Snehal Shah:

Thank you, Rob. Good morning, all, and welcome to Constellation Brands' Year End Fiscal 2024 Earnings Conference Call. I'm here this morning with Bill Newlands, our CEO, and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in today's news release or otherwise available on the Company's website at www.cbrands.com. Please note, when we discuss comparable earnings per share figures for fiscal 2024 and prior fiscal years, we are referring to earnings per share on a comparable basis excluding Canopy equity and earnings, unless otherwise noted. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we will also be making available in the Investors section of our Company's website a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time today. Thanks in advance, and now here's Bill.

Garth Hankinson:

Thank you, Bill, and good morning, everyone. As usual, my discussion will focus mainly on our comparable P&L results, starting at an enterprise level followed by business segment detail for fiscal '24. I will then discuss our fiscal '25 outlook and expectations in the same manner. Starting with net sales. As an enterprise, we delivered growth of over 5%, slightly exceeding our fiscal '24 guidance range of 4% to 5%. This was driven by the strong performance of our Beer Business, which grew net sales over 9%, exceeding our guidance of 8% to 9%. As Bill mentioned, our Beer Business had another strong year of depletion growth, a 7.5% increase as the strength of our portfolio carried throughout the entire year. Off-premise depletions grew by over 8%, which represent nearly 89% of our total depletion volume. The on-premise accounts for the balance of our depletions and grew by over 1%. We expect to build on our momentum in off-premise channels supported by the low-double-digit incremental shelf space that we captured this spring, which we foreshadow at our Investor Day last November. And we continue to see opportunity to drive growth in the on-premise with new draft handles, particularly for Modelo Especial and Pacifico in the coming fiscal year. I will elaborate on fiscal '25 shortly. Shipment volumes for our Beer Business in fiscal '24 grew 7.4% and we achieved favorable pricing of 2%. These volume and pricing increases were partially offset by the divestiture of our craft beer business and an unfavorable shift in product mix. In aggregate, the volume, price and mix changes amounted to a nearly $700 million increase in beer net sales for fiscal '24. In regards to selling days, we had one extra sell day in the year, which occurred in Q4. This had a minimal impact on our volumes as shipments and depletions, on an absolute basis, were over 99% aligned for the year. For our Wine & Spirits business, net sales declined 9% and 8% on a reported and organic basis, respectively. The change in organic net sales for our Wine & Spirits business was within our lowered guidance range of a 7% to 9% decline. This decline was largely driven by unfavorable US wholesale performance, particularly across our mainstream and premium brands. As Bill noted, we are working with our US wholesale distributor partners to enhance performance in our largest markets and channels in fiscal '25. Additionally, in our international markets, net sales for fiscal '24 were down 7% by destocking, particularly in Canada, our largest export market. More recently, in Q4, net sales from our international markets grew 14%, largely driven by the Canadian market, where inventory levels have begun to normalize. The net sales declines in our US wholesale and international markets were partially offset by 10% net sales growth in our direct-to-consumer channel. Moving on to our operating income and margin. At an enterprise-wide level, we delivered a 7% increase in comparable operating income at the upper end of our 6% to 7% guidance, resulting in a 50-basis-point increase in comparable operating margin to 32.6%. This was driven by the strong performance of our Beer Business, which grew operating income by just over 8% and delivered an operating margin of 37.9%. Enterprise-wide operating margins also benefited from an 11% reduction or $30 million decrease in corporate expense driven mainly by reduced third-party consulting fees related to our DBA project spend. This solid performance was partially offset by our Wine & Spirits results as operating income excluding the gross profit, less marketing of the brands that are no longer part of the business following their divestiture declined by 8%. This decline was within our lowered guidance range of a 6% to 8% decline, resulting in a flat year-over-year operating margin of 22.2%. Elaborating on the margin puts and takes in more detail, starting with the Beer Business. The increase in operating income and slight 40 basis point decrease in operating margin were reflective of an absolute increase of approximately 12% in overall cost. This increase in COGS includes the impact of increased volume and the nearly $205 million from cost savings initiatives realized in fiscal '24. By COGS component and on an absolute basis, inclusive of both volume growth and cost savings, year-over-year changes were as follows. Raw materials and packaging represented the midpoint of 55% to 60% of total COGS and had an absolute increase of 16%. Logistics making up just over 20% of total COGS increased 3% as a large portion of the benefits from our cost savings agenda came from this area. Labor and overhead landed at just under 15% of total COGS and increased 19% attributable to the construction activities at our Veracruz Brewery. And the remaining portion of total COGS depreciation increased approximately $37 million, representing the incremental capacity that was brought online in fiscal '24. Moving on to marketing. Our dollar spend increased by approximately 2% year-over-year. As a percent of fiscal '24 net sales, marketing was approximately 8.5%, coming in slightly below our medium-term 9% algorithm, partly driven by the divestiture of our craft beer brands and efficiencies from the transition to our new media agency. Lastly, SG&A, which represented approximately 5% of net sales, increased approximately 8%, driven by the unfavorable impact of foreign currency and increased compensation and benefits. These increases were partially offset by benefits from the craft beer divestiture and lower legal fees. Moving on. Our Wine & Spirits business operating income margin, excluding the gross profit, less marketing of the brands that are no longer part of the business following last year's divestiture, remained flat year-over-year as the volume decline and unfavorable channel mix were offset by favorability in our COGS driven by nearly $40 million coming from our cost savings initiatives, favorable pricing, reduced other SG&A expenses, and a reduction in marketing expense. Interest expense for fiscal '24 was about $435 million, a 9% increase from prior year driven by higher average borrowings and weighted average interest rates. We ended fiscal '24 with a comparable net leverage ratio, excluding Canopy equity and earnings, of 3.2 times, leaving us well-positioned to achieve our target of approximately three times in fiscal '25. Our comparable effective tax rate, excluding Canopy equity and earnings was 18.5% versus 19.2% last year. Comparable EPS for fiscal '24, excluding Canopy equity and earnings, grew nearly 9% year-over-year to $12.38 and came in above our guidance range of $12 to $12.20. Moving to fiscal '24 free cash flow, which we define as net cash provided by operating activities less CapEx. We generated free cash flow slightly over $1.5 billion, exceeding our $1.4 billion to $1.5 billion guidance range. Free cash flow decreased 12% year-over-year, driven by a 23% increase in CapEx investments attributable to our expansions at our existing facilities and the ongoing construction of our new brewery in Veracruz. In fiscal '24, we increased our total nominal capacity from our Mexico brewery operations from 42 million hectoliters to approximately 48 million hectoliters as a result of the modular expansions brought online over the summer that were fully ramped by year end, along with unlocked incremental capacity through our optimization initiatives. Consistent with our capital allocation priorities, we, once again, delivered cash returns to our shareholders with over $900 million of expenditures in dividends and share repurchases. In addition, we executed portfolio gap-filling transactions encompassing both a tuck-in acquisition of a female- and Black-founded luxury wine brand with a successful track record and a venture investment in the high-growth non-alcoholic space in fiscal '24. With that, let me now step through our outlook for fiscal '25, starting with net sales. We are targeting our enterprise-wide net sales to grow up 6% to 7%, inclusive of a 7% to 9% growth target for our Beer Business, and a 0.5% decline to 0.5% growth in net sales for our Wine & Spirits business. The beer top line outlook is expected to be primarily achieved by continued strong volume growth of our portfolio. Again, we expect this to come from distribution of our largest brands bolstered by spring shelf reset gains, the health and continued support of our consumers, and innovation in the form of brand extensions, new to world products, and new pack sizes. Regarding beer volumes, we anticipate fiscal '25 shipments and depletions to track closely on an absolute basis, consistent with prior years. Similarly, we expect the cadence of our shipments and depletions, in terms of share of annual volumes from a quarter and a half year perspective to be fairly in line with fiscal '24. For Wine & Spirits net sales, we expect to largely offset ongoing category headwinds as we drive the sales and marketing execution initiatives described by Bill earlier. Additionally, we expect mix-related benefits due to the better performance in our higher-end brands. That said, we continue to anticipate overall volume growth to remain challenged, particularly due to demand headwinds in the mainstream and premium price segments, which account for a major part of our volumes. Furthermore, from a net sales perspective, we're expecting unfavorable lapping of bulk sales in fiscal '24. From a cadence perspective, we also expect quarterly and half yearly shipments and depletion shares of the full year total to be fairly aligned with fiscal '24. For fiscal '25 operating income, we expect comparable enterprise-wide growth between 8% and 10%, reflecting 10% to 12% operating income growth for our Beer Business, a 9% to 11% operating income decline for our Wine & Spirits business, and a slight increase in corporate expense to approximately $260 million. For our Beer Business, we anticipate operating income tailwinds from volume growth and favorable pricing. We expect these tailwinds will be partially offset by continued input cost inflation with an absolute increase in COGS, inclusive of volume growth, cost savings initiatives, and our multi-year hedging actions in the high-single-digits. We expect the following percent of total COGS and absolute increases across each component, for packaging and raw materials to account for 55% to 60% and increase mid to high-single-digits. Logistics to make up approximately 20% and increase mid-single-digits. Labor and overhead to be approximately 15% and increase in the high teens, primarily driven by merit salary increases, given the strong operational performance from the business and incremental headcount, primarily at our Veracruz Brewery, as we continue with construction. And the remainder of COGS depreciation with a mid-single-digit increase, which approximately equates to a $20 million step-up, which is slightly lower than recent years, given prior depreciation of the packaging line of the ABA facility that was operational throughout all of fiscal '24. Outside of COGS, we expect marketing expense as a percent of net sales to be approximately 8.5%, which is lower than our unchanged medium-term algorithm of 9%. The change of marketing expense as a percent of net sales for fiscal '25 is driven by a shift in our marketing investment allocation with an overall focus on maximizing value. The investment shift is geared towards prioritizing our largest brands to support their continued momentum, followed by our high growth potential Next Wave brands and then thoughtful and deliberate investments to support our innovation pipeline and savings driven by efficiencies from our new media agency partnership announced in Q3 of fiscal '24. Rounding out beer operating margin drivers, we anticipate SG&A as a percent of net sales to be approximately 5%, in line with the medium-term algorithm we provided during our Investor Day. All in, this implies beer operating margins of approximately 39% as our Beer Business continues to generate best-in-class operating margins and year-over-year improvement as we close in on our medium-term targets. For our Wine & Spirits business operating income, we anticipate an overall COGS increase of mid to high-single-digits driven by less favorable fixed cost absorption as a result of lower volumes and higher seller overhead and blend costs, partially offset by favorability in logistics and packaging costs as part of our cost savings initiatives. For marketing and other SG&A expense as a percent of net sales, we anticipate 9% and 10%, respectively, each slightly above our medium-term outlook driven by the adjustments to our marketing, pricing, and sales investments to drive top line growth and partially offset by organizational structure changes, both points previously referenced by Bill. In addition, we expect to face headwinds from unfavorable lapping of contractual distributor payments and lower compensation and benefits in FY'24. That said, this implies Wine & Spirits operating margins to contract to approximately 20% in fiscal '25 as we continue to navigate category headwinds and reset investments in certain marketing and sales activities. We believe our enhanced focus on execution and planned cost savings can provide margin improvement over the medium-term toward the targets outlined at our Investor Day in November. Corporate expense is anticipated to increase slightly as we continue to invest in the business while reducing third-party fees more broadly. We expect interest expense to be approximately $445 million to $455 million driven by higher weighted average interest rates, and we expect our comparable effective tax rate to remain unchanged coming in at approximately 18.5%. We expect non-controlling interest to be about $35 million and anticipated weighted average diluted shares outstanding for fiscal '25 to be around 183 million, inclusive of share repurchase activity. Based on these assumptions, we expect our reported EPS to be between $13.40 and $13.70 and our comparable EPS to be between $13.50 and $13.80, representing a 10% midpoint increase year-over-year. From a cash flow perspective, we expect our free cash flow in fiscal '25 to be between $1.4 billion and $1.5 billion, reflective of $2.8 billion to $3 billion of operating cash flow net of CapEx spend of $1.4 billion to $1.5 billion, driven primarily by the expansions of our existing breweries and the ongoing construction in Veracruz. We anticipate approximately $3 billion of remaining CapEx spend from fiscal '25 to fiscal '28, with fiscal '25 expected to be the peak spend year as we progress with the construction of our greenfield site in Veracruz. And consistent with our Investor Day messaging, we expect a step-up in free cash flow that should yield cumulatively between $7 billion to $9 billion from fiscal '26 to fiscal '28. To conclude, we ended fiscal '24 with strong results, driven by continued outstanding growth in our Beer Business, as its core brands reach new milestones in cases sold and market share. Our Wine & Spirits business faced difficult marketing conditions in FY'24, but we've identified key actions to improve execution and performance. As we look ahead to fiscal '25, we are confident that we can deliver against our plan with strong enterprise results aligned with our medium-term targets, execute our capital allocation priorities and seek to create value for our shareholders. We thank you for your ongoing support throughout fiscal '24 and look forward to updating you on our progress and success in fiscal '25. With that, Bill and I are happy to answer your questions.

Nik Modi:

Thanks. Good morning, everyone. Just two quick ones for me. Just been getting a lot of questions about gross margin and wanted to get any perspective on if there's any one-time issues that might have affected the gross margin this quarter for beer. And then the second part of that is just when you think about the shipments this quarter, can you give us any context on how much might have been attributable to some, whether it be the Aguas Frescas launch into wholesale or preparing for some of the shelf resets that would be helpful. Thank you.

Operator:

Thank you. The next question is coming from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Bill Newlands:

Second time is the charm, Dara.

Bill Newlands:

Sure. We obviously take into account our March results with our overall expectations for the year. But I'd say, March was very consistent with what our expectations were. Everyone should keep in mind that March has two less selling days, April has two more. So we internally look at it as sort of the combo plan of those two months. With that said, we had a very comfortably strong March as we expected that we would, and think it's setting us off on a really solid year, as we said, consistent with what we said at the Investor Day in New York. As we also noted in my script, we had low-double-digit growth in our shelf sets here in the spring, greater than our growth algorithm, which is what we expected. And certainly, that's going to be one of the added values in our delivery of the total year. But as we've said, and as all of you know, incremental space, by and large, is not at the same velocity as what you have from existing velocity, because it's marginal returns. With that said, we're very pleased with the increase in our shelf position. We've said for many years, our brands really deserve it. They've averaged over $50 million per SKU in dollar return, and it certainly is reflective of what I'm sure all retailers are seeing and that our brands are driving the growth in the category.

Bryan Spillane:

Thanks, operator. Good morning, Garth. Good morning, Bill. So I guess, just stepping back, we had this question a couple of times this morning, and maybe the underlying question is just at an enterprise level we get back to being basically on algorithm for the year, but in a year where wine and spirits underdelivers beer, at least in terms of growth rate on operating profit, maybe a little faster than normal, a little help from below-the-line on interest expense. So just is it a coincidence, right, that basically there can be a hole with wine and spirits underdelivering, but there were other offsets? Or was this more a function of you all maybe making some adjustments to get to that place, whether it's pulling some savings forward or using some tax credits? I think people are just trying to understand how much manipulation or how much work you had to do to sort of make up the difference or whether this was just a coincidence.

Operator:

Our next question is from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Bill Newlands:

Yeah, you bet. We did see some inventory reduction this past fiscal year, particularly in Canada. There was quite a bit of inventory realignment in Canada, and certainly there has been some that we've seen in the US as well. The thing that I think is important for us to continue to focus on is we've made a number of changes. We're going to focus on those 11 brands that are really the biggest drivers of our success. That's a bit of a change. Frankly, we've probably peanut buttered our efforts a little too broadly in the past, and we're going to focus on those brands that we believe have real growth potential for the long term. We're also going to do a bit more promotional spend than we have in the past, particularly on brands like Woodbridge, where that's an important part of the consumer dynamic. A lot of work and research has been done in the last few months to make sure that we understand all the consumer dynamics around our critical brands and we will execute against those dynamics in this coming year. And I think that's reflective of an improved top line that you see this year, acknowledging there'll be a bit of a reset at the bottom line.

Chris Carey:

Hi. Good morning, everyone. So Garth, thank you for all the perspective on expectations around beer margins for the full year. Can you just perhaps expand a little bit on what specifically is driving the commodity input inflation, number one? And then secondly, if I put all this together, it does feel like maybe there's a little bit of top line leverage you're expecting or you need a little bit more savings on the G&A line to get to the low-double-digit number for the full year in the division. So maybe just help provide any context on that. So thanks on the commodities and maybe just some of the assumptions on how you're getting to the operating profit number for the full year. Thanks so much.

Operator:

Our next question is from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.

Bill Newlands:

Sure. As I stated, Kaumil, on our -- in my primary remarks, well, low-double-digit shelf space is what we expected to get, and that's in fact what we are getting in spring resets. Obviously, it varies all over the map depending, but that's roughly what the total number is in the aggregate. And again, that's at least as much as we expected. We're very pleased with where that landed. Relative to the Wine & Spirits business, we've made this comment a number of times. The person that drinks across all three categories, beer, wine, and spirits, spends six times as much as an individual that drinks only in one of those three categories. Therefore, we continue to feel that that's important, that we are accessing significant additional consumer occasions and consumer spending by being able to play in all three of those categories.

Nadine Sarwat:

Thank you. Two interrelated questions from me. First, you obviously posted very robust beer volume growth this quarter. What are you seeing in terms of the health of the US consumer today? Any signs of the downtrading or shift in behavior? And then a second question also on the consumer. Some of your industry peers have highlighted dry January being more meaningful headwind this year. Other commentators are calling out different drinking patterns amongst younger legal drinking-age consumers. So I'd be really curious to hear what you are observing when it comes to these trends. Any changes in behavior from the consumer? Thank you.

Operator:

Our next question is from the line of Andrea Teixeira with JPMorgan. Please proceed with your question.

Bill Newlands:

Andrea, your voice got a lot lower since the last time you asked a question. All joking aside, our trends were very, very strong really across the country. A significant place, let me use Pacifico as an example, the depletions across that brand for the year were up 17%, and obviously, the big stronghold is California. Modelo Especial continues to be the number one brand in the State of California. But we're also seeing really good success across the country. Places like Texas and Florida. And secondary markets. We've always said secondary markets are going to be an important element for us. And many, many, many of those showed double-digit increases over this past year. So we were very pleased to see a broad-based growth profile for our business as we closed out the year, and we think we're in position to continue to do that here in fiscal '25. Garth, I think, the second one was for you.

Operator:

Thank you. Our next question is from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Garth Hankinson:

Yeah, so on the first one, in terms of the amount of costs that are peso-denominated for our Beer Business is about 20% to 25% of our costs are peso-denominated. As I said, as we entered this year, we're hedged at about 80%.

Operator:

Our next question is from the line of Filippo Falorni with Citi. Please proceed with your question.

Bill Newlands:

Well, as we've said right along, we probably were not the single biggest gainer as it related to the controversy that you know, but I'd also, again, continue to point out something I said earlier, which is, we've got extraordinarily strong brand loyalty, and we only play in the high-end. The high-end is where the growth in the category is at the moment, and we're fortunate that that's exactly where we play. When you add in the fact that we've seen a significant increase in our shelf presence here during this spring reset program, we think we're in a great position, recognizing we are coming off the single biggest share gain in the history of Constellation Brands Beer Business. Two points in all total beer and 2.6 points in the high-end. It's an unprecedented gain and I think it reflects the sheer strength of our brands.

Gerald Pascarelli:

Great. Thanks very much. Just going back to wine, Bill, the drivers you laid out in your prepared remarks were very helpful, but based on current trends, I think the outlook for the year came in above expectations, definitely above our expectations. So, I guess, in the context of two guide downs last year, if you could maybe provide some more commentary just on your level of confidence this early in the fiscal year in achieving flat revenue performance, that would be great. And then does your outlook embed the assumption that the wine category will ultimately start to improve from current levels this year? Thank you.

Operator:

Thank you. Our next question is from the line of Carlos Laboy with HSBC. Please proceed with your question.

Bill Newlands:

You bet, Carlos. I think you saw some interesting volatility, depends on the particular time frame, and we saw some of that. We had an issue for a brief period during this year where we had some issues with kegs, which is now fully behind us. We're continuing to see strong development in the on-premise, and we're particularly excited about it heading into Cinco, which is obviously the next big time frame for us, and a time frame when we historically have done very well and made significant share gains, both in the retail and in the on-premise environment. So we're very optimistic that the on-premise is going to be an important part of what our results are this year. Both Modelo, Corona, Extra and Pacifico are all growing share in that channel and we expect that that continued share of growth is going to continue in this fiscal year.

Bill Newlands:

Thank you, Rob, and thank you to all who joined today's call. As we wrap up, I want to, once again, thank our colleagues across Constellation, as well as our trade partners, for delivering another strong year of performance in fiscal '24. Your continued focus and discipline has made Constellation a top-performing growth leader among CPG companies for 11 consecutive years. No other company in recent times can say that, and we're extremely proud of this achievement. As we head into fiscal '25, we're confident in our ability to further build on our momentum and to create additional shareholder value by delivering low-double-digit EPS growth, fueled primarily by our Beer Business, which we expect to generate high-single-digit net sales growth and best-in-class operating margins. Heightened focus on our commercial and operational execution in our Wine & Spirits business, while maintaining our disciplined approach to capital allocation and continuing to serve as good stewards of our environment and the communities where we operate. As we approach the key summer selling season, we invite you to enjoy some of our great-tasting products as part of your festivities, and we look forward to speaking with you again on our next quarterly call. Thank you very much, and have a good day, everybody.

Joseph Suarez:

Thank you, Darryl. Good morning all and happy new year. Welcome to Constellation Brands Q3 fiscal '24 conference call. I'm here this morning with Bill Newlands, our CEO, and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we'll also be making available in the Investors section of our company's website, a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I'd like to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance. And now, here's Bill.

Garth Hankinson:

Thank you, Bill, and good morning, everyone. As usual, my discussion on our financial performance will mainly focus on comparable basis results and stepping through our P&L. However, as of this quarter, we will discuss enterprise results, followed by business segment detail to better address our performance against the outlook shared at our Investor Day at these different levels. Beginning with net sales. We achieved enterprise-wide top line growth of 1% for the quarter. This was the result of solid Beer net sales growth of 4%, partially offset by the Wine & Spirits net sales decline of 8%. Wine & Spirits net sales decline was 7% on an organic basis. As Bill noted, Beer business depletions for the quarter were above 8% as the year-over-year growth momentum from summer continued through the fall, supported by ongoing strong consumer demand of our portfolio. Again, we saw a particular acceleration in depletion volumes at the end of November as we extended our leadership across key holidays with outstanding performance during US Thanksgiving. Our on-premise channel realized modest growth in depletions of about 1% for Q3 and accounted for approximately 11% of our total volumes as we've been able to replenish inventories following the keg disruption over the summer and began to advance growth and drive performance in the on-premise. Shipment volumes for beer business grew 3.4%, and we achieved favorable pricing slightly above 1% as we began to lap the elevated pricing increases from last fall. These volume and pricing uplifts were partially offset by a shift in packaging mix. Altogether, these year-over-year shipment, pricing and mix changes drove the 4% or approximately $77 million increase in beer net sales for the quarter. For our Wine & Spirits business, organic net sales declined 7%, driven by lower shipment volumes due to the previously referenced category headwinds and the change in our process aimed at aligning shipments and depletions. As a reminder, per prior calls this year, we now make quarterly shipment adjustments to align with depletions versus our former practice of only doing one annual adjustment in the fourth fiscal quarter. We believe this process change has partially driven less favorable comparisons for the first three quarters of fiscal 2024. Now shifting to operating margins. For Q3, enterprise-wide operating income increased 7%, and operating margin increased 170 basis points to 32.3%. This was primarily a result of an increase in operating income of 7% for our Beer business, which also drove a 100 basis point increase in Beer business operating margin to 38.5%. Enterprise-wide operating margins also benefited from a 13% reduction in corporate expense. These Beer business and corporate expense tailwinds were partially offset by a 5% decrease in our Wine & Spirits business operating income, which still yielded a 60 basis point increase in operating margin to 25.4% for the Wine & Spirits business. Excluding the gross profit, less marketing, of the brands that are no longer part of the business following their divestiture, operating income and operating margin for the Wine & Spirits business decreased by 4% and increased by 80 basis points, respectively. Stepping through these drivers in more detail, starting with beer. The increase in operating income and margin were a result of benefits and cost of products sold as we continue to build cost efficiency and productivity savings. For the quarter, total cost savings were approximately $55 million. An $11 million or a 6% decrease in marketing costs as a result of shifts in timing of spend. Note that marketing as a percent of net sales was 8.7% for the quarter. A $4 million decrease in SG&A expense, primarily driven by lower legal fees, partially offset by higher compensation and benefit expenses and $6 million of favorability from the divestiture of our craft beer business. These benefits were partially offset by a $12 million unfavorable foreign currency impact as we still realized a higher Mexican peso rate year-over-year, inclusive of our multiyear hedging positions. Additionally, in line with our full year expectations and guidance we are still facing higher costs in our packaging and raw materials, which resulted in a $17 million headwind for the quarter. We have also faced an $11 million increase in depreciation as a result of our capacity expansions. The reduction in our corporate expense, which for the quarter was $10 million, was primarily driven by the reduction in third-party services, particularly in our digital business acceleration investments partially offset by increased compensation and benefits. Our Wine & Spirits operating income margin, excluding the gross profit less marketing of the brands that are no longer part of the business following last year's divestiture had a year-over-year improvement as the volume declines and unfavorable mix were more than offset by reduced logistics and warehousing costs, favorable SG&A costs due to reduced third-party consulting expenses and lower compensation and benefits. More favorable material costs driven by our cost savings initiatives and reduced marketing expense as we continue to shift our marketing focus towards more efficient, high return efforts. Interest expense for the quarter was approximately $104 million, driven by higher average borrowings and higher weighted average interest rates. As a reminder, approximately 5% of our debt obligations are subject to adjustable rates. As Bill noted, we ended the quarter with a net leverage ratio of approximately 3.2 times excluding Canopy equity and earnings and remain on track to reach our target goal of 3 times within fiscal 2025. Our comparable effective tax rate, excluding Canopy equity and earnings for the quarter was 18% versus 18.8% last year. Our comparable EPS for the quarter, excluding Canopy equity and earnings, was $3.24, reflecting the consistent growth of our business and representing an 8% increase. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx, we generated free cash flow of $1.4 billion through the first three quarters of fiscal 2024 and a 10% decrease driven by a 33% increase in CapEx investments attributable to the expansions at our existing Obregon facility and the construction of our new brewery located in Veracruz. As we look towards the end of fiscal '24, our guidance for enterprise comparable EPS, excluding Canopy equity and earnings remains unchanged at $12 to $12.20 underpinned by the following expectations. First, an unchanged 8% to 9% net sales growth outlook but a higher 7% to 8% operating income growth expectation for our Beer business. As stated in our prior calls this year and at our recent Investor Day event for our beer net sales, we continue to expect pricing to be between 1% to 2% and mid to high single-digit volume growth in fiscal '24. And we still anticipate shipment volumes for the second half to account for approximately 45% of the full year total. Bill already addressed the drivers of the uplift in our beer operating income growth guidance but it's also important to note that we still expect beer operating margin to be approximately 38% for the full year. Second, for our Wine & Spirits business, we now expect a decline of 7% to 9% in organic net sales and a decline of 6% to 8% in operating income, excluding the impact of the divested wine brands that are no longer part of our results. Bill also already addressed the drivers for these revisions. Third, from a corporate expense perspective, we now expect that to be approximately $260 million to $270 million for the full year which includes a slightly lower end to the range versus our prior expectation. And similarly, our interest expense expectations are now slightly lower at approximately $450 million. And last but not least, we continue to expect our comparable effective tax rate, excluding Canopy, to be approximately 19% and despite the additional $215 million of share repurchases executed in the third quarter, we also continue to anticipate weighted average diluted shares outstanding to be approximately $184 million. Beyond the P&L, for free cash flow, we expect to be in the range of $1.4 billion to $1.5 billion for fiscal '24, reflective of $2.6 billion to $2.8 billion in operating cash flow and $1.2 billion to $1.3 billion of CapEx. In closing, we continue to deliver industry-leading results in our beer business and remain confident in our ability to achieve our stated EPS targets for this fiscal year despite incremental category headwinds affecting our Wine & Spirits business. As we look further ahead, we remain excited about continuing opportunities to build shareholder value over the medium term, which we hope to achieve by capturing the substantial growth opportunities that exist for our Beer business, executing against our consistent, disciplined and balanced capital allocation priorities and delivering enhanced performance in Wine & Spirits, supported by the significant transformation that business has undergone and the actions that we are taking to improve this business. We encourage existing and prospective shareholders who have not yet had an opportunity to review our recent Investor Day presentations to access those through our Investor Relations website, ir.cbrands.com to gain further insights into our medium-term perspective on these topics. And with that, Bill and I are happy to take your questions.

