Constellation Brands Inc (STZ) — Q2 2023 Earnings Call Transcript

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.

Thank you, Joe, and good morning all. Welcome to our second quarter call. I hope everyone had a good summer and enjoyed some of it with our great products. Before we get started today, I want to take this opportunity to say that our thoughts are with all those affected by Hurricane Ian. Thankfully, all Constellation employees living in Hurricane Ian’s path are safe and accounted for. We are also fortunate to avoid any adverse impact to our operations in the area to this point and we continue to stay in contact with our local distributors, retailers and other partners to best support their needs in this difficult time. Additionally, thousands of people in Florida, South Carolina, North Carolina and Virginia have been impacted by this natural disaster. So we are also supporting the American Red Cross with a significant contribution to help provide food, shelter and much needed assistance. We will also match employee contributions to the American Red Cross two-for-one as part of this effort and we hope it will provide at least some comfort to local residents as they work to recover and rebuild. I also want to remind everyone that we filed our proxy statement in connection with the Class B common stock reclassification a couple of weeks ago. We have called a special meeting of shareholders to vote on the reclassification next month on November 9th. At this point, we are unable to comment further or provide additional information on this topic during today’s call beyond what is available in the proxy statement and our other filings with the SEC. All of these filings are available through our Investor Relations website and I urge anyone interested in the special meeting or the reclassification to review these documents. Now, as usual, I would like to start by emphasizing a few key takeaways from our latest results. First, consumer demand for our products remained strong. Consumer-led premiumization trends continue across beverage alcohol giving further confidence in the resilience of premiumization as a fundamental driver of demand for our brands. Buy-rate, which captures both the number of trips a consumer makes and the amount they spend per trip increased in the second quarter for both high-end beer and total wine categories in tracked channels and buy rate for Hispanic high-end beer consumers, which is particularly relevant to our core beer portfolio is also proving resilient. More specific to our brands, our beer business posted depletion growth of nearly 9% that is more than 9 million additional cases for the quarter. And in our Wine & Spirits business, our Wine portfolio gained share and outperformed the entire Wine category in tracked channels, while our craft spirits brands outperformed the higher-end segment of the Spirits category. Second, our beer business also continues to outperform the entire category. In the second quarter, our beer business remained the leading share gainer in U.S. tracked channels across the entire beer category and now accounts for 28% of the high-end segment. Importantly, we believe our beer business remains well-placed to continue to support the steady growth of our brands with inventories across the supply chain at historical norms and production continuing for our operating plans to meet volume expectations for the fiscal year and incremental capacity unlocked from our existing brewery operations in Mexico through optimization and productivity initiatives and the expansion of our breweries at Nava and Obergon, as well as the construction process of our new brewery in Veracruz are all advancing as planned, all of which has given us the confidence to increase the fiscal 2023 net sales and operating income growth guidance for our beer business and continued conviction in our medium-term topline growth and margin algorithm. Third, the transformation of our Wine & Spirits business continues to yield results. Over the past few years, this business has been evolving from a U.S. wholesaler business focused mainly on the mainstream segment to a global omnichannel competitor primarily focused on the higher end. And in our latest quarter, our largest premium wine brands Kim Crawford, Robert Mondavi Private Selection, Meiomi and Ruffino and our largest fine wine brand, The Prisoner Wine Company all delivered solid depletion growth. In our craft spirits portfolio, High West, Casa Noble and Mi CAMPO all achieved strong double-digit depletion growth. In addition, our International and DTC channels each delivered double-digit net sales growth year-over-year and we continue to gain share in three-tier ecommerce. Fourth, our capital allocation priorities remain firm, starting with our investment grade rating. We expect to remain investment grade including after funding the expected $1.5 billion cash payment for the Class B common stock reclassification, given the strong operating performance and cash generation of our business. Moving on to cash returns to shareholders, as of the end of the second quarter, we were over 97% toward meeting our $5 billion goal and we have now exceeded the share buybacks component of our goal by $300 million and upon payment of today’s declared dividend, which we expect to take place next month, we will have fully achieved our goal ahead of our fiscal year-end deadline. Shifting to our third priority of reinvesting to support the growth of our beer business, as noted earlier, our capacity expansions and construction processes continue according to plan. And lastly, our M&A focus remains on small acquisitions