Constellation Brands, Inc. (STZ) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Dara Mohsenian, Morgan Stanley's beverage, household products and food analyst. I'm very pleased to welcome Constellation Brands to our Global Consumer and Retail Conference. Before we begin, I have to note, we do have disclosures on Morgan Stanley's research website at www.morganstanley.com\researchdisclosures. If you have any questions, you can reach out to your Morgan Stanley sales representative. So Constellation has a very strong track record over the last decade of delivering strong beer growth behind its Mexican import portfolio, including the Modelo Especial and Corona brands as well as shareholder value. And after some COVID-related pressure in the first half of fiscal 2021, it looks like trends are starting to reaccelerate with the recently reintroduced full year beer top line guidance from early November. So joining us today, we have Garth Hankinson, Constellation Brands CFO; and Patty Yahn-Urlaub, Head of Investor Relations. Thanks very much for joining us today, guys.

Hey, Dara. Thanks for having us.

So just to start with, Garth, maybe we can start on the beer top line outlook. You reintroduced the 7% to 9% beer top line growth guidance for the fiscal year in early November, in line with your medium-term target. Can you talk about what gave you confidence to reintroduce guidance at that point? Obviously, it's still a pretty volatile COVID environment. So just wanted to get a sense of what gave you the confidence to come out with guidance at that point?

Sure thing, Dara. So first of all, I'd say that throughout the year, we always said that we would provide guidance once we have greater certainty on how we thought the year was going to play out, what our production environment was going to look like coming out of Mexico and the impact of the out of stocks that we experienced over the summer. So as we moved through the summer months and in the fall and with about 3/4 of the year behind us, we feel we have that clarity right now around the performance of the brands, on the performance of the business. And so that's what gave us confidence in order to go ahead and give guidance here a couple of weeks ago, as you said earlier.

Okay. And the 7% to 9% growth, does that include the Ballast Point divestiture? Or that's sort of organic if you exclude Ballast Point? How should we think about that?

So in the 7% to 9% range, you should think about that including Ballast Point, we'll be closer to the low end of that range. But inclusive -- or exclusive of Ballast Point, we'll be at the upper end of the range.

Okay. All right. That makes sense. And I guess can you just give us a little more color on depletion growth, the assumptions embedded in that top line growth guidance? Obviously, you're expecting a pretty big shipment gap versus depletions in the back half as production levels rebuild from Mexico. So maybe just give us a little color on the depletion side or the gap between shipments and depletions?

Yes. So as you noted, right, there's going to be a big difference in depletions versus shipments in the first half of the year versus second half of the year. At this point, I'd say we're not really prepared to provide kind of a depletion outlook for the full year. What we are comfortable is providing the net sales and operating income guidance that we provided in that 7% to 9%. The reason that we're not so comfortable just yet providing guidance on depletions is it's a bit of a -- it's been a bit of a moving target as we've gone through the summer season, gotten past our production-related slowdown in Mexico and got -- and moving through the out-of-stock situation. And so over the course of the last several months, you've actually seen that our depletions have actually accelerated. And you can even see that in the IRI data, right, with consumer takeaway accelerating. And we're now outpacing the beer category on a 4-week basis by 4.6%, and on a 12-week basis at 3.1%. So just given the fact that consumer takeaway has accelerated and given the fact that we're -- just now, we're in day 2 of quarter-end close, we're just not in a good position to provide guidance on depletions.

Right. Okay. That makes sense. And obviously, you guys have indicated that September was better than the year-to-date pace or the 5% in the first half of the year. I guess as you think about the business going forward and just risk from any increased on-premise restrictions, is that a significant risk point for your business? Or are you confident that if there is incremental on-premise weakness, as we've been sort of hearing about from industry sources here in the near term, that a lot of that would shift to off-premise? How do you sort of think about just the level of risk from on-premise and a slowdown to your overall business if trends do slow down in that channel in the next few months here with greater restrictions?

