Welcome to
the Constellation Brands Third Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants have been placed on 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 Jan Urlap, Senior Vice President of Investor Relations.
Please go ahead.
Thanks, Liz. Good morning, and welcome to Constellation's Q3 2020 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 atwww.cbrands.com. Please also 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 1 question per person, which will help us to end our call on time. Thanks in advance and now your cell.
Thank you, Patty. Good morning and Happy New Year to everyone. I certainly hope you enjoy the holidays and have the opportunity to include some of our awesome Constellation products in your celebrations with your family and friends. The end of every year is a time of reflection for me and this year is no exception. As I reflect on 2019, I'm reminded that we're not only ending a certain fiscal year, but a dynamic decade at Constellation Brands.
Since 2010, Constellation has been on an incredible journey marked by strong financial performance and notable business milestones. Over the last 10 years, we significantly increased the value of our stock and produced double digit growth in sales, operating income and operating cash flow. As a matter of fact, the closing price of Constellation stock on December 31, 2009 was just more than $15 Fast forward to December 31, 2019, we closed at almost 190. This incredible increase of more than 1,000 percent over the last 10 years made Constellation the best performing stock in the S and P 500 Consumer Staples Index during this timeframe. One of the biggest drivers of our success was the game changing beer acquisition that was executed almost halfway through the last decade.
It enabled Constellation to buy a group of Modelo brands in the United States, where we successfully built these brands for many years, while positioning ourselves for this transformational opportunity. At that time, this deal allowed us to double the sales of our company, diversify our profit stream, significantly enhance our margin, earnings and free cash flow, while providing new avenues for growth. Since then, our beer business has made significant contribution to the overall sales, profit and cash flow results for our business and continues to be a powerhouse for growth as the number one brewer and seller of imported beer in the U. S. Market.
Calendar 2019 marked its 10th consecutive year of volume growth for Constellation Beer Business and solidified our position as the leader in the high end of the U. S. Beer business. These trends were driven by Corona Extra, Modelo Especial's explosive growth and our successful innovation initiatives. In 2010, the Modelo Especial brand depleted approximately 35,000,000 cases and then went on to achieve double digit growth in every single year of the past decade finishing 2019 at more than 140,000,000 cases and there's more to come.
In our most recent Q3, this powerhouse brand posted depletion growth of almost 15% with double digit growth in 46 of the 50 states, while solidifying its position as the number 4 beer brand in the U. S. Market. Corona Extra, which is the number 7 beer brand in the U. S.
Beer category, grew from approximately 90,000,000 cases in 2010 to more than 110,000,000 cases in 2019 and is one of the few top selling brands in the U. S. To grow this past decade. From a quarterly perspective, the Corona brand family grew nearly 7% in IRI channels, driven by the continued strength of our Corona Premier and Corona Refresca innovations as well as the renewed growth of Corona Extra. Corona Premier continues to gain distribution, especially in the on premise and delivered double digit depletion growth in 35 of the 50 states during the quarter.
Corona Refresca was a top 10 growth contributor to the year to the U. S. High end gear category during the Q3. And finally, let's not forget Pacifico, which achieved double digit depletion growth of nearly 16% and remained a top share gainer within the U. S.
Import segment. We're excited also about our plans for the launch of Corona Hard Seltzer this spring, which will help to further strengthen our position as the leader in the high end of the U. S. Beer segment. Our launch strategy includes the largest ever single brand investment for our portfolio of more than 100 excuse me, more than $40,000,000 in marketing to support this intro.
We've already started to take orders from distributors and have received incredibly positive feedback from retailers who are excited about the prospects of Corona Seltzer and have already incorporated our newest portfolio addition into their shelf set programming plans for the spring selling season. As we've discussed, Corona Hard Seltzer will be introduced in 4 flavors, including tropical lime, mango, cherry and blackberry lime. Corona carries unbelievably strong brand equity as the number one most loved brand among both Hispanic and total population drinkers aged 21 to 54. And that's why we've decided to put the Corona brand name on our new seltzer. And of course, the refreshment characteristics of seltzers perfectly matches with Corona's refreshment DNA.
There's been a lot of debate about the seltzer trend and where seltzers are sourcing their growth within the total beverage alcohol category. Our research shows that Seltzer is taking share across the board from beer, wine and spirits. While a significant amount of this growth is sourced from the beer category, it is primarily coming from domestic premiums, crafts and FMBs with minimal interaction of seltzer consumption with import brands. In addition, we're seeing increased overall consumption from those seltzer drinkers and new consumers who are entering the TBA space through their interaction with seltzers. As an aside, the trends that you've seen for Constellation's beer business in this week's 4 week IRI data covering the month of December are related to our recent annual price increase, specifically in the California market, which briefly decreases features and promotions.
The impact of these price increases are normal and typically short term in nature. Overall, we closed out the month of December with depletion growth over our business in the high single digit range of our year to date trends. Moving now to wine and spirits. I'm pleased that we've been able to execute a revised agreement with Galvo, which paves the way for accelerated growth and margin performance for our wine and spirit business going forward. In addition, we believe it addresses the FTC concerns by excluding the sparkling wine, brandy, dessert wines and concentrate categories from the original transaction.
We're already actively pursuing other opportunities to divest most, if not all brands in these categories as we believe this is the best path to optimize our portfolio going forward. To be clear, the FTC needs to provide final approval of our revised agreement with Gallo once we have finalized all transactions, including the proposed divestitures, which we expect to occur by our fiscal year end. We have also entered into a separate but related agreement with Gallo to divest our NABLO wine brand. This fits with Gallo's portfolio strategy and allows them to expand in the New Zealand wine category without affecting our long term goals and strategy or our opportunity in the New Zealand wine category in the U. S.