to fill portfolio gaps, particularly in our Wine & Spirits business. This included most recently the investment in a minority stake in Archer Roose as part of our focus on Female Founders initiative, which is an accessible premium wine brand focused on offering consciously crafted wines to a new generation of legal drinking age wine drinkers. We are proud to say that five years into our focus on Female Founders initiative, we have fulfilled 76% of our commitment to invest $100 million to Female Founded and Female led startups in the beverage alcohol sector as part of our efforts to enhance social equity within the industry. Now let’s move on to a more fulsome discussion of our performance in the quarter. As I mentioned earlier, our beer brands continue to resonate strongly with the consumer gaining 1.8 points across the entire category and 2.5 points in the high-end segment in tracked channels. Modelo Especial delivered depletion growth of over 10% and was the number one share gainer in the entire U.S. beer category. It continues to strengthen its position as the number two beer brand in dollar sales and is the number one or two beer in 11 states, more than double the number of states from just three years ago. We continue to see further opportunities to maintain the growth momentum of Modelo Especial particularly given the resilience of premiumization trends and our relentless focus on striving to close the brand’s distribution and awareness gaps. Corona Extra maintained its momentum with 6% depletion growth and as the number three share gainer in tracked channels. It remains the number one most loved beer brand with both general market and Hispanic consumers and our La Vida Mas Fina campaign has maintained the number one spot and aid awareness across the beer category. We continue to expect modest growth from Corona Extra supported by distribution gains within certain pockets of the U.S., where it is underrepresented and the brand's appeal and growth potential with younger legal drinking age and multicultural consumers. Pacifico achieved depletion growth of over 37% and was a top 10 share gaining brand in tracked channels. We continue to see a fantastic growth runway for Pacifico as an emerging brand, particularly as the brand has significant distribution potential when compared to Modelo and even more so when compared to Corona Extra. Lastly, our Modelo Chelada brands posted depletion growth of more than 60% for the second quarter and Modelo Chelada, Limón y Sal was a top 15 share gaining brand in tracked channels. Modelo Chelada remains the number one brand family in the Chelada space and owns nearly 60% market share of the Chelada segment nationwide. However, awareness for Modelo Chelada is still relatively low compared to other flavor categories and we continue to expect significant growth as we invest in marketing to broaden the demographic appeal and in additional flavors and package configurations to unlock new consumption occasions for this product. All in, the strong demand for our brands in the second quarter supported a net sales increase of 15% for our beer business and this in turn drove a 25% uplift in operating income, which also benefited from the lapping of higher obsolescence charges last year. This gives us confidence to increase guidance for our beer business, as we now expect to achieve 8% to 10% net sales growth and 3% to 5% operating income growth for fiscal 2023, which Garth will review in more detail shortly. That said, it is important to remember that in the third and fourth quarters of fiscal 2023, we will be lapping elevated shipments from the second half of the last fiscal year that resulted from the rebuild of distributor and retailer inventories after supply shortages and severe weather-driven shipping disruptions that occurred in the first half of fiscal 2022. So while on an absolute basis, we continue to expect our shipments for the remainder of this fiscal year to be relatively in line with depletions, we believe the more comparable indicator for growth for our beer brands in the second half will be the depletion rate. Looking forward, we are also confident that over the medium-term, our beer business remains well positioned to deliver 7% to 9% net sales growth and 39% to 40% operating margin, supported by the sustained momentum of our core brands, the steady progress of our brewing capacity additions and the continued development of our innovation lineup, including the momentum of our Chelada brands, the recent launch of Fresca Mixed, the expansion of Modelo Oro from select test markets to the entire national market next year and the introduction of Corona non-alcoholic. The new non-alcoholic drinking age consumer is an attractive target as they also consume high-end beer, as well as spirits and hard seltzers. So we are excited about the extension of Corona into this segment and we look forward to sharing more details as we approach the product launch. Moving on to Wine & Spirits. Our Wine & Spirits business is making headway with its vision to become a bold and innovative high-end market leader. As noted earlier, the largest premium and fine wine brands and craft spirits brands of our portfolio delivered solid depletion growth rates in the second quarter and relative to the market, the higher-end portion of our wine portfolio which includes our premium and fine wine brands outperformed the corresponding category segments in U.S. tracked channels. Our craft spirits portfolio delivered dollar sales grow significantly ahead of the higher-end segment of the Spirits category. Our Wine & Spirits business also continues to advance its