Nik Modi:

Thank you. Good morning, everyone and Happy New Year.

Nik Modi:

So, Bill, maybe you can provide some context. Obviously, you provided a few intra-quarter updates, one at the Analyst Day and one at the Morgan Stanley conference. Just regarding both the Beer and the Wine & Spirits business and obviously things came out a little bit differently. So I was hoping you can just kind of give us a perspective on what exactly happened to cause some of the delta. And if some of the clarity or perspective you gave us around the gaps between scanner data and your actual results, how we should think about that because I'm sure that's going to be something we're all going to have to start thinking about over the next couple of weeks?

Operator:

Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

Garth Hankinson:

Bonnie, just to start on the question for next fiscal year, obviously, we'll give guidance on next fiscal year at our next conference call in April. But as it relates to margins this year, I mean, obviously, margins are progressing in line with what our expectations are. And what you saw in the third quarter, this is the first time from a year-over-year perspective where we had margin improvement which again is what we expected at the outset of the year. What we've always said about margins is, and this ties back to what we've said about volumes and shipments and depletions is 55% of our activity will occur in the first half of the year and 45% in the second half of the year. And in Q4, specific to your question on Q4, that -- it's always typically one of our lower shipping quarters. And so therefore, margins are lower just by virtue of reduced throughput through our facilities. On top of that, we continue to have increasing depreciation costs that we referenced during our prepared remarks. But as I say, I mean, we do expect that Q4 margins this year will be better than they were of last year, continuing the trend of year-over-year improvement and which, obviously, we feel confident about our ability to get back into our 39% to 40% range as we went into very good detail at our Investor Day.

Kaumil Gajrawala:

Hi, guys. Good morning. You're depleting -- right now, you had a run rate of about 8%, or I guess you did 8% for the quarter. There's expectations for some pretty good shelf space gain in April. Could you give some context on what that might mean for a tick-up in depletion?

Operator:

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Bill Newlands:

Sure, thanks for the question, Brian. I'd say this, our transformation of that business is largely complete. As we've said now a number of times, it's a very different business than what it was several years ago, even though we still have a fair amount of business in the lower end of the business. What I would say is this. We will be focused on an individual who can bring great operating efficiencies and execution in the marketplace. We think it's critically important that we improve our wholesale performance in the United States, and we think there's going to be continuing opportunities for us to perform very well in DTC and international channels as we have developed that business over the last couple of years. All of those things, I would argue, are well within our control. A lot of work is being done on the mainstream portion of the business, particularly on SVEDKA and Woodbridge to enhance the performance of those businesses. I think that you will start to see that play out in the new fiscal year. And we believe that -- we believe some of the softening that's occurred in the overall business is transitory and will come back our way, given the real strength that we've seen in our higher-end business like Meiomi and Kim Crawford and the Prisoner and Mi Campo and things of that nature. So I'm always of the belief that a significant portion of your results are really within your control and we're going to focus on those critical factors that improve our business performance as we head into the new fiscal year.

Nadine Sarwat:

Hi everybody, thank you for taking my questions. A two-parter for me. First, you obviously have posted really good beer depletions this quarter, but looking at 2023 for the overall industry, US beer has been weaker than the historical plus or minus 1% that we've seen over the last decade. I'd love to hear your thoughts in your experience why you think that is. Any key takeaways to share on the health of the consumer? And what would you expect to see for the industry as a whole in ‘24? And then finally, just to come back to Wine & Spirits again, good to hear you reiterating that medium-term growth algorithm you disclosed at the Investor Day. But would it be possible for you to share more details as to how -- where that conviction and achieving that is given the guidance kept today, any building blocks. I appreciate the initiatives you mentioned, but clearly the gap between the guidance for this fiscal year and that medium growth algo is quite big now. So any color would be appreciated. Thank you.

Operator:

Thank you. Our next question comes from the line of Chris Carey with Wells Fargo. Please proceed with your question.

Bill Newlands:

Good morning.

Chris Carey:

Garth, the beer savings number that you called out, which I believe was $55 million, is a big number, certainly in the context of the savings targets through fiscal ‘28 that you laid out at Investor Day. And so I guess, are you pulling forward savings into fiscal ‘24 from other years, or are you perhaps just getting better at the ability to drive savings in the near term and perhaps we should be thinking about over-delivery or maybe just building more confidence in your ability to hit those targets over time? So again, I'm just trying to get some context for your self-help capacity in the beer gross margin, which was quite strong this quarter.

Operator:

Thank you. Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Bill Newlands:

Dara, why don't you do that right away? Because usually once you ask a question, you don't have further access. What's your wine question?

Bill Newlands:

Sure. So let's cover the first one initially about the depletions coming out of the quarter. Obviously, there's always a little bit of benefit when you have an early Thanksgiving because you give retailers a chance to restock after Thanksgiving. But let's make no mistake, the takeout that we had around the Thanksgiving holiday was exceptional, which you wouldn't get the great restocking if you didn't have an exceptional takeout period. And obviously we're very pleased to see, without going into specifics, that the strong November is playing into December as we expected it would because the underlying trends for our business remain very strong. And as I stated at an earlier question, our actual share gains have accelerated during the course of the year, which I think is very positive as well relative to our continuing success in that business. As it relates to wine, as I said before, the thing that we were most concerned about coming out of this particular quarter is that we end our year in an appropriate inventory position and that we are preparing ourselves to work closely with our wholesale distributor partners to accelerate that business going forward so that we are winning in the categories and channels in which we participate. We've got a lot of work to do there, but we continue to believe the strategy work that's been done over the past few years to reposition our portfolio much more to the higher end is going to pay dividends. And again, as I said, I think, to Nadine a moment ago, I'll come back with some more specific thinking. We're going to do, as you can understand, a fairly deep dive into that business. And I'll have some more thoughts on that as we get to our next call.

Operator:

Thank you. Our next question comes from the line of Andrea Teixeira with JP Morgan. Please proceed with your questions.

Bill Newlands:

Well, let's start with the second question first. We were quite pleased with the more limited changes that occurred on the shelf set in the back half of last calendar year. But we're expecting significant gains greater than our growth profile here as we get to the spring resets. You would notice that we fully expect that we're going to finish our year in a very strong performance. You will note that we raised the bottom of our guidance, as Garth noted, and I think I noted in my remarks as well. So we actually have raised our expectations around the income side. And of course that translates through into better cash and various other things as Garth noted. So I think you should take away what I hopefully we were trying to portray, which is our business continues to deliver exactly what we've told you what we would deliver on the beer side, 7% to 9% top line growth and strong bottom operating growth to match. And certainly I think our depletion rate coming out of Q3 reflects that strength.

Rob Ottenstein:

Great. Thank you. Two questions. First, so wondering if you could talk a little bit about pricing. I know that you're talking about 1% to 2%. It was 1% here. So kind of two parts to this. One, what is the kind of the general environment for pricing in the beer industry now, the sense that you get? And second, I know that you do kind of a sporadic pricing, so it's -- a lot of the country is zero and then certain parts is maybe 4% or 5% percent and so then it averages out 1% to 2%. Can you talk a little bit about kind of the timing of your price increases? My understanding that your major competitors are pricing at the end of January and the beginning of February. So how does your pricing fit into that? So that's question number one. And then question number two is kind of hearing a little bit, reading about an innovation, Corona Sunbrew, I think Sunbrew's Citrus that's off to a good start. I was wondering if you could talk a little bit more about that. Thank you.

Operator:

Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Garth Hankinson:

Yeah, thanks, Lauren. So there’s obviously a few drivers of the change in cash flow. And obviously I think that seeing the increase in cash flow just goes to further evidence the very disciplined approach we take to managing the cash of the company. Obviously, some of the drivers there will include things like the increase in beer margin, or I should say beer operating income that Bill referenced in his remarks. There, obviously will be some favorability in the taxes that I referenced in my remarks as well as some other favorability on things like tax rates there -- taxes and things of that nature. But those are the primary drivers.

Filippo Falorni:

Hey, good morning guys and Happy New Year. I want to go back to the on-premise channel for the Beer business. I think Garth mentioned we grew about 1% in the quarter. I was wondering if there's any more to recover from the keg issue that you guys had. And then if you think about next fiscal year, we talked a lot about the opportunity to gain share in off-premise, but can you comment on your ability to gain tap handles and gain more distribution in the on-premise channel as well? Thank you.

Operator:

Thank you. Our next question comes from the line of Gerald Pascarelli with Wedbush. Please proceed with your question.

Bill Newlands:

I think by and large the answer to your question is yes, that those are usually reflective. We don't see a lot of variation amongst channels on that particular thing. Although, you do have some very big markets that are not generally covered by some of those tracked channels, New York being an interesting one. So you do see some variation from time to time, but we don't expect that to be significant moving forward about what the tracked versus what the non-tracked channels look like.

Bill Newlands:

Absolutely.

Peter Grom:

Thanks, operator, and good morning, everyone. Hope you're doing well. So, Garth, I may have missed this, but is the expectation still for beer depletions and shipments to be roughly equal for the year? And then I think it was mentioned that shipments in the fourth quarter would be around 20% to 21% of full year shipments. Is that quarterly mix similar for depletions as well? Just, we've seen a lot of changes in quarterly mix over the past few years that have resulted in differences in growth rates between depletions and shipments. So just trying to understand how we should think about it specifically for the fourth quarter. Thanks.

Operator:

Thank you. Our next question comes from the line of Andrew Strelzik with BMO. Please proceed with your question.

Bill Newlands:

Certainly. We expect the promotional environment to be fairly consistent with what it usually is. We don't think there's going to be any radical changes around that topic. I think a lot of it goes back to what we've often said, which is the velocities that we have on our brands are superb. And obviously at the end of the day, the retail environment is very interested in having brands focused on those that deliver outstanding velocities and sales per point of distribution. We shared at our Investor Day that our sales per point of distribution is radically better than the competition, And I think that's going to continue to serve us well, especially when you consider the strong brand loyalty that we have with consumers. As we've also said on numerous occasions, our judicious 1% to 2% pricing actions, we don't pull back on our pricing in the marketplace, which I think is important also. So when we make those commitments to 1% to 2%, that's what we deliver.

Bill Kirk:

Hey, just one for me, maybe for Garth. I heard the comment about $17 million higher in packaging and material costs for beer. I think that's the lowest year-over-year increase in some time. So is that the low level of inflation you'd be expecting there going forward or is deflation on those items even possible in calendar 2024? And I guess separately it'll probably be in the 10-Q later, but was the transportation cost line for beer, was that deflationary year-over-year in the period?

Operator:

Thank you. Our final question will come from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Bill Newlands:

Well, as you often know, lots of things go into why you see acceleration. I think you've pointed out some. I think weather in California was better than it was in prior year. You saw Thanksgiving being slightly earlier than it was in prior year. I think all those things are true. What I would emphasize, though, is that the takeout around our business, around Thanksgiving, was particularly strong. And our share gains that occurred during that period were as good as we saw during the entire year, which again, just speaks to the strength of the brand. There's gives and takes all the way along in the year, as you know, from various factors that occur. But when you see that kind of share acceleration that we've been seeing in the sort of the 2 point range in the overall category and 3 point range in the high end, that just speaks to the continuing strength of our Beer business, irrespective of the potential gives and takes that occur naturally over the course of the year.

Bill Newlands:

Thanks very much, and thank you all for joining today's call. Again, we're very pleased that our Beer business delivered strong performance in Q3 and is on track to achieve the higher end of our initial net sales and operating income guidance for the fiscal year. Our beer portfolio continues to deliver industry-leading performance, and we see a long runway of opportunities to continue to drive strong growth. In our Wine & Spirits business, we're fully committed to realizing net sales growth and improving our operating margins in line with our medium-term outlook for that business as we leverage its reshaped, higher-end leaning portfolio and enhanced DTC and international footprint. And from a capital allocation perspective, we continue to consistently execute against our balanced and disciplined priorities, which are maintaining our investment grade balance sheet, consistently returning cash to our shareholders through our dividend, and executing opportunistic share repurchases beyond those needed to cover dilutions, while advancing our organic investments to support additional production capacity for our Beer business and deploying excess cash to smaller acquisitions that fill portfolio gaps, but with a thoughtful and prudent approach. Altogether, we remain confident in our outlook for the full year and continue to expect our enterprise comparable EPS guidance for fiscal ’24, excluding Canopy, to remain within our previously stated range of $12.00 to $12.20. And over the medium term, we continue to expect low double-digit EPS growth as we outlined in our Investor Day. So, thanks again, everyone, for joining the call, and I wish you all a safe, happy, and prosperous new year. Thank you again for joining.

Joe Suarez:

Thank you, Darryl. Good morning all, and welcome to Constellation Brands Q2 fiscal '24 conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we'll also be making available in the Investors section of our company's website, a series of slides, which highlight the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance, and now here's Bill.

Garth Hankinson:

Thank you, Bill, and good morning, everyone. Our second quarter results reflect the ongoing disciplined execution of our strategic initiatives and our relentless focus on continuing to deliver growth while enhancing our performance. As Bill noted, we achieved yet another strong quarter with double-digit net sales and operating income growth in our beer business while our Wine and Spirits business delivered solid performance across its largest premium, fine wine and craft spirits brands, which partially offset the category headwinds affecting our mainstream brands. We also continue to generate strong cash flow results and execute against our consistent and balanced capital allocation priorities. Now let's review our Q2 fiscal '24 results in more detail where I will mainly focus on comparable basis financial results. To begin, our beer business increased net sales by 12%, representing an uplift of $253 million. This was driven primarily by volume growth of 8.7% as demand for our Beer brands accelerated through the first half of the fiscal year. This growth also benefited from favorable pricing, which contributed $59 million of the overall net sales increase. As a reminder, we continue to expect pricing to account for 1% to 2% of our net sales increase this fiscal year from the combination of the wraparound impact from the significant pricing actions taken in Q3 of fiscal '23 and targeted pricing actions we are taking in fiscal 2024. For the second quarter of fiscal '24, beer shipment volume and depletions were generally in line with one another, and I'm pleased to report that our inventories are at healthy levels to support the ongoing growth of our brands. Beer depletion growth for the quarter came in at 7.9%, reflecting a successful summer selling season, driven by ongoing consumer demand across our industry-leading beer portfolio as evidenced by our share gain acceleration; execution of our distribution and marketing strategies, including extending our category leadership across the key summer season and continued positive results from our Shopper-First Shelf initiative; and lastly, the accelerated growth in share gains across our core and emerging markets. Before moving to on-premise performance, I'd like to take a moment to explain a notable recent development in off-premise channel observation. As many of you are aware, Circana tracked channel volume growth has historically been above depletion growth by a low single-digit variance. However, more recently, that variance has expanded to the mid-single-digit range as independent retailers not captured by Circana data have lagged in reversing the additional pricing they took beyond our October fiscal '23 pricing actions. We believe this has led certain consumers to ship from these independent retailers to chain retailers offering more competitive consumer pricing. While the shift in these variances has no impact on the overall demand of our brands we continue to monitor channel performance and plan to provide further updates or insights needed to reconcile tracked channel data with our overall performance as warrant. As a reminder, Circana captures approximately 50% of our total beer volumes. Shifting back to the on-premise channel, depletions were essentially flat year-over-year and accounted for approximately 10.3% of our total beer volume. Please note that while we did have some minor disruptions in our supply of kegs during the second quarter, this Q1 to Q2 step down largely reflects a normal seasonal pattern that we have seen in previous years. Importantly, while there is some disruption in the near-term, we are currently producing and shipping tags and fully expect to offset the impact of the disruptions as swiftly as possible. Looking forward to the second half of the year, as Bill noted, approximately 45% of our volumes will ship in the second half of the year, as a result of it being our lower volume period. In addition, our Q3 shipment volumes are also normally more subdued due to routine maintenance activities. Lastly, from a pricing perspective, we will start to overlap the uplift we saw from significant incremental pricing actions taken in October of fiscal '23. Nonetheless, as we have previously stated, we fully expect our full year shipments and depletions to be largely in line, both on an absolute and a year-over-year growth basis by fiscal year-end. In regards to selling days, they were flat year-over-year for the quarter, please note, for the remainder of fiscal '24, Q3 sales days will be flat year-over-year, and there will be one more selling day in Q4. Now let me review beer margins. For Q2, operating margin decreased by 60 basis points to 39.9%. This decrease was driven mostly by the ongoing inflationary pressures in our COGS as we faced an overall cost increase of approximately 17%. The largest drivers of these cost increases came from packaging and raw materials, incremental costs related to a voluntary product recall of select kegs for quality assurance. And higher depreciation that amounted to $12 million or a 24% increase. To mitigate the inflationary and depreciation pressures, we continue to work across the business on cost efficiency and operational productivity programs that yielded meaningful and sustainable benefits. Building on the $30 million of net savings delivered by these initiatives in the first quarter, we realized an approximately $20 million in incremental net savings, in the second quarter. In addition to our cost-saving initiatives, we incurred margin benefits from the following. A $4 million or 2% decrease in marketing expense, primarily driven by the divestiture of our craft beer business. Marketing as a percent of sales came in at 7.1% for the quarter and a $3 million or 3% decrease in SG&A expense, which was primarily the result of favorable foreign currency impacts. Regarding Q2, our marketing spend as a percent of net sales was outside of our previously stated algorithm of 9% to 10%. As usual, part of this relatively lower percentage in Q2 and is a reflection of the strong volume and therefore, net sales performance of the business due to category seasonality. However, the impact of the reduction in marketing due to the previously noted exit from craft beer has further lowered that percentage. For the full year, we now expect to be closer to the lower end of our stated range of 9% to 10% of net sales due to the craft beer divestitures and our continued focus on ensuring our large marketing investments are prioritized to the highest return areas in our portfolio. As a result of the acceleration in the growth of Beer Business since the beginning of the year, we are shifting our expectations for fiscal '24 to the higher end of our initial ranges, resulting in an 8% to 9% expected increase in net sales growth and a 6% to 7% and expected increase in operating income growth. Now, moving on to our Wine and Spirits Business. In line with the reshaping of our Wine and Spirits Business to a higher-end portfolio of offerings, we continue to benefit from the solid performance of our largest premium wine, fine wine, and craft spirits brands. Meiomi, Kim Crawford, The Prisoner Wine Company, and Mi Campo, which as Bill noted, outperformed the corresponding categories in tracked channels and delivered solid depletion growth. While we are pleased with the results with these leading higher-end brands, our overall Wine and Spirits organic net sales were down 11%, driven primarily by the category headwinds we continue to face from the performance of our volumetrically larger mainstream brands, Woodbridge and SVEDKA. Our plans to renovate Woodbridge and SVEDKA, are underway, and our Wine and Spirits leadership team is looking forward to sharing updates on this progress at our upcoming Investor Day. Shipments on an organic basis decreased by 15% and depletions decreased by approximately 8%. As a reminder, approximately 55% of the Wine and Spirits sales are anticipated to occur in the second half of the year, where we also expect to see consumer-led premiumization mixed shift towards the higher end to continue, supporting what we believe will be a notable acceleration in the growth trajectory of the business for the remainder of the year. Wine and Spirits operating income, excluding the gross profit less marketing of the brands that are no longer part of the business following their divestiture, was down 12% and operating margin decreased 10 basis points to 18.2%, also reflecting the same exclusion. The margin decline was primarily driven by the volume declines of our mainstream brands and partially offset by lower material costs, primarily from sustainable packaging projects, supply chain savings, and lower marketing spend as we continue to focus on higher return areas of our portfolio. As we look forward, we continue to expect the Wine and Spirits Business to significantly improve its net sales growth trajectory for the remainder of the fiscal year through a combination of increased contributions from our higher-end portfolio, as well as incremental pricing actions. We expect this acceleration in net sales growth, combined with our continued cost reductions and marketing efficiency initiatives to also support our operating income growth targets. As a result, we remain confident in the outlook for wine and spirits for the year and our guidance for that business for fiscal '24 remains unchanged. Now let's proceed with the rest of the P&L. Corporate expense was approximately $67 million, an overall reduction of 19% when compared to the prior year, primarily driven by reduced spend in the second wave of our digital business acceleration program, lower headcount-related costs and lower compensation and benefits post our reclassification transaction. Interest expense for the quarter was approximately $111 million, a 17% increase from the prior year, driven by higher weighted average interest rates on the portion of our debt with adjustable rates, which is approximately 5% of our debt obligations and higher average borrowings due to the financing of the share reclassification. However, we now expect interest expense for the full year to be approximately $460 million roughly $40 million lower than our prior guidance due to refinancing actions for some of our higher interest debt and faster-than-expected deleveraging throughout the year. We ended the quarter with a net leverage ratio of approximately 3.2 times excluding Canopy equity earnings and expect to continue to make progress towards our three times ratio target over the coming quarters. Our comparable effective tax rate, excluding Canopy equity and earnings for the quarter was 17.8% versus 20.3% last year. For fiscal '24, we continue to expect the comparable effective tax rate, excluding Canopy equity and earnings to be approximately 19%. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx. For the second quarter year-to-date of fiscal '24, we generated free cash flow of $1 billion, a 15% decrease versus prior year, driven by a 34% increase in CapEx investments attributable to the capacity expansions at our Nava and Obregon facilities and the construction of our new brewery located in Veracruz. As of Q2, we have fully commissioned our latest additional brewing capacity project at our Obregon facility and now have approximately 47 million hectoliters of capacity across our two breweries. Looking ahead, we remain on track to bring our ABA facility online at Nava towards the end of this fiscal year. And the development of our additional expansion at Obregon and our third brewery site at Veracruz are advancing as planned. We continue to expect fiscal '24 free cash flow to be in the range of $1.2 billion to $1.3 billion, reflective of operating cash flow between $2.4 billion and $2.6 billion and CapEx of $1.2 billion to $1.3 billion. Our comparable EPS for the quarter, excluding Canopy equity and earnings, was $3.80 as a result of the continued profitable and disciplined growth we have seen this year, we are raising fiscal '24 reported EPS guidance to between $9.60 and $9.80 and comparable EPS guidance, excluding Canopy equity and earnings to be between $12 and $12.20. And finally, our announced dividend of $0.89 a share will result in approximately $163 million returned to shareholders for the quarter. In closing, I'd like to say that our entire team continues to execute and deliver against our strategic priorities. We demonstrated solid execution in the first half of fiscal '24 and as we enter the back half of the year, we plan to remain disciplined as we seek to drive long-term profitable growth and enhanced shareholder value. Our management team is excited to meet with many of you this coming November as we lay out our medium and long-term ambitions and vision for Constellation Brands at our Investor Day. With that, Bill and I are happy to take your questions.

Vivien Azer:

Hi, thank you. Good morning.

Vivien Azer:

So, obviously, very strong one half results in the year. I've been getting a lot of questions on why the positive revision to guidance wasn't a little bit more robust. And, obviously, Bill, you laid out some of the factors to contemplate from a shipment perspective as well as from the lapping of pricing that Garth called out as well. But is there anything incremental that you can offer in terms of your outlook for the category in the back half that might have informed a little bit more caution as well? Thanks.

Operator:

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

Bill Newlands:

Certainly. We certainly expect to see a strong reset period. You know, there's some limited resets that occur here in the fall. Most of those occur in the spring. Our confidence around that drives primarily from the sheer velocities that we have within our key brands. No, our portfolio is second to none in terms of delivering against velocities. And those have been consistent year-on-year, which gives us a lot of confidence in our ability to continue to see shelf set gains. Retailers are very smart about this, and they recognize where the growth and velocity is coming from and that will work strongly to our advantage as those resets occur.

Nik Modi:

Yes, thank you. Good morning, everyone.

Nik Modi:

Bill, I was hoping you can -- hey, how are you? I was hoping you can just comment on systems and supply chain volume. And I ask this question because a lot of your growth is coming in areas that were not really driving your growth, let's call it, 5 to 10 years ago. So getting the right volume in the right place at the right time requires some adjustment and probably some systems overhaul. So I just -- I was wondering if A, if that is a valid point to be making; and B, if it is, what you're doing internally to make sure that you can actually have the most optimized supply chain?

Operator:

Thank you. Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Bill Newlands:

Hi, Dara.

Bill Newlands:

Yes. Sure, Dara. On the first point, the question of whether or not the sort of mid-single-digit continues, I think, remains to be seen. Certainly, as Garth noted at Barclays, and we said during our prepared remarks, it's more than it has usually been so whether or not it refers to the norm of what we usually see, which is sort of lower single-digit remains to be seen, and obviously, one that we watch carefully. Relative to the shelf sets, yes, we think this is going to be a great opportunity for us for all the reasons I answered earlier, which is our velocities are second to none. And we fully expect that we're going to be able to expand our presence. That also impacts some of our new product development. If you think about Oro, I mean, Oro is off to an excellent start much in line with what our expectations were. And that also gives us a chance to expand our shelf presence because we expect that, that particular brand using that example is going to get more shelf space. The last thing I would say, and I got to call out Chelada’s, because Chelada's has just been absolutely on fire. And our additional sizes and variety pack in those -- in that particular category, again, gives us chance outside of the core beer set to also gain more shelf space. So we need to think about this very broadly because we expect to gain both in what I would call the core beer shelf as well as the ancillary beer shelf as well with things like Chelada.

Gerald Pascarelli:

Great. Thanks very much. It's a macro-related question. Bill, one of the questions we get a lot is on student loan repayments. They're going to resume this month after a three-year pause. So just how are you thinking about the impact from that, maybe the potential for down trading, just obviously given some of the premium price points on your beer products? Any color there would be great. Thank you.

Operator:

Thank you. Our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question.

Bill Newlands:

Sure. As I noted earlier, we only had a couple of SKUs in Oro, but it's off to a really good start. And the cannibalization rates were less than we had anticipated and, frankly, less than they were in the three test markets that we had originally run. So we're very positive about that. One place where we're seeing disproportionate pickup on that particular sub-brand of Oro is in the Hispanic community. We've been very pleased by the takeaway in critical, large Hispanic markets, how Oro has done and as we continue to build that out, you'll see additional SKUs coming next year, which we believe will help to continue to accelerate that brand's growth. And if the cannibalization rates stay where they have been, it's going to be better than we had initially anticipated. Garth, do you want to handle the second one?

Operator:

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Bill Newlands:

Good morning.

Bill Newlands:

Yes. So I think this points out to where our judicious approach to pricing has been spot on. We've said consistently -- in fact, we got questions about that on prior calls at times about why we weren't taking more price. Our view has consistently been 1% to 2% annually. We were a little more than that the last couple of years, but 1% to 2% is the consistent way that we look at it, and we look at it market-by-market, SKU-by-SKU. The rationale for that is quite simple. It's much easier to keep your consumer than to have to go get them again, if you have lost them. I think in this particular instance, as you point out, people are careful. We're seeing less -- more trips, but somewhat less purchasing per trip than we used to see, which simply means people are being a little more careful about what they do, given the inflationary environment that exists. I think the important part for us is the fact that even though there are more trips, they are making more trips to purchase more of our brands, even if they might spend a little less on any particular trip, again, that speaks to what I just replied to on the prior question, which is about our brand loyalty and about the consistent consumer dynamics that really works to our advantage over the long run. So again, I think the critical element to that is our judicious pricing approach over time is one that's going to do us very well when you're in a consumer environment that people are a little bit more concerned or a little bit more nervous about the inflationary environment. And I think that's going to work to our advantage as we go forward.