At the greater than $11 price point. This transaction is expected to close in the first half of fiscal twenty twenty one. Despite the delay in timing and revisions to the transaction, I'd like to remind everyone that we have benefited from almost an entire year of additional cash flow from the divested brands by the time the transaction closes, which has contributed to our debt reduction and share buyback activities. During the last decade, our team has created significant value by transforming and simplifying our wine and spirits portfolio through the rationalization and divestiture of assets in an effort to premiumize business, which is the right strategy to enhance our wine and spirit growth and financial profile going forward. This premiumization strategy is taking hold in the marketplace as our power brands continue to outpace our competitors and take market share at the price points that matter in the higher end.
In fact, our power brands at the greater than $11 retail price point grew nearly 9% in IRI channels during the Q3, including brands like Meiomi, which has more than doubled its volume with a CAGR of nearly 30% since its acquisition in 2015 Kim Crawford, which is another gem within our Power brand portfolio was the number one selling wine on wine.com this past year and has consistently outperformed its competitors, posting a 20% volume CAGR in IRI channels over the last decade. As we progress through fiscal 2020, we continue to show steady upward progression in revenue trends for our power brands and expect mid single digit sales growth for this collection of brands
in the
Q4. Innovation and new product development are also critical to our success for the remainder of the year and we feel we are well positioned to drive these initiatives to the finish line. We've already had great success with the launch of Robert Mondavi Private Selection Buttery Chardonnay and Woodbridge Ready to Drink packs, which while gaining traction across all channels is doing especially well in the convenience channel, a channel growing at 2 times the rate of the total U. S. Wine market.
Both Woodbridge and Robert Mondavi Private Selection, which represent the most significant volume within the Robert Mondavi brand franchise are outperforming in their respective price segments driven by marketing investments that we've recently made. We recently extended our highly successful barrel aged program with the introduction of RMPS rye barrel aged Red Blend. As a reminder, we've sold more than 1,000,000 cases of barrel aged products since the inception of this program nearly 2 years ago, which helped to revive the Robert Mondavi Private Selection brand, while also becoming the foundation for some of our other successful barrel aged innovations like Cooper and Thief. We're also building on the success of wine in a can, where consumers are seeking products that are convenient, ready to drink and sold in environmentally friendly packaging. These trends have helped to fuel the growth of Crafters Union, which is the number one growth driver in canned wine over the last 12 weeks.
We plan to build on the momentum of this brand with the launch Crafters Union Bubbles during the Q4. Later this month, we will be releasing the Prisoner Unshackled, the newest addition to the Prisoner collection of brands in Cabernet, Red Blend and Rose. We expect these brands to strengthen our ability to compete at the fast growing $25 retail price point. On the spirits front, SPEDKA vodka continues to significantly outpace the vodka category in IRI channels, driven by increased distribution within the core portfolio as well as the more recent introduction of the Rose flavor. During the quarter, one of our most successful venture investments Nelson's Greenbrier launched its first Tennessee Whiskey product.
This Tennessee Whiskey is based on Charles Nelson's original recipe dating back to 18/60 and it's the first time it's been bottled since prohibition shut down the distillery in 190 9. This is another milestone for Nelson's Greenbrier as they continue to innovate and leverage the success they've already achieved. Overall, our U. S. Wine and spirits business has executed changes that have resulted in a sharpened focus on consumer preferred trends related to premiumization, innovation and brand building.
As a result, we have benefited from ongoing consumer trade off trends, positive mix and great consumer response to our new product introductions in the marketplace. Before moving on to Canopy Growth, I'd like to remind everyone that the core business activities I just highlighted are driving an increase in our EPS guidance for fiscal 2020. Now a few comments about our investment in Canopy Growth, which continues to have the leading market share in Canada and to be the leader in global cannabis sales. We remain bullish on the Canadian cannabis market as the conversion of the illicit market to the legal market continues to strengthen. Per Statistics Canada, in 2018, 23% of cannabis consumers obtained cannabis from the legal market, while in 2019 that number significantly improved to almost 50%.
In addition, retail store sales have increased significantly in every province during the last 12 months. We expect further retail sales increases as products like vape, edibles and beverages flow through the retail stores in Canada now that Rec 2.0 products have been released. We couldn't be more excited to see these products in the marketplace as Canopy now will have the ability to showcase their best in class brands and intellectual property. We are also excited to see the progress the Ontario government has made to satisfy the demand of consumers by agreeing to allow more retail store openings beginning in early March. During Canopy's 2nd quarter, they established leading recreational market share across Canada, including a noteworthy share of over 35% in Alberta, Canada's most developed provincial recreational market.
In the U. S. In early December, the Canopy team introduced 1st and Free, a line of branded hemp derived CBD products. These products are offered in a variety of formats including soft gels, oil drops and creams and are currently available for sale via e commerce on the 1st and Free website. Overall, we're pleased with the progress of the Canopy team and what they've accomplished in the last few months.
As most of you know, in less than a week, my colleague David Klein will assume the role of CEO at Canopy Growth, where I believe he will bring more focus and discipline to that business in executing their strategic priorities. We have also appointed Garth Hankison as Constellation's new CFO, who will help lead our company through its next phase of growth. David has been a significant contributor to our organization during his time here. His accomplishments at Constellation are numerous and I wish him great success at Canopy where I will continue to collaborate with him through our Canopy Board interactions. During his time in Constellation, David built an incredibly talented finance organization, which is why we're expecting a seamless transition to Garth as he assumes his new role.