Sure. And this even kind of goes back to the first question you asked around our confidence to provide guidance when we did. What we're seeing, right, is that so far, per capita consumption really hasn't changed throughout the year, regardless of whether or not the on-premise has been kind of open or closed. And so we think that, that kind of -- will continue as we move forward. So consumers will continue to consume. They'll just do it through different occasions. They'll buy through different channels. And really, I think that this has been illustrated throughout the year back early in the spring when COVID kind of settled in, the disruption to the on-premise was pretty extreme and so much down 80%, 90% on a year-over-year basis, but you saw big increases in the off-premise. And then through the summer, as some states opened back up or relaxed some of their on-premise restrictions, you saw that the on-premise came back. And in those states, the off-premise trends start to moderate. And then as we moved through the fall, then the reverse happened. Those states either put in additional restrictions or closed. And again, there, you saw the on-premise then start to slow down again. But again, a corresponding uptick in the off-premise. So for us, we expect that, that's going to continue, at least through the end of our fiscal year. And just as a reminder, we might have less exposure to that than some of our competitors. Only about 15% of our business, whether it's in beer, wine or spirits, goes through on-premise channels.

Right. Okay. And then in terms of catching up from a shipment perspective versus depletions, given some of the production issues in the first half of the year, when do you expect to return to normal inventory levels? Is that something that comes in fiscal Q4? Are you already sort of back there, given productions ramp back up? How should we think about a return to normalized type of inventory levels?

Sure. On our last earnings call in early October, we had indicated that we thought that we'd be back to sort of more historical levels across our network, so to speak, by the end of our Q3. Quite honestly, it's looking like that's going to be pushed into Q4. And that really is really just associated with the increase in consumer takeaway that we're seeing and the increase in depletions. Has nothing to do, not related at all to any supply chain interruptions or anything like that. It really just is reflective of the increase in consumer takeaway, which, quite honestly, is a good position to be in. That being said, while it will take us a little longer to get to those normalized inventory levels, we will certainly be in good shape by the end of our fiscal year and moving into the next summer selling season.

Right. Okay. And the -- if you look at your beer market share trends, obviously, this summer, you moved to slight declines versus those consistent historical share gains as production has come back. You're seeing pretty strong market share recovery and up significantly year-over-year in the most recent period. So just sort of checking in on your view on market share. Was the deterioration this summer entirely related to out of stocks? Do you have visibility to return to historical share gains going forward? How do you sort of think about the market share environment for Constellation products at this point?

Yes. So as you know, some of the market share weakness maybe that we had experienced in the summer months really was driven by 2 factors, one of which was the out-of-stock situation, and then another was just the growth of the emerging seltzer category. I do think it's important to note that even over the summer, while we are experiencing some of the out-of-stock headwinds that we had, that when you exclude self-serve from the market, we were actually gaining share in our 5 highest volume states. So we continue to perform actually very well, even in the face of out of stocks. And so as we continue to refill our pipeline and now that we've got Corona Hard Seltzer in the market, we think that we're going to continue to be a share gainer in the high end and be a leader in the high end.

Okay. That's helpful. And as you think about shelf space in this environment, historically, you guys have been able to gain significant shelf space, obviously, with limited product availability. We've seen some shelf space declines for you guys in recent periods on a year-over-year basis. How much visibility do you have that you can really regain all that back as production ramps up? Is there any kind of lingering impact on shelf space you think that would continue medium to long term from some of the short-term dynamics?

Yes. We're definitely not seeing that there's going to be any lingering or permanent loss of shelf space due to the out-of-stock situation. As we prioritized our SKUs, we prioritized our production around our fastest-moving SKUs, we did experience some out of stocks, but those out of stocks tended to be short term in nature. We're able to sort of get the shelves back full in pretty short order. A majority of our retailers kind of flexed our out-of-stock SKUs with other SKUs that they had in the stock. And so in many instances, we had shelf space waiting for us. That being said, as you noted, we did lose a little bit of shelf space. But our team is out there and they're gaining that back as we speak. And we don't really see that there's any permanent loss here. I think it's also important to note that we weren't alone in this -- in that regard. The entire beer category had -- was having out-of-stock issues for a variety of reasons. And so it is pretty commonplace. And again, we think we're going to be able to go back and get any lost space in short order.

Okay. And then maybe moving past the short-term dynamics and COVID impact. Your Shoppers First initiative has been an initiative that's helped drive shelf space for you guys over the last few years. Can you talk about that program, if it continues to ramp up? Are you sort of seeing incremental benefits there, or most of the benefits already been realized? And how that sort of impacted your partnership with retailers?