mainstream strategy through a greater focus on brands and initiatives with higher returns, including through the delivery of relevant and innovative products. As we also announced this morning, we continue to further premiumize our business with a divestiture of a portion of our mainstream wine portfolio combined with a couple of select premium brands to the Wine group. When it closes, we believe this transaction will further enable us to focus our portfolio and efforts to deliver the industry-leading growth and margins that we continue to work toward. From an innovation perspective, we have several great examples of recently introduced products that are driving growth within our Wine portfolio. Woodbridge Box was the number two Premium Box share gainer in the second quarter, Meiomi Red Blend 750 was the number two wine SKU, Kim Crawford Sparkling Prosecco was the number four new wine brand and the recent launches of The Prisoner PINOT NOIR and Blindfold Blanc de Noir are respectively seeing early successes in priority accounts and the on-premise. Beyond product innovation, we continue to extend our growth in direct-to-consumer and three-tier e-commerce channels, as well as International markets. Wine & Spirits DTC net sales grew 15% in the second quarter, as our investments in these channels continue to yield strong performance. We also continue to outperform in three-tier e-commerce delivering dollar sales growth 16 points ahead of the competition in the second quarter. Importantly, we are also outperforming in three-tier e-commerce with our beer business, which achieved a seven-point lead in dollar sales growth versus competition in the second quarter. Back to our Wine & Spirits business, International net sales grew 10% versus prior year showing the continued momentum of our brands in the select International markets that we are targeting, Going forward, we will continue to focus on growing our omnichannel and International footprint as we believe these channels will continue to grow as a portion of our mix over time and be an important opportunity for higher-end growth. Now let’s move on to Canopy growth. While the impairment of our Canopy investment is clearly disappointing, it is not indicative of the significant long-term market opportunity that still exists for the legal cannabis market, particularly in the U.S., where the market was estimated at $25 billion at the end of 2021 and is expected to nearly double in size by 2026 as more states continue to legalize cannabis. In fact, the companies that Canopy invested in to establish its U.S. ecosystem continued to perform strongly and to scale. We also remain supportive of Canopy’s efforts to restructure its Canadian operations and its plan to further drive BioSteel’s growth, and believe these actions will also strengthen their business and ultimately provide an opportunity to enhance the value of our holding. Before I conclude, I also want to take this opportunity to highlight that we expect to release our 2022 ESG Impact report later this month. The report seeks to provide a comprehensive review of our ESG strategy and key initiatives designed to make a positive difference in our communities, safeguard our environment, and advocate for the responsible consumption of beverage alcohol. We will also for the first time be reporting with references aligned to the Sustainability Accounting Standards Board Framework and taking into consideration the recommendations from the task force on climate related financial disclosures. We believe these planned enhancements to our reporting will be valuable steps intended to better align with stakeholder expectations on the information we provide on these important topics reflect our company values and better showcase our ongoing efforts to address pressing environmental and societal needs that are important to our communities, our consumers and our employees. I invite all of our stakeholders to spend some time reviewing the report when it is released, which will be available through our company website. In closing, I’d like to reiterate our main takeaways from this quarter. Number one, consumer demand for our higher-end beer and higher-end Wine & Spirits products continues to be strong and we remain confident in the long-term prospects of our portfolio and our runway for growth. Number two, our core imported brands continue to outperform the industry. Modelo Especial further strengthened its position as the number two beer in the U.S. market and continues to gain ground as the number one share gainer. And Corona Extra also maintained its momentum delivering solid growth rates and taking the number three share gainer spot in the beer category. The strong performance of our brands in the first half of fiscal year now puts us on track to deliver better than expected growth for our beer business in fiscal 2023. Number three, we continue to see the benefits of our Wine & Spirits strategy taking hold. Our largest higher-end Wine & Spirits brands are delivering growth and we are also performing strongly internationally with our higher-end brands and e-commerce and DTC channels. And number four, we continue to deliver on capital allocation priorities by maintaining our investment grade credit rating, delivering cash returns to shareholders through dividends and share buybacks, advancing the brewery capacity expansion and construction processes in our beer business to support its continued strong growth and executing on disciplined tuck-in M&A to fill gaps in our portfolio. And with that, I would now like to turn the call over to Garth, who will review our financial results in the quarter.