Garth brings a wealth of experience to this critical leadership position, most recently serving as Senior Vice President for our Corporate Development Activities, where he's led the company's efforts in financial planning, reporting and analysis as well as mergers, acquisitions and our venture initiatives. Many of you will have the opportunity to meet Garth in the coming weeks, and I would like to publicly congratulate him and welcome him to our executive management team. In closing, we've accomplished a great deal on this exciting journey through the last decade, but I'm equally excited and optimistic about the next 10 years as well. We have a great product portfolio and a terrific industry. We have the right strategy and an energized management team in place to execute our vision for the future.
With every step we take, we are positioning Constellation for sustained long term success as we continue to premiumize
the portfolio,
a strategy which has paid huge dividends over the years. I'm confident in the continuation of strong results for our beer business and the excellent prospects for our wine and spirits business going forward. Number 2, our powerful cash generation capability and our desire to quickly delever and return $4,500,000,000 in cash to shareholders makes Constellation a compelling investment for the future. We remain steadfast in this commitment and I believe our significant debt reduction to date coupled with our 2nd quarter share repurchases are a testament to this commitment. We have a relentless consumer obsessed focus on brands and categories that are high growth, high margin and we're working continuously to build a solid and sustainable foundation of operational excellence, financial strength and innovation.
We plan to execute in these areas throughout the remainder of the year and well into the coming decade. With that, I'd like to turn the call over to my colleague, David, who will review the financial results of our Q3. David?
Good morning, everyone, and thank you, Bill. It's truly been a pleasure working with you and all of the wonderful people at Constellation. My time as CFO has been exciting as well as personally and professionally fulfilling. I'm leaving the company in good hands with Garth as the new CFO. Throughout his 18 years at Constellation, Garth has been a significant contributor to our premiumization and growth efforts, while developing an in-depth understanding of the company's business operations and finance activities.
Going forward, we will continue to collaborate on key initiatives as they relate to Constellation's investment in Canopy Growth. I'll certainly miss my interactions with our investors and the sell side analysts who cover Constellation. Over the years, I valued your ideas, suggestions and feedback, and I thank you for your ongoing support. I look forward to continuing to interact with many of you in my new role at Canopy Growth. Now moving to the financials.
In Q3, we continued to produce strong beer operating performance and cash flow results. Our Wine and Spirits power brand strategy is gaining momentum as marketplace performance for these brands continues to outpace the overall category. We also recently closed the Black Velvet transaction, revised the original wine and spirits deal with Gallo, including a separate but related agreement to divest the Novella wine brand and signed an agreement with Kings and Convicts Brewing to divest Ballast Point. Before we jump into the financial results, I'd like to provide an update on guidance. We've increased and narrowed our full year comparable basis diluted EPS range to $9.45 to $9.55 Our increased guidance range primarily reflects the updated Gallo transactions and related timing as well as strong beer operating performance.
This range excludes Canopy equity earnings, which better reflects the underlying performance of our core business. We strongly urge investors to focus on this metric as the Canopy equity earnings impact is non cash. Our increased FY 2020 guidance now assumes the revised wine and spirits transaction and the Ballast Point transaction closed by the end of fiscal 2020. We expect the Nove Loa transaction to close in the first half of fiscal 2021. As Bill mentioned, we believe efforts to divest remaining brands from the original transaction along with incremental cash flow generated from the delay in timing of the transaction, will get us relatively close to the value outlined in our original divestiture agreement with Gallo.
This assumes we realize the full value of the earnout. After completing these transformation activities, we believe the Wine and Spirits business will be positioned to produce mid single digit top line growth while migrating to an operating margin of 30% over time. Now let's review Q3 performance and our full year outlook 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 nearly 7%. The reversal of the year end fiscal 2019 over shipment was minimal in Q3 and came in lower than previously anticipated.
We expect the remainder of the shipment timing benefit from fiscal 2019 to reverse in Q4. Depletion volume growth for our import portfolio showed continued strength growing nearly 8%. As Bill mentioned, this was mostly driven by continued strong performance of Modelo Especial. When including an unfavorable impact from Ballast Point, total beer depletions were up 7.3%. In Q4, we pick up the additional selling day that we lost in Q2, which will help us achieve high single digit depletion growth in Q4.
Beer operating margins increased 200 basis points to 39.3%. Benefits from pricing in COGS were partially offset by higher marketing in SG and A. COGS benefits were largely driven by FX, a one time contractor cost reimbursement and an inventory build ahead of our SAP S4HANA implementation. The contractor cost recovery and the inventory build helped us outperform our margin expectations for the quarter. I'm pleased to report that the first phase of our SAP S4HANA implementation for our beer operations in Mexico was completed ahead of schedule and with excellent execution by the team.
This is an important milestone after more than a year of planning, designing and training for this important initiative. We'll continue to update you on upcoming milestones of our S4 HANA implementation. Marketing as a percent of net sales increased 30 basis points to 11%. Marketing spend for the quarter slightly below expectations. We expect fiscal 2020 marketing as a percent of net sales to be in the 9.5% to 10% range.
For fiscal 2020, we now expect net sales growth of 7% to 8%. This includes 1% to 2 percent of pricing within our Mexican portfolio. As a result of the planned reversal of fiscal 2019 shipment timing benefit, we expect full year fiscal 2020 depletion volume growth to land about 1 percentage point ahead of shipment volume growth. We also expect fiscal 2020 operating income growth of 8% to 9% and our full year operating margin to be in the range of 39.5% to 40%, which is an improvement compared to the previous year and prior FY 2020 guidance of 39.3%. As we move toward next year, we're excited about our plans to launch Corona Heart Seltzer at the beginning of fiscal 2021.