Chris Carey:

Hi, everyone. Garth, can you just comment on how inflation is coming in relative to your expectations entering the year, puts and takes. I asked this in the context of your comments around marketing coming in at the low end of the historical range for the full year. And I would just be curious on how you view gross margin delivery in the quarter relative to expectations with any context on the back half of the year? But -- so anyway, high level, just trying to get some context around how costs are running relative to what you were thinking going and maybe you can frame how this delivery is coming in, again, relative to your going expectations? Thanks.

Operator:

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question. Lauren, are you self-muted?

Operator:

Lauren, unfortunately, we can't hear you. Are you muted? I will move on and Lauren…

Operator:

You got it. Our next question comes from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Bill Newlands:

Thanks, Robert. Yes, I would say that our cost savings and efficiency initiatives certainly are multiyear in nature. Obviously, we communicated earlier this year in Q1, we had taken $30 million out and then this year, an incremental $20 million for this quarter, I should say, an incremental $20 million. We're always looking at ways to sort of prove productivity create efficiencies in the business, whether that's through supply chain and procurement or operations. Examples of that over time have been things like double stacking rail cars and the use of plastic pallets optimizing the location of inventory, as Bill referenced in response to a question earlier, improved purchasing in terms of raw materials, through better contract management and negotiations, as well as more effective and efficient use of our marketing spend. So it's absolutely something that the organization is focused on a year-on-year basis. And certainly, we will share a lot more detail on our cost savings initiatives for both our beer and our Wine and Spirits businesses at our upcoming Investor Day.

Filippo Falorni:

Hi, good morning, everyone. Bill, you mentioned that the last four-week trends has been very strong and consistent with the last 52 weeks. Can you give a little bit maybe more color on the performance of your business in September. And then at the industry level, one of your competitors, the Investor Day mentioned that September for the industry is particularly sluggish, particularly last couple of weeks as you cycle the shipments ahead of the price increases in the last year. So maybe some color on the timing of shipments into September into Q3 would be helpful. Thank you.

Operator:

Thank you. Our next question comes from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question.

Bill Newlands:

Yes. So capital allocation is obviously something that we're going to discuss in greater detail at our upcoming Investor Day. But just broadly speaking, I would say, for this fiscal year, as we noted when we entered this year, we were going to at least buy back the dilution that occurred throughout the year. But this year, we are also prioritizing getting our leverage ratio back to our target of 3.0 versus where it was at an elevated state as a result of the reclassification. That said, we're always looking to be flexible and agile as conditions allow for. So something we continually look at. And just as a reminder, we do have $800 million remaining under our current board authorization. So in the event that we decide we want to be a bit more active, we have the ability to do so.

Lauren Lieberman:

Hi. Can you hear me?

Garth Hankinson:

We can.

Lauren Lieberman:

Okay, hooray. Okay, cool. Sorry about that, I don't know what happened, but just quickly, I was going to ask about wine industry growth. And just against the backdrop of your comments on Woodbridge/SVEDKA, obviously not wine, and then the higher end brands performance. But just as you think about the path forward, not just second half, but into next year and so on, how do you think about wine industry growth, wine versus beer versus spirits? I'm guessing we'll get into this a bit more the Investor Day, but I was just curious if you could preview a bit your view on kind of that long-term growth in wine? Thanks.

Operator:

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Bill Newlands for any closing comments.

Operator:

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.

Joe Suarez:

Thank you, Kevin. Good morning, all, and welcome again to Constellation Brands' Q1 fiscal 2024 conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we'll once again be making available in the Investors section of our company's website, a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I'd like to ask that we limit everyone to one question per person as noted, which will help us end our call on time. Thanks in advance, and now here's Bill.

Garth Hankinson:

Thank you, Bill, and good morning, everyone. As Bill noted, fiscal 2024 is off to a solid start. We steadily executed against our annual plans, remaining both focused and adaptable as the economic and consumer backdrop continue to evolve and we remain on track to deliver against our stated financial performance goals for this fiscal year. As Bill noted, our Beer Business achieved double-digit net sales growth and the higher-end segment of our Wine and Spirits Business outperformed the higher end of the wine category. We also continue to execute and deliver against our capital allocation priorities, and we are reiterating our guidance for the year. Now, let's review our Q1 fiscal 2024 results in more detail where I will mainly focus on comparable basis financial results. Starting with the Beer Business. Net sales increased by $200 million representing an uplift of 11%. This was driven primarily by our volume growth of 7.5% as strong demand continued across our industry-leading portfolio. We also benefited from favorable pricing, which contributed $60 million of the overall net sales increase. Staying on the topic of price for just a moment, the incremental pricing we realized this quarter primarily reflects the wraparound impact from the elevated pricing taken in fiscal 2023 that was above our typical 1% to 2% algorithm. As a reminder, we expect pricing to account for 1% to 2% of our net sales increase this fiscal year, which represents the combined uplift from the wraparound impact and the average of any other additional pricing actions to be taken in fiscal 2024 on a market-by-market, channel-by-channel and SKU-by-SKU basis. Beer depletion growth for the quarter came in at 5.5%, which reflects a slower start but strong finish in the three-month period between March and May as growth significantly accelerated through the quarter, driven by the disciplined execution of our distribution and marketing plans, including during the key Cinco de Mayo and Memorial Day holidays, ongoing consumer led premiumization trends including solid buy rates for high-end beer. And as Bill noted, significant growth in several of our top five markets and beyond as well as improving conditions in California. These results give us confidence as we head into the peak summer selling season. Our largest brands, Modelo Especial and Corona Extra delivered mid-single-digit and low single-digit depletion growth, respectively. While our emerging brands, the Modelo Chelada brands and Pacifico each delivered double-digit depletion growth. On-premise depletions grew 3.2% and accounted for approximately 12.4% of total volume, reflecting more normalized year-over-year performance following the distortions caused by the pandemic closures and post-pandemic reopenings. For the first quarter of fiscal 2024, shipment volume ran slightly ahead of the depletion volume on an absolute basis. Shipments were in line with our plan throughout the quarter, and depletions ultimately ramped up over the course of the three months, as previously noted. This difference in timing was the primary driver of the variance between shipment and depletion volumes. Additionally, as it has been the case historically, strong shipment volume in the first quarter also reflects inventory preparations with distributors and retailers for the peak busy summer season. That said, distributor inventories remain at normal seasonal levels, so we do not expect this variance to generate any further distortion in Q2 and expect both shipment and depletion volume to be aligned for the full fiscal year. Importantly, we also – we are also well-equipped with capacity flexibility to meet any incremental demand as we move through the year. In regards to selling days, they were flat year-over-year for the quarter. Please note that for fiscal 2024, there will be one more selling day in Q4. Moving on to beer margins. Operating margin decreased by 220 basis points to 38%. This decrease was primarily driven by continued inflationary headwinds in our COGS as we faced an overall cost increase of approximately 4% for the quarter. As anticipated in our guidance for the year, we continue to face higher packaging and raw materials, freight and overhead costs. In Q1, we experienced low double-digit percent increases in packaging and raw materials as inflationary pressures continued throughout the period, albeit at a declining rate over the three months. We also continue to face higher overhead costs related to our brewery expansion as well as increased logistics costs, largely related to higher shipment volumes. As we have previously stated, it is important to note that for fiscal 2024 and consistent with recent years, roughly 70% of our COGS are subject to annual pricing adjustments. These are based on trailing indicators, such as producer price indices and, therefore, typically reflect inflation from the preceding year. The remaining 30% of COGS are subject to fluctuations throughout the year and we can manage the volatility for about half of that 30% through our multi-year hedging program. Will our full year COGS expectations currently remain unchanged, we are monitoring closely any potential favorability in direct commodity and pass-through raw material prices for the approximately 15% non-hedged portion still subject to intra-year adjustments and will provide any relevant updates in future quarters. Additional operating margin headwinds for the beer business were comprised of a $29 million or 17% increase in marketing expense, primarily driven by ongoing media spend to build awareness of our core products as well as recent investments to support the new Modelo Oro product launch and as a result, please note that marketing as a percent of net sales came in at 9.5% for the quarter. A $15 million or 18% increase in SG&A expense which was primarily the result of increased legal costs and an $11 million or 16% increase in depreciation, almost entirely associated with our brewery capacity investments. To help offset the increase in cost to our Beer Business, we are executing on various levers to partially offset the full year high single-digit inflationary headwinds in our overall packaging, raw materials and logistics costs through productivity initiatives. These initiatives have yielded savings of over $30 million for the first quarter of fiscal 2024, and are focused on unlocking efficiencies and cost savings across procurement, operations and supply chain. For fiscal 2024, our guidance for the Beer Business remains unchanged as we continue to target 7% to 9% of net sales growth and operating income growth of 5% to 7%, implying an operating margin of approximately 38%. Now moving on to the Wine and Spirits Business. As Bill noted, over the last few years, our Wine and Spirits Business has been effectively shifting its portfolio to be more focused on higher-end brands that are better aligned with consumer-led premiumization trends while broadening sales channels to also expand into higher growth avenues. To that effect, please recall that we divested a collection of primarily mainstream wine brands from our portfolio during our third quarter in fiscal 2023. Accordingly, during today's discussion, I will be referring to the top line of the Wine and Spirits Business on an organic basis, which excludes the contribution from the divested brands. Consistent with the strategic transformation, the Wine and Spirits Business has undertaken the higher-end brands of the wine portfolio continue to resonate with the consumer and outperformed the corresponding segment of the category in the U.S. tracked channels in Q1. More recently, we've seen even greater strength in our three largest premium and fine wine brand families with Meiomi, Kim Crawford and the Prisoner Wine Company, showing dollar sales growth and acceleration in tracked channels. Similarly, we were also pleased to see the overall spirits portfolio deliver strong dollar sales growth in tracked channels led by Mi CAMPO, and High West ready-to-drink cocktails. However, Wine and Spirits organic net sales were down 6%, largely as a result of the continued impact of ongoing consumer-led premiumization affecting the entire category and the lapping of a particularly strong prior year first quarter for our higher-end brands due to distributor inventory balancing actions. From a channel perspective, we continue to see success through our direct-to-consumer efforts, which delivered 13% net sales growth in our overall DTC channel. While still small compared to the rest of our Wine and Spirits Business, this channel accounted for 4% of total net sales, an increase of 100% versus just a few years ago. Shipments on an organic basis decreased by 9% and depletions decreased by approximately 6%. As noted earlier, this volume decline was primarily driven by our mainstream brands, Woodbridge and SVEDKA, as their respective segments of the categories face ongoing growth headwinds driven by consumer-led premiumization. Again, the Wine and Spirits Business continues to diligently work on the reinvention of Woodbridge and SVEDKA to address these headwinds. In particular, SVEDKA declines have stabilized, and we continue to look at incremental opportunities to revitalize the brand and accelerate improvements. And more broadly, in our spirits portfolio, our craft brands posted nearly 40% depletion growth driven by Mi CAMPO, posting depletion growth of over 80%. Wine and Spirits operating income, excluding the gross profit less marketing of the brands that are no longer part of the business following their divestiture were relatively flat, and operating margin increased 90 basis points to 19%, also reflecting the same exclusion. The margin improvement was primarily driven by the favorable impact of the pricing actions taken last year that primarily focused on our higher-end brands, lower materials and packaging costs, including great blend optimization, lapping of higher freight and warehousing costs and lower marketing expense as we have streamlined our approach to marketing, focusing on the highest return areas of our portfolio. Looking ahead, we expect the performance of the Wine and Spirits Business to accelerate throughout the remainder of the fiscal year through the combination of increased growth contribution from the portfolio's higher end brands, which are already seeing depletions improve in line with our sales efforts and seasonal trends, ongoing growth in DTC channels as well as a return to growth in international markets. Lower marketing spend as we shift towards higher growth areas, focusing on the Aspira portfolio, and continued work toward a revitalization of SVEDKA and Woodbridge in the mainstream category. Accordingly, we remain confident in the outlook for Wine and Spirits, for the year and our guidance for that business for fiscal 2024 remains unchanged. Now let's proceed with the rest of the P&L. Starting with corporate expense, which for the quarter was approximately $50 million from SG&A and overall corporate expense reduction of 19% when compared to the prior year and $33 million from unconsolidated investments related to Canopy and our Ventures portfolio investments. The overall corporate expense reduction is primarily driven by reduced spend in the second wave of our digital business acceleration program. I want to take a moment to talk briefly about the next wave of our digital business acceleration program. For fiscal 2024, our DBA program will have three main goals

Dara Mohsenian:

Hi guys.

Dara Mohsenian:

So, you sounded pretty bullish about beer depletions towards the end of fiscal Q1 in May and June so far. I was just hoping for a little more detail there. And more specifically, if you can sort of juxtapose that versus the slowdown we have seen in the November to April timeframe. It does seem like a fairly sizable inflection in the other way. So, more detail there would be helpful. And just if these factors driving the better May and June look more extendable and how you think about that? And if I can slip in a second part that I'll pretend is related to the first part, just if industry pricing worsens going forward, given there's obviously a lot of potential changes on the ABI side, how do you think about domestic beer pricing as sort of the risk factor to your volume trends as you look going forward, if, in fact, there's any change from an industry backdrop standpoint? Thanks.

Operator:

Thank you. Next question today is coming from Lauren Lieberman from Barclays. Your line is now live.

Bill Newlands:

Lauren, on-premise is still not quite back to where we saw pre-pandemic. As we've said before, it was roughly 15% of our business pre-pandemic, and it's still in that 12% to 13% range, as we have come out of the pandemic. And it's probably been a little more volatile, the hit and miss compared to what you see in tracked channels. We believe it's going to continue to do well, and it's going to continue to improve over the course of the summer, as we put the final touches hopefully on the pandemic behind us, but it's admittedly not back to quite where it was ahead of time. The thing that we've often been very pleased about is we've seen many accounts in the on-premise get much more focused on well-known recognized brands. And obviously, whenever that happens, it's to our advantage because of the strength of those brands.

Peter Grom:

Thanks operator and good morning everyone. So I kind of wanted to ask about beer margins, maybe two-parts here. Maybe first, I think marketing was up almost 17% this quarter. And I think the expectation in the initial guidance was for a low single-digit increase for marketing for the year. So I guess, how should we think about the phasing of marketing spend moving forward? And I guess has the outlook changed at all, given the high-teens increase in one or two? And then just related, you mentioned that monitoring some favorability across some of your key inputs and we'll provide an update later. But I guess, conceptually, should there be any capability in those in would you anticipate those benefits dropping to the bottom-line? Or would you look to take out marketing further? Thanks.

Operator:

Thank you. Next question today is coming from Bryan Spillane from Bank of America. Your line is now live.

Garth Hankinson:

Yes, Bryan, absolutely. No changes in that. And obviously, that's one of the reasons why we think wine will continue to improve through the year. And again, no change that - the Beer business is pretty seasonal and tried and true. So that's absolutely what the outlook is for the Beer Business.

Bonnie Herzog:

All right. Thank you. Good morning everyone. I guess I had a question about the Bud Light issue and how it may be impacting your business as well as your distributors? And any changes you might be making there? And then also in light of this, wondering if there might be an opportunity for you to possibly secure more tap handles from Modelo, just thinking about the on-prem business. And then just finally, any changes that you might be making to your marketing strategy or possibly spend levels in light of all of this. Thanks.

Operator:

Thank you. Next question is coming from Nadine Sarwat from Bernstein. Your line is now live.

Bill Newlands:

You bet, Nadine. It is - the incrementality on the actual market has been better, a slight bit better than what we had anticipated coming out of our test markets. And we are quite pleased with it in the test markets. So we're getting very good response on that. It is already a top 10 share gainer, as I noted in my prepared remarks. And again, we've done this with, I would say, a careful approach. We only have two SKUs in that particular product at this point in time. Recognizing, as Garth pointed out in his remarks, should that continue to show the positive signs that it has to-date, we do have the capacity now to more aggressively go after that as the year continues, which I think, again, is very, very positive and speaks to the success that we've had in our operations in Mexico of creating some ability to go beyond what our initial plans are when those opportunities present themselves. But it's early days. I don't like to get too far over my skis too soon on any new product introduction. But so far, this is going at least according to plan, if not better, and we're very pleased with the incrementality that we're seeing. As I said, it's slightly better than we saw in our test markets. So, all thumbs up for us at this point on that product.

Operator:

Thank you. Next question is coming from Andrea Teixeira from JPMorgan. Your line is now live.

Bill Newlands:

So let me take the first half, and I'll let Garth take the second half of that. Our marketing approach has been consistent for years. That's one of the things that we think has been tremendous for our brands and why they continue to accelerate in the market. We believe in spending against our brands. We have refined it some. We're getting much more capable in the digital arena than what we were just a few years ago. And I think that's very positive. But we have the number one share of voice in the market and we expect to continue to be - to have that continue going forward. And we believe in it. It's shown tremendous success for our brands as we've gotten to this point, and we believe it's going to be an important part of our continued success moving forward. Garth, I'll let you answer the other, if you would.

Operator:

Thank you. Your next question is coming from Chris Carey from Wells Fargo Securities. Your line is now live.

Garth Hankinson:

Yes. So, on the shipments and depletions. So look, as we said, we expect the shipments and depletions to be on a nominal basis to be largely in line with one another on a full year basis. I think if you look and you go back to the years that are unaffected by the pandemic or weather-related operational difficulties, you'll see that there is some seasonal differences between depletions and shipments. Q1, as we noted, we typically do have some outpacing of shipments relative to depletions on a nominal basis as you're building for the summer season. So - and you're getting distributors and retailers in a position that they're able to meet the demand of that key summer selling season. So that's fairly typical. So I would just ask you to go back and look at some prior periods, again, pre-pandemic. As it relates to our Wine and Spirits Business, again, as we said on the call, we do expect to see continued improvement through the year on the margin front as we continue to see increased traction with our premium portfolio. Again, we're seeing good growth on brands like Meiomi and Kim Crawford and The Prisoner Wine Company. We're continuing to get the benefit of pricing on those. And there are a number of cost initiatives underway in our wine business. As well as seeing improvements there, as we said, on both logistics and on great input costs. So again, that's a business also that, as Bryan noted, we've guided will - the volume there is about 55 back end loaded. So, for all of those reasons, we're confident that we can deliver the year and deliver the margin profile that we previously guided to.

Filippo Falorni:

Hi, good morning, everyone. A quick question on the health of the U.S. consumer, particularly, if you look about your core Hispanic consumer base, any changes that you see in terms of purchasing behaviors, in terms of package size, trade down or any signs of that? And clearly, your business has improved as the weather improved in California. But any signs there also in terms of changing consumer behaviors, particularly again, in the Hispanic consumer base in the states? Thank you.

Operator:

Thank you. Our next question is coming from Andrew Strelzik from BMO Capital Markets. Your line is now live.

Bill Newlands:

Yes. You're entirely right, Andrew. That's something that our beer leadership team is working on aggressively day in and day out. And frankly, we think we can learn a lot from some other players in the beverage arena, particularly in the soda area, where pretty much if you tell me what you've got to spend, there's a pack size or a pack appropriate for a particular price point. So a lot of things we are looking at, things like Modelo, we're looking at different quantities, ounce quantities against some of our packaging. So all of these things are critically important. Part of the reason you're seeing the massive acceleration in the high 40 percentile in the Chelada business, is what used to be only a 24-ounce can is now available in both multi-pack and 12-ounce opportunities. So again, we think – and that's been part of the big acceleration in the Chelada area. So this is an area that we're spending a lot of time on ourselves to make sure that whatever the consumer has available to spend against our brand, that we have something available to them within our portfolio to make sure that they can take our products home with them when they leave a store.

Bill Newlands:

Thank you, Kevin, and thank you all for joining today's call. We're off to an excellent start in fiscal 2024. Our Beer Business delivered strong growth for the quarter with performance accelerating since the beginning of the year and into Q2. The higher-end brands of our Wine and Spirits portfolio continued to outperform and track channels and to drive margin improvement. We remain confident in our outlook for the full year and are building great momentum as we head into the key summer selling season for our Beer Business and the seasonally stronger second half for the Wine and Spirits Business. In closing, I want to wish you all a happy fourth of July for those of you celebrating that and hope you choose to enjoy your celebrations with some of our great products. Thanks again, everyone, and have a great summer.

Joe Suarez:

Thank you, Darryl. Good morning, all, and welcome to Constellation Brands year-end fiscal 2023 conference call. I’m here this morning with our Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the Company’s website at www.cbrands.com. Please refer to the news release and Constellation’s SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we will also be making available in the Investors section of our company’s website a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today’s call. Before turning the call over to Bill, in line with prior quarters, I would like to ask that, we limit everyone to one question per person, which will help us end our call on-time. Thanks in advance. And now, here is Bill.

Garth Hankinson:

