hedges for the next couple years. So, we could see some further benefits in coming fiscal years.

Thank you. Our next question comes from Laurent Grandet with Guggenheim. You may proceed with your question?

Yes. Good morning. Thanks for the opportunity. So, two follow-up questions actually. One, you said you will focus on the core brands going forward. And that makes sense. I’d like to understand if Corona Seltzer is considered as a core brand and being -- will be one of your focus points for the next two months. That's one question. And the second follow-up, sorry to come back on this, manufacturing in Mexico. But, this morning again one of your competitors said that on Sunday April 5th Grupo Modelo will suspend beer production and distribution operations. So, as you've got 70 days of inventory, obviously you want to beat kind of goodwill with the Mexican government, I mean, on the Mexicali and brewery subset. So, why -- and there is something, I don't know understand it. Why are you -- have you decided to go against the government decision in that specific subject? Thank you.

So, let's tackle your first question, which is seltzer. Certainly, our Corona brand family, since we approached 150 million cases of product in fiscal '20 is one of the critical things and critical brands that we have within our portfolio. The seltzer, as you know, is one of the fastest growing sub segments within the alcohol beverage business, as well. Therefore, the combination of the great Corona branding, plus the hot category of seltzer is a wonderful combination. And we're expecting that that's going to be important part of our success story for fiscal '21. I do need to be very, very clear with you. We are not doing anything against what the government of Mexico is suggesting. We certainly -- our company is known for respecting, respectful of the laws and approaches of any company -- any country in which we operate. And that certainly will continue. I have no comment regarding a competitor and what they are choosing to do or not choosing to do. I personally would suggest you ask them. What I would say is today, currently, we are operating and we will continue to do what's appropriate under the restrictions that apply or don't apply in any company -- in any country in which we operate.

Thank you. Our next question comes from Bill Kirk with MKM Partners. You may proceed with your question.

Thank you, everyone. So, on the 70 days of inventory in the system, how much of that is in Mexico? I guess, that'll show up in a 10-K, but how much of it is in Mexico and how much of that is actually allowed to leave Mexico and into the United States? Is that allowed to come over the border right now?

So, to answer your question, the vast majority of that answers in the United States between either inventory at our distributors or in our DCs. So, the vast majority of it I would say, in excess of 80% of that is already in the United States.

Thank you. Our next question comes from Bill Chappell with SunTrust. You may proceed with your question.

I just want to go back to Mexicali. And I understand you can't talk about where it goes from here. But can you maybe give us an update on how much money has been put into it? And then, any kind of color on how you've got this far down the path and we got to this stage?

Yes. I'll take the first part of that. To-date, we have spent approximately a $700 million in Mexicali.

So, what I would say is that there are a lot of decisions that have been made as time has gone on. As you know, there have been changes in government during the time that this facility has been started. What I would say is this. We've been operating in Mexico for 30 years. It has been a tremendous partnership with the people of Mexico and with the government of Mexico and with the local States within Mexico. We remain extremely confident in our long-term ability to meet the consumer needs in the United States for the critical brands of Modelo, Corona, Pacifico, and other related brands. So, I don't feel that it does anyone any good to micromanage the approach to the situation. What I would say is we're going to have a very solid solution for our long-term prospects and we certainly appreciate the government's engagement with us on that topic.

Thank you. Our next question comes from Sean King with UBS. You may proceed with your question.

Hi. Thanks for the question. I got a wine sale question. Is it safe to say that the escalating COVID-related work stoppages and disruptions could have an impact on the, I guess, achievability of the new timing, or is that already baked into your new outlook?

So, thank you for the question. We think that the COVID situation is baked into the current timeline. That being said, I don't know how much more disruption COVID-19 could have in terms of the government's ability to work. But I can tell you right now that the FTC continues to be actively engaged in our conversations and in the review of this process. And, we’ve factored all of that into the timeline that we provided.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Bill Newlands for any further remarks.

I'd just like to thank everyone for joining our call today, particularly in these challenging times. I believe we've done an excellent job of building vital momentum in fiscal '20 as we head into what admittedly will be a volatile start to our new fiscal year. Through our strategic initiatives and priorities, we are positioning Constellation for sustained long-term success and will continue to quickly adapt to the rapidly changing market dynamics as we navigate through fiscal ‘21. As the environment evolves, and more factors become known over the next few months, we hope to be able to provide much more clarity on the prospects for our business for the year in which we are in. I'd like to thank you all again for joining the call. And I hope you and your loved ones remain healthy and safe during this unprecedented time. Thank you.

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