There will be some investment in production costs as we ramp up production for this major innovation in addition to the significant marketing investment Bill mentioned earlier. Moving to wine and spirits. Net sales declined 10% on shipments that were down 14%. Depletions declined 6%. Q3 results outperformed our previously communicated expectations, primarily due to a shipment timing benefit.
Our 3rd quarter wine and spirits results were somewhat impacted by a shift in Thanksgiving holiday timing with retailer and distributor replenishment shifting to the 4th quarter. Last year, there was 1 full week post Thanksgiving to fully replenish. In addition to the shift of the Thanksgiving holiday, we continue to be impacted by transition activities with distributors and lapped some lower quality sales incentives and pricing activities that we've decided not to repeat in order to better align with our strategy for the business going forward. Wine and Spirits operating margin decreased 80 basis points to 26.2 percent as mix benefits were more than offset by and higher SG and A as a percent of net sales. Higher COGS mostly reflect great cost headwinds.
The higher SG and A as a percent of net sales included marketing investments driven by the continued support of the Power Brands, including new product development initiatives and Meiomi advertising in the quarter. We now expect fiscal 2020 Wine and Spirits net sales and operating income to decline 8% to 10%. Our updated guidance reflects the revised transaction close assumptions discussed earlier. As part of the wine and spirits transactions, we remain committed to our $130,000,000 stranded cost reduction plan, which we now expect to be realized over the fiscal 2021 to fiscal 2022 time frame. I remain confident that the Wine and Spirits transformation strategy is working.
Our brand performance continues to benefit from our increased focus and marketing investments. In fiscal 2020, we're running a bit short of our mid single digit power brand depletion growth target, largely due to the activities I mentioned earlier. However, Power Brands are driving mix benefits and gaining share in IRI channels and you should expect to see a sequential improvement in depletion trends in Q4. When you include these mix benefits, we believe our portfolio post divestitures is on track to achieve our longer term targets, including mid single digit net sales growth, while migrating to an operating margin of
30%. Fiscal year
to date corporate expenses came in at 149,000,000 up slightly versus Q3 year to date last year. We now expect full year corporate expenses to approximate $230,000,000 reflecting an increase for insurance related costs, higher incentive compensation and the ramped IT spend, which includes our S4H implementation and other digital enablement activities. We expect our SG and A look to decrease by the end of fiscal '22 once our digital enablement activities are fully implemented when we can eliminate redundant IT costs and realize the benefits of the new platform. In Q3, comparable basis interest expense increased 11%. This primarily reflects additional interest expense related to the funding of our incremental Canopy Growth investment in fiscal in November of 2018.
Fiscal 2020 interest expense is now expected to approximately $430,000,000 Our Q3 comparable basis effective tax rate excluding Canopy equity earnings came in at 17.5% versus 14.1% last year. This increase primarily reflects lower stock based compensation benefits. We now expect our full year fiscal 2020 comparable effective tax rate excluding Canopy equity earnings to approximate 18%. The 1 percentage point rate increase versus our guidance is primarily due to the impact of lower stock based compensation benefits and higher expense for miscellaneous tax items than we previously forecasted. I'd like to note that we expect our full year cash tax rate to be in the mid to high single digit range.
Let's move to free cash flow, which we define as net cash provided by operating activities less CapEx, we generated free cash flow of $1,500,000,000 for the 1st 9 months of fiscal 2020. This represents an impressive 14% increase. Free cash flow improvement primarily reflects strong operating cash flow and lower CapEx. We now expect full year CapEx spend of $700,000,000 to $800,000,000 versus our original guidance of $800,000,000 to $900,000,000 This includes approximately $560,000,000 of CapEx for our Mexico beer operations expansion, including investments in the Overgone and Mexicali breweries as well as the 5th glass furnace at the Nava Glass plant. We expect fiscal 2020 operating cash flow to be in the range of $2,200,000,000 to 2,400,000,000 and free cash flow to be in the range of $1,500,000,000 to $1,600,000,000 Now let's discuss several impacts that were excluded from Q3 comparable basis results.
Last quarter, we noted that we expected to recognize a loss in Q3 on the write down of assets held for sale related to our transaction with Gallo. The actual write down of $340,000,000 was largely driven by the $250,000,000 of contingent consideration associated with the revised transaction price. Accounting rules govern our election to record the contingent consideration when it's determined to be realizable. We also recognized $547,000,000 of net income tax benefit resulting from the remeasurement of our deferred tax assets in connection with tax reform in Switzerland. Moving to Canopy.
The total pre tax net gain recognized since our initial Canopy investment in November 2017 is $223,000,000 In Q3, we recognized a $534,000,000 decrease in the fair value of the Canopy investment. As a reminder, Constellation's original warrants with Canopy have an exercise price of CAD 12.98 98 per share and will expire on May 1, 2020, and represent less than $200,000,000 in consideration. In addition, the tranche 8 warrants expire on November 1, 2023. The company will evaluate exercise of each of these warrants immediately prior to expiration and does not plan to make additional cash contribution to Canopy beyond the potential exercise of these warrants. I'd like to close with some comments on capital allocation.
1st and foremost, as Bill mentioned, Constellation remains committed to its goal of returning $4,500,000,000 to shareholders in dividends and share repurchases over the fiscal 2020 to fiscal 2022 timeframe. I'm pleased to report that in Q3, we returned to our targeted leverage ratio range. This was at the early end of 12 to 18 month timeframe we committed to when we closed on the Canopy investment. This includes non cash Canopy related equity earnings. Continued deleveraging driven by the company's strong cash flow generation capabilities should provide the flexibility to be opportunistic and increase share repurchases as we move into fiscal 2021 2022.
