Constellation Brands Inc (STZ) — Q1 2023 Earnings Call Transcript

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.

Thank you, Patty, and good morning, everyone. Before we get started today, I wanted to take a minute to recognize Patty, who, after 15 years with Constellation, has elected to retire next month. We appreciate Patty's commitment in helping shepherd our Investor Relations function since joining the company in 2007. And on behalf of all of our team here at Constellation, we thank Patty for her many contributions to our success over the years, including managing our relationships with a number of folks on this call. We wish her the very best in retirement. Effective July 1, leadership of our IR function will transition to Joe Suarez, who joined Constellation last November as Vice President of Investor Relations. Joe previously served as Managing Director at Teneo, a global CEO advisory firm. Prior to his time there, Joe also served in a range of commercial, governance, finance and investor relations roles for a couple of major players in the global resources sector. We look forward to the continued success of our Investor Relations function under Joe's leadership. With that, let's move on to a discussion of our first quarter results. We're off to a strong start in our new fiscal year, thanks to the solid fundamentals of our business, the disciplined execution of our strategy and the relentless commitment of our Constellation Brands team as well as that of our distributors and retail partners. Our performance in Q1 fiscal '23 continued to build momentum in three key areas tied to our long-term goals. First, our beer business once again delivered industry-leading share gains with Modelo Especial and Corona Extra taking the number one and number four spots among share-gaining brands across tracked channels. The business achieved an important milestone, having reached more than five full points in shares gained over the last five years. Coming back to Q1. Our beer business delivered net sales growth of 21% and added nearly 15 million cases in incremental shipment volume. As anticipated, these significant increases were partly driven by the lapping of supply challenges as a result of severe weather impacts in Q1 fiscal '22. For clarity, shipments and depletes in our current quarter were roughly equal on an absolute basis. Importantly, our shipments mainly were underpinned by continued strong demand for our authentic Mexican beers, our consistent and balanced approach to pricing and the effective ramp-up of new brewing capacity from our organic growth investments. Second, our Wine & Spirits business outperformed the U.S. Wine & Spirits category in tracked channels, where we gained share supported by strong performance of our higher-end brands. Our Wine & Spirits business grew net sales by 2% and saw overall U.S. depletions increase by over 1% with the premium wine and fine wine and craft spirits portions of our portfolio achieving 8% and 16% depletion growth, respectively, with brands like Meiomi, the Prisoner, High West and Casa Noble delivering double-digit depletion growth rates; and third, our sustained and strong operating performance and cash flow generation enabled us to continue to deliver against our established capital allocation priorities. Our balance sheet remains strong. We continue to invest behind the momentum of our beer business with a focus on growth and flexibility, and we exceeded our planned $500 million accelerated share repurchase activity with an additional $800 million in buybacks. In fact, we have now fulfilled the share buyback portion of the $5 billion goal in cash returns to shareholders that we promised. Now let's discuss in more detail our beer business performance. We maintained our number one position as the number one supplier in high-end beer in the U.S. and achieved depletion growth of almost 9% in the quarter, consistent with our expectations and our growth profile target. As for Memorial Day, which celebrations took place within the quarter, we were the number one share gainer for that holiday, capturing 1.5 share points of total beer and 2.3 points of high-end beer in the U.S. tracked channels. In the on-premise, our beer business achieved a 30% depletion growth rate across the portfolio and delivered double-digit growth for the Corona and Modelo brand families as well as Pacifico. As mentioned, Modelo Especial remains the number one share gainer in tracked channels, adding over 1.2 points in incremental share, nearly double the incremental share of the second largest gainer. Overall, Modelo Especial delivered the total depletion growth above 15% for the quarter. Our Modelo Chelada brand family grew in line with our medium-term double-digit CAGR expectations, achieving over 39% depletion growth in the quarter. The national release of our new Limón y Sal 12-ounce, 12-pack helped this popular flavor of our Chelada brand deliver the 15th largest share gain across the entire U.S. beer category in tracked channels. And although it is still very early days for our other Modelo innovations, we are encouraged by the initial data we're seeing in test markets, particularly for Oro. We continue to be encouraged by the sustained healthy growth of Corona Extra. This brand