So over the last several years, we've made good strides. We made really good strides with our Shopper-First Shelf initiative. And for anyone on the call who doesn't know what that is, I mean, that's us working with our retail partners to show them through real hard data how they can benefit by focusing their shelf space and managing their shelf space, which is their most precious sort of asset, to optimize their performance by prioritizing those SKUs that move the fastest and provide the highest profitability. And so we've made really good progress on that in terms of both basic and effective distribution. We think that there's still room to go to improve upon that. And in some respects, we think that going through what we've just experienced with COVID can be a catalyst for further gains there as consumers have entered into the retail stores, looking to find their tried and true brands, wanting to be able to find those easily and get in and out of the store. So we think that as we move into doing some shelf resets here in the fall, that didn't take place in the spring, and then next spring, as we go through the more typical shelf set season, that we're going to be able to continue to grow our shelf share.

Right. Okay. And then just longer term, as we think about your implied beer volume guided in that mid- to high single-digit range, as a company, you've moved to much higher market share levels over the last 5 to 10 years here. Theoretically, maybe after a bump up post-COVID, distribution opportunities aren't as significant. Perhaps you see more competition from hard seltzers moving into the beer space, understanding they're also taking volume from other categories. But just sort of what gives you confidence around being able to sustain the algorithm longer term as we look out from a multiyear perspective?

Yes. So we maintain confidence that we can deliver that high single-digit growth on our beer business, 100 to 200 basis points that will come through pricing, which is something that we've historically been able to achieve. And then we think that the brands are set up for continued growth, and I'll kind of go through those on a brand-by-brand basis, if you will. If you look at the Corona brand family, even though that this has broad distribution, there still are distribution gains to be had within certain large DMAs, particularly sort of in the middle part of the country where Corona Extra is underrepresented. We continue -- and that family continue to have opportunity to grow some of the new product introductions that we had over the course of the last couple of years. Corona Premier continues to be a priority for us. And in the latest 4 weeks -- 4-week IRI data, it's growing over 20%. Corona Hard Seltzer has been a fantastic new product launch for us this year, kind of exceeding our expectations. And we think that, that's got a very, very bright future. We're very bullish on that opportunity. And then we had another product launch within the last couple of years, Corona Refresca, which is a bit smaller but is another opportunity for growth for us. Now unfortunately, when we moved through the summer season and we were prioritizing our sort of top 20 SKUs that represent sort of 75% of our volume, Corona Refresca didn't make that cut, so to speak. And so that's effectively out of the market right now, but we're going to reintroduce that back here in the springtime. And we think that, that can provide some meaningful growth for us for the Corona family. If we then move on to Modelo, Modelo has been a juggernaut for a number of years now, and we still think that there's a lot of room for growth here, too. While that's the #1 import in the U.S. right now, there's still distribution gains to be had for that. It's not as fully distributed or broadly distributed as Corona. So there's opportunity there. It has the same sort of DMA opportunities with getting basic and effective distribution. And from a household penetration perspective, it's at about 75% -- roughly 75% of the rate of possible penetration that Corona is. So there's opportunity there. There's further opportunity for Modelo in line extensions and innovation as well, similar to what we've done with Corona. Obviously, anything that we did in terms of extending that brand, we'd make sure that it was consistent with the brand essence, and we wouldn't do anything sort of unnatural there. But there are areas of opportunity to extend that brand. And then just a couple more things on Modelo. One is there's the general market opportunity. That's a brand that, historically, we didn't do a lot of general market advertising or promotion behind. We started to do more that sort of 2, 3 years ago. Prior to starting that -- those activities, the brand was about -- skewed about 80% Hispanic, 20% general market. Since we've started to spend more in the general market, promotional and marketing efforts, that now is kind of closer to sort of 2/3, 1/3. So still some upside there in the general market for us. And then finally, we've got favorable demographic trends for Modelo and to a lesser extent, Corona, with the Hispanic demographic expected to grow kind of a 3% compound annual growth rate for the next 10 years. So really good opportunity there for Modelo. And then one final note on continued growth is we have Pacifico, which historically has performed really well in California, specifically in Southern California. And it's a brand that we're starting to get behind from a national perspective. And it's early days in that, but the early indications are that it's performing really, really well. In the last 4 weeks, that brand is up 27% in IRI. So we feel good about the potential growth that, that has for us.