Thank you, Bill, and good morning, everyone. As Bill mentioned, our business continues 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 a 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 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 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 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, which 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 to 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 a 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.

Hey, guys. So on the beer 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?

So regarding the on-premise performance, it's common for us to experience a stronger first quarter due to Cinco de Mayo, which is the largest event for our beer business in that segment. On-premise accounted for approximately 11% of our volume this quarter, slightly lower than the previous quarter. It's also important to note that our depletion volume has been very consistent with IRI trends. For example, the latest IRI data over 26 weeks indicated a 7.5% overall growth in our beer business, with imports showing a 9.4% increase, which aligns closely with our depletion growth of around 9% for this quarter. Furthermore, we expect to see strength in certain untracked channels, particularly among smaller Hispanic accounts in the West that are not covered by IRI or Nielsen. Overall, our depletion growth aligns well with the trends observed in tracked channels. As we have mentioned several times, this year is particularly important to consider due to last year's weather-related variances impacting our operations and shipment schedules, which I am sure Garth will elaborate on shortly.

Dara, regarding the margin aspect, I would note that you can expect this year’s margin profile to show a typical pattern between the first half and the second half, which has not been the case in recent years due to production challenges that we faced, leading to a realignment in our shipments. Now that we are in a more standard production environment, you will see a more conventional margin distribution between the two halves. However, we anticipate that margins in the second half will face negative effects, as I mentioned earlier, because the advantages from pricing and some cost-saving measures will be outweighed by ongoing inflationary pressures. From a materials standpoint, we are still experiencing some pressure from corn, cans, cartons, and glass. Although we maintain a strong hedging strategy, the way we implement and roll off these hedges means we experienced the most significant impact during the first half of the year. Therefore, while we are well hedged, the rates won't be as favorable as they were in the first half. Additionally, as we expand our capacity, we'll incur extra costs related to training personnel before that capacity becomes operational. Lastly, we expect to see a notable increase in marketing efforts during the second half compared to the first half as we support new marketing campaigns around college and NFL football. For the fiscal year 2024, our guidance remains consistent, and we believe the appropriate way to consider our margins is still in the 39% to 40% range, and we have no intention of lowering it.

Great. Thank you.

Good morning, everyone. Bill, I wanted to discuss the wine sale this morning, especially considering the ongoing focus on premiumization, while you are still maintaining Woodbridge, a more value-oriented brand. Historically, the view has been that this brand provides scale. Could you share some insights on how this deal came about, whether you feel you are finished with your changes, and if you are generally satisfied with the portfolio's structure after this transaction? Additionally, taking a broader perspective, given the changes, it raises the question of whether the wine portfolio, while more streamlined and focused on the premium segment, still fits within the overall portfolio compared to the beer business, which has much higher growth margins and returns on capital. I would appreciate your thoughts on this. Thank you.

Sure. We are very pleased with the progress we are making in the Wine business, and the divestiture announced this morning helps to reshape our portfolio. I believe our overall business is increasingly focused on the high end. We have recognized this trend for beer over many years and are now applying it to our Wine & Spirits business as well. Much of the work we have done in this area has concentrated on craft spirits and higher-end wine brands that fill gaps in our portfolio, all aimed at the high end, where we see improved growth and margins. Today represents another step in reshaping our business. We are committed to achieving a strong growth profile and better margins in this sector, and we believe we are on track to achieve that goal.

Thank you very much. Good morning. I was curious about the outlook for the second half, specifically regarding the cost structure. Some of the issues you've mentioned, such as rolling hedges, make me think you might have had some prior visibility into these elements. I'm interested in understanding what has changed in the cost outlook for the second half, rather than just why it's different from the first half. Additionally, you clearly stated that you're still aiming for 39% to 40% margins on beer in the medium term. Aside from the timing shifts affecting the second half margins, could you provide insight into fiscal 2024 and beyond? Will we return to 39% to 40% in 2024, or is it going to take longer due to how the hedge positions will unfold as we move into 2024?

Yeah. So, Lauren, on the first half of that around what changed from Q or from the first half of the year to the second half of the year, and I would say that, really nothing changed in our mind. We give guidance on an annual basis, not on a quarterly basis, and we are going to deliver margins in line with where we said at the beginning of the year. Do you want to answer the second half, Bill?