Thank you, Bill, and good morning, everyone. Fiscal ‘23 was another solid year for our company as we continued to relentlessly deliver on our operating plans and strategic initiatives. Despite the inflationary pressures that both our industry and consumers have been facing, we demonstrated yet again the strength of our adaptable businesses, higher end brands and resilient teams. We expect the same focus and dedication to further support our momentum in fiscal ‘24. So, let’s review in more detail our full year fiscal ‘23 performance and fiscal ‘24 outlook. As always, I will focus on comparable basis financial results. Starting with the fiscal ‘23 performance of our beer business. Net sales increased $713 million or 11%, exceeding the upper end of our guidance range. This was primarily driven by solid shipment growth of approximately 7% as strong demand continued across our portfolio, supporting a $464 million uplift in net sales from incremental volumes. Net sales also benefited from favorable pricing in excess of our unusual 1% to 2% average annual pricing algorithm. As we previously noted, the incremental pricing actions taken in fiscal ‘23 were in response to cost pressures across the value chain due to inflationary headwinds. We introduced larger pricing increases and made pricing adjustments in certain markets ahead of our regular case. Depletion growth for the year was over 7%, which, as Bill noted, was driven by continued strong growth in our largest brands, Modelo Especial, Corona Extra, Pacifico and Modelo Chelada brands. On-premise depletions grew 15% year-over-year, and on-premise volume accounted for approximately 12% of total depletions in fiscal ‘23, nearing the mid-teen volume share from prior to the start of pandemic. As previously guided, our shipments and depletions were closely aligned on an absolute basis. Moving on to the bottom line for our beer business. Operating income increased 6%, also exceeding the upper end of our guidance range. This increase was largely driven by a $492 million benefit from net sales growth and yielded an operating margin of 38.3%, which was in line with our implied guidance range. As expected and noted over fiscal ‘23, operating margins were negatively affected by inflationary headwinds. For the import portion of our beer business, which represents nearly the entirety of COGS, we faced an increase of approximately 16% in our raw materials and packaging costs, which was largely driven by inflationary pressures that resulted in an 8% increase on a per case basis. This reflected some benefits from the lapping of the seltzer obsolescence charge in fiscal ‘22 as excluding any obsolescence impact, the increases in our raw materials and packaging costs would have been 20% on an absolute basis and 12% on a per case basis. Note that these two COGS categories, including the obsolescence impact represented just over 55% of the import portion’s COGS in fiscal ‘23. We also saw a 12% year-over-year increase in freight costs, mainly driven by incremental shipment expenses that were offset by efficiency initiatives. Freight costs were 5% up on a per case basis and account for just under 25% of import. And we faced a 14% rise in labor and overhead costs that was mainly driven by our brewery capacity investments. Labor and overhead were up 7% on a per case basis and accounted for just under 15% of import COGS. In addition, operating margins for the beer business were also affected by a $41 million or nearly 22% increase in depreciation, almost entirely associated with our brewery capacity investments. A $55 million or nearly 9% increase in marketing spend related to incremental investments in sports sponsorships and a $48 million or nearly 14% increase in our -- in other SG&A, driven by incremental sales support to align with the momentum of our beer brands. Note, however, that while our marketing investments increased when compared to the prior year, they were still within our 9% to 10% range as a percentage of net sales. All of that said, and it’s important to note that we still delivered best-in-class margins for our beer business in fiscal ‘23. Now shifting to our Wine and Spirits business. First, please recall that we divested a collection of primarily mainstream wine brands from our wine portfolio in fiscal ‘23. So during today’s remarks, I will also be discussing top line on an organic basis, which excludes the contributions from the divested brands. As Bill noted, despite the strong performance of our higher-end Wine and Spirits brands on an organic basis, net sales decline of 2%, ultimately landing in our guidance range. The decline in net sales, excluding the impact of the divestiture, was primarily driven by our mainstream brands as they faced challenging market conditions and lapping of prior fiscal year inventory build. Again, this decline was partially offset by strong growth in our higher-end brands, which outperformed in the U.S. in the higher-end category for both Wine and Spirits and total U.S. wine market. Our higher-end brands also had strong growth in our emerging and rapidly expanding direct-to-consumer channels and international markets. Over time, we expect our portfolio to continue to migrate toward the higher end and for these higher-end brands, channels and markets to support our top line growth acceleration. Shipments on an organic basis decreased by under 8% and depletions decreased by 3%. As just noted, this volume decline, which reduced organic net sales by $148 million, was driven primarily by our mainstream brands, as mix and price, largely driven by our higher-end brands provided a $111 million uplift to organic net sales. Wine and Spirits operating income, excluding the gross profit, less marketing of the brands that are no longer part of the business, following their divestiture in fiscal ‘23, increased 2%, and operating margin increased 80 basis points to nearly 23%, also reflecting the same exclusion. This margin increase was driven by a $12 million uplift from net sales flow-through as favorable product mix was supported by lower grade costs as well as a strong New Zealand harvest. Benefits from other cost savings actions primarily resulting in lower-grade costs that helped to partially offset higher logistics material costs and more efficient marketing expense from enhanced investment strategies, which increased focus the highest return opportunities which supported a $20 million tailwind to operating income. These benefits were partially offset by $17 million in higher SG&A from increased headcount as we continue to strategically invest in our growing DTC channels. We remain well positioned to continue to expand margins in our Wine and Spirits business over time with mix improvements and productivity initiatives in the future. Now moving on to the rest of the P&L. In fiscal ‘23, our corporate expense included approximately $270 million from SG&A and $20 million from unconsolidated investments related to our ventures portfolio, all-in, landing at the low end of our guidance at $290 million. Within the SG&A portion of corporate expense, the implementation of our DBA program, which stands for digital business acceleration, accounted for $47 million. As a reminder, we introduced our multiyear DBA initiative in fiscal ‘23 and expect similar investments to carry into fiscal ‘24. Interest expense for the year increased 12% to approximately $400 million, coming in at the upper end of our guidance range. This increase was driven primarily by the financing of the stock reclassification, which took place in Q3 of fiscal ‘23 as well as the impact of rising interest rates on approximately 15% of our debt with adjustable rates. Our full year comparable basis effective tax rate, excluding Canopy equity earnings, came in at 19.2% versus 17.5% last year as we lapped favorability in fiscal ‘22, primarily driven by higher stock-based compensation activity. Free cash flow for fiscal ‘23, which we define as net cash provided by operating activities, less CapEx, was above the upper end of our guidance range at $1.7 billion. CapEx totaled $1 billion, including over $800 million of investment in our beer business. CapEx came in below our guidance, primarily due to timing shifts in the spend for certain materials and equipment of our Mexico brewery investments at our Nava and Obregon facilities. As of the end of fiscal ‘23, our Mexico brewery operations had a total nominal capacity of approximately 42 million hectoliters. This includes 32.5 million hectoliters at our Nava facility and 9.5 million hectoliters at our Obregon facility. This represents 1 million hectoliter uplift at our Nava facility relative to the capacity we communicated a few months ago. This uplift is once again the result of our continued productivity initiatives that have unlocked additional production flexibility from the existing footprint of our breweries. As a reminder, earlier this year, we shared that these initiatives had unlocked additional capacity of 1.5 million hectoliters at Nava and 0.5 million hectoliters at Oregon. In light of the 2.5 million hectoliters of productivity capacity unlocked at Nava in fiscal ‘23, we have slightly adjusted the ramp-up plans for our new ABA production line at that facility, which I will discuss shortly. With that, let’s move now to our outlook for fiscal ‘24. We expect a comparable basis diluted EPS to be in the range of $11.70 to $12, excluding Canopy equity earnings. For fiscal ‘24, our beer business is targeting net sales growth of 7% to 9%. As Bill discussed earlier, we expect continued strong volume growth momentum to be largely driven by our icon brands, Modelo Especial and Corona Extra and next wave brands, Pacifico and the Modelo Chelada brands. We anticipate our full year fiscal ‘24 shipments and depletions to track each other closely, both on an absolute basis and in terms of the year-over-year comparison. As a reminder, despite some fluctuations in the last few years in our quarterly shipment cases and year-over-year growth rates due to severe weather and pandemic-related impacts, we expect the cadence of our shipments in fiscal ‘24 to follow a more traditional seasonal pattern. We anticipate approximately 55% of our fiscal ‘24 wines to ship in the first half as we meet peak summer demand for our products. In addition, from a quarterly perspective, particularly when looking at year-over-year growth rates, we also expect shipment and depletion comparisons to still show some variability as they always have, as we manage inventory levels around seasonality throughout the year and our regular brewery maintenance activities in Q3. All of that said, we do not expect to have any incremental lapping variability in our shipment growth rate for Q4 as we did in fiscal ‘23. From a pricing perspective, at this stage, we are planning for average annual pricing within our 1% to 2% algorithm. We are mindful that consumers will likely continue to face challenging macroeconomic conditions for the foreseeable future and that our pricing increases in the last 2 fiscal years were above this algorithm. As we advance throughout the year, we will continue to monitor inflationary dynamics and potential recessionary risks to ensure our pricing is appropriately balanced to support the momentum of our brands. We will provide any further update in that regard as part of our future quarterly calls. In terms of operating income growth. Our beer business is targeting 5% to 7%, which implies a fiscal ‘24 operating margin of approximately 38%. As we have discussed, we continue to expect our beer operating margin to be negatively impacted by inflationary COGS headwinds. The majority of these relate to the year-over-year adjustments in our packaging and raw material costs, which, on average, represent a high-single-digit increase in absolute terms for these inputs in the import portion of our beer business. While prices for some of these inputs are off their peaks, most are subject to contractual terms that reflect annual adjustments based on trailing pricing data and some still remain significantly elevated relative to pre-pandemic prices. In fiscal ‘24, we expect packaging and raw material for our imports to account for approximately 55% to 60% of our costs. In addition, we expect freight to be approximately 20% to 25% of costs and reflect a high single-digit year-over-year absolute increase as we continue to face annual volume and contractual increases. And labor and overhead to be approximately 15% of costs and reflect a high-teens increase in absolute terms, largely driven by increased headcount and training tied to our brewery capacity investments. For our beer business, we expect incremental depreciation of approximately $35 million to $40 million as we continue to bring into production incremental growing capacity from our investments, particularly at Obregon, in fiscal ‘24. As noted earlier, the incremental capacity unlocked from our existing Nava facility footprint from productivity initiatives has given us additional flexibility on the ramp-up of our new ABA line. We now intend to spend a bit more time optimizing that new additional ABA production to better support the strong growth of our Modelo Chelada brands. Accordingly, we anticipate the ABA line will be ramping up in Q4 of FY24. Conversely, we have been able to accelerate the ramp-up of our next 5 million hectoliter investment at Obregon to Q1 of fiscal ‘24. This is being enabled by the move of brewery and package equipment that we had previously intended for use in Mexicali. Now, going back to operating margins. We plan to execute a number of productivity initiatives to help offset inflationary pressures. The expectations shared for our beer business COGS in fiscal ‘24 have operational efficiencies and cost-saving actions embedded into them. These initiatives include benefits from our ongoing hedging program and contractual negotiation efforts as well as from our fiscal ‘23 DBA program. To that end, it is relevant to note that only around 25% of our beer business COGS are subject to contractual pricing adjustments within fiscal ‘24, and then we expect our hedging program to reduce our exposure to those adjustments for about 10% to 15% of COGS. In addition, we expect to deliver marketing and other SG&A efficiencies, including an even greater focus on optimizing these types of investments toward our icon and next wave brands. So despite remaining slightly below our medium-term operating margin target we expect our fiscal ‘24 efforts to still yield best-in-class results for our beer business, and we expect all quarters within fiscal ‘24 to deliver operating margins above this latest quarter’s result. Moving to the outlook for our Wine and Spirits business. Our fiscal -- for fiscal ‘24, we are targeting organic net sales to be relatively flat within 0.5 percentage point from fiscal ‘23 net sales, excluding $38.5 million of net sales from the brands divested in fiscal ‘23. We expect to continue the strong growth of our Premium Wine, Fine Wine and Craft Spirits brands and in our DTC channels and international markets. These segments of our business will help to offset the headwinds we expect to face with our mainstream U.S. wholesale brands, which are facing challenging market conditions due to ongoing consumer-led premiumization. Conversely to our beer business, we expect our Wine and Spirits business to ship approximately 55% of our fiscal ‘24 volumes in the second half, again, in line with seasonal demand for our Wine and Spirits products. More notably, despite continued inflationary pressures, we are targeting operating income growth between 2% to 4%, exclusive of $19.5 million of gross profit, less marketing, related to brands divested in fiscal ‘23. This implies an operating margin improvement of at least 40 basis points. The primary margin improvement drivers for fiscal ‘24 include additional mix improvement, particularly with our further optimized portfolio, driven by ongoing growth in our higher-end brands from continued consumer-led premiumization trends, enduring growth momentum in our higher-margin direct-to-consumer channels and targeted international metro areas, primarily through our Aspira portfolio brands, additional innovation with new consumer-led products that help extend our higher-end offerings and stabilize our mainstream brands, reduced marketing spend relative to net sales with optimized investments increasingly focused on high-growth, high-return areas and additional SG&A reductions in cost management initiatives. Similar to our beer business, we expect approximately 25% of our Wine and Spirits business COGS to be subject to adjustments within fiscal ‘24. Now moving to expectations for the rest of the P&L in fiscal ‘24. Corporate expense, including just the SG&A portion, is expected to be approximately $270 million. We expect to see favorability from the termination of certain compensation and benefits that will not be payable in fiscal ‘24 following the retirement of Rob and Richard Sands from their executive roles for the reclassification agreement, approved by shareholders in fiscal ‘23, offset by the impact of inflationary pressures and merit-driven salary increases. Interest expense is expected to be approximately $500 million for the year. This is a 25% increase from fiscal ‘23 and is primarily due to the incremental interest expense associated with the financing of the reclassification. The comparable tax rate, excluding Canopy equity and earnings is expected to be around 19%. Rounding up the P&L, we anticipate approximately $40 million in non-controlling interest benefits and weighted average diluted shares outstanding are targeted at approximately 184 million. Turning to cash flow. We expect fiscal ‘24 free cash flow to be in the range of $1.2 billion to $1.3 billion, which reflects operating cash flow in the range of $2.4 billion to $2.6 billion, and CapEx of $1.2 billion to $1.3 billion. CapEx includes approximately $1 billion to support our Mexico brewery investment and most of the remainder will support our Wine and Spirits hospitality updates. To wrap up, I would like to reiterate that our refreshed capital allocation priorities that we have introduced and discussed throughout fiscal ‘23 and earlier by Bill remain unchanged. We remain committed to a disciplined financial foundation by maintaining an investment-grade rating as we move towards our net leverage ratio target, delivering returns to shareholders via both dividends in line with our payout ratio goal and through incremental share repurchases to at least cover dilution while remaining opportunistic for any additional repurchases, continuing to support the growth of our businesses through deployed capital in our beer brewing additions and in our Wine and Spirits hospitality investments. And lastly, through smaller acquisitions that will fill gaps or enhance our existing portfolio. We believe that this strong disciplined capital allocation strategy, combined with exceptional execution, will empower us to be a premier shareholder return generator for the foreseeable future. With that, Bill and I are happy to take your questions.

Andrea Teixeira:

Thank you. Good morning. Can you comment on what you’re seeing most recently and that makes you feel confident about the 7% to 9%, your sales growth outlook and particularly in light of the broad deceleration in consumption called out by retailers in March? And related to that, are there any dynamics between shipments ahead of the Cinco de Mayo, start of the summer and the depletions as we move into the first quarter and throughout the year? And if I can squeeze on the pricing front, you mentioned the 1% to 2%, but I understand some of the competitors decided to just pushback. And given the dynamics that you had towards the fall last year, if you’re going to be mostly looking to do pricing for the fall? Thank you.

Garth Hankinson:

Yes. So I mean, as we stated in our prepared remarks, we’re comfortable with the pricing at our 1% to 2% algorithm. Obviously, we will continue -- our approach to pricing gives us the flexibility throughout the year to monitor what’s the macroeconomic and the inflationary recession impacts -- potential recession impacts are on our consumer. It allows us to monitor competitor behavior and give us the flexibility to act agilely when we see a reason to move on price. So that will be something that I said in my prepared remarks that to the extent we make any changes throughout the year, we will provide updates on our regular quarterly calls.

Kevin Grundy:

Just a quick cleanup. Bill, I’m not sure if you can comment on March depletion trends. I mean, presumably, given the importance of California, I suspect it’s probably running a bit below what we saw in the fourth quarter. Maybe you could just comment on that. But my broader question is on the Oro launch, and maybe just follow-up there on your expectations, comments on cannibalization risk. And then I think importantly, sort of context around how we should be thinking about this rollout relative to the premier launch several years ago and the degree of incremental spend? If I’m not mistaken, Garth, you can correct me if I’m wrong, I think that was in the $35 million to $40 million range of incremental spend behind that rollout, but just some context around there would be helpful. So, thank you both for that. I appreciate it.

Operator:

Our next question comes from the line of Dara Mohsenian with Morgan Stanley.

Bill Newlands:

You bet. So in terms of on-premise, on-premise continues to grow, as we noted in our prepared remarks. We continue to see acceleration in the on-premise, which we think is very good. We’re not quite back to where we were from a normal standpoint that where we sat before the pandemic, but we continue to make progress against that as we are seeing more and more often that consumers are being out in the marketplace and consuming on-premise. So, we remain optimistic. Our growth profile in the on-premise really continues to accelerate. As I think many on-premise accounts are looking more and more for brands that resonate consistently with consumers. And obviously, we have those and that speaks very well. I used the example of a well saturated market like California seeing draft panels on our business were up 9% in the fourth quarter last year. And I think that’s a great reflection of the potential that still exists for us in the on-premise. Relative to your question about trade down, we have seen very little trade down against our portfolio. Certainly, there has been some, it appears, but it tends to occur at lower price points than ours. So there are some consumers that are showing some concern about general inflationary macroeconomic trends. But by and large, that has occurred at lower price points that where our brands compete. And that’s fairly consistent with what we’ve seen relative to the pure loyalty we see against our brands. It’s the benefit of having consumer preferred brands in our portfolio.

Rob Ottenstein:

Just a follow-up on Garth on some of your guidance comments, and I don’t know if I -- just maybe I didn’t follow you. But I think you were talking about productivity measures that would help get to the margin target. And then you talked kind of very quickly or with some points on hedging programs and the amount hedged or not -- and I just -- I apologize, I lost you on that. But I was kind of trying to connect what hedging would have to do with productivity and trying to exactly the point you were trying to make.

Operator:

Our next question comes from the line of Nik Modi with RBC Capital Markets.

Bill Newlands:

Yes. You bet, Nik. Thanks for the question. One of the things that relative to resets, we are doing extremely well in reset situations. And I think it’s just simple, good business because with our portfolio representing more than 80% of the growth in the total beer category, it just makes sense for retailers to increase our shelf positions versus the competition. You see, as we said in our prepared remarks, Modelo being the number 1 growth driver and Corona being the number 3 growth driver and Pacifico being the top 10 growth driver, these brands demand more space on the shelf. And we’re very fortunate that our team is specifically focused on that very topic. Relative to pricing, as Garth noted, we carefully analyze the elasticities against our brands, and I’ve said this on many other occasions, we’re very mindful that we want to keep our consumer. And our pricing strategies over time have been to be sensible and approachable to ensure that we keep our consumers. We’re going to raise within our normal algorithm this year in the 1% to 2%, as Garth noted, but we should then expect no rolling back of any pricing scenarios from us this year because we have been judicious and sensible about keeping the consumer engaged with us as we move pricing in the past. We’ll continue to monitor to that carefully as the year goes on, as we always do. On a monthly basis, we analyze elasticities and drivers and drags, which you’ve all heard from Jim Sabia over time. But we see absolutely no need to be rolling back pricing in any market because we think we were very appropriate in what we have done historically, which should allow us to be right back in our algorithm going forward.

Bonnie Herzog:

I had a question on your free cash flow guidance of $1.2 billion to $1.3 billion this year. It’s a fair amount below your historical run rate. So maybe you could highlight the key puts and takes that are going to impact your free cash flow this year? And then, you completed your share repurchase goals to date and your $5 billion return to shareholder target, but you didn’t necessarily announce a new return goal. So, curious how you’re thinking about your capital allocation priorities going forward? And then, maybe what’s realistic to consider for cash return to shareholders this year and beyond thinking about this in the context of the CapEx needs, your leverage targets, et cetera? Thanks.

Operator:

Our next question comes from the line of Peter Grom with UBS.

Bill Newlands:

Well, there’s a lot of negative what ifs in the question, which, frankly, we don’t see coming to pass. If you look historically what our beer business has been able to accomplish, we have maintained a very consistent approach to pricing over time, 1% to 2% year after year after year. The last couple of years, as you know, we’ve significantly gone beyond that in an effort to hedge against some of the strong inflationary pressures that all consumer companies have faced. Our belief is we are in a very good position to do our historical 1% to 2% pricing increase. That’s based on a lot of analytics and a lot of elasticity assessments that we do on an ongoing basis. We are very comfortable with that, and we feel like that’s going to be an appropriate play for the course of this fiscal year, which should allow us to do everything we said. I would also note, just as an adjunct to that, one of the things that I said at CAGNY was how strong the Modelo share was in its two strongest markets, which was California and Nevada, where we were double digit. I’m pleased to report that at this point that actually is now in four states, which includes both New Jersey and Texas, which again just continues to show that our growth profile outside of the state of California, it remains a tremendous growth opportunity for our business over the long term and also helps to support what we just talked about relative to our ability to price within our 1% to 2% algorithm.

Chris Carey:

So just two quick ones for me. On the -- Garth, on the beer margin outlook, you gave a lot of great detail. I guess, you’re looking for flat operating margins for the year. Is there any way -- or flattish. Is there any way to frame expectations for gross margin relative to operating margin? And I say that in the context of productivity initiatives, which I suppose can play out in both line items. So I was just curious if you have any comment there. The second observation is Wine and Spirits just delivered what I think is the best operating margin in a few years. And yet the outlook would imply that you’re giving a lot of that back. So is that just conservatism, or is there something just missing in the bridge about some of this nice premiumization, which has really helped the margin structure there? And I sort of asked that in the context of prior margin targets for the Wine and Spirits business in general. So, thanks for those two on Beer margins and Wine and Spirits margins.

Operator:

Our next question comes from the line of Nadine Sarwat with Bernstein.

Garth Hankinson:

So, we do apologize because you broke there at the end…

Garth Hankinson:

Yes. So I think as you’re working with the numbers that we provided, when we said 38% operating -- approximately 38% operating margin. So that if you kind of look at the various points within our range, you’ll come up with various different outputs as it relates to what the margin will be. So we fully -- we have full conviction that we’re going to deliver operating margins for our beer business on approximately 38%. As it relates to the outlook going forward, we’ve just provided our outlook -- our margin outlook for our beer business for FY24. We’re not providing any guidance for future years. We typically don’t do that at this point. That’s not part of our process. Certainly, the biggest driver again this year that we have for FY24 is again driven predominantly by inflation and the inflation that we’re seeing, which I outlined in my scripts as well as some incremental depreciation. Offsetting that, we’ll continue to take pricing as we have. And as we’ve said earlier, we’ll be -- pricing in our 1% to 2% range. We continue to drive incremental volume, which helps to offset fixed overheads and depreciation as we grow into our expanded footprint, and we’ll continue on with the efficiency drivers that I mentioned as well. So, that’s where we stand for FY24, and we’ll talk about FY25 as we -- closer to the end of the year.

Bryan Spillane:

I wanted to touch -- just move back to Wine and Spirits. And maybe Garth, could you talk a little bit about how and SVEDKA and Woodbridge are affecting margin and maybe margin progression there? And I guess I ask in the context of they’re a much larger contributor to volume than they are to revenue. And I guess my assumption is the margins are lower than the average. So just trying to understand, is getting volume stabilization or volume growth in those 2 brands an important component sort of building margins there, or is that not really a big factor? So, really just trying to understand Woodbridge and SVEDKA and kind of the longer-term impact on profitability in Wine and Spirits?

Operator:

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the call back over to Bill Newlands for closing remarks.

Operator:

This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Joseph Suarez:

Thank you, Rob. Good morning, all, and Happy New Year. Welcome to Constellation Brands third quarter fiscal 2023 conference call. I'm here this morning with our CEO, Bill Newlands; and our CFO, Garth Hankinson. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Before turning the call over to Bill, in line with prior quarters or like last, let me limit everyone to one question per person, which will help us to end our call on time. Thanks in advance, and now here's Bill..

Garth Hankinson:

Thank you, Bill, and good morning, everyone. As Bill mentioned, we delivered another set of solid results in the third quarter and continue to make progress against our operating plans and strategic initiatives. Our beer business achieved high single-digit net sales growth and continue to deliver best-in-class operating margins. Our Wine & Spirits business made additional progress against its strategy with an even more premiumized portfolio further aligned with consumer trends following our recently completed divestiture. Additionally, we generated strong cash flow results and with yesterday's declared dividend to be paid in February, we are on track to exceed our stated $5 billion goal of returning cash to shareholders in the form of dividends and share repurchases between fiscal '20 and fiscal '23. I will now review our Q3 performance and full year outlook in more detail, where I will generally focus on comparable basis financial results. Starting with our beer business. Net sales increased 8%, primarily driven by higher average price increases and solid demand across our portfolio. Q3 shipment volumes were up 3% reflecting a difficult volume lap given the focus of replenishing product inventories in the same period last year. From a depletions perspective, we achieved growth in the quarter of approximately 6%, driven by the demand of our Modelo family of products, including the Modelo Especial and Modelo Chelada brand as well as double-digit growth from Pacifico. As Bill noted, depletions decelerated sequentially from Q2 to Q3. This was primarily due to

Lauren Lieberman:

Thanks. Good morning. When you walk through the drivers of the change in trend for depletions that you saw towards the end of the quarter, one sort of mention was a comparison on macroeconomic trend versus the prior year and then also your comments on taking sort of more muted pricing as you look into '24. So I'd love if you could just spend a little bit more time talking about what you're seeing from your various kind of core consumer groups, it feels like I know you pointed out some share gain continues. But when we look at some of your brands relative to other high-end brands, core beer brands, not Seltzer, it does look like there's underperformance, it's specific to your brands. So just any further diagnostic you may have done would be really helpful to hear about? And then also, I wasn't entirely clear on why the slower CapEx spend, I know you just went through it across at the very end of your comments, but I was hoping you could just reframe that because I admittedly missed why is it $200 million lower this year?

Garth Hankinson:

Yes, Lauren, just on the CapEx, it's important to note that we continue to progress with our expansion as planned. As we stated in the remarks, we've added 11 million hectoliters of capacity over the last several years, $9 million in growth, sort of $2 million through productivity initiatives. We are on track with our expansions at both Nava and Obregon. And as we mentioned, we've recently broken ground in Veracruz. So the reduction in CapEx for this year is not necessarily abnormal as we move through the year. It really has more to reflect the timing of when payments will be made and less to do with progress.

Nik Modi:

Yes, good morning, everyone. Bill, I was hoping maybe you could talk about what's actually happening with some of the pricing as it goes through the supply chain? Certainly, we've picked up some commentary within the trade that pricing was taken on top of what you actually took in the market. And I'm just curious what the state of that is, if it's starting to get unwound? And have you seen any implication of that in some of the more recent weeks?

Operator:

Our next question is from Nadine Sarwat with Bernstein.

Bill Newlands:

Sure. So let's start with the question of track channels. One of the things that we have historically found is that you're in the roughly -- there's roughly 3-point delta, we use IRI, I realize you just said Nielsen, we use IRI. There's roughly a 3-point delta historically between the growth that you see in the tracked channels and the depletion rates. Interestingly, that got massively bigger when you're in the middle of the pandemic because the percentage of business that went through the off-premise trade increased substantially. That has now come back to somewhat of a more normalized level as you get to a little bit better positioned in the on-premise, not quite back to where it was, but it's directionally. So that is some of what you are seeing is you're back to a more traditional split between those individual things. Relative to -- and I quoted to the California, some other states are seeing a bit different. Texas on the other was also a market that was somewhat softer post price increase, and that one has not rebounded just yet. But that, again, is not unusual either. It's a little bit of a different channel mix than what you see in the state of California where you often see a more faster response to whatever impact pricing increases take. So this, in our judgment is all part of a normal process of when pricing actions are taken. It takes a few months for it to all work its way through the system. Relative to the depletes, we don't have the final numbers in. As you would expect, we're only in day five of the New Year and obviously, it included the New Year, which makes the reporting a little bit behind. What I would say is that we're comfortable with where we think the summer is going to land. Otherwise, we wouldn't have raised our guidance.

Kaumil Gajrawala:

Hi, guys. Not to belabor the pricing conversation, but when you mentioned 2024 pricing to be more muted, could you maybe just talk a little bit more about what that means? And then Garth, when we think about the share price, not just the movement today but perhaps more recently and perhaps even the fact that it's been -- the share has been flat for a period of time. Does that change how you're thinking about share recalls?

Garth Hankinson:

Yes, Kaumil on the share repurchase, I just want to make sure it's clear that we haven't necessarily deprioritized share repurchase activity. As we mentioned, we have $1.2 billion worth of capacity under our current board authorization. In the near term, we think that it's more important to focus on getting our leverage ratio back down close to 3%. That being said, we do have the flexibility to be able to take advantage of weakness in the marketplace, as we said in our prepared remarks and be opportunistic. So it's absolutely something that we have the flexibility and optionality to execute against.

Bonnie Herzog:

All right, thank you. Hi, everyone. Just maybe first, a quick clarification on your pricing. I'm wondering if you're still expecting to be in your 2% to 3% pricing guidance range for the full year since I guess that would imply only around 1% pricing in Q4? And then, I guess, a question on your guidance, just in terms of your beer guidance, you raised your full year sales and op income growth, but it does imply shipments will be down maybe as much as high single digits in Q4. So I'm aware you're lapping the distributor inventory build from last year, but just trying to reconcile this with some of the key initiatives you have out such as the rollout of Modelo Oro that's shipping now. So maybe if you could touch on that? And then just finally, I wanted to clarify if you expect your full year shipments and depletions to be broadly in line with each other? Thanks.

Garth Hankinson:

Yes. Just in Q4, right? I mean as a reminder Bonnie, as we said throughout the year, you need to focus on sort of full year performance as that we're going to -- it was going to be sort of uneven or choppy results throughout the year, given the fact that we had the difficult overlaps as we were in the first half of last year dealing with some production-related issues in the second half of the year, we were building back inventories. So Q4 will certainly be muted this year versus what it was last year as last year was sort of artificially high due to that, those rebuilding efforts.

Dara Mohsenian:

Hi guys, good morning. So I know we spent a lot of time on depletions already, but just a couple more specific follow-ups to drive a finer point on it. A, just as we think about the deceleration we've seen in nontrack channels, the untracked channels the last couple of quarters here. I wanted to get a little more detail on your perspective on what's occurring there. Is it more just look, there's less momentum from an on-premise recovery post-COVID as you cycle the more normalized post-COVID comps, might there be more of a macro slowdown on the untracked off-premise channels as theoretically volume shift to track channels in areas like Bodegas, et cetera, just sort of break down that nontracked channel mix a bit in terms of talking about on-premise versus the untracked off-premise. So sort of extended a bit beyond the answer to Nadine's question? And then Modelo does look like it's disproportionately slowed. Just to check on that, it seems like your mindset is more that it's related to some of the weakness in California, some of the pricing impact, less sort of more temporary factors. Is any of that sort of related to more longer-term factors? Maybe it's at a much larger base and you're having -- you're not going to see as much growth? How do you sort of think about the Modelo brand and its performance recently? And then last, sorry for the multipart question, but price/mix was obviously very strong in the quarter. Some of that is higher year-over-year pricing. But presumably, some of that is mix also. So are you seeing a big shift to smaller packages, might that also be part of the reason for some of the depletion weakness. So I just wanted to get a little more clarity on those points as it related to depletions? Thanks.

Operator:

Our next question is from Kevin Grundy with Jefferies.

Bill Newlands:

Sure. I'll go backwards there on that. Hopefully, I won't miss anything. We maintain our continuing expectation of our medium-term guidance that we've said before, we don't think there's any radical change to where that has been. And as you know, we've often beaten that in the past. Relative to trade down, we'd obviously watch this carefully. We are very fortunate in the alcohol beverage business that we tend to be recession-resistant, doesn't mean that there's no impact that we are -- it is certainly resistant. The interesting thing that's occurred at this particular time is we've seen variable trade down at our price points. It doesn't mean -- you're correct, there has been trade down, but it has tended to be from price points below us going even lower rather than trade down from our brands which I think speaks very strongly to this year's strength of those brands. We have seen some trading around within our brands. I know -- as I said a moment ago, the Pacifico scenario in the state of California is spectacular. And I think is reflective of the growth potential for that business but it also reflected some trading around within our portfolio that occurred. So we are less concerned. We also keep our eye on it. We are less concerned about trade down from our price points. And remember, we are continuing to market these brands in the same way that we have historically. Our share of voice at the consumer level has never been higher. And I think that's important as well. We continue to invest behind our brands to support those in the eye and the mind of the consumer. And I think that's going to be critically important during a time when there could be some trade down lower in the category.

Andrew Strelzik:

Hi, good morning. Thanks for taking the questions. First, I'll follow up quickly and then another question. The follow-up is on pricing again. I'm just curious, obviously recognizing that you're making some of the commentary about '24 being a bit more muted, while you're seeing some volatility in the depletion trends. So can you just talk about how you'll be approaching that or what you'll be watching as you move through the year potential flexibility there, things maybe holding a little bit better? And then the other question is just on product innovation, which you mentioned all the growth that's been driven by product innovation in the last several years. How does the innovation pipeline look now versus the last several years? Are you -- where are you seeing kind of the biggest opportunities or where is the focus? And is that more or less relevant in this consumer environment? Thanks.

Operator:

Our next question is from Chris Carey with Wells Fargo. Please proceed with your question.

Garth Hankinson:

Yes, Chris, thanks for the question. Look I think it's important to note that we will continue to deliver best-in-class operating margins, both this year and next year. As we said during the call, we're in the process right now of going through our annual planning review. And so we'll have a lot more detail to share on this with our Q4 earnings release and outlook for FY 2024. That being said, we did want to use today to acknowledge that next year's margin profile is going to be more in line with this year's margin profile for all the reasons that we discussed. Certainly, inflation continues to be enduring, and it's lasted longer than anyone had expected. And as we noted, many of our costs are contractual in nature, and those contracts when they get renegotiated, they get renegotiated at sort of the then inflation rate, not necessarily what the outlook for the year is. And we're going through that process again right now. So we'll have more clarity around where we land on those as we go through the next several weeks and months. We've talked about hedges in commodities, and commodities coming off their highs, but certainly, they certainly haven't reverted yet to where they were pre-pandemic, so they will continue to be a bit of a headwind for us next year. Depreciation will also be a bit of a headwind next year for us as we lay around the incremental CapEx that I referenced to Lauren's question, we will -- we do expect to go live with our ABA capacity expansion at Nava as well as that incremental capacity at Obregon. What's the impact to that depreciation on, again, we'll know better about that in the next few months because that's all dependent upon when assets are put into service. And then as you know, pricing will be a bit more muted. Again, we're still going to be within our 1% to 2% algorithm. We just won't be above 2%, like we have been not just this fiscal year but last fiscal year as well. And so those will be some of the headwinds. And again, we always have tailwinds for as well. The continued momentum of the brands, right? We'll continue to -- the brands will continue to grow and drive efficiencies, and we always have a robust set of cost savings initiatives that we will avail ourselves up. And again, we'll have more detail around what -- how each of those impact margins for FY '24 as we release our FY '23 annual results, but we wanted to acknowledge that on this call.