delivered over 4% depletion growth for the quarter, and as mentioned earlier, was the number four share gainer in the U.S. beer market in tracked channels. We continue to expect modest growth for Corona Extra in fiscal '23. And Pacifico delivered depletion growth of more than 20% for the quarter. We continue to expect Pacifico to grow in line with our medium-term 10% to 15% total annual volume growth forecast in fiscal '23. All in, our beer business delivered strong net sales growth for the quarter and this, in turn, supported a double-digit increase in operating income. Looking ahead, we're confident that our beer business remains well-positioned to deliver against our net sales and operating income growth targets for fiscal '23 despite the ongoing inflationary pressures affecting consumers. We'll continue to take appropriate pricing and cost management actions to ensure we maintain both the growth algorithm of our brands and our industry-leading margins. We'll also continue to support our consumer-led innovation and brand-building efforts throughout the remainder of the year, which will include the launch of our Fresca Mixed vodka spirits and tequila Paloma flavors in early September. And we continue to make progress with our brewing capacity additions, including our new brewery to be built in the state of Veracruz. During the quarter, we were pleased to have formally announced the location of our new brewery with the President of Mexico, Andres Manuel Lopez Obrador, as well as with both the Governor of the State of Veracruz and the Mayor of the city of Veracruz along with federal, state and municipal authorities. The new brewery will be located in the port of Veracruz, one of the most prominent seaports in the region and will have ample access to water and necessary resources and a highly capable workforce as President Lopez Obrador himself has stated. We look forward to continuing the remarkable journey of our strong performance of our beer business with a focus on both growth and flexibility as we deploy the investments needed to meet steadily rising demand for our products. Now let's move on to Wine & Spirits. Our strategy to increasingly focus on higher-end brands, aligned with ongoing consumer-led premiumization trends, continues to enhance the commercial performance of our Wine & Spirits business. The premium wine, fine wine and craft spirits portions of our portfolio all significantly outperformed their corresponding categories in tracked channels. Meiomi, the Prisoner and Kim Crawford remain the driving forces behind our premium and fine wine growth with continued share gains in tracked channels and strong increases in depletions. And in craft spirits, our High West and Casa Noble brands delivered dollar sales growth ahead of the competition. We maintained share in mainstream wine with Woodbridge primarily driving that performance. Our innovation efforts also continued to produce excellent results with Meiomi Red Blend becoming the second-largest new product growth contributor in the wine category in just over a quarter since its launch. And we are seeing incremental growth from the expansion of our Wine & Spirits brands into international markets with particularly significant gains of more than 60% in international shipment volumes for our fine wine and craft spirits products. As with our Beer business, we continue to closely monitor the state of the consumer and remain disciplined in our approach to ensure we balance both pricing and growth across our Wine & Spirits portfolio as economic conditions further evolve. That said, while consumers are reporting increasing concerns about the economy, these concerns have not yet translated into significant behavior change for beverage alcohol shoppers, particularly for our major brands. In total, beverage alcohol servings per capita in the U.S. have remained stable and are expected to remain stable with growth of 1% to 2% based on population growth expectations. Against that backdrop, we are encouraged by the continued strength of our high-end beer and Wine & Spirits brands in the first quarter of this fiscal year and remain confident in our ability to drive additional growth for both businesses over the medium term. To that end, we are accelerating our investments in digital capabilities to further support future growth. These investments will be focused on securing the talent and enhancing the technologies needed to further optimize our marketing efforts and reinforce our leading position in 3-tier e-commerce and direct-to-consumer sales, as well as unlock value from enhancements to our procurement, supply chain management, plant operations and back office activities. Online beverage alcohol sales remain over 4 times the pre-COVID rates and we are seeing great traction with our direct-to-consumer and 3-tier e-commerce efforts, having outperformed the competition by 3.5 points in these channels over the first quarter. We are now planning additional investments as part of these efforts this fiscal year and expect the total impact of this digital business acceleration program to ultimately result in incremental earnings to be realized over the coming years driven by more effective marketing as well as more efficient supply chain, procurement, data and analytics