Great. That's very helpful. That's very comprehensive. And as you think about growth in the high-end segment with beer, clearly very consistent and strong growth over the last decade. What gives you confidence that premiumization can continue as you look out going forward over the next few years and that you continue to see strong sub-category growth in the high end?

Yes. Well, you see, premiumization trends have been evident in beverage alcohol for years and years and years. Premiumization trends goes back a long time. And we don't see that, that is abating anytime soon. And in fact, as we've gone through this environment, the premiumization trends haven't slowed at all. And as I noted earlier, if you look at our 4- and 12-week trends, they're very positive and don't show any slowing down. And not only do -- are we seeing this in beverage alcohol, but we're seeing this across all of consumer packaged goods, where consumers are trading up and demanding more from the products in which they consume. And then one final point on this is we've seen that premiumization holds true in other economic downturns, right? In the last recession, we saw the rate of growth maybe slow a little bit at the premium end, but the premiumization, the shift to premiumization didn't change, right? So we're confident that premiumization will continue and that we'll continue to be a beneficiary of that growth.

Great. That's helpful. Then maybe we can switch to the hard seltzer category. Obviously, explosive growth over the last few years. First, can you just give us your perspective on which alcohol categories or maybe it's incrementally alcohol category, but which areas hard seltzer is sourcing share from, in your mind, within alcohol?

Sure. So based on the research that we've done, right, and I'll kind of use just kind of round numbers here, approximately 50-ish percent of the growth is being -- it's increased consumption to the category, which is inclusive of just increased consumption per occasion, new consumption occasions or consumers who are new to the TBA sort of segment, if you will. The remaining roughly 50% of the growth then is coming from within TBA. And of that 50%, about 40% is coming from beer, about 35% from wine and about 25% from spirits. And then within that 40% that's beer, it's being sourced primarily from domestic lights and then other FMBs. So we're seeing very little interaction with the import category, specifically with the Mexican import category, which is why we're seeing that -- which is a big reason why we're seeing that so far, Corona Hard Seltzer for us has been 90% incremental to our overall beer business.

Right. Okay. And in terms of shelf space, obviously, there's more shelf being allocated to hard seltzers. Which beer segments do you think that's coming from, to the extent it's coming out of the beer space and not incremental?

Yes. We think that we're seeing the shelf space being sourced from the craft segment, which was overskewed. I mean, as you know, craft had -- every store seem to have national craft, regional craft and then local craft. So we're seeing some shelf space coming from that. Also seeing it come from other segments or subsegments within sort of the FMB segment, if you will, and then some -- from some of the domestics that we touched upon as well.

Right. Okay. And why don't we turn to Corona Hard Seltzer? First off, how has it performed relative to your expectations? And second, we did see it peak at 6% earlier this summer. It's now down to about a little above 4% share. So just any commentary around the market share level for the brand over the last few months here? And how it's performed in general versus your original expectations?