As I reflect on my time as CFO of Constellation, I'm proud to have been in this role during a time of significant value creation. I remain bullish about Constellation's prospects and believe the company has the right strategy in place to produce top tier performance for many years to come. I look forward to creating value for Canopy shareholders, including Constellation in my new role at Canopy Growth. With that, Bill and I are happy to take your questions.
Our first question comes from the line of Kamil Gajrawala with Credit Suisse. Your line is now open.
Hey, good afternoon everybody. David, congratulations.
I guess
Question on seltzer. It's obviously going to be an incredibly competitive category for calendar 2020. What's going to make your proposition different? And how are you thinking about marketing spend and investment given that it seems like it's really building up to be a pretty significantly competitive category this summer? And then second separately, on your deleverage comments, are you happy to keep the levels at where they are now and everything incremental from here?
Is it buyback to manage to those levels? Or should we be thinking about it differently? Thank you.
Sure. I'll take the first half of that. We're very excited about Corona Hard Seltzer in part just because of the refreshment DNA that's attached to the Corona brand. We obviously have done a lot of product testing, a lot of product research to make sure that we have a product that meets or exceeds the other key players in the marketplace. So we're quite comfortable with the sheer quality of the product that we're going to bring to the table.
And as usual, our crack marketing department will bring outstanding consumer communications as they always do around our critical brands. The last thing I would say is, we still believe that there's a lot of upside in the total size of the Seltzer business. It was roughly 60,000,000 cases in 2019 And we believe there could be a 2 to 3x opportunity going forward. And we expect to take a significant share of that opportunity. Yes.
Komal, on the buybacks,
our targeted range is 3 to 4 times. Our preference would be at the midpoint of the range. But now that we're back in the range, we'll definitely look to be opportunistic as we move forward.
Our next question comes from the line of Nik Modi with RBC Capital Markets. Your line is now open.
Yes, thanks. Good morning, everyone. David, let me second the congratulations on your new opportunity. So the question is really around, if I can go back to capital allocation. Phil, obviously a lot of investors for years have been concerned about Constellation's capital allocation decision and the last few months have been tough, right, with Ballast Point, with Canopy value declines.
So maybe just kind of give us a state of the union from your perspective, kind of what you've learned as an organization from Ballast Point in particular, and how you think about just capital deployment outside of obviously the buyback stuff that you guys have already committed to, just to give people a sense of kind of how you're thinking about it philosophically as you kind of go into year 2 of being CEO of this company?
Sure. I think one of the things, and David just pointed it out, we remain as committed as we always have to getting ourselves into the range. And as he said, we're pleased that we have gotten into the top end of our range earlier than we had anticipated. We have a tremendous amount of opportunity with our core existing franchises. You have seen and you will continue to see a relentless focus on the critical categories and brands that we see as high margin, high growth opportunities and we will invest to take significant share within those.
Where we see issues and problems, much like you point out with Ballast Point or the low end of our line business, we are prepared to take action to make sure we are focused on where the consumer is going rather than where they have been. And those are two examples of that. I think what that will do will that will allow us to continue to focus all of our attention on the premiumization play both in the beer business and the wine and spirit business, so that we continue to be the leader. And when someone sits in this chair 10 years from now, they'll be able tell the same story that I just told, which is a great decade of tremendous growth for our company and for our shareholders.
Our next question comes from the line of Vivien Azer with Cowen. Your line is now open.
Hi, good morning. I'd also echo my congrats to you, David. I really look forward to working with you as part of my coverage of Canopy. So Bill, I just wanted to follow-up on your commentary around the dislocation that you think Hard Seltzer is driving based on the consumer insights you offered. So if you think it's kind of broad based and it's under indexing to imported beer, how are you thinking not asking for guidance for fiscal 2021, but are you expecting that dynamic to shift given the introduction of Corona Hard Seltzer?
And perhaps to put it more specifically, how much cannibalization might you guys be expecting in terms of the interaction between your core Corona offerings and that hard proposition? Thank
you. Well, the thing that excites us, Deb, about the Corona seltzer introduction is that, first of all, the category appears to continue to have real strength and that there's a lot of growth potential in it. As I said a moment ago, I think there's probably 2x to 3x where it sits today, which creates tremendous opportunity for those of us who are going to play in the category. I think our expectation would be that we would have a similar type of cannibalization profile that we saw around Premier, which is as you might recall was in the 70% to 75% range incremental. So this we think this is a great opportunity for us.
But I would also urge all of you on the call to keep in mind, as big and as exciting as this launch will be, Modelo Especial is likely to be our single biggest grower next year. This continues to be a brand that is absolutely on fire. It grew 15% in the most recent period and it had 30 plus consecutive years of double digit growth. This is a brand that's going to be and remain a significant foundational play for this company for many, many years to come.
Our next question comes from the line of Kevin Grundy with Jefferies. Your line is now open.
Hey, good morning, everyone. And David, I want to extend my congratulations as well. I wanted to pick up on the beer guidance. So Bill, you sounded pretty positive despite some of the slowing that we saw on the Nielsen data. I think you attributed to pricing.
But as I look at the midpoint, if my math is right, it implies about 7.5% organic sales growth. The year over year comp is easier. You do get an additional selling day. Can you talk about maybe what you're seeing in the business? Corona looks a little bit light.