and operations platforms. Garth will provide additional details in just a few minutes. Beyond the growth we continue to expect from our businesses which will be further supported by our digital business acceleration program. We also continue to believe that our ownership position in Canopy represents a compelling opportunity in a developing industry with significant long-term growth potential. Within that context, we think Canopy's focus on premiumizing its cannabis-branded portfolio to improve performance in Canada is appropriate. And we are also supportive of its efforts in the U.S. to strengthen the distribution of its emerging CPG brands and build a competitive THC ecosystem as Canopy continues to gain traction. Canopy's agreements with Acreage, TerrAscend, Wana and Jetty position it to quickly scale operations across the U.S. upon federal legalization. We continue to support Canopy through our strategic relationship, sharing our experience and capabilities to support the continued advancement of their U.S. strategy, specifically in the areas of commercial sales, marketing and operations. And as announced yesterday, part of our holding in Canopy's convertible debt will be transitioned into equity, which will reduce Canopy's debt while maintaining our share of equity ownership without putting additional capital at risk. On a separate note, earlier today, we also announced that our Board of Directors has approved a proposal to eliminate our Class B common stock. After an extensive review and analysis by the special committee and with the special committee's recommendation, our Board agreed that it is in the best interest of the company and all Constellation shareholders to eliminate the Class B common stock. Under the proposal, owners of our Class B common stock, which are primarily the Sands family, would convert those shares into Class A common stock and receive $64.64 per share in cash, which equates to a total amount of $1.5 billion. The transaction requires shareholder approval, including approval of a majority of the issued and outstanding shares of Class A common stock not held by the Sands family or their affiliates, executive officers of the company or Directors that also hold Class B common stock. Once shareholder approval is received, we expect that the proposal would deliver a number of corporate governance and other benefits, including the elimination of the higher vote Class B common stock, including the associated voting control of the Sands family and a reduction in the concentration of voting power; a simplification of the company's equity capital structure to better align the voting rights and interests of all shareholders; a broader appeal of our shares to a larger base of investors who prefer single voting class common stock structures; operating cost savings associated with executive salary and certain benefits, as well as administrative savings from maintaining the Class B common stock. We expect the executive salary and benefits cost savings will be about $15 million to $20 million per year using the $17.5 million midpoint of that cost savings range and our current trading multiple of approximately 21x PE. That equates to roughly $300 million of value on a tax-effective basis. Other corporate governance benefits include a rotation of the lead independent Director position on the Board at the next available normal cycle opportunity. And finally, a shift to majority voting in uncontested elections from the current plurality standard for our Board of Directors and the adoption of a Board anti-pledging policy. We will be seeking the approval of shareholders at a special meeting, and a proxy statement, including all details of the proposal will be available ahead of that special meeting. In the meantime, the announcement we made this morning related to the proposal can be found on our company website, cbrands.com. And at this point, we will be unable to comment further or provide additional information on the proposal during today's call beyond what is available in that announcement. In closing, I once again want to recap the three highlights I shared earlier on our performance in the first quarter of fiscal '23. First, our beer business continued to achieve industry-leading share gains, driven by our high-performing Modelo Especial, Modelo Chelada, Corona Extra and Pacifico brands delivering overall strong financial results with double-digit growth for both net sales and operating income. Second, our Wine & Spirits business outperformed the U.S. Wine & Spirits category and tracked channels, particularly through the strong performance of our higher-end brands and also grew net sales in the quarter. And third, we continued to deliver against our established capital allocation priorities, including through the $1.3 billion return to shareholders and share repurchases through June and dividends for the first quarter of this year. We are now at over 90% of our $5 billion promised goal. We were very encouraged by the continued strength of our business in the first quarter of this fiscal year and remain confident in our ability to drive sustained growth over the medium term. And with that, I'd now like to turn it over to Garth, who will give you more detail of our financial results in the quarter.