Yes. So in terms of just how it's performed relative to our expectations, I mean, it's really kind of exceeded the expectations we had at the beginning of the year. And that was even before COVID kind of landed upon us. So despite launching this really concurrently with the onset of COVID, the brand has just performed exceedingly well. We've gotten great distribution for it. We've gotten -- we've achieved distribution levels to this point with what our targets were. Those targets were again set pre-COVID. So we were able to get this distribution even in the face of many retailers either delaying or postponing their shelf resets altogether, which I think really speaks to the partnership and the commitment and the excitement that our retail and our wholesale partners had for the brand at launch. So not only have we gotten good distribution, but the velocity of the brand has been very strong as well. And so we're very pleased with that. As we -- as I noted earlier, it's 90% incremental. And when we entered the year, we kind of -- we're benchmarking that against Corona Premier, which its incrementality was kind of in that 75% to 80% range. So the fact that we're at 90% now, I think, is a positive. Now we fully expect that as time goes on, that incrementality will abate a little bit. But the fact that we hit 90% right out of the gate and that really hasn't moderated at all as we move through the year is very positive for us. And then just close out a couple more points on there. Repeat purchase intent remains very high for this. We think that we have a rather unique opportunity here to appeal to Hispanic consumers who haven't migrated to the space as quickly as other consumers. For most of our competitive set, the Hispanic consumer accounts for maybe sort of 10-ish percent of consumption. But for us, that's more like 15% to 20%. So again, for all those reasons and more, the brand is meeting our expectations, and we're really excited about what this can be for us going forward. Related to the second part of your question there in terms of market share, the peak of market share and where we're at now, a big part of that is, and we've been pretty clear about this right from the outset, which was this year, we were going to have a production limitation of around 10 million cases. And we're going to essentially sell everything that we're able to make. But because we have that limitation and because the category continues to grow, that just means that our market share is kind of coming back a little bit. But I'd say that in the face of the fact that we've only got 1 SKU out there versus our competitive set that have multiple SKUs and that there have been a number of recent product -- new product launches or line extensions from the competitive set that we're holding up really well. Our distribution remains strong. And our velocity, most importantly, has maintained where it needs to be in order for us to continue to gain share once the capacity limitation comes off of us, which will next year. Next year, we're going to have the ability to produce more than 2x what we're doing this year. And then the following year, our output is almost uncapped.

Okay. That's very helpful. And then you've mentioned that your goal is to be a top 3 player in the hard seltzer category. What's sort of the key to achieving that target? Is it the Corona brand itself? Might there be other brands over time? Is it expanding SKUs? How do you think about your key drivers to get there over time?

Good. I think it's going to be a multipronged attack, so to speak. Number one, for all the reasons I just laid out, we're really bullish around Corona Hard Seltzer. Obviously, we'll put out some more SKUs around that, and we have very high expectations for that in the pipeline, and it's really too early to kind of to talk about what these are or when they might hit the market, but we have some really interesting concepts out there that are very complementary to what we already have out there with Corona Hard Seltzer. And we think that we'll have a variety of different brands within hard seltzer to take advantage of the seltzer opportunity. And then beyond what we're doing with Corona and some of the innovation we have in-house, we have a couple of other opportunities there as well. Last year, we took an equity stake, we made a venture investment in a small seltzer brand called PRESS. It's performing well in the markets that it's in. And then we're seeing some early signs of success for one of our craft beers out of Florida called Funky Buddha. It's launched a seltzer within Florida that's actually done quite well. And so we're toying around with testing to see what that could look like on a regional basis and maybe even beyond. Candidly, that's probably not going to be where we have the greatest opportunity. But it's just another one of the irons we have in the fire, so to speak.

Okay. That's helpful. And maybe we can shift to beer margins. You reintroduced implied margin guidance of flattish margins this fiscal year with the recently reintroduced guidance. After expansion in the first half of the year, why should we expect compression in the back half? And maybe walk through some of the potential puts and takes on your margin outlook this fiscal year.

Sure. So I'll start by just generally saying, like, look, we feel really good about the 39% to kind of 40% margin range over the near to medium term. What we've said is that in any given year, we might have some -- we might have more tailwinds than headwinds. And in those years, we might be slightly above 40%. And in other years, we might have more tailwind -- or more headwinds than tailwinds. And in those years, we might be slightly below 39%. But over a period of time, 39% to 40% is the right way to think about it. Know, by the way, I mean, that's -- those are best-in-class margins. So we're not apologetic about that. Specifically to this year and the differential between the first half and the second half of the year, obviously, in the first half of the year, we spent -- as a percent of net sales, we spent a lot less in our marketing efforts because the number of sponsorships and/or venues were closed to us, closed to everybody for that matter just given some COVID shutdowns. Those opportunities have opened up here in the second half of the year, and we're committed to spending behind our brands. We think that, that's important for the long-term health of our brands. We know through our marketing analysis that the investments we make behind our brands are very -- they provide very strong returns not only in the year that we make the investment, but sort of in years 2 and years 3 as well. So it's very important for the health and the continued strength of the brands for us to support those. So you'll see an uptick in our spend in the second half of the year. And then as -- just a couple of more things around as we move into next year and some of those headwinds and tailwinds, we're going to be facing things like increase in depreciation as things like furnace 5 in our glass joint venture are on for a full year. The next 5 million hectoliters of production come online at Obregon here by the end of our fiscal year, so we'll have a full year depreciation next year for Obregon. As that incremental capacity comes online, obviously, there's a little bit of overhead absorption drag as you grow into that capacity. And then for the next year or 2, we're likely going to have some margin drag related to seltzer. Another thing that we've been pretty clear about is that in the short term, seltzer is a bit of a drag on our overall margins because of the flavors that get added as well as some of the manual repacking that goes along with the variety of packs. We're investing to be able to take that repacking in-house as we move into next year. Now we won't have it fully inside our 4 walls. Next year, we'll still be doing some externally. But as we scale up and grow into, that will be in-house. And once we get to scale, which I say should be inside of the sort of 2 years, then our seltzer margins will then more closely approximate our beer margins. And then finally, we just have the -- from a margin standpoint, we always have your normal sort of inflationary things that you have to deal with from inputs and from labor and things like that. That being said, those are the headwinds. And if tailwinds for us are -- we're committed to 100 to 200 basis points of pricing every year to offset some of those headwinds. And we've got world-class operations and procurement folks who always find a way to be able to take some costs out of the business in a way that doesn't impact the consumer experience. So that's the -- that's really the margin play.