Sure. I believe we will provide specific guidance for fiscal 2024 when the time comes. Currently, we see a strong potential for growth in our beer business, estimating a consistent range of 7% to 9%. We also expect to maintain margins between 39% and 40%. As Garth and I have mentioned in previous years, there may be years where we exceed or fall short of this estimate. This year, we are slightly behind due to various factors we've discussed, but we remain confident that this expectation holds for the medium-term. We will offer precise guidance for 2024 when appropriate, but we are committed to delivering consistent results in the coming years.

All right. Thank you. Good morning, everyone. I was hoping for a little more color on your beer shipments versus depletions. I guess, first, it would be helpful to hear how your quarter-to-date depletions have been tracking. And then second, you mentioned depletion should outpace shipments in the second half, but just really trying to think through how we should think about your shipment in the context of your new top line guidance, it does imply really any shipment growth in the second half. So, I guess, what I am really trying to understand is given you are lapping some of the brewery maintenance you had last year in Q3 and then you have the rollout of some really strong innovation such as Modelo Oro that will need to be shipped in Q4. So I am just kind of thinking through your new top line guidance and it feels pretty conservative. So I just want to make sure I understand that? Thanks.

To answer your first question, Bonnie, the start of September was strong and aligns well with our annual expectations. We believe we are starting Q3 on a positive note. Garth mentioned earlier this year that it would be a somewhat unpredictable year. It's crucial to consider that our depletion volume and our year-to-date shipments are nearly identical. However, when compared to last year, the percentages appear different due to shipping disruptions we faced. In terms of actual volume, they are quite similar, and we expect this trend to continue throughout the year. This is why we have emphasized looking at our depletion rate as a key indicator of our business success. Currently, our depletion rate for the beer segment is just below 9%, which is a factor in our increased guidance. We are confident that we will exceed the growth targets we established at the start of the fiscal year. We urge everyone to focus on the depletion rate, as the shipments may be inconsistent this year, but this does not detract from the strong performance of our beer business in the market.

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.

Yeah. Andrea, thanks for the question. So, first of all, just to reiterate with what you said, our shipments and our depletions for the first half of the year have been in line with one another, so we have not overshipped beyond the depletions. The issue between the first half and the second half is strictly due to the timing of shipments related to some production outages we had to deal with last year. So that’s the differential. As it relates to your point on pricing, as we said in our scripts, we are taking more pricing this year, we update for this year from our normal 1% to 2% algorithm to 2% to 3%.

It is important to note that we have experienced significant mixed benefits in our business. This is partly due to the growth of Cheladas, which are mostly single serve, and our introduction of new innovations in different size and pack configurations. The single-serve segment of our business has performed very well, which is a great example of how the mix can be beneficial. In addition to the price increases we are implementing, which are higher than we initially expected, we are also recognizing mixed benefits within our portfolio, which will be advantageous.

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?

No, Robert. I don’t think so. I mean, again, when we look at the kind of growth profile that Modelo Especial using that as the example. In any of the volumetric trend timing, we are growing in double digits all the way along and that becomes, obviously, that the bigger it gets the more double digits is a very enjoyable proposition. We are very excited admittedly about Corona Extra. Corona Extra has grown a bit ahead of what we had expected. But I think that speaks to the just the long-term belief amongst both Hispanic and non-Hispanic consumers in that brand. It’s the most loved brand. We continue to benefit from that. And we continue to advertise against that business very heavily. So I wouldn’t read a lot into the fact that Modelo was continues to grow double-digit, but it’s slightly less than the last double-digit. I would view it as we have a comprehensive brand portfolio whether you talk about Modelo Especial, Corona Extra, the Chelada business, Pacifico, that just continues to radically outperform and that in combination allowed us to raise our expectations for the beer business for the year.

Great. Thank you.

You are welcome.

Thanks, Operator. Good morning, guys.

Good morning.

I just wanted to ask a question about, I guess, beer inventories and given that you have had more supply this year and it seems like you’re in-stock levels are better in assortment. Has it just been more in-stock with your full array of assortment is that, how much of a benefit has that been to depletions?

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 done 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 we have had some challenges on inventory, what can really happen in the strength of our inherent brands.

Talk to us, Kaumil.

I am sorry about that, guys.

There you are.

Carry on.

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?