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 four 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 affecting 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 favorable overlap from two items: one, fixed cost absorption related to increased production levels compared to last year's Q1 driven by the weather events I just mentioned; and two, decreased obsolescence primarily related to hard seltzers. On an absolute dollar basis, marketing investments increased versus the prior year. However, due to favorable top-line leverage, marketing as a percent of net sales decreased 40 basis points to 9% versus prior year. We continue to expect marketing as a percent of net sales to be in the 9% to 10% range for the year. For full year fiscal '23, 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 2% to 4%. This implies an operating margin of approximately 38% for the year. Throughout the remainder of the year gross margin will be negatively impacted as benefits from price and our cost savings agenda are expected to be more than offset by the following COGS headwinds. First, elevated inflationary pressures will continue throughout fiscal 2023 across numerous cost components but largely driven by aluminum, cartons, wood pallets and steel. In addition, we'll see increased logistic costs for fuel and freight rates for truck and route. Second, we're expecting incremental brewery costs driven by labor inflation in Mexico as well as increased headcount and training expenses to support our continued capacity expansion initiatives at both Nava and Obregon. Third, as a result of these brewery expansion plans, the step-up in depreciation expense will continue as additional capacity is planned to come online throughout the fiscal year. Moving to Wine & Spirits. Q1 fiscal '20 net sales increased 2% driven by a combination of increased shipments and favorable price and mix. Q1 depletion growth was driven by double-digit contributions from Meiomi, the Prisoner brand family, High West and Casa Noble. Operating margin decreased 330 basis points to 19.6% as mix and price benefits, combined with a favorable inventory adjustment, were more than offset by higher COGS driven by inflationary headwinds, including higher material costs for grapes and glass, as well as increased transportation and warehousing costs. SG&A and marketing increased as a percent of net sales versus the prior year primarily driven by increased headcount and marketing initiatives to support key growth areas of our business. For full year fiscal 2023, the Wine & Spirits business continues to expect net sales to decline 1% to 3% with an increase of 4% to 6% in operating income, implying operating margins of about 24% for fiscal '23. Despite unit Q1 margin results, we expect to achieve our Wine & Spirits margin goals for the year through a combination of the following initiatives that are primarily weighted to the second half of the year. We expect ongoing premiumization and mix improvement driven primarily by our fine wine business and the timing of the vintage transition for these products. We have planned incremental pricing actions beginning in the second quarter. A strong New Zealand vintage coming online is projected to drive volume and enhanced margins. And finally, we expect to see benefits from our ongoing cost savings initiatives. Now let's proceed with the rest of the P&L. This is a good point to provide additional detail regarding the digital business acceleration initiative that Bill outlined a few minutes ago. Constellation is already an emerging digital business today with impressive progress in key areas such as direct-to-consumer, 3-tier e-commerce and digital marketing. The digital business acceleration effort will help to create a more cohesive digital strategy and is an entirely new way of doing business that is designed to enable us to become best-in-class initially in the areas that include procurement, end-to-end supply chain planning and marketing optimization. The implementation of our new SAP platform last year enabled a framework for us to proceed with this initiative, which is expected to add $35 million to $40 million in corporate expense this year. As a result, our initial corporate expense guidance increased from $230 million to a range of $265 million to $270 million. We expect to start to see some benefits from these investments later this year. Our fiscal 2023 EPS comparable guidance of $11.20 to $11.50 remains unchanged despite the lower share count. Corporate expenses as a percent of net sales remain at about 3%, which is at the level that had been trending during the SAP implementation. In fact, the Q1 increase in corporate expense of approximately $7 million was primarily driven by investment spending for our digital business acceleration initiative. You can expect to see the majority of the remaining fiscal 2023 spend for this project to occur in Q2. Comparable basis interest expense for Q1 increased slightly due to higher average borrowings, and we ended the quarter with a net leverage ratio of 3.2 times, excluding Canopy equity earnings. During Q1, we entered into an agreement that amended and restated our senior credit facility. This resulted in an increase in our existing revolving credit facility from $2 billion to $2.25 billion and extended its maturity to 2027. In addition, we issued senior notes and subsequently repaid the 2018 3.2% senior notes and the 2013 4.25% senior notes that were coming due next year. We believe that this was the appropriate action to take in a rising interest rate environment. 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 $562 million, which represents a 7% decrease versus prior year driven by a 73% increase in CapEx investments to support planned capacity expansions and related activities in Mexico. 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 CapEx of $1.3 billion to $1.4 billion, including investments targeted for Mexico beer operations expansion. In closing, our excellent performance and strong business fundamentals demonstrate that we are committed to generating net sales and operating income growth while returning value to shareholders. Our path to impressive Q1 results were paved by great execution in growing our core business and supported by investments to enhance our portfolio and operations. With that, Bill and I are happy to take your questions.