Okay. That's very detailed and helpful. And thinking about the same question, I guess, from a longer-term standpoint, you did mention the consistent pricing every year earlier. Theoretically, you get a bit of volume leverage with the strong volume growth that you're seeing. There is some productivity efforts over time. So I guess sort of the absolute level of margins is high, but that's driven by what's a relatively efficient business and high price points for your products, right? So you're implying little margin expansion and margin expansion longer term in your business. Might there be room to get there? Or are you sort of assuming marketing might need to move up over time? How should we think about that in terms of the long-term margin outlook in beer?

Yes. I mean, I think long term, as I said, I mean, I think the right way to think about that is the 39% to 40%, which still puts us best-in-class. And in any given year, we might be slightly above or slightly below that, just based on whatever the dynamics are we face -- are facing in that year. Related to the marketing spend, I mean, I think that again, we think that it's really important to spend behind the brands, to invest behind the brands. We think that, that's what enables us to continue to have the outsized volume growth that we have relative to the market. And as such, the right way to think about marketing spend is kind of in that 9.5% to 10% range. That's where we've been spending historically.

Okay. Great. That's helpful. And then turning to capital allocation priorities. You've obviously committed to reducing leverage to 3.5x, but it looks like post the Gallo transaction, assuming that closes and with some strong cash flow, you'll be close to that level in fairly short order here in the next couple of quarters. So I guess are share repurchases on your radar screen? You guys have been pretty opportunistic in the past when it comes to that. But maybe talk about the priorities as you get closer to the level where you've indicated you've considered different opportunities.

Yes. So as you rightly noted, our priority for this year, particularly as COVID unfolded, was to manage our debt levels, right, and to get lower in our range, right? So our range headed into the year was kind of in the 3.5 to 4x range. We've been below 4x for the entire -- entirety of the fiscal year. We've made progress on that quarter-over-quarter. But clearly, we want to get down close to 3 -- 3.5x. We think that, that's important for the business. We think that, that's good for our share price. I think that as COVID hit and there was a lot of trading in the marketplace, trading -- we probably fell faster than we otherwise should have and faster than some of our competitors just because of our debt levels. Even though we were still considered investment grade, being close to that 4x was definitely a drag. So getting to that 3.5 is really important for us. Once we achieve that -- and the Gallo transaction absolutely will help with that. Once we achieve that, then we can turn to fulfilling our commitment to return significant amount of capital to our shareholders through the combination of dividends and share buybacks. Now candidly, the fact that our business has held up and been very resilient through this -- through the current economic environment, which is indicative with our restating our guidance, that resiliency plus the closing of the Gallo transaction will give us the flexibility to consider getting into the repurchase or back into the repurchase program quicker than maybe we thought 4, 5, 6 months ago. At the beginning of the year, we had extended the time line to meet our commitment to return to $4.5 billion by a year. That, again, was just to give us the flexibility to manage through COVID. And so the intent has always been there to, again, fulfill that commitment. And based on business performance, we think that we've got greater flexibility to move maybe a little bit more quickly on that once the Gallo transaction is closed.