Premier looks like it's decelerated a bit. Is there anything that gives you cause a bit of pause here with the base portfolio in terms of some deceleration? And then given that as we look at the 7% to 9% longer term growth that you've expressed confidence in over the intermediate term and the fact that we had to tweak it modestly lower this year, should that be at all concerning for investors looking out to next year? Thank you.
Sure. No, I think you should be very positive about our expectations around our core business. We were particularly excited that the Corona Extra business returned and renewed in growth in the Q3. As I stated, certainly, the price increases that we took, particularly in the state of California, gave us a very brief factor that you saw in the most recent IRI data. But we do not expect that to have any impact on our longer term trends.
And in fact, as I alluded to earlier, our December depletion growth profile overall was in the high single digit range, which is ahead of our year to date trends. So we remain very, very bullish. And when you think about things like Modelo and Pacifico and the addition of our Excelsior business, I think you're going to see a continued strong delivery against our business in the range that we had said we would do and that we will deliver for this year.
Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Your line is now open.
Hey, good morning guys. Also wanted to extend my congrats to David. Just two quick clarifications on the beer business. Bill, you mentioned that high single digit depletion growth in December. I think that included an extra day though.
So ex the extra day, what type of rate are you trending at? And then David, you mentioned the contract and inventory timing benefited margins in the quarter. Can you give us a sense of how much that was? And those are more clarifications. So if you're giving the benefit of additional question, you guys did comment on the fabulous track record of beer volume growth over the last decade and kudos for that, obviously an amazing track record.
But if you do look at the year to date depletion growth of 7%, it's below that 9% to 10% pace from the prior few years. I know it's close to what you guys originally expected, but just at a high level taking a step back, just curious for your perspective on if the slowdown this fiscal year, that's just more of a natural maturation as you move to larger case volumes, if we should expect sort of a gradual slowdown in depletion over time on larger numbers or if there were more discrete issues driving the sequential slowdown this year, and this is not sort of the start of a moderation trend as you look out longer term? Thanks.
So relative to the depletion trends for the Q4, we expect fully expect that our depletion trends for the Q4 are going to be in the high single digit range, much like December presented itself. Look, we remain extremely bullish about the long range prospects for our beer business. We are significantly, significantly outperforming the overall category as well as the high end of the category as well. And that's before we introduce our Seltzer product, which will compete in an area that admittedly has gotten very big, very fast. So this will provide us with, I think, renewed opportunity for growth.
And we're very excited about the prospects for that going into the new fiscal year. Obviously, as a reminder, we will give fiscal guidance during our next call. So we'll refrain from doing that at this point in time. But certainly, we're very excited not only about the Q4 and finishing our year very strongly, but for next year as well.
Yes. Darren, on the contractor settlement and even in the S-four HANA kind of production build that we did in Q3 that gave us a benefit. These are all a few to several $1,000,000 each. And if you think about last year, if you rewind to last year, I think in Q3, we had an issue with glass production in the quarter. So we get these impacts every single quarter that are, call it, dollars 3,000,000 to $7,000,000 each.
And sometimes they kind of aggregate in our favor, sometimes they go against us. But if you look at our total operating margins in say FY 2018, we're at 39.5 percent. FY 2019, we're at 39.3 percent. And this year, we're saying we're going to be between 39.5% to 40%. I think by the time you get to the end of the year, all these little timing nets go away and we end up in a pretty consistent margin range in this business, which I'll point out maybe for the last time is by far our best in class in North American brew.
You can come back and say that again later if you want.
Our next question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open.
Hi, good morning everyone. Good
morning. Good morning.
Just a couple of questions. One on beer. Bill, talked about the long term outlook. It looks like you're still confident in high single digit. Can you talk about Modelo in particular?
Like, still growing double digit, but some people are a little bit concerned about the decel that we saw recently. Can you talk about what is in the pipeline from a Modelo perspective as you look to continue this momentum? And then on wine, David, good to hear 30% operating margin outlook still intact for that business. Can you talk about the timeline of the stranded cost as they come out post the divestiture of
the lower priced rents? Thanks. Sure. I'd say and I've said this many times, I think Modelo remains the single largest opportunity for this company. It is just beginning to crack into the general market.
It has had a very, very strong run with its core Hispanic base and continues to grow with that audience. And as many of you know, we do have a great tailwind with the growth of the Hispanic consumer in the United States, which will continue to give us a tailwind for a fair amount of time. But as you know, our growth profile within the non Hispanic consumer is tremendous. So we see a remaining tremendous upside in MEDELA. Going to your question then about what else, we will be introducing the Modelito product, so a different size.
We have size opportunities. And as you all know, we have done nothing truly to innovate around Modelo outside of the gelato business, which has done extremely well for us. So we think Modelo is going to continue to be a juggernaut well into the next decade and will likely be the single largest growth product and brand for us going forward.
Yes. And on the topic of stranded costs, it's a bit of the story we told at the beginning of this year almost on a 1 year delay where we're saying it's $130,000,000 stranded costs without getting into specifics that will be included when we provide guidance next quarter. You can assume that a quarter to a third of those costs come out in FY 2021, the rest in FY 2020 2 because we have the flow through COGS to hit before it hits our P and L. So like FY 2023 will be the first real clean year where we can take a look at that seeing all the stranded costs coming up or being out.
Our next question comes from the line of Lauren Lieberman with Barclays. Your line is now open.
Great. Thanks. Good morning. So I was hoping you could talk a little bit about the increased marketing spend on corona because last quarter, right, you took the opportunity to say, look, beer profitability is coming in a bit ahead of plan. We'll put some extra money behind Corona.