Bryan Spillane:

Thanks, operator. Good morning, everyone. Just one quick one for me. Garth, I guess while we're talking about '24 there's a $26 million, I guess, gross contribution after marketing hit from the Wine & Spirits divestitures that affected fiscal '23. So does any of that spill into fiscal '24? Or are there still I guess drags from divestitures that we should be thinking about as we're just polishing up our '24 model today?

Operator:

And our final question comes from Vivien Azer with Cowen and Company. Please proceed with your question.

Bill Newlands:

Sure, you bet Vivien. We have seen some more trading down in the wine business in the fact that private label has been tending to outpace branded sales by roughly 2.1 points in the last 12 weeks. So that has had some impact. What's interesting is you get a bit of a, I would say, a buying model scenario, meaning you're seeing some trade down at sort of mid- to lower price points. And then you're doing fine if you get into higher price points and a little bit in the middle has been a little shaky is some of what we're seeing. So -- which is a little different than what you have seen historically in these particular environments. As I said in my prepared remarks, there's been a pretty radical change in the amount of our business in the premium sector. I would -- I didn't categorize it as $20. But we're well over 60% of our total business now occurring in the premium and fine wine sector, which was 34% just a few years ago. So we're seeing a pretty radical move within our business as we thought what if we reshape the portfolio because over the long term that's where the consumer is going. And we believe that's not only where there's better profitability but there's better growth as well. So we believe the work that we've done is bearing fruit, and I think it plays itself out in terms of the growth profile of some of our higher end and critical brands.

Bill Newlands:

Thank you, Rob. Despite the ongoing inflationary headwinds affecting the concern in our business over the last three quarters, we're on track to deliver another strong year of growth and remain well placed to further build on the solid track record we have established against advancing our long-term strategic initiatives for nearly four years now. Our Beer business continues to lead in share gains, growth and margins and we're confident in our ability to capture the significant opportunities we still see for our core and our next wave brands. Our Wine & Spirits premiumization strategy continues to gain momentum as well advancing our higher-end brands, DTC channels and international footprint, all yielding noticeable results. Lastly, the performance of our businesses, coupled with our disciplined and balanced capital allocation priorities has allowed us to maintain our investment-grade rating, surpass our cash returns goal, grow our beer production capacity and execute small growth accretive M&A. With all that said, let me reiterate, looking ahead, we remain committed and believe we now have an even stronger foundation to deliver sustainable growth and value creation for our shareholders. Thanks for everyone for joining the call, and I wish you a happy, safe and healthy New Year.

Joseph Suarez:

Thank you, Kevin. Good morning all. And welcome to Constellation Brands second quarter fiscal 2023 conference call. I am here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company’s website at www.cbrands.com. Please refer to the news release and Constellation’s SEC filings for risk factors, which may impact forward-looking statements made on this call. Before turning the call over to Bill in line with prior quarters, I’d like to ask that we limit everyone to one question per person, which will help us end our call on time. Thanks in advance, and now, here is Bill.

Garth Hankinson:

Thank you, Bill, and good morning, everyone. As Bill mentioned, our business continue to perform well in the second quarter, delivering another strong set of operating results. We are making good progress against our operating plan and strategic initiatives, and we are now expected to exceed our previously stated fiscal 2023 net sales goals for the beer and Wine & Spirits businesses and our operating income goal for the beer business. Our strong Q2 results were led by 12% increase in net sales driven by growth in both our beer and Wine & Spirits businesses. Additionally, we achieved a 10% uplift in operating income underpinned by significant double-digit increase in the operating income of our beer business. Our strong cash flow results supported dividends and incremental share repurchases in Q2 that put us on track to exceed our $5 billion goal in cash returns to our shareholders by the end of this fiscal year. With that, let’s review Q2 performance and our full year outlook in more detail, where I will generally focus on comparable basis financial results. Starting with beer. Net sales increased 15% primarily driven by shipment volume growth of over 12% from strong demand for our core beer portfolio and higher average annual price increases. Q2 shipment volumes were generally aligned with depletion volumes and inventories across the supply chain remain at historical norms. From a growth perspective, depletions for the quarter were up nearly 9%, which was propelled by the continued strength of Modelo Especial, Corona Extra, Pacifico and the Modelo Chelada brands. Selling days in the quarter were flat year-over-year and will continue to be flat in Q3. Moving on to beer margins, we continue to experience headwinds driven by the inflationary economic environment, particularly in packaging material cost and shifts in mix. However, beer operating margin increased over 330 basis points to 40.5%, primarily driven by more -- up by favorable impact from pricing, lower obsolescence charges and lower marketing spend, as well as the favorable impact of fixed cost absorption and strong shipment volume growth. As you may recall, we reported higher obsolescence charges in Q2 of fiscal 2022 due to the slowdown in the overall hard seltzer category during the summer of last year. Marketing as a percent of net sales decreased 170 basis points due to the timing of our media spend. We continue to expect that marketing as a percent of net sales will be in the 9% to 10% range for the full year, as we anticipating -- as we anticipate marketing spend to ramp up in the second half of the year with the launch of new campaigns particularly from our media investments around college and NFL football. Given the strong performance of our beer business, we are now targeting full year fiscal 2023 net sales growth of 8% to 10%, and operating income growth of 3% to 5% for that business. Our updated fiscal 2023 outlook includes a 2% to 3% price increase, which is higher than the previously anticipated 1% to 2% expectation and medium-term algorithm range, as elevated cost continue to create pressure across the supply chain. However, we continue to expect an implied operating margin of approximately 38% for fiscal 2023. We anticipate second half operating income margins to be negatively affected as we expect the benefits from our pricing adjustments and cost saving actions will be more than offset by ongoing inflationary pressures across raw materials and packaging, particularly as more favorable hedges will continue to roll off, additional headcount and training, as well as increased depreciation from our brewery capacity expansions, and higher marketing spend as previously referenced. Now shifting to Wine & Spirits, Q2 fiscal 2023 net sales increased over 1% driven primarily by an increase in box sales and favorable pricing, and as Bill noted, Q2 depletion growth was solid for our largest premium wine brands Kim Crawford, Robert Mondavi Private Selection, Meiomi and Ruffino, our largest fine wine brand The Prisoner Wine Company and our largest craft spirits brand High West, Casa Noble and Mi CAMPO. Operating margin decreased 40 basis points to 19.3%, primarily driven by the continued impact of inflationary headwinds and higher general administrative expenses. The increase in COGS was mainly a result of higher supply chain costs, particularly container surcharges and warehousing, and higher material costs, including grapes and glass, partially offset by favorable fixed cost absorption as a result of the lapping of the New Zealand frost and the wildfires in the U.S. The increase in general and administrative expense was driven by compensation and benefits primarily to improve marketing effectiveness. Marketing was favorable due to the time -- timing of spend. For full year fiscal 2023, we now expect Wine & Spirits net sales to come in flat to down 2% and operating income to increase 3% to 5%. This implies operating margins of about 24% for fiscal 2023. Despite significant inflationary pressures and the inclusion of Cooper and Thief and the divestiture previously referenced by Bill, we continue to expect a considerable improvement in operating margins albeit at a lower point than previously anticipated. As noted in our Q1 earnings call, we expect to achieve the uplift in operating margins in the second half through the following key drivers; consumer led premiumization and mix improvement mainly in our fine wine brands; incremental pricing actions executed in Q2 that will be fully reflected in the second half; a bountiful New Zealand harvest, which will drive volume and enhance margins for Kim Crawford; lowering marketing as a percent of net sales; and finally, continued benefits from our cost savings initiatives. Now let’s proceed with the rest of the P&L. As we also discussed in our Q1 earnings call, increased investment in our digital business acceleration initiative was the primary driver of our higher corporate expense. The majority of the spend in our Digital Business Acceleration Program or DBA for short was incurred in Q2 and we expect to start to see some small benefits from these investments later this fiscal year, followed by larger benefits in FY 2024. As a reminder, the goal of our DBA initiative is to support our aim to become a digital leader and capture value. It is a combination of data, technology and operating models, including evolving ways of working organizational structures and acquiring talent. DBA builds on the implementation of our SAP platform, it was completed last year and we anticipate it will enable us to deliver cost savings and greater efficiency in a number of areas by taking our digital strategy to the next level. The first phase of our DBA program is focused on three key areas, supply chain, marketing and procurement each with their own objectives. The aim of these initial efforts is to maximize efficiency across end-to-end supply chain, to build a world-class procurement function with greater spend visibility and to unlock demand for our products by analyzing and connecting multiple consumer data sources. We continue to expect $35 million to $40 million of spend in our DBA program for fiscal 2023 as part of our total $265 million to $270 million of corporate spend anticipated for the full year. Comparable basis interest expense for the quarter was relatively unchanged. However, we now expect interest expense for fiscal 2023 to be between $360 million and $370 million as a result of the July equitization of the Canopy debt securities and rising interest rates. This excludes the impact of any interest expense associated with the funding of the $1.5 billion cash consideration payable in the event the Class B common stock reclassification closes. From a balance sheet perspective, should the reclassification be approved on a Q2 FY 2023 pro forma basis, our net leverage would increase to approximately 3.5 times when considering funding for the premium payment and excluding Canopy equity earnings. We ended the second quarter with a net leverage ratio of approximately 3 times excluding Canopy equity earnings. As Bill noted, we have nearly completed our goal of returning $5 billion to cash to shareholders. We will continue towards our goal through planned dividend payouts and opportunistic share buybacks throughout the remainder of this fiscal year. This remains a top capital allocation priority and we now expect to exceed our cash returns to shareholders goal by the end of this fiscal year. That said, we continue to expect our weighted average diluted shares outstanding to be approximately $186.5 million for fiscal 2023 including shares repurchased in Q2. As a result of the adjustments to our beer business growth outlook for fiscal 2023 and the partial offset from higher interest expense, we now expect EPS comparable guidance to be in the $11.20 to $11.60 range, which represents a $0.10 increase the top end of our prior guidance range. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx. We generated free cash flow of $1.2 billion for the first half of fiscal 2023, which is a 4% increase versus prior year, reflecting strong operating cash flow, partially offset by 23% increase in CapEx investments, as we continue to make good progress on our brewery capacity expansion plans to support the robust growth of our beer business. In addition, our brewery optimization and productivity initiatives have enabled us to utilize incremental capacity from our existing footprint. We now estimate our current total capacity to be approximately 41 million hectoliters, giving us additional production flexibility and enhancing the returns of our prior capital investments. We continue to expect fiscal 2023 free cash flow to be in the range of $1.3 billion to $1.4 billion, which reflects operating cash flow in the range of $2.6 billion to $2.8 billion and unchanged CapEx of $1.3 billion to $1.4 billion. Lastly on Canopy growth, we recorded a $1.1 billion impairment on our investment, which was excluded from our comparable basis results. This non-cash item was driven by the following factors, the period of time for which the fair value has been less than the carrying value and the uncertainty surrounding Canopy stock price recovery in the near-term, Canopy’s previously announced goodwill impairment for their cannabis operations and the uncertainty of U.S. federal cannabis legalization. In addition, we also recorded a $651 million equity loss from our share of ownership in Canopy, which includes $461 million of Canopy’s goodwill impairment. While disappointing, we continue to believe that Canopy’s focus on premiumizing its cannabis branded portfolio to improve their performance in Canada is appropriate and we also remain supportive of Canopy’s efforts in the U.S. to strengthen their emerging CPG brand distribution and build of a competitive THC ecosystem. In closing, we continue to deliver strong business performance and are proud of the continued progress we are making against our operating plans and strategic initiatives. Our beer business continues to outshine the market and our Wine & Spirits business is showing the benefits of its strategy to become a global omnichannel competitor in line with consumer preferences, primarily focused on the higher end. With that, Bill and I are happy to take your questions.

Dara Mohsenian:

Hey, guys. So on the beer…

Dara Mohsenian:

…business, there has been a pretty nice halo the last few quarters between scanner data and the reported depletions just as on-premise recovers post-COVID. It wasn’t as much the case this quarter. So can you just give us some detail on on-premise and untracked channels in general in Q2 and what you are seeing there? And then on the beer margin side, obviously a big beat in the quarter versus consensus, that’s great news, but the implied H2 margins of 36% are well below what you saw in the first half, obviously there is some seasonality there? But just help us understand as we think about margins for fiscal 2024. Should we think about it more relative to a 38% full year basis and more relative to 36% the back half, again there’s some seasonality there, but just conceptually how you think about that would be helpful?

Garth Hankinson:

Yeah. Dara, on the margin piece. So, one, I would say that, you would expect that this year’s margin profile on a first half versus second half would reflect something if it’s more normal, which we really haven’t had the last couple of years due to sort of production issues that we had to contend with, which led to sort of a rebalancing of our shipments. Again, this will be more, because we are in a more typical production environment, you will see a more sort of normal first half versus second half margin profile. We are expecting margins in the second half to be negatively impacted as I said in my remarks as the benefits from pricing and some of the cost saving actions will be more than offset again by ongoing inflationary pressures. From a material’s perspective, we continue to see some pressure from corn, as well as cans and cartons and glass. As you know, we have a relatively robust hedging policy. But the way that we layer in those hedges and then the way that those hedges then roll off, we saw the greatest impact from those in the first half of the year. So while we are nicely hedged, they just won’t be at the favorable rates if you will, as we were in the first half. And then again as is typical -- and then it’s typical as we are laying out incremental capacity, we will be impacted by incremental costs as we bring on people to train in advance of the capacity coming online. And then, finally, we are expecting to see a significant increase in marketing in the second half versus the first half as we support new marketing campaigns around college and NFL football. For FY 2024, our guidance is continues to be clear on that. We continues to view the right way to think about our margins is in that 39% to 40% range and we are not coming off of that.

Operator:

Our next question is coming from Kevin Grundy from Jefferies. Your line is now live.

Bill Newlands:

Sure. Look, we are very pleased with the progress that we are seeing in the Wine business and the divestiture that you saw this morning again it helps to reshape the portfolio. What I -- the way I think you should think about our total business is we are increasingly focused our attention on the higher end. We have noted that for many, many years as it relates to beer. We have now specifically related that on our Wine & Spirits business as well. As you probably noted, most of the tuck-in work that we have done in our Wine & Spirits business has been focused on craft spirits, as well as higher end wine brands that fill portfolio gaps, all of which focus on the high end, where we believe the growth and margin profile are significantly improved. So I would think about this today as just a further step in the reshaping of our business. As we have said, we are very focused on seeing a growth profile and an improved margin profile on that business, and we believe we are well on our way to delivering that and today is just again one more step in the process of achieving that goal.

Lauren Lieberman:

Great. Thanks so much. Good morning. I was just curious on the second half outlook because some of the things - just in terms of the cost structure because some of the things you have called out in terms of rolling hedges and so on. I would have thought, you might have had some visibility into previously. So I was just more curious on the, what’s changed on the second half cost outlook rather than just why second half is different than first half? And then the second thing was, you made a pretty clear statement on the medium-term algorithm still looking for 39% to 40% margins on beer. So outside of the timing shifts that are impacting the second half margins, I was just curious if you can maybe look forward fiscal 2024 and beyond, like, do we get back to 39% to 40% in 2024 or is it a longer rebuild because of where you think that -- those relative hedge positions kind of roll through when we look into 2024?

Bill Newlands:

Yeah. Sure. I think the way that -- I think we will obviously give specific guidance on fiscal 2024 when we get to that timeframe. But I think, what we are seeing is, we continue to see a long runway for growth in our beer business and we think that’s in the 7% to 9% range consistently. We think, we are going to see consistent delivery of 39% to 40% on the margin play. As Garth and I have always said, over the last several years, you have opportunities to be ahead or behind that in any one particular year. This year we are a little behind that algorithm because of a number of factors that we have touched on before. But we still believe that is a solid expectation for the medium-term and we will give specific guidance around 2024 when we get there. But we believe that’s a consistent approach that we are going to be able to deliver on with consistency for the next several years.

Bonnie Herzog:

All right. Thank you. Good morning, everyone. I…

Garth Hankinson:

Hi, Bonnie.

Bill Newlands:

Sure. Well to answer your -- first part of your question, Bonnie. The start of the quarter, September was very solid and it’s consistently in line with what we expect our annual numbers to be. So we certainly think we are off to a good start in the -- in Q3. Garth said this at the beginning of the year that it was going to be a very lumpy year. The important part that I think everyone should think about is, our depletion, the actual volume of our depletions and our shipments year-to-date are almost on top of one another. However, because you are comparing to last year and because we had shipping disruptions last year, it looks very different on a percentage basis. One an actual volumetric basis, they are very similar and you are going to see the same thing for the rest of the year. But this is why we have consistently said, the best thing to do to look at the success of our business is the depletion rate and our depletion rate year-to-date on our beer business is in just under 9%, and obviously, that’s why we increased our guidance, because we have further confidence that we are going to outpace the growth profile that we set out at the beginning of the fiscal year. So that’s the way, we have consistently urged that people think about it around the depletion rate, because it’s just going to be lumpy this year on the shipment side, doesn’t take away one iota for the outperforming success that our beer business continues to have in the marketplace.

Andrea Teixeira:

Thank you. So I just want to go back to this question, because it does imply though that, of course, you shipped more than you had in depletions in the 9%. So what you are seeing now, we should be seeing shipment volume negative in the third quarter and the fourth quarter, which is that’s what’s implying because we see it at flat revenues. If I understood it correctly, minus 2 to plus 2 giving your guidance and you have pricing. So you are just telling us to assume volumes will decline in the second half. I just want to clarify that. And then another question related to that, given the pressures that you had in commodities rolling over and all the hedges, isn’t it make sense to take another pricing usually in the fall to kind of like offset those pressures? Thank you.

Bill Newlands:

The other thing, I think, it’s important to consider is, we have seen significant mixed benefits in our business as well. There’s been a -- because in part from the growth of Cheladas, which are almost entirely single serve or we have added some innovation in different size and pack configurations, but the single-serve pieces of our business, have been very strong. It’s a great example of that’s mix accretive. So in addition to purely the fact that we are going to be taking a bit more price than we had originally anticipated, we also are seeing mixed benefits within the portfolio as well, which will be advantageous.

Rob Ottenstein:

Great. Thank you very much. So wondering if you could talk to us a little bit about what’s going on with Modelo and Corona. Corona being somewhat stronger than we would have expected, Modelo still very strong, but slightly slower than it has been in prior years. Is there anything going on there in terms of the interaction between those two brands or the brand families that we should be aware of?

Rob Ottenstein:

Great. Thank you.

Operator:

Our next question today is coming from Bryan Spillane from Bank of America. Your line is now live.

Bill Newlands:

Good morning.

Bill Newlands:

Well, obviously, any time you have all the packages and you have all the availability that you expect, it certainly is beneficial. What I must say is our team has did an outstanding job of making sure throughout the challenging time, when we had some product outages to make sure that we had availability of the brand. Brand size switching, meaning package size switching within the beer business is very strong, because most consumers come into the store planning to buy a Corona or a Modelo, and therefore, will adjust their package size selection based on what’s available. We have seen that through in-depth consumer research. So, yes, it certainly helps some because it provides the wide array of selection that we own to consumers. But it doesn’t change the algorithm radically, because as you have seen, we continue to show high single-digit volumetric and double-digit topline growth within the business, almost throughout the entire thing. The other thing that I would say though, where you do see some real change by availability is Pacifico. We have said a couple of quarters ago, we had some challenges around brown glass, which significantly impacted Pacifico, but didn’t really change, in fact some of you on the call asked questions about that, are we concerned the Pacifico’s growth profile is what it once was and it comes roaring back with 37% and the IRI data shows over 50% take out increases. So I think it shows and confirms what we had said to you on prior quarters is that Pacifico is a tremendous potential brand for us going forward and it is a great example to your question of in instances where you -- we have had some challenges on inventory, what can really happen in the strength of our inherent brands.

Bill Newlands:

Talk to us, Kaumil.

Bill Newlands:

There you are.

Kaumil Gajrawala:

Can we talk a little bit about the price increases, you are looking for a little more pricing perhaps than you had expected for, are they in place, what’s the magnitude? And then on price gaps, you gave pretty compelling reasons in previous quarters on why you are going up perhaps less than the market, given kind of our outlook for inflation, most of which has come through. So can you maybe talk about kind of this new outlook and what has changed?

Operator:

Thank you. Our next question is coming from Vivien Azer from Cowen and Company. Your line is now live.

Bill Newlands:

Hi, Vivien.

Bill Newlands:

Sure. We feel miserably of predicting how that was all going to play out. So I would take my answer with a slight grain of salt admittedly. But we are cautiously optimistic that that there will be progress. What I am particularly happy about relative to Canopy, as I think they are positioned to be a winner in the U.S. There want jetty and acreage layouts which are all ready to go. I think are an important part of being a winner. We still believe that in the longer run brands are going to matter and I think they are positioning themselves to have the right brands that will matter over the long run here in the U.S. But look, we are optimistic, I think, everybody’s optimistic that we are going to start to see the legislation loosen up, although again being able to predict that, I would have feel miserably on that score, but we are hopeful.

Nadine Sarwat:

Hi, guys. I’d like to kick off with the two long-term questions here. So sticking on the Canopy’s points in the past you have alluded to U.S. federal legalization has been one of the key factors behind your continued confidence in the Canopy investment, but it’s now one of the stated reasons for the meaningful impairment you took today. So how long are you willing to wait to see U.S. legalization happen and do you see the size of your stake changing in Canopy anytime soon? And then, similarly, a bigger picture question, you are super premium beer brands continue to perform strongly in the last quarter, but the consumer is seeing increasing pressure on their wallets from macro pressures. So are you seeing anything if any changes in consumer behavior quarter-to-date from that macro pressure? Thanks.

Garth Hankinson:

And as to outlook, I would just say that, in terms of the first part of your question around legalization. First of all, that was one part of a multi-part analysis to determine whether or not we need to take a -- to take the impairment that we announced today. Beyond that we continue, as Bill has said we continue to be pleased with how the cannabis category has unfolded. In the U.S. as Bill noted in his remarks, it’s now a $25 billion retail sales opportunity in those states where it’s legal. So it is starting to convert consumers, consumers are adopting to the category and we are happy with the position that Canopy has in the U.S. and with the improvements that they are making in Canada.

Bill Chappell:

Thanks. Good morning. Just couple questions on mix, I mean, Modelo Oro, I can’t remember, is that the shipments as you expand nationwide going to have an impact or a meaningful impact on the back half of the year kind of shipments or is that more into next year or is it did not meaningful. And then second and I know that I should probably understand this, but why isn’t just coming out, it’s Modelo Light. I mean it seems like with some of the confusion of Corona Premier that the consumer doesn’t always understand that it’s a light beer or it’s a low-calorie beer. So any clarification would be helpful. Thank you.

Operator:

Thank you. We have reached end of our question-and-answer session. I’d like to turn the floor back over to Mr. Newlands for any further closing comments.

Operator:

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Patty Yahn-Urlaub:

Thanks, Kevin. Good morning, and welcome to Constellation's Q1 Fiscal '23 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance, and now here's Bill.

Garth Hankinson:

Thank you, Bill, and good morning, everyone. Fiscal '23 is off to a great start. We're executing against our business strategy, and we're on track to achieve our targeted financial performance goals for the year. Our beer business achieved double-digit net sales and operating income growth, and our Wine & Spirits business is progressing as marketplace momentum accelerates for the portfolio. In addition, our strong cash flow results enabled us to accelerate and complete our share buyback as we repurchased 5.3 million shares for $1.3 billion through the first 4 months of our fiscal year. As a reminder, one of our key capital allocation priorities has been to return $5 billion to shareholders through a combination of dividends and share repurchases by the end of fiscal '23. To date, we've completed the share repurchase portion of this commitment well in advance of our year-end target. As such, we are now forecasting weighted average diluted shares outstanding of approximately 186.5 million for fiscal 2023, which includes share repurchases through June only. As is typical, since we do not know the timing and cadence of future share repurchase activity, any additional share repurchases have been excluded from our guidance assumptions. Now let's review Q1 fiscal '23 performance in more detail where I’ll generally focus on comparable basis financial results. Starting with beer. Net sales increased 21% primarily driven by shipment volume growth of over 17% from ongoing robust demand for our core portfolio and favorable price. As a reminder, we're seeing a favorable shipment volume overlap versus last year's Q1, which was impacted by supply shortages and missed shipping days as a result of severe weather events impacting Texas and Northern Mexico. Depletion growth for the quarter came in at nearly 9% driven by the continued strength of Modelo Especial and Corona Extra as well as the return to growth in the on-premise channel. Q1 shipments were generally aligned with cases depleted as distributor inventories remained at normal levels. The on-premise channel grew more than 30% in Q1 and now accounts for approximately 13% of our depletion volume versus 11% in Q1 fiscal 2022 when the on-premise channel continued to be somewhat affected by the pandemic. Moving on to beer margins. As expected, beer operating margin decreased 260 basis points to 40.2% primarily driven by the expected impact of inflationary headwinds, leading to increased COGS for transportation and material costs, including pallets, cartons, steel, corn and aluminum. Additional factors include higher depreciation and brewery costs associated with planned capacity additions at our Obregon production facility in Mexico. These headwinds were partially offset by the favor overlap from 2 items

Bryan Spillane :

Just 2 questions for me. One is as we think about the -- assuming that the shareholder proposal gets approved and there's the $1.5 billion outlay, how would we finance that? And are there any offsets to offset the incremental cost of financing? And then second is just as we think about the incremental -- the accelerated investment in digital, should we think about that as being part of the kind of the cost base going forward? So is it a multiyear investment? Or you're just having a good year and you figured you'd spend -- you'd sort of pull forward some of the expenses. So really those 2 things, how we think about offsetting the incremental cost, I guess, of the $1.5 billion; and then how to think about the digital investments.

Operator:

Our next question is coming from Bonnie Herzog from Goldman Sachs.

Garth Hankinson:

Yes, Bonnie. So Bill and I will probably try to tag team a little bit in response to your question. So I would say, first of all, Q1 was on our estimates for the quarter, keeping in mind, as we stated, as we entered the year that this year would be a bit lumpy just like last year was a bit lumpy as we've been overlapping the production issues we had last year. So you'll continue to see some of that lumpiness. For the balance of the year, I would say that we continue to expect that we're going to have strong depletions, and we will continue to have shipment growth that is in line with our long-term algorithm. So the business will continue very much going forward in a very strong manner. As it relates specifically to the guidance, I kind of alluded to this in my scripts, while we did get a benefit from the share repurchases, obviously, from retiring more shares and reduced share count, we also introduced today the incremental spend on the digital business acceleration initiative. And those 2 things kind of net out against one another. And for that matter, as we look again to the balance of the year, it's just a little bit too early for us to make any adjustments given that we're still monitoring macroeconomic conditions as well as what those economic conditions, including inflation, have on the consumer.

Operator:

Your next question today is coming from Dara Mohsenian from Morgan Stanley.

Bill Newlands:

Sure. well, let's deal with a few facts that I think are very strong and supportive of our business. We are finding that 7 out of 10 shoppers who purchased beer have that as a planned purchase before leaving their home. I think that's very strong. It speaks very well to our business. We then look at a thing like buy rate. And buy rate, the way we discuss buy rate is equal to the number of trips times the spend that occurs during the trip. And that's actually up versus pre-pandemic levels and is actually accelerating in Q1 for beer versus the prior 3 months. I think those are very strong indications of the strength of our portfolio, particularly when you look at the share gains that both Garth and I have alluded to up to this point. June looks consistent with our yearly algorithm. I think it was another very solid month, and it's consistent with what our expectations are for the year, as we've said it earlier. So just to recap. Modelo continues to be on fire. We're continuing to see strong results in Corona Extra. Once we get over the supply chain issues in Pacifico -- you saw a very, very strong quarter in Pacifico. So our anticipation is that we are going to continue to see a very solid year in our beer business as the year progresses, recognizing there's a lot of unknown variables that are going to go on relative to the economy.