Okay. That's helpful. And A, are you confident that Gallo transaction will close? B, as we think about the wine and spirits business, you've given low to mid-single-digit top line guidance longer term post deal close as your target and approaching margins of 30% or so. Maybe just give us a little bit of update on sort of how that business is positioned post the divestiture? How quickly you can get to those levels and the outlook from here with the new portfolio?

Yes. So I'll be really succinct on the first question, which is am I confident that Gallo transaction is going to close? And yes, very confident the transaction is going to close. And I stand by the press release we put out several weeks ago, right? So we're very confident that closes. Once that closes, we have a wine and spirits business that we feel really good about. It's going to be a focused portfolio, a much tighter set of collection of brands, all experiencing very, very good growth. Kim Crawford, Meiomi, The Prisoner, all growing really nicely. We still have some big lower-priced brands in there like Woodbridge, which we're investing behind and actually taking a little bit of price on that so that we can build the equity behind that brand. And so we feel really good. And we think that if you look at those brands that we'll have post transaction, that as a whole, they're experiencing good growth right now. And so we're very bullish on that. And then as it gets to the margin question, yes, we're on our way to being able to achieve or approaching 30% operating margins. Probably going to take us about 2 years post divestiture to get there because at first, next year, the margins will actually come down as we kind of delever the organization or delever the top line and haven't had the chance to take the cost out just yet. Those cost take out, we've always said should take us about 2 years. About 1/3 of the cost should come out in the first year post-transaction and the remainder coming out in the second year. Now just because the transaction has been delayed doesn't mean we've lost any time in identifying what those costs are or what those opportunities are. So once we close the transaction, we'll be able to quickly execute against those plans. But once we're done, our wine and spirits business is going to have that low to mid-single-digit top line growth. And it's going to have near 30% operating margins. And quite candidly, I think that, that's a really attractive consumer packaged goods company, right? And it will be a really good complement to our beer business.

Great. That's helpful. And then maybe we can close just around Canopy. Obviously, a lot of news there over the last couple of years and David Klein being installed as the CEO there. Maybe can you just talk about how your expectations might have changed around that investment since the initial investment and the strategy changes and what you see in terms of the revenue outlook for both the cannabis business but also cannabis-infused beverages and the potential there over time.

Yes. So we remain quite bullish on the cannabis category and on Canopy growth. We're very pleased with the progress that David and the extended team have made since he took over in January. I think that obviously, when you tell him, ask the question, I have to acknowledge that the prior management team did a remarkable job in creating something out of nothing in a category that didn't really exist when they started the business. So kudos to them. I think, though, with David being in that position, he's brought real prioritization and focus and financial discipline. And I think that you're seeing that play out in the results that they're able to post. Unfortunately, COVID hit the cannabis category like it hit every other category. David and the team were expecting that in Canada, that they were going to be -- have positive profit in their fiscal year '21. As I'm sure you've heard him say that, that will get delayed a little bit just given the COVID impact, but they're now expecting in their fiscal '22 to be -- to have -- to be profitable in '22, which really then is proof-of-concept that cannabis can -- is a legitimate consumer goods category and that, that kind of success can be replicated in other markets as they open up. So yes, so we remain really, really, really bullish on that. And they've seen you -- you asked a question on the beverages. So a couple of points on the beverages. I haven't had the opportunity to get up there and try any myself. But I can tell you that I know some people who've had them. The taste profile of them, I'm told, are fantastic. And there's consistency in the onset of effects and consistency in the duration of effects, which were very, very critical in terms of getting consumer uptake on those and repeat purchase. So they seem to have hit it out of the park on that front. And then the early indications are that these are performing very, very well in market. And shipments of these products have exceeded what the Canopy's team's expectations were. So early returns on the cannabis drinks is very positive. And we look forward to the day when legalization occurs here in the U.S. and be able to have those products migrate down here and see how they resonate in this market.

Great. Well, with that, we're out of time. That 45 minutes went very quickly. So that was a great update on the business. We really appreciate your time, Garth. And with that, we'll end things here, and everyone, stay safe out there.

Dara, thanks so much for the time today.

Thanks for joining.