I think there’s two or three things that fall into that equation. You are correct, we have raised our expectation from 1 to 2, 2 to 3. I think there’s several things that are in play there. We have been very excited by the buy rates that we have seen across our business one. We obviously are doing our best to cover as best we can some of the inflationary pressures that Garth noted in his remarks. But we really haven’t changed how we do pricing. We do our pricing, SKU-by-SKU, market-by-market, all the way across the Board. But it will probably come into that 2 to 3 range, which again is up from what we expected. I think, an important part and I touched on a couple of questions ago is, we are also seeing mixed benefits, which does flow through in terms of how it presents itself when you have things like single serves doing better, which is a better mix item for us, you see Chelada which are all almost all single serve being a better mix item for us. So you have got a combination of, yes, we are going to take a bit more pricing. Yes, you are seeing better mix in the overall equation and yet we are still doing it the way we are doing it, which is SKU-by-SKU, market-by-market. And I believe it’s remains judicious, we always keep the consumer in mind as we think about what we are doing relative to pricing and that certainly isn’t going to change.

Hi. Good morning. I want to touch on cannabis, Bill. Hi, I wanted to touch on your comment on safe banking. I mean, I fully agree rate like so hard to know, but in the base case assumption is that Republicans flip the house. It seems like there’s maybe better than a 50% chance that they could pass. Historically cannabis indicated that the Constellation Board sensitivity in your lender sensitivity is the key determinant in terms of their ability to close their purchase obligation on acreage that would certainly be meaningfully accretive to their bottom line and in turn, how you guys are reporting that business. So could you just offer any updated insights on how the Board and your lenders are thinking about safe in the current kind of health version very narrow? Thanks.

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. Their 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.

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.

Sure. Let me address the question about consumer spending, and then we can move on to the next topic. Unfortunately, we recognize that beer is a staple for many of our consumers. We have noticed some changes in the pack sizes being purchased. However, as I mentioned earlier, we view this as a crucial aspect. The buy rates have been increasing, which is one of the first indicators we examine, specifically how often people visit stores and what they purchase while there. Therefore, we are cautiously optimistic that this trend will continue. It reflects the strength of our brands and the confidence consumers have in us. Regarding cannabis, I do not anticipate any changes in the size of our investment there.

As for the outlook, regarding the first part of your question about legalization, that was just one aspect of a comprehensive analysis we conducted to decide on the impairment we announced today. Additionally, as Bill mentioned, we are pleased with the growth of the cannabis category. In the U.S., it has become a $25 billion retail sales opportunity in states where it’s legal. Consumers are starting to embrace the category, and we are satisfied with Canopy’s position in the U.S. and the improvements being made in Canada.

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.

Oro will be launched nationwide next fiscal year, so it won't have any impact on the current fiscal year's second half. It's currently in three test markets and will continue in those, but we plan a national rollout next year. We conducted extensive research to determine the best approach. The can we are promoting represents the gold standard of light beer, and we believe consumers will know what to expect. Our research indicates they do understand the product, and we were very pleased with the test market results. We are eagerly anticipating its performance on a national scale next year. The test markets showed significant incremental growth, and we are very excited about that. We are optimistic about Oro's potential as a light version of Modelo.

Thank you again and appreciate all of you joining our call today. Hopefully, as you could hear, we delivered another quarter of strong growth performance. Consumer demand for our higher-end beer, Wine & Spirits brands remain robust, giving us further confidence in their runway for future growth. Our Core beer brands Modelo Especial and Corona Extra continue to outshine the market and our next wave brands like Pacifico and Modelo Chelada are achieving very strong double-digit growth. We continue to see opportunity ahead for our beer portfolio supported by continued consumer-led premiumization and our ongoing investments in brewery capacity expansions. The benefits of our Wine & Spirits strategy are also taking hold, as our higher-end brands continue to resonate with consumers and our global and omnichannel efforts are yielding benefits. Our largest premium wine, fine wine and craft spirits brands all delivered positive depletion growth and we achieved double-digit net sales growth in both DTC channels and International markets. And we continue to demonstrate again that we are committed to capital allocation priorities to maintain our strong financial foundation, balanced returns and reinvestment and deploy excess cash with discipline. In closing, as our next earnings call is not for January, I’d like to wish everyone a safe and happy holiday season. And as always, we hope your celebrations will include enjoying some of our great products with your family and friends. Thanks again, everybody. I appreciate you joining the call.