It clearly has been some reactions, but at the same time, the marketing spend on beer came in a little bit light of plan. So if you can just give us some color on why the spend was a little bit lighter, kind of plans looking forward and what in that marketing mix was particularly had a particularly attractive return would be interesting. Thanks.
Sure. Yes. I'll comment on the kind of timing of spend. It really is it's a timing issue. We expect that we will finish the year, as I said, in the 9.5% to 10% range of net sales.
At the same time, we expect that we will see an uptick in our marketing spend in Q4 this year versus Q4 last year. Some of that having to do with incremental investment behind our core brands, but also some of it having to do with basically production costs around the seltzer marketing campaign that Bill outlined earlier. So I think for marketing for us, it really is just a function of timing as we still are focused on that 9.5% to 10% range.
Our next question comes from the line of Robert Ottenstein with Evercore ISI. Your line is now open.
Great. Thank you very much.
A couple of just kind of follow-up clarifications. First, it looks to us that the price mix was about 1.6%. Can you give us a sense of what that would have been without Ballast Point? And then second, following up on some of the comments on Corona Seltzer. You made some comments that it's being well received by retailers.
Can you give us a sense of how you see the shelf sets coming out next year? Where Corona Seltzer is going to be positioned on the shelf versus beer versus other White Claw. And then if you look at the White Claw trends, they've been unbelievable, right? I mean, they've and they're actually increasing share. I think the latest share is something like 67%, up from 60%.
What gives you the confidence that this is actually a Hard Seltzer segment
as opposed to a
White Claw segment and that there's room for a lot of new competitors? Thank you.
Sure. So let's talk about the sets and where we expect to see seltzer. Seltzer is in all likelihood not going to take space from our core beer franchise. The consumer views it as something different. The retailer is viewing it as something different, whether it's on the shelf or in the cold box.
So we think there will be a distinct differentiation of product location versus just cannibalizing existing shelf space. That's the way it's been so far. We believe that will continue. Just The answer to your question regarding whether this is a category or a brand, I think we solved that answer for ourselves with research. Our consumer and the seltzer consumer is very interested in the idea of Corona hard seltzer in part because of what I said earlier, which is the whole refreshment DNA around the core Corona brand.
The strength of Corona in that whole refreshment, relaxation, beach experience is perfect for this. As we said earlier, the seltzer consumer has generally been increasing their overall consumption of the total alcoholic beverage category, which I think speaks well to the overall category of seltzers going forward and the strength of the Corona brand name together with the investment that we're going to make against it, we're quite bullish on it. And Robert on
the price mix question, it might be if we were just looking at imports, it might be 10 basis points, 15 basis points, but not additional
to that, but not much more.
Our next question comes from the line of Steve Powers with Deutsche Bank. Your line is now open.
Thanks and congratulations from me too, David. Maybe coming at the beer outlook from another direction, just coming back and coming into calendar 2019 at the beer event in Chicago, you guys were pretty adamant that beer margins would trend flattish more or less in line with where you finished last year, call it 39.5% as you said. But now we're 3 quarters into fiscal 2020, beer margins have exceeded expectations 3 quarters in a row, raising the full year outlook. And arguably 4Q would seem to have potential upside embedded in it as well, acknowledging some of the 3Q benefits that could reverse. I guess as you step back, does any of that change your go forward thinking as to where beer margins could ultimately aspire to, especially without the recent drag from Ballast?
I mean, is there I guess is there structural upside to your prior outlook? Or do you attribute the recent strength just to some of those timing nets that you had mentioned earlier, David?
So I'll start with that and David can add as he would like. During that discussion, one of the things we were quite clear about relative to our guidance is there will be some years where things go our way. Costs are better, FX is better, certain things just simply are favorable to what we would view as sustainable long term proposition around our margin structure. This year has been one of those and we're certainly happy to take it. But it's also realistic to recognize that those things can go either way.
As I said, this year it has gone in our favor and we continue to work as you would expect on our operational footprint to make sure we are extracting every ounce of opportunity as it relates to cost. But this year, we're on our way, and we're quite pleased that it has. David, you want to
Yes. Steve, I would say that we are pleased. I'm convinced we have some of the best operations people on the planet in order to produce the results that we do on a consistent basis. A note of caution though is that and I think we've been clear about this is that when we are in the launch here from a Seltzer standpoint, we know that we're going to be driving towards the high end of our marketing spend as a percent of SG and A range. We also know, as I said in my script, that there are going to be some drag on gross margins as we come out of the gate on seltzers.
However, we've also said that we believe over time, seltzers don't have to be a drag and we don't expect them to be a drag over time, right? So I think you're going to see puts and takes in our business, as Bill outlined. But I'm actually pretty pleased with the consistency of margins in that, as I said, 39.5 percent -ish range for 3 years in a row.
I would just add on to David's comments that much like our beer margin structure is best of class, I think you would expect that our seltzer margin structure as we get to critical mass will also be best in class versus the competition.
Our next question comes from the line of Andrea Teixeira with JPMorgan. Your line is now open.
Hi, good morning. David, congratulations also on your promotion and thank you for your work as a CFO of Constellation. So my question is a follow-up on the comment about increased investment on the seltzer marketing. Should we budget part of it already in the 4th quarter and also increasing early Q1 in fiscal 2021? Because I understand the launch is early fiscal year in March, early March.
So relative to the typical launches or the typical innovation that happens around Cinco de Mayo. And a clarification, if I will, in shifting gears a little bit for wine and spirits. So the implied 4th quarter wine and spirits profit guidance, it's down so far it's down 13% year to date. So the full year is down 8% to 10%, which implies that you have an improved performance in the Q4. So if you can elaborate on that as well.
Thank you.