I have two questions. First, if the shareholder proposal is approved and we have a $1.5 billion expense, how do we plan to finance that? Are there any measures to mitigate the additional financing costs? Second, regarding the accelerated investment in digital, should we view this as part of our ongoing cost base? Is this a long-term investment, or are we simply having a strong year and choosing to accelerate some expenses? So, to summarize, I'm interested in how we will manage the financing costs associated with the $1.5 billion and how we should approach the digital investments.

Yes. Thanks, Bryan. So I'll take those in that order. First, on the funding of the $1.5 billion. First of all, we're in a very enviable position given the strength of our balance sheet and given our investment-grade rating. We're obviously, given the timing of this proposal, we're still thinking through exactly how we're going to fund the $1.5 billion, but likely will include some new debt and may or may not include some of our existing debt that we have available to us under the revolver. So there will be more to come on that as we move forward. That being said, whatever we do, we do remain committed to our investment-grade rating, and we intend to remain within our targeted leverage range and can do so as we support this commitment. On the digital business acceleration cost, so this is a multiyear program that's in place. What the spend will be in future years? We will work on that as we move through this year and into next. But this is not a pull forward per se, this will be incremental investment, and so you'll see more about that, as I said, as we move through this year and into next.

All right. So I guess the key question this morning that we're hearing from investors is on your full-year guidance and why you maintained it despite the significant outperformance in Q1 and also thinking about the significant repurchases. So I guess we're all trying to understand your level of conservatism, especially considering it implies that your beer shipments only grow about 3% for the balance of the year despite what I think is pretty darn good momentum behind your brand. So what are we all missing? I mean, maybe you guys could sort of lay out for us some of the key puts and takes to help us better understand this.

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 two 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.

Yes. The only thing, Bonnie, that I would add to that is I always try to look at what our depletion rate looks like and to make sure that you're seeing the consumer takeaway. And as we stated, we're gaining significant share in our beer business. We're gaining share in almost every sector of our Wine & Spirits business. Both of those were very positive within the quarter. And don't get confused or muddled, if you will, by the lumpiness of the shipment timing because, last year, as we know, because of weather-related events, was a bit unusual. And so therefore, the overlaps in particular, quarters of this year will be a little different. I look at the depletions, and our depletions were very strong, yielding share-gaining performance within the market. More importantly, we are continuing to see strong consumer demand throughout the year. And certainly, the consumers continue to be interested in our business despite an understanding that it's going to be an interesting year relative to questions around inflation and around recession. But we remain very confident in the performance of our business, and I think it was reflected in the quarter we delivered.

So maybe we could just take a step back and talk about how you think your business is positioned if we do move into a recession and a period of weaker consumer spending both looking at past cycles and what you've seen so far this cycle. And second, maybe just an update on June depletions. Have you seen any trade down impact on your business so far? So maybe first conceptual and then be a bit more concrete. What are you seeing near term?

Sure. Let's focus on some strong facts that support our business. We’ve found that seven out of ten shoppers who buy beer plan to do so before leaving their homes, which is very positive for us. If we examine buy rate, defined as the number of trips multiplied by the spending during those trips, we see it is higher than pre-pandemic levels and is actually accelerating in the first quarter for beer compared to the previous three months. These are solid indicators of our portfolio's strength, especially considering the market share gains mentioned by Garth and me. June aligns with our yearly expectations and has been another solid month for us. To summarize, Modelo is performing exceptionally well, and we're seeing positive results from Corona Extra. Once we resolve the supply chain issues affecting Pacifico, we anticipate strong performance there as well. Overall, we expect to continue seeing robust results in our beer business as the year unfolds, while acknowledging the potential economic uncertainties ahead.

This is Philippe 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. 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?

We have consistently communicated that our long-term pricing algorithm targets 1% to 2%. Remember, last year we surpassed that target. It's crucial for us to consider the consumer as we make decisions regarding our pricing strategy. Our current algorithm is effective and adaptable, allowing us to respond as market conditions evolve throughout the year. I want to emphasize that we are actively monitoring inflation and pricing dynamics, and we will be prepared to make adjustments if necessary. However, our long-term algorithm remains unchanged. We still believe that maintaining a 1% to 2% increase over time is appropriate for our business and is vital for retaining our consumer base, which is ultimately our primary focus.

Just to start, Bill, just a clarification. You said that depletions are consistent with your yearly algorithm. Were you referring to the beer growth algorithm of 7 to 9 or the volume component within that algorithm? So that's just a clarification. And the main question is I hear you in response to the resilience of the consumer. I was wondering if you could just maybe frame consumer risk within your portfolio. For example, do you see relatively higher consumer sensitivity in Modelo versus Corona, given different demographic exposure? And maybe just offer some thoughts on how you could evolve your strategy, as you just noted, should you start to see a change in the consumer habits.

To address the first question, both depletion and volume are expected to be roughly equal throughout the year. Due to growth, shipments tend to be slightly higher since they are based on a larger foundation. This results in consistently higher shipments each year, as we maintain a strong growth profile in our business. The premiumization trend in our portfolio remains strong; currently, 59% of beer sales are in the high-end segment. Just a few years ago, we anticipated surpassing 50%, and now we are at 59.5%, representing an increase of 1.1 points compared to the previous year. We are also witnessing similar trends in the wine sector, which indicates ongoing premiumization. All of this supports a sustainable growth trajectory for our business. We believe there are still many opportunities for growth within our various franchises. For example, Modelo continues to grow significantly in secondary markets with ample distribution potential, as well as gaining market share in areas that show long-term strength. We are confident in our long-term growth prospects across all of our brands, and the data supports this belief.

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.