Unidentified Analyst:

This is Philippe [indiscernible] on for Nik. Question on pricing, on beer pricing. You came in a little bit before expected and your 1% to 2% target for the full year. We are -- how are you thinking beer pricing will evolve in the balance of the year? And do you think the narrowing price gaps versus domestic beer could be a benefit, potentially accelerating your market share gains going forward as we get into a more uncertain macroeconomic environment?

Operator:

Your next question is coming from Chris Carey from Wells Fargo Securities.

Bill Newlands:

Sure. So to answer the first question, it's both. Depletes and volume, we expect to be roughly equal over the course of the year. Because there is growth, shipments are always a little bit higher because you're working off a bigger base. So there's always a bit more shipment in any year because, unfortunately, we have a strong growth profile within our business. Premiumization rates, and I think this is an important one also relative to our portfolio, are continuing to hold. In fact, in beer, 59% of dollars are now in the high end. You remember just a few years ago, when we were predicting that we'd pass 50%. It's continued up to 59.5% as of this point in time, which is up 1 point -- 1.1 points versus prior year. You're also seeing similar activity in the wine business, where the premiumization that's occurring is continuing to occur there as well. All of those things speak very well to the sustainability of our growth profile for our business. And as we've said before, there's still plenty of room for growth within all of our franchises. But using Modelo as an example, Modelo is still growing substantially in a lot of secondary markets where there's a lot of distribution opportunity as well as gaining share in markets that have more sustained and long-term strength. So we're very comfortable that we have a long and sustained runway for growth across all of our brands, and certainly, the facts are backing that up.

Lauren Lieberman:

Great. So I guess I'm trying a few different questions. From an industry volume standpoint, Bill, you've spoken very clearly to the strength of your brand momentum in your portfolio. But industry-wide in beer, I mean my understanding is there's historically a pretty strong correlation between gas prices and beer consumption. And so I think some of the industry data that's out there or anecdotal has been that there has been a deceleration in industry volume in recent weeks. So I was just curious if you could comment on that. If you guys are not seeing that, if you think something different, if you don't think there's a relationship with gas pricing. I'd be curious that broader industry perspective would be helpful because I have no doubt that within that, your brands are in a great spot.

Operator:

Your next question is coming from Nadine Sarwat from Bernstein.

Bill Newlands:

Sure. Let me take the first part of that because you are correct. If you look at the data, it certainly shows that the pricing scenario at the moment is above the 1 to 2 algorithm. There's a number of things involved in that. One is it only reflects tracked channels. So that's a piece of it. It is partly mixed. As you see different sizes and different products and different subcategories within beer affecting it, you see different scenarios. It's partly retailers making choices about hitting specific price points, which, in some instances, will drive the percentage higher but doesn't reflect the change in our pricing strategy. As I said earlier, I think this all goes back to our algorithm being particularly important and particularly flexible in our ability to see what's happening in the market and adjust as necessary as part of it. But all of those elements weigh into what is certainly some higher pricing than what we have noted in our words.

Operator:

Our next question is coming from Rob Ottenstein from Evercore ISI.

Bill Newlands:

They are extraordinary times. And I think the one thing that's important, Robert, in extraordinary times is to remain balanced, sensible and not sort of get caught up in the world wind at the moment and doing things that what I would describe as anti consumer. So that's why we are, again, saying that we are going to be judicious as to how we look at this, balancing the understanding that there are a lot of pressures that our consumers and all consumers are under because of inflationary pressures in the market. You have seen some increase in pricing as one of the prior callers asked that is being taken either at the distributor level or at the retail level to hit specific price points, and it's being reflected. So we're trying to walk the delicate line of what's appropriate, what is -- what can we do to reflect and address the rising costs that we are all facing while keeping our consumer base. We think that's in the long-term interest not only of our company but for the category as well. And as I said, we are going to be very judicious, we are watching it very closely. And as I said earlier, not to repeat myself, but we do have a very flexible algorithm that allows us to address questions in real time, and I can assure you we keep our eye on it almost on a daily basis.

Andrea Teixeira:

So as we all listen to what you said in terms of like how you exit consumption and depletions, it sounds as if you are -- you're still quite confident as you exit the quarter and enter the Q2, and correct me if I'm wrong on the beer side. So given you cast the guidance for the balance of the year, should we summarize and interpret that you're monitoring how volumes would flow through as you're shipping more than depletion and, at this point, you're helping wholesale that retailers take a larger share of the profits at this point? But if everything goes well in the summer, goes as expected, perhaps you could take pricing as you go into the fall, which is a typical pricing point, a pricing action point. And if you can comment on how you're going to balance because your low single-digit implied shipment volume for the balance of the year? Obviously, it [discouraged] investors. Is there anything we should be noting in terms of like the level of conservatives that you're assuming now? Or is that just a function of again, looking at how your typical consumer will behave, given higher oil prices?

Operator:

Our next question is coming from Bill Chappell from Truist Securities.

Bill Newlands:

Sure. You bet. So in wine, and I quoted the beer example earlier, in wine, the entry levels of the high end are, frankly, the most robust growth profiles, and that's sort of in that $11 to $25 range. That represents about 28% to 29% of total dollars. And that's also, interestingly enough, it's the exact same number, 1.1 points versus a year ago. I quoted the beer one was also 1.1 points a bit earlier, but that's also up 1.1 points. And of course, that's perfect for us because we've got brands like Kim Crawford, Meiomi and Unshackled and various other brands that fit right into that price point. So therefore, it's not surprising that those brands are doing extraordinarily well. As I said earlier, our premium wine and our fine wine and craft spirits businesses had a very strong quarter with strong depletion growth of 8% and 16%, respectively. So we had a very strong start in wine. And certainly, the premiumization that you're seeing continues. It would be a different answer if we talked about mainstream wine where, frankly, it's been more challenged, even though we're very pleased that our Woodbridge brand is gaining share in a challenged subcategory. So overall, it's very similar in style to what I responded earlier in beer, and we're quite pleased that it is.

Bill Newlands:

Great. Thanks again. Thank you all for joining our call today. As you could hear, we're off to a very good start to the year. We delivered excellent operating performance, underpinned by strong business fundamentals which provides us with great momentum as we head into our key summer selling season. Consumer demand and takeaway especially for our beer brands, remains robust as I've stated before, and we're well positioned to achieve our targeted financial goals for the year. Overall, we've demonstrated again that we're committed to pursuing our strategic growth initiatives while returning value to our shareholders. In closing, I'd like to wish everyone in the United States, a happy fourth of July holiday weekend and hope your celebrations with your friends and family include some of our fantastic beer, wine and spirits products. Thanks again, everybody, and have a safe and healthy summer.

Patty Yahn-Urlaub:

Thanks, Kevin. Good morning, and welcome to Constellation's Year-end Fiscal '22 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to prior quarters, I would like to ask that we limit everyone to 1 question per person, which will help us to end our call on time. Thanks in advance, and now here's Bill.

Garth Hankinson :

Thank you, Bill, and good morning, everyone. Fiscal 2022 marked another year of solid financial performance and shareholder value creation despite a myriad of headwinds forming our fortitude and resiliency. Our strong operating results and powerful cash flow generation allowed us to return almost $2 billion in capital to shareholders for the year. Additionally, as Bill mentioned, this morning, we announced that we are entering into an accelerated share repurchase, or ASR agreement to repurchase $500 million of shares during Q1 of fiscal 2023. Please note that the ASR agreement constitutes the $500 million share repurchase referenced in this morning's earnings release. Once we complete the ASR in Q1, we will be approximately 75% of the way toward achieving our goal of returning $5 billion to shareholders by the end of fiscal 2023. More on fiscal 2023 in a minute, but first I want to review full year fiscal 2022 performance in more detail, where I'll generally focus on comparable basis financial results. Starting with beer. Net sales increased 11%, landing in the upper end of our previous guided range driven by shipment growth of approximately 9% and favorable price, which, as expected, landed slightly above our typical 1% to 2% range. These tailwinds were partially offset by unfavorable sales mix primarily driven by a shift in package types and the return of on-premise draft SKUs. Depletion growth for the year came in at nearly 9% driven by the continued strength of Modelo Especial and Corona Extra as well as the strong return to growth in the on-premise channel. On-premise volume accounted for approximately 11% of the total beer depletions during the fiscal year and grew strong double digits versus last year. As a reminder, the on-premise accounted for approximately 15% of our beer depletion volume pre COVID and was only 6% of our depletion volume in fiscal 2021 as a result of on-premise shutdowns and restrictions due to COVID-19. When adjusting for 2 extra selling days in the year, the beer business generated approximately 8% depletion growth. As previously guided, cases shift continue to exceed cases depleted during the fourth quarter, which resulted in distributor inventories returning to normal levels at fiscal year-end. Moving on to beer margins. As expected, beer operating margin decreased 110 basis points versus prior year to 40%. Benefits from favorable pricing, marketing as a percent of net sales and mix were more than offset by unfavorable costs. The increase in COGS was driven by several headwinds that included the following

Lauren Lieberman:

Great. I wanted to talk just a little bit about Corona. I was actually surprised that in your prepared remarks, you talked about expecting more modest growth in Corona Extra in '23. But the momentum on that brand has been so strong this year, my understanding of anecdotes around performance during the Super Bowl period has been tremendous. So just curious why expecting things to slow down a bit in '23.

Operator:

Our next question is coming from Dan Mohsenian from Morgan Stanley.

Garth Hankinson :

Thanks, Dara. I'll take the first part of that question on margin and then Bill will comment on pricing. So as we started selling in the second half of last year, the inflationary environment, obviously, have gotten a little bit deeper and more protracted than anyone expected. And so that's why we were focused in January as to the facts we're going to be facing some additional headwinds this coming year. Typically, we're seeing inflationary increases on a year-over-year basis in that kind of low to mid-single-digit range. And this year, we're expecting them in the high single digit to low to mid-double-digit range. You're seeing that across things like glass, which is our biggest component in beer, which is up 6%. Cartons are up 17%. Crowns were up 26%. Wood pallets are up 35%. So costs are definitely under pressure for sure. That being said, we think that we're fairly well positioned as we enter into the year. To be very proactive around this, we've gotten more aggressive with our hedging policy or our hedging practices, I should say. We typically enter a year somewhere hedged in the neighborhood of sort of 50% to 60% on any given line. But this year, we've taken a more defensive posture to make sure that we're really protecting the P&L. As we enter the year this year, we're hedged at about 75% on aluminum, 70% on natural gas, 60% on the core and 90% of diesel. So we're in a pretty good spot. That being said, as you articulated, there's a lot of volatility around commodities, and that's where we're watching as we go through the year, and we're being opportunistic to layer and even been further hedges as we see weaknesses on a day-to-day basis. So we think we're in pretty good shape. But certainly, there's still some exposure just given the depth and the duration of the inflationary environment we're currently in.

Operator:

Your next question is coming from Bonnie Herzog from Goldman Sachs.

Bill Newlands:

You bet, Bonnie. Fortunately, so far, things are holding up very well. One of the things that I've seen over the course of my career in the alcoholic beverage business, is many, many times, when there is recessionary environments, consumers are still interested in our category and almost view it as a small luxury that they can still experience where they might pass on buying a new refrigerator or something that's a bigger purchase. If they're having personal challenges, they still want to engage in some things that they enjoy in their life. And fortunately, our category is one of those. So so far, this continues to hold. And I think it speaks directly to my answer to Dara a minute ago, which is trying to be sensitive to our consumer and to make sure that that we continue to provide our great products to them at pricing that's reasonable given a tough environment.

ChrisCarey:

Just one follow-up on the pricing and then related question. Are you planning on pricing on Corona? Or is that all going in Modelo and the other SKUs? Can you just maybe comment on where the pricing is going to be going in? And then just specifically on Modelo, I think you said mid-single digit to high single-digit in the off-premise. Can you maybe review expectations for on-premise penetration for this fiscal year? And just in general, where you see that as far as kind of innings of developing the on-premise for that specific offering?

Operator:

Thank your next question today is coming from Kaumil Gajrawala from Credit Suisse.

Garth Hankinson :

Sure. Thanks, Kaumil. Look, we're going to use the same approach this year that we used last year, which is we're going to use all sort of the tools that are available to us to buy back the shares that we need to buy back in order to meet our obligations. So last year, we used an ASR in the second quarter. We also took advantage of a 10b5 and 10b18 program. So we're going to do that for the -- we can optimize the timing of the -- of our repurchases as well as appropriately dollar cost averaging, dollar cost average out here to make sure we get the best value for this. And we opted to use the ASR in the first quarter because we're going to get the benefits earlier in the year. And also, I think that it's a good time for us to buy it.

Vivien Azer:

I just wanted to offer, I think it's really reassuring to investors how consistent you guys have been in terms of the commentary on capital allocation today. So thank you for that. In terms of my question, I also wanted to focus on pricing in the health of the consumer but perhaps pivoting to the Wine & Spirits business. Clearly, you guys have done a ton of work to premiumize your portfolio. So given the portfolio evolution in Wine & Spirits, how does that change your thinking around your ability to take price there?

Operator:

Our next question today is coming from Nik Modi from RBC Capital Markets.

Garth Hankinson :

Nik, this is Garth. I'll take the first part, and then I'll turn it over to Bill. I think it speaks for itself that Constellation is fully aware of and comprise all of our obligations under state and federal securities laws. And relative to your question of how March was, Nik, we're pleased that it's at least consistent with our annual algorithm despite huge comps that we faced in March of last year. So we're pretty pleased that we got off to a good start.

Bryan Spillane:

So Garth, I had a question about just the Wine & Spirits margin outlook medium term. And one thing just in terms of, I think you gave kind of 2 sets of numbers. One was 28% to 29% operating margin and then the other was approximating a 30% EBIT margin over time. And just are those different? Or are we just saying that we still think we can get back to the 30% margin? I was a little just confused about the language there.

Operator:

Your next question is coming from Nadine Sarwat from Bernstein.

Bill Newlands:

Obviously, the seltzer market has developed very differently than what we had anticipated. And frankly, it's been more of a challenge than what we had anticipated as well. As you know, this year, we're doing a number of things. We're repackaging, as we said, in prior quarters. We are getting much more focused on where we bring differentiated products rather than me-too products into that particular sector. But we still feel that, that's going to be a growth segment of the overall beer business, and we're going to participate in it. So relative to lessons learned, I think a couple of things are always important. It's important to test. We're obviously doing tests as it relates to our Modelo franchises to make sure that we have consumer propositions that are best of class and that are going to win with consumers. And we're going to continue to operate under that approach going forward.

RobOttenstein:

Terrific. Just kind of swinging back to the question on seltzers and taking it a little bit broader. Clearly, a lot of the excitement on that segment is gone. From your perspective, is there actually a silver lining in that such that retailers and distributors will spend more time, energy on your brands, and that should be something that you should benefit from going forward? And then connected to that, are you starting to get a little bit more of the shelf space that you guys have earned given the tremendous brands and velocity that you've had and the fact that you've been undershelved in the past?

Operator:

Our next question is coming from Kevin Grundy from Jefferies.

Bill Newlands:

You bet. So just relative to your question about the Sands proposal, we've been advised that transactions of this nature typically takes 60 to 90 days. Beyond that, it's really out of our hands. The management is not involved in the discussion, the discussions between the Sands family and the special committee of the independent directors of the Board. So I don't have the exact answer to that question, believe that by 60 to 90 days is very typical. So we shall see. Relative to the start of the year, I think everybody recognized January was a bit of a tough month. It was for every -- I think everybody in the industry. A little bit of that was where New Year's fell, there were weather events, Super Bowl got pushed out an extra week versus what it was the year before. But I think the exciting part for us is it was a very, very strong February, and as I responded to Nik 2 questions ago, March has been very strong as well in the start of our fiscal year. So I don't think there's anything that's overarching as an issue within the category but certainly not as it relates to our business. We continue to be very pleased with how our brands are performing. And as Garth pointed out in his prepared remarks, we've gotten our inventories back in the right position. So brands like Pacifico, which we were a little challenged for a while on brown glass, we have gotten through that. Some of those kinds of things, which were sort of detrimental to an otherwise very strong performance here, we've now fixed. So we're in a much better position heading into this fiscal year than we were last year where there were just a lot of extraneous things that were not helpful to us.

Andrea Teixeira:

I just wanted to double-click on the opportunity to improve mix with the shift to on-premise. You had, I think, 3.8% price/mix expansion in the quarter. Can you still have around -- my calculation’s around the 100 basis points tailwind? And do you expect this to be -- price/mix to be embedded in your guide around 400 basis points? I just want to double check that. And on Wine & Spirits, I think Bryan, Vivien asked good questions regarding the outlook. Is there any reason why it was a bit disappointing? I know you're making a lot of investments to premiumize the portfolio. But anything to kind of give us more comfort that besides the Opus One impact, what is impacting there and if there is a better outlook towards the long term?

Garth Hankinson :

And relative to your first -- the first part of your question, if I understood it correctly, you're pointing out that, in Q4, we had sort of a 4% points of pricing and whether or not that's going to continue. Our outlook for next year assumes that we're going to get our -- more in line with our typical 1% to 2% pricing. So that's sticking in line with our normal outlook.

Steve Powers:

Great. I actually wanted to follow up on both those those 2 questions and your answers there. So on the beer side of things, the 1% to 2% pricing outlook, you're saying that that's inclusive of any mix impacts. I want to clarify that. And then on the wine, Bill, given the decision to reinvest stranded overheads towards additional growth, as you think about that 2% to 4% objective, are you biased, over time, higher within that range because of accelerated reinvestments? Or is the takeaway that the -- just sort of the cost of achieving that top line has just gone up a tick because of -- probably because of mainstream dynamics, but just your perspective there.

Operator:

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Newlands for any further or closing comments.

Operator:

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Patty Yahn-Urlaub:

Thanks, Valerie. Good morning, and welcome to Constellation’s Third Quarter Fiscal 2022 Conference Call. I’m here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company’s website at www.cbrands.com. Please refer to the news release and Constellation’s SEC filings for risk factors which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to prior quarters, I would like to ask that we limit everyone to one question per person which will help us to end our call on time. Thanks in advance, and now, here’s Bill.

Garth Hankinson:

Thank you, Bill, and hello, everyone. Q3 was another quarter of strong execution by our Beer business. This continued strength, coupled with tax favorability enabled us to deliver 8% comparable basis diluted EPS growth for the quarter excluding Canopy. As a result, we have increased and narrowed our full year fiscal 2022 comparable basis diluted EPS target to a range of $10.50 to $10.65 versus our previous guidance of $10.15 to $10.45. This range excludes Canopy equity earnings, includes an increase in Beer operating income guidance, and reflects a decrease in the tax rate for fiscal 2022. Now let’s review our Q3 performance and full year outlook in more detail where I’ll generally focus on comparable basis financial results. Starting with Beer, net sales increased 4% driven by shipment growth of 3% and favorable price partially offset by unfavorable mix. As a reminder, we are lapping a significant inventory rebuild in Q3 of the prior year which generated 28% shipment growth. Depletion growth for the quarter came in above 8% driven by the continued strength of Modelo Especial and explosive growth of Corona Extra as well as the continued return to growth in the on-premise channel. Again, keep in mind the difficult volume overlap we encountered during quarter as we faced a 12% depletion growth comparison driven by robust inventory replenishment at the retailer in the prior year. On-premise buying accounted for approximately 12% of the total beer depletions during quarter and grew strong double-digits versus last year. As a reminder, the on-premise accounted for approximately 15% of our beer depletion volume pre-COVID and was only 8% of our depletion volume in Q3 fiscal 2021 as a result of on-premise shutdowns and restrictions due to COVID-19. Selling dates in the quarter were flat year-over-year, and please note that in Q4 there is one additional selling day. Cases shipped exceeded cases depleted as distributor inventory levels began to rebuild during the quarter. Inventories are expected to return to normal levels by the end of the fiscal year as shipment volume is expected to continue to exceed cases depleted for the remainder of the fiscal year. Moving on to Beer margins, Beer operating margin decreased 130 basis points versus prior year to 41.3%. Benefits from favorable pricing and marketing planning were more than offset by unfavorable costs. The expected increase in COGS was driven by several headwinds that included the following. First, increased material costs due to rising commodity prices and inflationary headwinds that on average are in the mid to high single-digit range predominantly driven by wood pallets, aluminum, steel and cartons. Please note that this range includes the impact of hedging where possible. Second, increased brewery costs driven by labor inflation in Mexico, increased headcount, incremental spend related to capacity expansion, and annual brewery maintenance that was performed during the quarter. As a reminder, the annual brewery maintenance took place during the fourth quarter last fiscal year. And third, a step-up in depreciation expense largely due to the incremental 5 million hectoliters at Obregon completed earlier this fiscal year. These COGS headwinds were partially offset by favorable fixed cost absorption driven by increased production levels. Marketing as a percent of net sales decreased 130 basis points to 8% versus prior year as we have returned to our typical spending cadence which is weighted more heavily towards the first half of the fiscal year. In the prior year, a significant amount of marketing spend was shifted from the first half to the second half of the fiscal year due to COVID-19-related sporting and sponsorship event cancellations and/or postponements. Additionally, we continue to expect full year spend as a percent of net sales to land in the 9% to 10% range which is in line with fiscal 2021 spend of 9.7% of net sales. For full year fiscal 2022, we now expect net sales growth to land in the 10% to 11% range and operating income growth to land in the 6% to 7% range reflecting continued the strength of our core beer portfolio. As previously communicated, we expect price increases within our beer portfolio to land slightly above our typical 1% to 2% range. However, we anticipate this incremental pricing favorability to be partially offset by unfavorable net sales mix primarily driven by a shift in package types and return of on-premise draft SKUs. We continue to expect our gross margin to be negatively impacted for the fiscal year as benefits from price and cost savings agenda are expected to be more than offset by cost headwinds predominantly driven by significant step-up in depreciation and increased inflation across numerous cost components as the inflationary environment resulting from economic supply chain and other by-products of the pandemic continues to be dynamic and variable. We now anticipate these elevated inflationary pressures to persist well into fiscal year 2023 and expect inflation on the commodity spend component of direct materials to land on average in the high single-digit to low double-digit range next fiscal year. We will continue to maintain our disciplined approach to address these evolving conditions through our commodity hedging program, cost saving initiatives, and balanced price adjustments. However, due to a persistent and tough inflationary environment and incremental depreciation driven by our capital expansion plans, operating margins could land below our stated 39% to 40% range in fiscal 2023. Let me reiterate that these are still best-in-class operating margins within our industry which reflects the strength of our core beer portfolio and efficiencies of our operations. We will continue to refine our outlook for fiscal year 2023 and will provide more details and official guidance during our Q4 earnings call in April. Moving to Wine and Spirits, Q3 fiscal 2022 net sales declined 25% as shipments declined approximately 39%. Excluding the impact of the wine and spirits divestitures, organic net sales increased 3% driven by shipment growth of approximately 3%. Favorable price, incremental sales of crates to Opus One, and small wine sales, all partially offset by unfavorable mix. Depletions declined approximately 7% during the quarter and continue to be challenged by port delays for our international brands and distributor route-to-market changes in transition markets. Additionally, depletions faced a difficult overlap, especially for our premium and luxury brands which experienced robust growth during Q3 of the prior year. However, we expect depletion growth to accelerate during the fourth quarter driven by the continued strength of our higher-end brands led by The Prisoner Brand family, Meiomi, and Kim Crawford, a robust innovation agenda, and an easier buying overlap versus a year ago. From a shipment perspective, we expect shipment growth for the fourth quarter to decelerate versus Q3 as we continue to right size distributor inventory levels for our mainstream brands. Moving on to Wine and Spirits margins, operating margin increased 140 basis points to 25.4% as decreased COGS, mix benefits from divestitures, and favorable price were partially offset by increased marketing and SG&A as a percent of net sales and unfavorable mix from the existing portfolio. As expected, lower COGS were driven by net favorable fixed cost absorption, lower rate for raw materials, and cost savings initiatives, partially offset by increased transportation costs. The net favorable fixed cost absorption resulted from lapping the unfavorable impact of $20 million in the prior year which was a result of decreased production levels due to the 2020 US wildfires. This benefit for the quarter was partially offset by unfavorable fixed cost absorption resulting from decreased production levels in New Zealand due to a late frost during their harvest season earlier this year. Marketing and SG&A as a percent of net sales increased versus the prior year due to the loss of top line leverage resulting from the divestitures. In the prior year, a significant amount of marketing spend was shifted from the first half to the second half of the fiscal year due to COVID-19-related cancellations and/or postponements. As a result, marketing as a percent of net sales for Q4 is expected to be lower than the prior year. For the full year, we expect marketing as a percent of net sales to be in the 10% range. For full year fiscal 2022, we now expect net sales and operating income to decline 21% to 22% and 23% to 25%, respectively. Excluding the impact of the wine and spirits divestitures, organic net sales is now expected to grow in the 4% to 6% range versus our previous guidance of 2% to 4%. It is important to note that the increase in our top-line guidance is mainly due to incremental shipments to support our route-to-market transition earlier this fiscal year and revenues associated with sales of smoke-tainted bulk wine. Both are one-time in nature and thus, we do not expect them to be repeated in future years. As such, going forward, we remain confident in our medium-term top line growth algorithm for the wine and spirits business 2% to 4%. Looking ahead to fiscal year 2023, we expect significant cost increases for the business including supply chain disruptions, inflationary cost pressures on product, freight, and warehousing costs. However, in order to mitigate some of these cost headwinds, we intend to take incremental price that will be staggered throughout the first half of calendar 2022. We will continue to work through the puts and takes of our full year fiscal 2023 outlook and will provide more details and official guidance during our Q4 earnings call in April. Now let’s proceed with the rest of the P&L. Fiscal year to date corporate expenses came in at approximately $162 million, down 6% versus Q3 year-to-date last fiscal year. The decrease was predominantly driven by compensation and benefits due to the reversal of an accrual for performance share units which will not be earned due to not achieving the threshold level of earnings performance from our Canopy investment and a favorable foreign currency event. These tailwinds were partially offset by an increase in consulting services and T&E spend. We now expect full year corporate expenses to approximate $230 million reflecting the year-to-date compensation and benefits favorability. Comparable basis interest expense for the quarter decreased 8% to $88 million versus prior year primarily due to lower average borrowings. We expect fiscal 2022 interest expense to land towards the midpoint of our previous guidance range of $355 million to $365 million. Our Q3 comparable basis effective tax rate excluding Canopy equity earnings came in at 14% versus 17.7% in Q3 last year primarily driven by the timing and magnitude of stock-based compensation benefits partially offset by higher effective tax rates on our foreign businesses. We now expect our full year fiscal 2022 comparable tax rate excluding Canopy equity earnings to approximate 19.5% versus our previous guidance of 20%. This half-point decrease primarily reflects the impact of increased stock-based compensation tax benefits received during the quarter. Additionally, stock-based compensation tax benefits were weighted toward Q3 versus our previous expectation of Q4 resulting in a sequential rate increase to our implied Q4 tax rate which is now expected to approximate 23%. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx, we generated free cash flow of $1.8 billion for the first nine months of fiscal 2022 reflecting a 3% increase in operating cash flow offset by an increase in CapEx spending. CapEx spend totaled approximately $600 million which included approximately $500 million of beer CapEx primarily driven by expansion initiatives at our Mexico facilities. Our full year CapEx guidance of $1 billion to $1.1 billion which includes approximately $900 million targeted for Mexico beer operations expansions remains unchanged. Furthermore, we continue to expect fiscal 2022 free cash flow to be in the range of $1.4 billion to $1.5 billion. This reflects operating cash flow in the range of $2.4 billion to $2.6 billion and the CapEx spend previously outlined. As Bill mentioned, our Beer business continues to significantly outperform the U.S beer industry driven by robust consumer demand and it is essential that we invest appropriately to support the expected ongoing growth momentum for our exceptional beer brands. As such, we have updated and increased our brewery expansion investment plans in Mexico. Total capital expenditures for the Beer business are now expected to be $5 billion to $5.5 billion over the fiscal 2023 to fiscal 2026 time frame with a majority of spend expected to occur in the first three years. In total, this investment will support an incremental 25 million to 30 million hectoliters of additional capacity and includes construction of a new brewery in Southeast Mexico in the state of Veracruz as well as continued expansion and optimization of our existing sites in Nava and Obregon. Please note that this investment includes the previously-disclosed beer CapEx guidance of $700 million to $900 million annually during the fiscal 2023 to fiscal 2025 time line to support a 15 million hectoliter buildout between our Nava and Obregon facilities. As a reminder, our existing brewery footprint currently supports 39 million hectoliters between Nava and Obregon. In closing, I’d like to reiterate our medium-term growth expectations for our Beer business. As Bill and I outlined, we expect continued momentum and thus continue to target top line growth in the 7% to 9% range over the next three to five years which includes one to two points of price and implies buying growth in the mid to high single digit range. This expectation provides us with the conviction to support incremental capital investments in Mexico. With that, Bill and I are happy to take your questions.