Yes. So on marketing spend, yes, we expect that our spend will be up on a year over year basis in Q4. And that's the you can kind of calculate back to get into that 9.5% to 10% range. As I said, that's
most likely to be seltzer
production marketing production costs. And then we think that the spend will be a little bit weighted to the Q1 and certainly the first half of the year while we're just getting the product on the shelf, we want to make sure that we're driving a lot of consumer activity at that point in time.
Our next question comes from the line of Bill Kirk with MKM Partners. Your line is now open.
Thank you. So I have a quick question on cannabis. Obviously, you've worked with Canopy on the beverage launch up in Canada. And as I understand it, acreage can bring Canopy's IP technology, including that beverage technology to the U. S.
So I guess my question is, would you want acreage in the U. S. To start making the products that you developed with Canopy?
Yes. I think the best thing that so it's not our decision. Let me just be clear about that. It's Acreage's decision. But to the extent that we've developed outstanding products for use in the Canadian market, if acreage can bring those to the U.
S. And they're comfortable to do so, we think that that's a home run all around like throughout our cannabis ecosystem, if you will. That's a benefit to Canopy. That's a benefit to acreage. And some of our Constellation team has been been helpful in making sure that the products are meeting the expectations of the consumer in the marketplace.
Our next question comes from the line of Sean King with UBS. Your line is now open.
Hi, thanks. You called out Refresca as a growth driver, but it still looks pretty small in the tracked channels. Where do you stand in terms of, I guess, the national rollout strategy? And how do you expect Seltzer to interact with Refresca, I guess, on the shelf? Yes, we're very pleased with the Rhopresskaya.
It has outperformed what our expectations were and we're going to continue to invest behind it to make sure it continues to grow. As I said a little earlier, we don't expect the shelf interaction to get in the way between our seltzer Refresca businesses. We think they serve different needs, although admittedly there is some interaction between an F and B consumer and a seltzer consumer. But we think there is room for both of those products in the market and we're looking forward to seeing continued acceleration of both the Refresca franchise as well as the Hard Seltzer when it comes out.
Our next question comes from the line of Bill Chappell with SunTrust. Your line is now open.
Thank you so much. And David, congratulations. Two quick ones. Any kind of guidance on what the pace of versus the dollar impacted beer margins this quarter? Or is that more to come in future quarters?
And then also in terms of kind of what you talked about marketing spend and following Andreas' question, is this similar when we look at the Q1 of 2021 to what we saw 18 months ago with the rollout of Premier in terms of pulling forward marketing, more spending, very front end loaded or is it more balanced throughout the year? Yes. So on FX, and again, we did some volatility in FX. And our team, I think, does a nice job of trying to lock in bumps in the peso, which gives us a little tailwind on especially given the volatility between the USD and the peso over the last couple of years, right? So we think that in the quarter that was about 60 basis points of impact on margins.
And then, yes, I think you can think
about it a lot
like Premier. So kind of the spread throughout the quarters of the year should look just like the Premier launch.
Our next question comes from the line of Laurent Grandet with Guggenheim. Your line is now open.
Yes. Good morning, Bill and David. I'd like to have a question on corona premiere and familir, specifically regarding Familiar when looking at the Nielsen data over the last few periods, we are seeing an accelerated decline. So is it deliberate choice as it seems and you keep mentioning it, I mean, now you're anchoring Corona in the refreshment space that Samir may not fit and to provide probably more space for Modelo to grow? And then on Corona Premier, growth is plateauing.
It seems like it's getting to the size of Corona Light. So is there any sense you can revamp that ramp and reaccelerate the growth? Or are you satisfied with the current performance of Corona Premier? So those two ones. Thank you.
So relative to Familiar. Familiar continues to do very well, particularly in the core Hispanic community, which is where it was originally targeted. So we continue to think that familiar is going to be an important part, particularly with the Hispanic consumer in very specific demographics and very specific geographic regional opportunities. Relative to Premier, Premier continues to do very nicely and we're excited about it. Obviously, there has been some impact.
The cannibalization that has occurred has been impacting Light as you would expect to some degree. But Premier also opens up a bunch of new consumers to our franchise as well who are looking more for that low cart positioning that Premier presents. So we remain very bullish on the future for Premier and we're going to continue to invest against that franchise going forward. And again, it goes right back to we are always pleased when more and more consumers spend more and more dollars against the overall Corona franchise. People believe in this franchise.
It is the number one, as I said before, number one most trusted brand with both Hispanic and non Hispanic consumers 21 to 54. And that gives us the chance to continue to leverage new introductions like Refresca, Premier and Hard Seltzer, which is obviously coming in this coming fiscal year. So we remain very bullish on the overall Corona franchise. And I think the fact that, that franchise was one of the few growth brand franchises over the course of the last decade shows the real longevity for that brand.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Bill Newlands for closing remarks.
Well, thanks very much. And I get that you remiss, David, if I didn't say that all the congratulations you just received are well deserved. We're certainly going to miss you on this side, but we're happy to get our 37% value going forward. Thank you everyone for joining our call today. Before closing, I'd like to reiterate what a powerful decade this has been for Constellation.
Our results over the past 10 years are a testament to the dynamic strategic efforts made by our strong management team. Through our current initiatives and priorities, we are positioning this company for sustained long term success and therefore we are just as excited and optimistic that the next 10 years will continue the momentum into the Q4 as well as a strong finish to this fiscal year. As a reminder, during our next quarterly call, as I said earlier, we will be providing guidance for the upcoming fiscal year. So thanks again everyone for joining the call. I wish you all a safe, happy and prosperous New Year and new decade.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.