Certainly, it's something that we're all monitoring. One of the advantages observed during past recessions or recession-like trends is that alcoholic beverages are viewed as an affordable luxury, which means consumption tends to persist during those periods. To provide a specific example regarding beer-drinking households, it holds significant importance for many consumers. In fact, beer ranks 15th among 172 edible categories, indicating a consistent consumer interest in this segment. While there may be short-term effects due to gas prices and other inflationary pressures, overall, this category remains stable for many individuals. This stability is particularly evident among our Hispanic consumer base, with whom we have a strong connection. Therefore, I believe it reflects positively on our ability to navigate a recessionary environment in a healthy manner.

Two questions for me, if I may. The first, could you just help us understand exactly why the Q1 price mix was above that longer-term 1 to 2 that you mentioned? Is that the phasing of pricing? Is there a mix component we're not taking into account or perhaps some distributors taking pricing? Color on that would be appreciated. And then my second question on Canopy Growth. I appreciate your comments in the prepared remarks that you remain committed to that investment. But the company does continue to lose share in Canadian recreational cannabis, continues to face challenges reaching profitability. U.S. scheduled legalization is looking increasingly less likely, at least in the short term. So could you maybe provide more color as to what gives you conviction that this business can meaningfully improve in the long term?

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.

Yes. Regarding Canopy, it’s clear that the company has encountered several challenges over the past few years. However, we remain very optimistic about the category and Canopy’s future. Our confidence stems from the fact that, in Canada, the Canopy team is focusing on premium products through their newly announced restructuring programs, which are profitable and are paving the way towards profitability soon. In the U.S., we see promising signs for the category in terms of consumer consumption, with both retail sales and state tax revenues from cannabis sales growing significantly, indicating strong consumer acceptance. We also appreciate the strategic approach the Canopy team has adopted in the U.S. Their partnerships with Acreage, TerrAscend, Jetty, and Wana position them well for future opportunities as the market opens and legalization progresses. This is why we remain confident in the category.

Great. I just wanted to follow up a little bit on the pricing question. And that is if you can talk a little bit about your views about what appears to be happening based on channel checks, trade checks that retailers are essentially taking or increasing their margin given the much higher price increases for other brands and just the fact that distributors, right, have pressures in terms of their costs, and they're likely to want to see higher prices, so if you could talk maybe a little bit about that dynamic. And I think we all understand the long-term algorithm, why that makes sense, but these are extraordinary times.

These are exceptional times. It's crucial to remain balanced and sensible, avoiding getting swept away by the moment and making decisions that could be detrimental to consumers. Therefore, we are committed to being cautious in how we approach this situation, recognizing the significant pressures that our consumers face due to inflation. We’ve noticed some price increases occurring, whether at the distributor or retail level, to meet specific price points, and this is evident. Our goal is to navigate the fine line of what is appropriate and how we can respond to rising costs while preserving our consumer base. We believe this approach is beneficial not only for our company but for the broader category as well. As mentioned, we will be very careful and are monitoring the situation closely. We have a flexible algorithm that enables us to address concerns in real time, and I can assure you that we closely oversee this on a near-daily basis.

So as we all listen to what you said in terms of like how you exit consumption and depletions, it sounds as if 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 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 the level of conservatism 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?

Let me attempt to address most of those points here. First, I'd like to revisit something from my prepared remarks, which is that although it appears we shipped significantly more than we depleted in the first quarter, this is primarily due to the overlap from last year affected by weather events. The absolute numbers for beer shipments and depletes were about the same, and we anticipate this consistency to continue throughout the year. As Garth mentioned earlier, it may be somewhat uneven due to the weather-related activities we encountered in the first quarter. Additionally, in the latter half of the year, we addressed rebuilding inventories from the previous year, so we expect some fluctuations. Regarding pricing, our approach is generally 60% in the first half of the year and 40% in the second half, which has been our consistent pattern. We do have specific pricing moments and evaluate it SKU by SKU and market by market rather than applying broad-based pricing strategies. This allows us to assess the development of the year and identify opportunities in the marketplace continuously. We believe this method has served us well in the past and will continue to be beneficial moving forward.

Could you share your thoughts on how the current market conditions are impacting wine sales, similar to the questions you've addressed regarding elasticity and the beer market? Specifically, are you noticing a shift where consumers downgrade from $25 wines to $20 options, or is there a positive trend for the Woodbridge brand as more consumers gravitate towards value wines? I'm curious if you've observed this trend or anticipate it, and how it might influence your projections.

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.

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.