Dara Mohsenian:

So on beer depletions, another strong result. It was the best two-year average we’ve seen in recent history. So in regards to Q3, can you discuss the underlying strength behind the business and maybe specifically, the market share performance which we saw improve in track channels? And then also, on a go-forward basis on depletions, how sustainable do you think those trends are? Perhaps give us an update on December. You sounded bullish on fiscal Q4 and any updates specifically on December and any thoughts around Omicron variant impact and if that could pose any risk to your business as we look at the on-premise channel or overall to the business. Thanks.

Operator:

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

Garth Hankinson:

Yeah, thanks, Vivien. And as you know, our typical range for price increases on any given year is kind of in that 1% to 2%, so what we do is we go through the year, we’re looking at our portfolio, we’re looking at the competitive set and we’re looking at individual markets. We take our price increases on a brand-by-brand and on a market-by-market basis, and so we do this as I say in a very disciplined approach. Given the current economic environment this year, we’ve determined that we can take more pricing than we typically have, and that’s what’s driving us to say we’re going to be slightly above the 2%. Keep in mind we have to make sure that we’re balancing the right level of price increases with what’s going on with our consumer. As you know, we have a consumer set that skews a bit more Hispanic than some of our competitors, and in times of economic downturn, if you will, or weakness, they tend to get hit a little bit harder and they recover a little bit slower, so we want to make sure we’re not leaving any pricing on the table. We want to take as much as we can but we also don’t want to take so much pricing that we impair the performance of our brands or impair the growth of our brands.

Kaumil Gajrawala:

Hi. If I could just follow-up, Garth, on that, I think you explained how you take pricing in the market-by-market those sorts of things, but it seems pretty clear from everything that we’re seeing as it relates to inflation that the pricing you have in place now is covering it. But can you maybe just talk a little bit further out? It feels like that’s also likely to be the case for next year, so if you could just give some context on pricing for next year?

Operator:

Thank you. Our next question comes from Bonnie Herzog of Goldman Sachs. Your line is open.

Garth Hankinson:

Yeah, so in general, or not in general, but we are sticking to our long term or mid-term growth outlook that is, so as I said in my script, we continue to target over the next three to five years in Beer to have top line growth in that high single-digit range, and as we’ve said historically, we think the right way to think about our margins is between 39% and 40%. However, we’ve also said that in any given year depending on market dynamics or what’s going on in the business that we could fall above or below that range. So I think what I referenced in my comments is pretty consistent with what the we said previously. We’re still, as I said, we’re still in the process of going through our annual planning process, so we’ll give a more update on margins as we close out the year and move into next year. But it is a tough inflationary environment. As I mentioned, we’re seeing inflationary and commodity pressures that are in the high single-digit to double-digit range, and again, we’ll absorb as much of that as we can with pricing and with a robust cost savings initiatives that we have in both wine and spirits and in beer, and we’ll alter our hedging strategy to take care or to take advantage of weakness in commodity prices as we see some weakness, as we recently have in aluminum and heating oil. So those are all things that we’ll do to try to offset inflationary pressures, but we’ll have more details on the actual margins and outlook for margins at our Q4 earnings call.

Bryan Spillane:

Hi. Good morning, and happy new year. I guess my question is around the brewery, the new brewery in Veracruz and maybe just tying, Garth, back to the 39% to 40% margins over time for Beer. I guess given that the distance that that brewery will sit relative to the border, is there any negative mix implication I guess to margins over time as you begin to produce more beer there, or are there other offsetting factors that would sort of mitigate that?

Operator:

Thank you. Our next question comes from Chris Carey of Wells Fargo Securities. Your line is open.

William Newlands:

Sure, Chris. This particular partnership around the Fresca brand was one that was very exciting to us. Fresca hits on a number of key consumer attributes, everything from convenience to flavor, and is the hottest diet soda in their portfolio. So the idea when you consider that more than 50% of Fresca consumers already mix it with spirits, it seemed like a natural one for us, and certainly, they felt the same way. So we’re very excited about the potential for this. Obviously it starts in the United States. We’re still putting a lot of finishing touches on exactly how and what this will be as we get later in the year and certainly we’ll give you a lot more information about that as we get closer to the time where we will launch this product. But certainly, this opens a very interesting door and one that’s exciting, I think, for both companies.

Lauren Lieberman:

Great. Thanks. I know we’ve covered a lot. I wanted to ask about Corona depletions because the brand has had building momentum, getting up to double-digit depletions this quarter. So I think when I’d asked it previously, you didn’t have a great sense for how much of this was driven by on-premise recovery versus the brand performing better in take-home channels, and if it’s the latter, kind of what’s really been driving that change in momentum for the brand. So would love any additional color on that you can offer. Thanks.

Operator:

Thank you. Our next question comes from Nik Modi of RBC Capital Markets. Your line is open.

Garth Hankinson:

Yeah, thanks, Nik. I’ll take the first part, and then Bill can respond to the second. So just on the inflationary front, as I mentioned, we’re seeing sort of a wide range of increases year-over-year from kind of low to mid-single-digit for things like corn and hops and glass, which obviously is a big driver of our cost build-up. But then you’re seeing some really large increases on things like cartons, which is up in kind of the mid-teens and wood pallets which is up sort of over 30%. And then there’s a number of other line items that range sort of in between those two bookends. So all of that is driving what we expect to be high single-digit inflation overall across for the beer portfolio.

Operator:

Thank you. Our next question comes from Rob Ottenstein of Evercore. Your line is open.

William Newlands:

Obviously, Robert, there was a lot of change in the seltzer business over the course of the last calendar year, and certainly, the growth profile has slowed substantially. We still think that there’s going to be some growth in that particular segment. As you know, we have both reformulated and repackaged some of our variety packs which we’ll be bringing out in the first quarter of 2023. We still think that that’s going to be an important part of the overall beer sector, and we’re going to participate in it. So we are optimistic that that’s going to continue to see growth, albeit it’s probably significantly lower than what everybody anticipated say a year ago, and so it remains to be seen. Most predictions have proven to be challenging, so we’ll not over-predict the question. What we will say is we think we’re putting the right products in the market that have the right flavor profiles that are going to attract consumers going forward.

Sean King:

Hey. Good morning. Sort of related to Bryan’s question, but how should we think about the capacity expansion CAGR to 2026 with the long-term beer algorithm? Is it safe to say that the capacity will be exceeding the utilization based on the 7% to 9% growth model, and I guess is incremental capacity typically more flexible or automated because part of your success in this company has been the high utilization of the capacity that you have in place, so just curious on your thoughts on that.

Operator:

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

William Newlands:

So I think our thinking around that was in many instances, it’s very different approaches to how the consumer buys and engages with the fine wine and craft spirits sector. That area tends to be higher DTC. It tends to be higher on-premise, and in many cases it’s a little bit of a different skill set. And we realized by segregating those two things, it would give us a chance to both maximize the potential in the mainstream and premium sector as well as maximizing our potential at the very high-end where some of those different and evolving channels are becoming more and more important to us. I think both understand our strategy which is we want to grow our business, we want to improve our margin position to best of class margin structures, and we’re well on our way to doing that. But our view was this was an opportunity to maximize the potential to do that. It also matches up very nicely with how many of our distributors go-to-market where they separate their portfolio and their sales organizations in fine wine and craft sectors and mainstream and premium. So it also matches our organization with the route-to-market approach that many of our distributors take.

Steve Powers:

Hey, thanks, everybody, and good morning. Maybe circling back on Bonnie and Bryan’s earlier line of questioning on Beer margins and just round it out, if I could; as depreciation presumably ramps further alongside the CapEx build over the next few years, do you think you can get back to that consistent 39% to 40% range beyond fiscal 2023 as you catch up on the current inflation dynamics, or is there a risk that the depreciation build could keep you at least toward the lower end of that range for the next couple years. That’s just kind of a follow-up, clean-up? And then I guess relatedly, as the incremental CapEx commitment just runs through the cash flow statement, just any commentary you have on how you think about capital allocation in terms of how it may impact M&A or further return of shareholders over the next couple years alongside that ramp. Thank you.

Garth Hankinson:

Yeah, and just to put a final point on that, as I said, you’re right, depreciation will ramp up but we’re going through the process right now. We’re looking at the impacts of what’s the right sort of capacity to have or capabilities to have in our breweries and optimizing that. We’re looking at optimizing our transportation. So to the extent that we have any news on that, then we’ll share it with you at our Q4 earnings call. As related to capital allocation, with this increased investment, nothing changes. We continue to have the best portfolio in terms of growth and in terms of margins. That growth and margins generates a significant amount of cash flow. That cash flow allows us to continue to prioritize investment grade rating, return capital to shareholders, and to invest in the growth of our business. So our capital allocation strategy hasn’t changed. And then the last piece of that is acquisitions, and we continue to say that acquisitions will be used as a portfolio gap filler, and in large part, we’re going to use our venture fund to fill those gaps.

Nadine Sarwat:

Hi, everyone. Thanks for taking my questions. Two quick follow-ups, if I may. First regarding the Fresca agreement, could you give us a sense of the economics of the agreement, what would the impact on margins be, and what edge do you think you and Coke can bring into win in an already-crowded space. And then the second one on Pacifico. I know you mentioned brown glass bottles. What sort of initiatives do you have in place to mitigate this negative impact, and when can we expect Pacifico to return to its previous growth profile? Thank you.

Operator:

Thank you. Our next question comes from Andrea Teixeira of JPMorgan. Your line is open.

William Newlands:

Let me answer the second part first, and I’ll have Garth answer the first. As we said, we have had a very strong start to our fourth quarter. Our depletions in the Beer business are up ahead of our year-to-date trends in the month of December, and we feel very comfortable and confident in our ability to deliver what we’ve said around fourth quarter and the overall fiscal year. Garth, do you care to take the first one?

Operator:

Thank you. Our next question comes from Laurent Grandet of Guggenheim. Your line is open. Please make sure your phone isn’t on mute.

Garth Hankinson:

Well, relative to the whole Fresca story, we will bring that to you in our next earnings scenario when we are much further along on the exact launch planning and launch timing, and we’ll give you a more fulsome view of what we plan to do. What we would say, as we said in our release today, this will be going through our distribution network which will largely be driven by the gold network on the beer side and in some states it will go through the wine and spirits network, depending on the regulatory environment of the particular state.

William Newlands:

Thank you, everyone. Appreciate your joining our call today. Despite the challenges faced thus far driven by the continued effects of the pandemic, some global chain issues, and a volatile and dynamic inflationary environment combined with severe weather events, we’re on track to deliver again another strong year of financial performance. Our Beer business continues to remain extremely solid as consumer demand for our core beer brands continues to be robust, while our incremental capacity investments in Mexico will position us to capture the ongoing growth opportunities we see within the higher-end of the U.S beer market well into the future. Additionally, our Wine and Spirits business continues to move towards its long-term revenue growth and margin expansion vision. Overall, we remain bullish on the future performance of our powerful selection of consumer-connected brands which provides us with strong momentum as we head into the fourth quarter. As a reminder, during our next quarterly call, we’ll be providing our guidance for the upcoming fiscal year. So thanks again, everyone, for joining the call, and I wish you all a safe, happy, and prosperous new year. Thank you.

Patty Yahn-Urlaub:

Thanks, Josh and good morning and welcome to Constellation's second quarter fiscal 2022 conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to prior quarters, I would like to ask that we limit everyone to one question per person which will help us to end our call on time. Thanks in advance. And now, here's Bill.

Garth Hankinson:

Thank you Bill and hello everyone. Q2 certainly reflected another strong quarter of marketplace performance for our beer business. Due to continued robust consumer demand for core beer portfolio we now expect to exceed our initial top line and operating income targets for our beer business. Additionally, our strong cash flow generation enabled us to continue to repurchase shares during the quarter and through September we've repurchased 6.2 million shares of common stock for $1.4 billion. As a result, we have increased our full year fiscal 2022 comparable basis diluted EPS target and we now expect to be in the range of $10.15 to $10.45. This range excludes Canopy equity and earnings impact and reflects the increase in beer operating income guidance and decrease in the average -- in the weighted average diluted shares outstanding based on shares repurchased through September partially offset by an increase in the tax rate for fiscal year 2022. Now let's review future performance and our full year outlook in more detail where I will generally focus on comparable basis financial results. Starting with beer, net sales increased 14% driven by shipment volume growth of nearly 12% and favorable price partially offset by unfavorable mix. Depletion volume growth for the quarter came in above 7% driven by the continued strength of Modelo Especial and Corona Extra as well as the continued return to growth in the on premise channel. Depletion trends tempered in Q2 versus Q1 driven by out of stocks due to ongoing robust consumer demand as well lost shipping days for some of our distributors due to severe weather events including hurricanes and wildfires. We estimate that these factors hampered Q2 growth by approximately two to three points. As Bill mentioned on premise volume accounted for approximately 11% of the total beer depletions during the quarter and grew strong double digits versus last year. As a reminder, the on premise accounted for approximately 15% of our beer depletion volume pre-COVID and accounted for only 6% of our depletion volume in Q2 fiscal 2021 as a result of the on premise shutdowns and restrictions due to COVID-19. Selling days in the quarter were flat year-over-year and will also be flat in Q3. Wholesaler depletions continued to outpace cases shipped during Q2 resulting in a lower than normal distributor inventory on hand at the end of the quarter. To rectify this gap, shipment case volume is expected to exceed depletion case volume throughout the second half of the fiscal year resulting in a gradual improvement of distributor inventories during Q3 and Q4 as inventories are expected to return to normal levels by the end of the fiscal year. Moving on to beer margins. Beer operating margin decreased 530 basis points versus the prior year to 37.2%. Benefits from favorable pricing, mix, and foreign currency were more than offset by unfavorable COGS, increased marketing investments, and higher SG&A. The increase in COGS was driven by several headwinds that include the following. First, a Q2 obsolescence charge of $66 million. As a result of our production constraints earlier in the year we pre-built Hard Seltzer inventory in advance of the key summer selling season based on our best estimates for fiscal year 2022. Due to the overall slowdown in the Hard Seltzer category in the U.S. some of that growth is not going to materialize in the fiscal year resulting in excess inventory. Second, increased brewery cost driven by labor inflation in Mexico, increased headcount, and incremental spend related to capacity expansion. Third, a step up in depreciation expense largely due to incremental 5 million hectoliters at Obregon. And finally, as expected increased material costs predominately driven by increased commodity prices and inflationary headwinds on pallets, cartons, and aluminum. These COGS headwinds were partially offset by favorable fixed cost absorption. Marketing a percent of net sales increased 150 basis points to 9.9 versus prior year as we return to our typical spending cadence which is weighted more heavily towards the first half of the fiscal year. As a reminder, marketing spend in the first half of the prior year was significantly muted resulting from COVID-19 related sporting and sponsorship event cancellations and/or postponements. Lastly, the increase in SG&A was primarily driven by an increase of approximately $12 million in legal expenses as well as higher compensation and benefits. As mentioned earlier, we are increasing full year fiscal 2022 net sales and operating income guidance for our beer business. We are now targeting net sales growth of 9% to 11% reflecting the strength of our core beer portfolio and pricing actions that are higher than initially planned. Furthermore, we are now targeting operating income growth of 4% to 6% which implies operating margin in the low to mid-point of our stated 39% to 40% range. Please note that the updated guidance includes all obsolescence charges and legal expenses incurred in the first half of the fiscal year. We continue to expect our gross margin to be negatively impacted for the fiscal year as benefits from price and our cost savings agenda are expected to be more than offset by several cost headwinds. However, the mix and magnitude of these headwinds have changed from our original assumptions presented at the beginning of our fiscal year. First, we're still estimating a significant step up in depreciation expense which began to accelerate in Q2. However, some of this depreciation started late which began to accelerate in Q2. However, some of this depreciation started later in the year versus plan. As such we are now estimating total beer depreciation expense to approximate $250 million, an increase of approximately $55 million versus last year or a $10 million decrease versus our original planned estimate. Second, we still expect substantial inflationary headwinds across numerous cost components to continue during the second half of our fiscal year as commodity prices continue to rise specifically across aluminum, diesel, and pallets resulting from a rather volatile inflationary market. And third, due to the growth moderation within the Hard Seltzer market as well as lower ACB levels across the category on new items, we do not expect our Hard Seltzer skews to meet our originally planned volume expectations which results in a positive mix benefit versus our original estimate. Conversely due to the slowdown in the Hard Seltzer sector excess inventory resulted in a fiscal year-to-date obsolescence charge of approximately $80 million. Please note that these losses cover our Hard Seltzer obsolescence exposure and as such we do not expect to take any additional obsolete charges in the back half of the fiscal year for Hard Seltzers. From a marketing perspective we continue to expect full year spend as a percentage of net sales planned in the 9% to 10% range which is in line with fiscal 2021 spend of 9.7% of net sales. Looking ahead to Q3 I'd like to remind everyone of the difficult buying overlaps we will encounter as we're facing a 28% and 12% growth comparison for shipment volume and depletion volume respectively. Additionally, we expect to reform our normal annual brewery maintenance during Q3 which will result in a less throughput versus Q2 as we have to shut down production for a few days. As such we are estimating low single digit shipment volume growth for Q3. Moving to wine experience, Q2 fiscal 2022 net sales declined 18% on shipment volume down to 36%. Excluding the impact of the wine and spirits divestitures, organic net sales increased 15% driven by organic shipment volume growth of nearly 6%, favorable mix and price, and smoke tainted bulk wine sales. Robust mix driven by the Prisoner brand family Meiomi and Kim Crawford accounted for approximately nine points of the year-over-year organic net sales growth. Shipments were negatively impacted by port delays for our international brands and route to market changes which also impacted depletions. Depletion volume declined 2% during the quarter and was additionally impacted by the challenging overlap in consumer pantry loading behavior especially for our mainstream brands that experienced robust growth during the beginning of the COVID-19 pandemic. However, as we head into the second half of the fiscal year we feel as though most of these challenges are behind us and expect shipment volume and depletion volume to generally align in the second half of fiscal 2022. Moving on to wine and spirits margins. Operating margin decreased 620 basis points to 19.7% as mixed benefits from the existing portfolio and divestitures combined with favorable price were more than offset by increased marketing and SG&A spend, higher COGS, and margin dilutive smoke tainted bulk wine sales. Higher COGS were driven by unfavorable fixed cost absorption and increased transportation costs. The unfavorable fixed cost absorption resulted from decreased production levels in New Zealand due to a frost during our harvest season earlier this year as well as decreased production levels at our wineries in California due to the 2020 U.S. wildfires. These headwinds were partially offset by lower grade raw materials and other cost savings initiatives. Keep in mind that we're lapping lower SG&A spend in Q2 fiscal 2021 due to COVID and have a smaller business post the divestitures resulting in significant marketing and SG&A deleveraging impacting operating margins. For full year fiscal 2022, the wine and spirits business continues to expect net sales and operating income to decline 22% to 24% and 23% to 25% respectively. This implies operating margins to approximate 24% which is flattish to prior year on a reported basis which shows significant margin expansion on an organic basis. Excluding the impact of the wine and spirits divestitures, organic net sales is expected to grow in the 2% to 4% range. From a Q3 perspective keep in mind that we are lapping unfavorable fixed cost absorption of $20 million in the prior year resulting from decreased production levels as a result of the 2020 U.S. wildfires. We expect this favorable overlap to be partially offset by a continued increase in transportation costs and incremental unfavorable fixed cost absorption due to the New Zealand frost. Also, we continue to expect marketing and SG&A deleveraging as a result of the wine and spirits divestitures. As such we expect marketing and SG&A to continue to be a significant drag to operating margins in Q3 fiscal 2022. Now let's proceed with the rest of the P&L. Fiscal year-to-date corporate expenses came in approximately $170 million up 7% versus last fiscal year. The increase was primarily driven by higher consulting services and compensation benefits, partially offset by favorable foreign currency impact. We now expect full year corporate expenses to approximate $245 million driven by increase in compensation and benefits. Comparable basis interest expense for the quarter decreased 4% to approximately 96 million versus prior year primarily due to lower average borrowings. We now expect fiscal 2022 interest expense to be in the range of $355 million to $365 million. This slight decrease versus our previous guidance reflects early redemption of higher interest rate debt as well as $1 billion of senior notes issued in July at attractive rates. Our Q2 comparable basis affected tax rate excluding Canopy equity earnings came in at 21.8% versus 16.9% in Q2 of last year primarily driven by the timing of stock based compensation benefits and higher effective tax rate on our foreign businesses. We now expect our full year fiscal 2022 comparable tax rate excluding Canopy equity earnings to approximate 20% versus our previous guidance of 19%. This increase is primarily due to a higher effective tax rate on our core earnings than originally estimated. I would also note that we expect stock based compensation tax benefits to be weighted towards Q4. As a result, we expect our Q3 tax rate to be higher than our full year estimate at approximate 21%. We also now expect our 2022 weighted average diluted shares outstanding to approximate 192 million reflecting an impact of our September year-to-date share purchases previously discussed. Moving to free cash flow which we define as net cash provided by operating activities less CAPEX, we generated free cash flow of 1.2 billion for the first half of fiscal 2022 which is flat to prior year reflecting strong operating cash flows offset by an increase in CAPEX. CAPEX totaled $353 million which included approximately $295 million of beer CAPEX primarily driven by expansion initiatives at our Mexico facilities. Our full year CAPEX guidance of 1 billion to 1.1 billion which includes approximately 900 million targeted for Mexican beer operation expansions remains unchanged. Furthermore, we continue to expect fiscal 2022 free cash flow to be in the range of $1.4 billion to $1.5 billion, this reflects operating cash flow in the range of $2.4 billion to $2.6 billion and the CAPEX spend previously outlined. In closing I want to iterate that while we had our fair share of challenges during the first half of our fiscal year resulting in several puts and takes impacting our results, the fundamentals of our business remains strong and consumer demand for our products particularly our imported beer portfolio remains robust providing us with strong momentum as we head into the second half of our fiscal year. And with that Bill and I are happy to take your questions.

Dara Mohsenian:

Hey guys, so on the beer topline front, first just a detailed question given the volatility here and the tough comp in Q3, can you give us an update on how September depletions are trending so far and also for the quarter are you expecting depletions to still be above that low single-digit shipment rate that you mentioned or is that tough with the difficult 12% depletion comp? And then second, the longer term question is, you raised your revenue guidance for this year how much of that is underlying demand strength and depletions maybe versus shipments and perhaps getting more supply into the balance of the year versus pricing and on the pricing front you've sounded more aggressive in terms of pricing expectations going forward publicly, a) I guess, is that correct and b) is that more just to combat higher commodity costs or is it more confidence in market share gains or that the consumer environment is conducive to taking pricing care? Thanks.

Garth Hankinson:

No, I will just say on the depletions for the quarter, depletion growth will absolutely outpace shipment growth in the quarter. But on an absolute basis, the shipments will outpace depletions which helps us get into a better position from an inventory perspective.

Operator:

Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. You may proceed with your question.

Garth Hankinson:

Thanks, Bonnie. I mean look let me try to give you the walk on margins right and you noticed -- as you noted, we've got some headwinds and we've got some tailwinds, right. And so just on the tailwinds, obviously, we said in my opening remarks we've got a bit of a benefit on depreciation just starting later than expected in the year and so that's a net positive. As Bill just articulated, we're taking more -- we're taking increased pricing across more skews than we had originally planned, so we'll be above our range there. So that's a net positive. We also have a mix benefit of Seltzers and again a net positive there and then the increase in core beer outlook is a net positive. So, those are all the headwinds. But we still have -- those are all the tailwinds. But we still have the headwinds that we've been talking about all year long, right. So, even though depreciation is coming in less than expected, we still have an uptick in depreciation in the second half of the year. We still are facing increase in commodity prices, including aluminum, diesel, natural gas, wood those will continue in the second half of the year. Now we think that the guidance we provided takes into account all of those cost increases, so we feel we have those covered. But again, I mean, we just continue to have these puts and takes and we feel confident that in the margin outlook that we provided. Keep in mind too that even though we're going to have a mix benefit from Seltzers, we still are going to sell Seltzers and those are margin dilutive as we've noted previously.

Nik Modi:

Yes, thanks. Good morning everyone. So, I have two questions. One is a real quick one, just on the self-service formulation, still a bit -- I know you probably don't want provide too many details until it is in the market, but will this change the calorie or the sugar levels, so just curious on that? And then my broader question is Modelo is clearly doing very well. We see that in the data with non-Hispanic consumers. But as we look at some of the numerator data and we look at different cohorts, what we notice is that Corona has kind of leveraged to some of these demographics, so Modelo is doing much better so we are seeing some of those numbers in period. So just wanted to get a sense on incrementality of Modelo when you think about Modelo and Corona together and do you ever think that maybe there's a different merchandising scheme you can use instead of putting both brands right next to one another to kind of reduce some of that cannibalization?

Operator:

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

William Newlands:

Sure. So probably 50% give or take of the growth profile that we saw in Corona Extra is the reopening of the on premise. As we said in prior calls, we were down as low as 3% of our business a few quarters ago during the sort of the peak of the initial COVID pandemic issue. That's now up to 11% and clearly with the Corona being one of the most loved brands that exist in the category, the increase that you would expect to see an on premise has been important. But don't underestimate, Corona actually has done very well at retail as well. Relative to Pacifico, we continue to feel like Pacifico is another great opportunity. It's like a baby Modelo. It's developing in a very similar way to what Modelo did say 20 years ago with extensive growth profile on the West Coast and it is starting to filter East. As you know, we're investing more against Pacifico than we have historically. We have a little bit of challenge in this quarter with Brown Glass, which had some impact on Pacifico during the quarter as it did with Modelo Negra as well. But those are ongoing supply chain challenges that we're working our way through. It does nothing, nothing to slow down what we expect to be another superb brand for us as time goes forward in Pacifico.

Chris Carey:

Hi, thank you very much. Just on Hard Seltzers. You had originally planned on investing pretty significantly behind the launch this year. Are you getting any savings from those investment plans now that the category has slowed or are those locked and presumably that can be a good story going into fiscal 2023? In addition, you had mentioned that you had plans to double capacity for your ABA’s and so how are you thinking about flexing that capacity towards beer, obviously you're looking at building a new brewery in Southeast Mexico, does this get to delay that new build out over time because you have capacity?

William Newlands:

The only other thing I'd add to that on the last part of your question was about whether or not it causes any delay in what we would do to invest in the Southeast. As I said, we're continuing to work with the Mexican government. We feel the Southeast is highly likely to be where we put our next brewery position. And as we said, because of robust demand we're going to continue to invest to support our business. So, we would not expect to see any radical change of what our timeframe is all about. Demand has been higher than expected. We need to create some redundancy in our system as we've noted on prior calls and our brewer in the Southeast will be an integral part of that strategy.

Vivien Azer:

Hi. Good morning. I was hoping you could comment please on intra quarter trends in on premise, whether you saw an evolution or a softening there around the delta variant? And as well, perhaps from an industry perspective, are you observing any changes in consumer alcohol preference across kind of TBA, and across category switching as consumers central back out and deposit in restaurants? Thanks.

Operator:

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

William Newlands:

I think you got to keep in mind relative to the higher end of the wine business, you're also seeing some what I'll call channel evolution and things like three tier e-commerce and direct-to-consumer. Those are for us three to four times what it was in 2019 and you're seeing that as sort of 3% to 5% of our business today where it was 1% before. So some of what you're seeing in that is a difference in the way the consumer actually acquires and it may or may not be reflective of some of the IRI/Nielsen data because it's not picked up in those channels. Some of it is with three tier e-commerce, but certainly the direct to consumer channel is not. So, you've got some of that dynamic in place and of course, almost all of that tends to the higher end. That's where that consumer purchasing behavior occurs. So, I do think there's ebbs and flows on all of those things. I think you saw probably more consumption behavior at home during COVID so you're probably seeing a little bit of more challenging comparable versus prior year. So, I think as we get hopefully back to a bit more normalcy, I think you'll continue to see what the long-term trend is which is that the higher end of the business continues to outperform, and then it's a strong growth of play for that sector. Garth.

Operator:

Thank you. Our next question comes from Robert Ottenstein with Evercore. You may proceed with your question.

William Newlands:

Obviously, that's a little bit of a tough question to answer, because unlike a year ago where we were very selective a what we produced this year we've been producing all skews. We've just had trouble keeping up with the demand. Our best estimate would probably be in the 2 to 3 percentage points that we lost in this process. But again, in most instances the consumer is looking for our brand, they may have an issue out of particular point time finding a skew, but they don't have trouble finding our brand. So, I think that's probably the way to think about it.

William Newlands:

Well, I would put more emphasis on your very last point, which is the sector changed a lot versus what everybody anticipated. I think we were probably a bit on the conservative event compared to some of the competition as to what they expected going into this year where some of them were predicting in excess of 50% growth, we projected less. But even as it was, we were wrong. So that is the fundamental issue. When you combine that with the fact that we pre-produced, which again at the time was about production scheduling and our judgment was the right thing to do at the time, that in hindsight did not work out for us as well either. But you got to keep in mind, despite all of that, it's a relatively small percentage of our overall growth profile. It is additive to our growth, it is not the majority of our growth. The majority of our growth continues to be the robust demand against our core beer portfolio, and that's where we expect it to continue to be. So, now relative to the formulation, we just -- we obviously do a lot of consumer research and we track consumer perspectives and we have found that consumers are desiring a bit more flavor and a bit more differentiation within their Seltzer preferences and we plan to address those consumer needs.

Sean King:

Great, thanks for the question. Thinking longer term on the margins front and some of the long-term exposures you have and hedges you have in place, is the second half fiscal 2022 the right way to be thinking about margins for 2023?

Operator:

Thank you. Our next question comes from Nadine Sarwat with Bernstein. You may proceed with your question.

William Newlands:

Sure. We had mid-single-digit depletion growth in that brands during the quarter. And obviously it was constrained. We would have expected it to be higher without any supply chain issues that revolves around Brown Glass.

Andrea Teixeira:

Thank you. Good morning. So I wanted to go back to the depletion in shipments commentary. You said depletion should outpace the low single-digit shipments you have guided in the 3Q which would imply a sequential acceleration in 3Q from the 12% on a two-year stack that you achieved in the second quarter. So given that you're facing a tougher comparisons, as you do depletion the same amount of our 12% in the third quarter of last year, is that acceleration on the two year coming mostly from on premise and at home decelerating, but still growing, is that the way we should be thinking, in other words, should we think about the depletion growing around mid-single-digits when you said, I think you said it emphatically that the third quarter depletions would outpace shipments as well? And then related to -- and just a clarification on the pricing front, should we think that you will have about 2% price mix realization already in 3Q and what are you seeing playing out so far? Thank you so much.

Operator:

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

William Newlands:

Sure. If I understood the first part of your question correctly, I mean, keep in mind that the beer category has been roughly flat at a time when we are up roughly 8%. So there is a significant delta between what the overall category is performing and what we are performing. We're radically outperforming the category. Relative to our desire in the Seltzer/ABA space, there's a number of things. First of all, we're going to focus our attention on where we think we bring differentiated products that are distinct. Given what we have today, I would use Refresca and Limonada as two examples of that that meets specific needs and are not what I would describe as need to products. We also have as we noted in our scripts some innovation agenda items that we think are going to be distinctive and will bring unique value to the table as well. So, we continue to believe this is going to be additive portion of our growth, but certainly not the largest portion of our growth that will continue to be our core beer portfolio.

Bill Chappell:

Thank you. Sorry to belabor the Seltzer questions. But I mean I guess two things, one simple, one bigger picture. I mean, two quarters ago like you said, you have a lot of market research, you and everybody else was very bold up about the market and it seems like it was a soft summer. But it didn't seem like the category was a fad or it's over. But in kind of redirecting, marketing and advertising and moving to kind of focus SKUs, it seems that is what you're kind of saying so, I guess, is that what you're saying, I mean do you see this as kind of a small niche permanently and everybody was kind of wrong, it was going to be a bigger place or is this just a pause for the category? And then the second question is with you directing kind of advertising marketing towards your core beer portfolio, does that result in -- I know it's small, but Seltzer falling off a cliff over the next two quarters and creating kind of headwinds for your growth on beer? Thanks.

Operator:

Thank you. I would now like to turn the call back over to Bill Newlands for any closing remarks.

Operator:

Thank you. Thank you for participating. You may now disconnect. That concludes today's conference call.

Patty Yahn-Urlaub:

Thanks, Jiji [ph]. Good morning, and welcome to Constellation's first-quarter fiscal '22 conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to prior quarters, I would like to ask that we limit everyone to one question per person which will help us to end our call on time. Thanks in advance. And now, here's Bill.

Garth Hankinson:

Thank you, Bill. And hello, everyone. Our fiscal 2022 is off to a great start demonstrated by our strong segment operating results and cash flow generation. As Bill highlighted, our Beer business achieved double-digit depletion volume, top-line, and operating income growth. Our Wine & Spirits business is nicely positioned to drive accelerated growth and profitability from its portfolio of higher-end industry-leading brands, and our robust cash flow generation enabled us to resume share buyback activity, reaffirming our commitment to execute our goal of returning $5 billion to shareholders through dividends and share repurchases through our fiscal 2023. As Bill outlined, through June, we've repurchased 2.2 million shares of common stock for $523 million. In addition, this morning we announced that we entered into an accelerated share repurchase or ASR agreement to purchase $500 million of incremental shares which is expected to be completed no later than October of 2021. Please note that the ASR agreement constitutes of $500 million incremental share repurchase referenced in this morning's earnings release. As a result, we've increased our full year comparable basis diluted EPS to be in the range of $10 to $10.30. This range excludes Canopy equity earnings impact and reflects the decrease in weighted average diluted shares outstanding, driven by the year -- the June year-to-date share buyback activity as well as the ASR agreement or approximately $1 billion of share repurchases. As such, we are forecasting weighted average diluted shares outstanding of approximately $193 million for our fiscal 2022. We plan to repurchase additional shares during the back half of the fiscal year in excess of the $1 billion of share repurchases previously outlined. However, we do not know the timing and cadence, and as such, these expected share repurchases have been excluded from our guidance assumptions. We will continue to update our outstanding shares accordingly when we report quarterly earnings throughout the fiscal year. Now, let's review our Q1 fiscal 2022 performance in more detail, where I'll generally focus on comparable basis financial results. Starting with Beer, net sales increased 14% driven by shipment volume growth of over 11% and favorable pricing. The increase in beer net sales was impacted by some miss shipping days and supply shortages as a result of severe weather events impacting Texas and Northern Mexico, early in the first quarter of our fiscal year. Depletion volume accelerated from fiscal 2021 year-end trends and achieved nearly 11% growth for the quarter despite overlapping the peak of last year's pandemic-related pantry loading behavior, driven by continued strong demand in both tracked and non-tracked off-premise channels, as well as the return to growth in the on-premise channel. On-premise volume accounted for 11% of total beer depletions during the quarter, which accelerated and nearly doubled since fiscal '21. As a reminder, the on-premise accounted for approximately 15% of our depletion volume pre-COVID and accounted for only 3% of our depletion volume in Q1 fiscal 2021 as a result of on-premise shutdowns due to COVID-19. Lastly, when adjusting for one extra selling day in the quarter, the beer business generated nearly 10% depletion volume growth, and in Q2 depletion selling days are flat year-over-year. Due to continued robust consumer demand and muted shipment volume driven by supply challenges due to severe winter weather early in the quarter, depletion volume exceeded shipment volume during the first quarter, resulting in lower than normal distributor inventory on hand at the end of Q1. Let me assure you, that we are fully producing and shipping products out of our breweries, however, inventories will remain tight throughout the second quarter as we enter our peak summer selling season. As a result, we expect distributor inventory levels to return to more normal levels during the second half of the fiscal year. Moving on to beer margins; beer operating margin increased 110 basis points versus prior year to 42.8%. Benefits from favorable pricing, SG&A as a percent of net sales, and foreign currency were partially offset by unfavorable logistics and operational costs and increased marketing. The increase in logistics cost was driven primarily by increased obsolescence resulting from initial conservative expiration dates on new SKUs, partially offset by the transition of a portion of our co-packing capabilities to our Nava Brewary. The increase in operational costs was driven primarily by brewery costs, largely due to labor inflation in Mexico and increased headcount and incremental spend to bring the additional 5 million hectoliters online at Obregon. These headwinds were partially offset by favorable fixed cost absorption related to the overlap of reduced production in the first quarter of fiscal 2021 due to COVID-19 safety measures. Depreciation expense had a minimal impact during the quarter as we began to depreciate the incremental 5 million hectoliters at Obregon late in Q1 but expect depreciation expense to ramp up during Q2. Marketing as a percent of net sales increased 70 basis points to 9.4% versus prior year as we have returned to our typical spending cadence which is weighted more heavily towards the first half of the fiscal year. As a reminder, marketing spend in the first half of the prior year was significantly muted resulting from COVID-19-related sporting and sponsorship event cancellations and/or postponements. As communicated last quarter, given the current state of activities in Mexicali, we will be unable to repurpose this site for future use. As such, an impairment of approximately $665 million was recorded for the quarter, which was excluded from our comparable basis results. For full year fiscal 2022, we continue to target net sales growth of 7% to 9% which includes 1 to 2 points of pricing within our Mexican product portfolio and operating income growth of 3% to 5%. This implies operating margin to land in the low to mid-point of our stated 39% to 40% range. As previously discussed, we continue to expect our gross margins to be negatively impacted for the fiscal year as benefits from price and our cost savings agenda are expected to be more than offset by the following headwinds. First, a significant step up in depreciation expense and other brewery expansion costs relating to the incremental 5 million hectoliters that was completed at Obregon earlier in the fiscal year. Second, substantial inflationary headwinds across numerous cost components. And lastly, negative mix as we expand our ABA and Hard Seltzer portfolios. As it relates to timing and cadence, as mentioned earlier, during the second quarter we will begin to see an impact from depreciating the incremental 5 million hectoliters at Obregon, which will be a significant margin headwinds for the balance of the fiscal year. Additionally, due to benefits from our commodity hedging program, we did not experience the expected cost inflationary pressures during this quarter. However, we expect significant inflation headwinds to ramp up during the second half of our fiscal year as current hedges roll off. In addition, we believe the depth and duration of inflationary pressures are becoming more uncertain as the year unfolds. Lastly, we continue to expect marketing as a percent of net sales to be in the 9% to 10% range for full year fiscal 2022 which is in line with fiscal 2021 spend of 9.7% of net sales. We expect to invest significantly during Q2 of fiscal 2022 to support strategic initiatives and continue generating strong marketplace performance throughout the key summer selling season. As such, 2Q marketing as a percent of net sales is expected to be in the range of 10% to 11% versus Q2 fiscal '21 which came in 8.4%. Moving to Wine & Spirits; Q1 fiscal 2022 net sales declined 22% on shipment volumes down 38%. Excluding the impact of the Wine & Spirits divestitures, organic net sales increased 16% driven by organic shipment volume growth of 6%, smoke-tainted bulk wine sales, and favorable price and mix, while depletion volume declined approximately 8%. There are several dynamics to point out as it relates to organic net sales as well as shipment and depletion volume trends for the quarter. Starting with organic net sales and organic shipment volume; growth of 16% and 6% respectively was impacted by the following. First, smoke-tainted bulk wine sales accounted for approximately 4 points of the year-over-year organic net sales growth in the quarter. Second, from an organic shipment volume perspective, we under shipped depletions in Q1 fiscal 2021 as we were unable to fulfill excessive consumer demand driven by pantry loading, creating easy shipment volume compared to Q1 fiscal 2022. Conversely, we over shipped in Q1 fiscal 2022 as a result of the distributor transitioned to Southern Glazer's in order to ensure that they had ample inventory during the quarter as there was a delay in transitioning Constellation inventory from canceled distributors to Southern Glazer's. Moving to depletion volume trends; down approximately 8%, which were impacted by the following. First, we are experiencing a challenging overlap to the last year's pandemic-related consumer pantry loading behavior. Second, as a result of the SAP transition, we experienced challenges that impacted the shipping process early in the quarter. While we were able to rectify the situation during the quarter, the timing of shipments throughout Q1 negatively impacted depletions and created out of stocks for some of our larger key brands. Lastly, global supply chain logistics issues, including shipping delays and transport interruptions have also created out of stocks in certain areas for Kim Crawford and Ruffino which are imported from New Zealand and Italy respectively. As Bill mentioned, we believe these challenges are temporary and continue to improve, and we expect to refill retailer inventory in Q2. Moving on to Wine & Spirits margins; operating margin decreased 540 basis points to 22.9% as mixed benefits driven by the Wine & Spirits divestitures and favorable price were more than offset by margin dilutive smoke-tainted wine -- bulk wine sales and increased marketing and SG&A as a percent of net sales. Keep in mind that we're lapping lower marketing and SG&A spend in Q1 fiscal 2021 due to COVID and have a smaller business post the divestitures resulting in significant marketing and SG&A deleveraging impacting operating margins. For full year fiscal 2022, the Wine & Spirits business continues to expect net sales and operating income to decline 22% to 24% and 23% to 25% respectively. This implies operating margin to approximate 24% which is flattish to prior year on a reported basis, which shows significant margin expansion on an organic basis. Excluding the impact of the Wine & Spirits divestitures organic net sales is expected to grow in the 2% to 4% range. Lastly, please keep in mind that we will continue to lap significantly reduced marketing spend during Q2 as many of our planned media and event sponsorship investments were suspended or canceled in Q2 fiscal 2021. Furthermore, we continue to expect marketing and SG&A deleveraging as a result from the Wine & Spirits divestitures. As such, we expect marketing and SG&A to continue to be a significant drag to operating margins in Q2 fiscal 2022. Now, let's proceed with the rest of the P&L. Q1 corporate expenses came in approximately $55 million, up 8% versus Q1 fiscal 2021. The increase was primarily driven by higher consulting services and compensation and benefits, partially offset by favorable foreign currency impact. We continue to expect full year corporate expenses to approximately $235 million. Comparable basis interest expense for the quarter decreased 13% to approximately $87 million primarily due to lower average borrowings as we continue to decrease our net leverage ratio and ended the quarter at 3.06 times, excluding Canopy equity earnings. Our previous guidance assumed free cash flow would be used to pay down debt versus share repurchases. However, as discussed earlier, updated guidance now reflects approximately $1 billion of share repurchases through the first half. As such, fiscal [ph] interest expense is now expected to increase and be in the range of $360 million to $370 million. Our comparable basis effective tax rate, excluding Canopy equity earnings, came in at 21.1% versus 19.3% last year, primarily driven by higher effective tax rates on our foreign businesses. We expect our Q2 fiscal '22 comparable tax rate, excluding Canopy equity earnings impact to approximate 20%. However, we continue to expect the full year to approximate 19% as expected stock-based compensation benefits are weighted more towards the second half of the fiscal year. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx. For Q1, we generated free cash flow of $602 million, which represents an 11% increase versus prior year reflecting strong operating cash flow and lower CapEx. CapEx totaled $114 million or 21% last year spend. This included approximately $86 million of beer CapEx, primarily driven by expansion initiatives at our Mexico facilities. Lower CapEx spend is primarily due to timing, as we have significant spending plan for the balance of the fiscal year. As such, our full year CapEx guidance of $1 billion to $1.1 billion, which includes approximately $900 million target for Mexico beer operation expansions remains unchanged. Furthermore, we continue to expect fiscal 2022 free cash flow to be in the range of $1.4 billion to $1.5 billion. This reflects operating cash flow in the range of $2.4 billion to $2.6 billion and the CapEx spend previously outlined. Moving to Canopy; in Q1 we recognized an unrealized loss of $745 million from the decrease in the fair value of our Canopy investments. This was excluded from our comparable basis results. The total pre-tax net gain recognized since our initial Canopy investment in November of 2017 is $366 million. In closing, I want to reiterate our expectations to continue to have significant capital allocation flexibility throughout our fiscal 2022, which will enable ongoing progress in returning cash to shareholders, while making strategic investments to support long-term growth opportunities. We believe the combination of strong cash flow and future growth prospects in both our Beer and Wine & Spirits businesses positions Constellation for success. The growth and margin profile of our high-end beer business is best in class and we expect it to remain as such well into the future while the transformation of our Wine & Spirits business is underway and we expect to continue to achieve margin expansion as we migrate to operating margins of approximately 30%. And with that, Bill and I are happy to take your questions.

Bonnie Herzog:

Thank you. Hi, everyone.

Bonnie Herzog:

Hi. I was actually just hoping to get a little more color on the out-of-stock pressures you've been facing. We're aware that you guys had temporarily paused [ph] orders during the end of May given how strong demand was in relation to your forecasted supply. So, first, are these caps still in place? And then specifically, have you seen these pressures maybe get better or worse in June? And finally, are there any specific impacts on certain SKUs or pack sizes or was this just more broad-based in your portfolio? Thanks.

Operator:

Thank you. Our next question comes from the line of Nik Modi from RBC Capital Markets. Your line is now open.

William Newlands:

Certainly. So, first -- your first part of your question regarding June, and you're correct, well it isn't over yet. We're very enthused by how June is setting up and is certainly consistent with our long-term algorithm assuming we finished the last couple of days strongly. So, we think June is going to look pretty good. Secondly, relative to households, Nik, we obviously are continuing to develop and broaden our reach across our core brands, particularly in beer. If you think about Modelo, and Garth I think said this in prior quarters, we are rapidly increasing our penetration in the non-Hispanic community. It's a little difficult for us at this point to break that out of how much of that was COVID versus non-COVID because we're just seeing such an acceleration of Modelo not only in its core Hispanic market but in the broader market as well. So, it's a little difficult for us to put an exact percentage on any of those things. What I would say is, we are gaining consumers in our portfolio that has been obvious, and we expect that trend to continue. Part of that has been driven by our innovation agenda. We are meeting more consumer needs, more consumer drinking occasions than we ever have before because of our successful innovation agenda across the whole portfolio, across the company. So, I would expect that we're going to continue to see some acceleration of bringing new consumers in because we are opening up occasions for those people to come into our franchise.

Lauren Lieberman:

Great, thanks. Good morning. I was curious about the beer pricing. It’s price mix was north of 2%, and I was just curious if you could talk a little bit about how much of that was driven by mix or if there is some greater pricing starting to come through in the market and your thoughts broadly on pricing for beer this year? Thanks.

Operator:

Thank you. Our next question comes from the line of Kaumil Gajrawala from Credit Suisse. Your line is now open.

William Newlands:

We'd expect that the abatement of supply issues to take care of themselves over the course of the year. Remember, I think we probably made this reasonably clear. We lost several points of top-line growth because of the power outage that occurred at the end of February in Northern Mexico and in Texas. So, we certainly had a muted shipping scenario. We will expect to pick that up over the course of the remainder of the year. And we're still expecting demand to be very solid. So, we are fully expecting to meet the demand that we'll see in the marketplace, which we continue to say will be in that 7% to 9% range over the course of the year.

Sean King:

Great, thanks for the question. Yes, I appreciate the color you gave on the on-premise at 11% and I guess that's greater than 250% growth for beer. But was that at the close of the quarter? Is that like the average of the quarter overall? And inside that, what are you seeing in terms of draft amount [ph]?

Operator:

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

Garth Hankinson:

Yes. Thanks, Bryan. And just as a reminder, when we issued our Q4 guidance, we talked about inflation and we said that, overall, we are expecting inflation kind of in the low to mid-single-digit range. And that was taking into account that on any given line item within our cost structure we were seeing the inflation kind of the low-to-high single-digit range. We have -- as we talked about at that time, we have a pretty effective hedging policy in place and we entered the year in a good position as I said. So, as we look out this year, first of all, the outlook for inflation still kind of remains the same. Our outlook as well as sort of the external advice we get on this is still that inflation is going to have a bit of a spike but it's going to be temporary in nature. The question just is like how temporary, right? It seems as though that kind of blip, it might take a bit longer to kind of come down from there. And so, the things that we're watching mostly right now really are around as you indicated, logistics and transportation, and labor, and those things are somewhat intertwined if you will. The labor market has made it difficult to get dedicated trucking lines and so, that's becoming more and more competitive. So, that's absolutely a concern. We continue to watch aluminum and then we look at natural gas to -- or glass, right? Glass, because glass is impacted by natural gas. So, those are the areas we're kind of most watchful for as we go through the year. I said it, as we sit here today, we're feeling like we're in a similar position to be able to cover our inflationary headwinds as long as they don't get significantly worse as we go through the year.

Eric Serotta:

Great, thank you. Bill, hoping to get a little bit more granularity as to what you're expecting from the Hard Seltzer category and the broader ABA category or the ABA category more broadly? And related to that, you reiterated that you're more than doubling Corona Seltzer's capacity this year and you'll have the additional 5 million hectoliters of ABA capacity at Nava I believe for next year. If your forecast on ABA growth don't pan out, how flexible is that capacity to produce traditional beer?

Operator:

Thank you. Our next question comes from the line of Chris Carey from Wells Fargo Securities. Your line is now open.

Garth Hankinson:

Yes, Chris. Thanks for the question. So, as you indicated, the topline is doing quite well. So, we're very pleased with our transformation as it relates to top-line growth. In terms of the margins journey, what we've always said around that is, it was going to take us about two years post divestiture to get to the 30% operating margins. And in order to get to about 30% operating margin, it was going to take a number of different things. There was pricing, there is mix, there is the cost takeout that we've talked about previously, stranded cost takeout of around $130 million, not all of which will fall to the bottom line. Some of that, we will reinvest behind the brands to make sure that we have strong brands that can generate the topline growth, as well as other initiatives around footprint optimization as a result of that the Gallo divestiture, not only did we share a large number brands but we also shared seven wineries, seven facilities with that transaction. So, there is a footprint optimization, as well as doing some cost optimization to make sure that the products we're putting in the bottom-most reflect what the consumers are looking to get when they pick up those brands. So, that -- we're well underway. We certainly didn't sit back and wait for the transaction to close to identify those cost savings, those initiatives. So, we're just now executing against those. But as you say, we're at that interim period where the business is a bit deleveraged. And so, until the rest of those cost comes out, we -- you will see that kind of -- that downward blip as you noted this year as we move to the 30% operating margins at the end of sort of two years post divestiture.

Unidentified Analyst:

This is actually Greg [ph] on the line for Kevin. Just one quick follow-up question on some of the on-premise channel trends that you guys have been seeing. Many of your peers have noted that it's been running in front of plan so far in terms of the number of reopenings, the velocity that they've seen. You guys gave some helpful context on what you've seen over the last quarter, but maybe could you talk about how your expectations for the full year have changed? Have you seen the reopening phase faster than you thought it would be? And maybe how you think that would impact full year results? Thank you.

Operator:

Thank you. Our next question comes from the line of Andrea Teixeira from JPMorgan. Your line is now open.

William Newlands:

Sure. So, let's start with question around the on-premise. Keep in mind, based on what we can see, per capita consumption has remained pretty steady throughout the pandemic. It's just that where and how people consume has moved around quite a bit. So, it's really difficult to precisely predict how consumers are going to operate. And I think it's going to vary, as I said a moment ago, quite a bit by state depending on the individual restrictions and whether or not certain states are still allowing takeaway from a restaurant environment for alcoholic beverages, some are not. So, until all this dynamic plays itself out, I think it's going to be very difficult to predict exactly how the consumer will land. Other than I would say some of the sheer shopping behavior where you see three-tier e-commerce and direct-to-consumer changes are going to continue. As we've said in prior calls, we have made major investments to increase our capability in three-tier e-commerce and direct-to-consumer, and I'm very glad that we did. It's playing out well and it's showing tremendous takeaway in those sectors which have grown around the pandemic. As it relates to inventory, we continue to believe we're going to have a very solid year. We're in a good position to make up the challenge that was the one-time challenge around the power outage that occurred in February, and we expect to have, as we've said, a very strong year and that I would expect would include the second quarter which is upon us.

Steve Powers:

Hey, guys. Thank you very much. I know you've got a lot of questions already, Bill, but just to round out that last topic on beer supply. I guess is there a ceiling we should think about in terms of how much you're just physically able to ship in 2Q? I think consensus has you shipping around 100 million cases in the second quarter relative to the 85 million in the first quarter. And I guess just given all that you said, I'm just trying to understand or dimension whether that kind of step up is doable in broad brushstrokes or in the back half? And then, I -- what I really wanted to ask about was for Garth, just -- you ran through a number of items, very helpfully that will kind of weigh -- explain the beer margin trajectory sequentially and what will weigh on beer margins over the remainder of the year. If you could provide any more detail there, may be a rank order just in terms of the items we should be focusing on is having the biggest impact there, that would be very helpful. Thank you. Thank you to both.

Garth Hankinson:

Yes. Just to follow-up on the margin question. So, as we stated in Q4, really, it's those three big drivers of depreciation, inflation, and mix, and those are really kind of equally weighted in terms of the impact on margins. So, on the depreciation front, that was -- we have an increase of about $65 million this year, and that's comprised of Obregon full year [indiscernible] in the glass joint venture [ph], depreciation as well as some other things. Inflation, I think we've covered, and the fact that it's more in the second half of the year as our hedges kind of roll-off. And then mix, I think mix is also something that's going to impact us again more as we go through the year because we started the year really with kind of one SKU in Corona Hard Seltzer Variety Pack #1, Corona Hard Seltzer Variety Pack #2 was just launched at the beginning, and then we launched Limonada here in June. So, there will be a more mix impact as we go through the balance of the year as well. But really it's equally -- the impact is equal across those three buckets.

Laurent Grandet:

Thank you. And hi, everyone, and thanks for squeezing me in the queue. Up to recently [indiscernible] penetrate most from these spending household about 15% for the right kinds were to a record as a test was not pleasing [indiscernible]. So, now with new bolder flavors, Seltzer and brown/black [ph] targeting specifically Hispanic, we are seeing household penetration within Hispanic going up to 25 to 35. So, my question is do you see that as a risk to your portfolio of Mexican beer? And if not, why? And what are you doing to reach more Hispanic consumer with your current Seltzer portfolio? Thank you.

Operator:

Thank you. Our next question comes from the line of Trevor Stirling from Bernstein. Your line is now open.

William Newlands:

I'll take the price part, Garth. Maybe you take the first part. Relative to the price, we continue to believe 1% to 2% is going to be our long-term expectation. We think that balances appropriately the dynamics that occur with price sensitivity when you raise your price and recognizing, it does obviously help you cover any inflationary effects during the course of the year. So, we're pretty comfortable, that algorithm of 1% to 2% is the right answer, that balances all of those factors and we would see that continuing well into the future.

Operator:

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Bill Newlands for closing remarks.

Operator:

This concludes today's conference call. Thanks for participating. You may now disconnect.