Constellation Brands Inc (STZ) — Q1 2025 Earnings Call Transcript

Thank you, Daryl. Good morning, all, and welcome to Constellation Brands Q1 fiscal '25 conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we will also be making available in the Investors section of our company's website a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, and as Daryl mentioned, 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.

Thanks, Joe, and welcome all to our Q1 fiscal '25 earnings call. I'm pleased to say that we got off to a solid start in Q1. And as usual, I'd like to start with a few key highlights for the quarter. First, we continued to extend our position as a growth leader within consumer packaged goods, achieving an enterprise dollar sales increase 4.5 percentage points above that of the entire CPG sector. Let me repeat that. We achieved an enterprise dollar sales increase 4.5 percentage points above that of the entire CPG sector per the Circana tracked channel data for the 12 weeks ended on their May 19 quad week. This significant outperformance was largely driven by the continued growth of our Beer business, which attained the second largest share gain in the total beverage industry, as well as once again the top share gain in all beverage alcohol. This is for the Circana 12 weeks ended June 2, which most closely aligns with our quarter. Second, continuing with our Beer business. We delivered another strong quarter with high-single digit net sales increase driven by our Beer portfolio's 57th consecutive quarter of depletion growth, as well as significant operating margin improvement supported by our cost savings and operational efficiency initiatives. And, of course, all of this was aligned with our full year guidance and our medium-term outlook for the business. Third, in line with our disciplined and balanced capital allocation priorities, which we have consistently delivered against for more than five years now, in the first quarter of this fiscal year, we did several things. First, we maintained our strong investment grade balance sheet and still expect to achieve our target 3 times net leverage ratio in fiscal '25. Second, we returned $185 million to shareholders in dividends and executed $200 million in share repurchases, plus we completed over $40 million more dollars of buybacks in June. Third, we continued to advance our latest brewing capacity addition at Obregon and new brewery development at Veracruz. And we are pleased to have executed the divestiture of our Mexicali site, which as a reminder was mainly the land building as we had already repurposed most of the equipment. Fourth, we executed the tuck-in acquisition of SeaSmoke to address white space and enhance asset utilization in our wine portfolio. And in parallel, initiated a potential sales process of a few wine and spirits non-core assets, including certain vineyards and facilities to better align our network and partially offset the acquisition cost. Staying with Wine and Spirits for a moment, while the performance of the business continues to face near-term challenges largely driven by broader category headwinds, we expect net sales and operating income improvements and our outlook for the fiscal year is unchanged. Lastly, all in, we drove comparable earnings per share growth of more than 17% and remain focused on achieving our stated full-year guidance and medium-term target of low double-digit comparable EPS growth. With that, let's turn more fully to our Beer business' performance. We maintained the momentum in our Beer business during the first quarter of fiscal '25 with net sales and operating income growth of more than 8% and nearly 16%, respectively. As noted earlier, these increases were primarily supported by strong volume growth as well as cost and operational efficiencies. Our Beer business grew shipments by 7.6% in Q1 on a reported basis, while depletions were up 6.4% excluding the impact of the craft brand divestitures in June of last year. It is important to reiterate that this mid to high-single digit level of volume growth was fully aligned with the expectations we shared for our fiscal year, as well as our medium-term algorithm. So, despite the volatility of short-term scanner data, whether due to weather, timing of holidays or other non-structural factors or the performance of the broader beer category due to dynamics affecting other brands or segments, our Beer team once again consistently delivered on our targets and objectives. Now honing in on the performance of our largest brands, Modelo Especial grew depletions by nearly 11% and upheld its position as the top share gainer, extending its lead as the number one beer brand in U.S. tracked channels. Importantly, Modelo Especial also continues to grow household penetration, rising to become the number three brand on this metric at the end of May, with a 2.4 percentage point increase on a 52-week basis. While Corona Extra depletions declined just over 1% in Q1, we continue to expect we can deliver low-single digit growth from this brand. Importantly, Corona Extra remains a top five beer brand in the U.S. and it continues to gain share in the category. Pacifico delivered remarkable depletion growth of over 20% and was the number four dollar share gainer across the total beer category. Our Modelo Chelada brands delivered an increase of more than 5% in depletions and we are excited to continue to build on that momentum in fiscal '25 with two new flavors, Fresa Picante and Negra con Chile. More broadly, from an innovation pipeline perspective, the rollout of our two new Modelo Oro pack sizes is underway as we continue to thoughtfully build out the brand using our disciplined approach after a successful national launch last year. In addition, the expansion of our Aguas Frescas variety pack to an additional 20 markets and the launch of Corona Sunbrew in select Eastern test markets are also advancing per our plans, and we look forward to sharing more on these additions to our portfolio over the coming year. The strong execution of our Beer business in Q1 was also reflected in our ability to deliver significant operating leverage, driving 2.6 percentage points of operating margin expansion year-over-year. Looking ahead, we continue to expect our Beer business to deliver net sales growth of 7% to 9%, operating income growth of 10% to 12% and an operating margin of approximately 39% in fiscal '25. Moving on to Wine and Spirits. As noted earlier, we continue to face challenging dynamics in these categories, particularly across most of the wine price segments. These headwinds were the main drivers of the 7% net sales decline for that business in Q1. That said, our craft spirits portfolio achieved shipment volume growth of 14% as well as double-digit dollar sales growth in Circana U.S. track channels, significantly outperforming the low single-digit growth rate of the higher-end spirit segment. In addition, we continue to make good progress against the operational and commercial execution initiatives identified last quarter to support our efforts to improve the performance of this business in fiscal '25. The tactical investments in the 11 brands that represent 75% of net sales and over 80% of volumes for our Wine and Spirits business in fiscal '24 are now underway, and we expect to see improvements in this select group of our most scaled offerings over the remainder of the year, ultimately underpinning the relatively stable net sales outlook for that business in fiscal '25. However, these incremental investments did have a near-term impact on the operating income, which declined 25% in the first quarter. That said, we also expect year-over-year operating income performance of our wine and spirits business to improve throughout the remainder of the year, and we continue to target Wine and Spirits operating income to be down 9% to 11% in fiscal '25. As we have noted previously, we remain committed to continuing to advance this business over the coming years towards the medium-term target shared in our Investor Day. Lastly, we continue to make good progress against our ESG ambitions, having recently received TRUE Certification for Zero Waste at our Nava and Obregon breweries, marking a significant milestone in meeting our waste reduction commitment. And as a reminder last year, we also achieved our initial water restoration commitment one year ahead of schedule and we then set an ambitious target nearly 5 times the size of the original goal to be completed within the same timeframe of fiscal '23 to '25. So in closing, we once again delivered another quarter of solid performance driven by the continued strength of our Beer business and we expect to maintain this momentum throughout the rest of fiscal '25 and beyond as committed at Investor Day. Our Beer business continues to achieve strong volume growth, well above that of its category and total beverage alcohol. This outstanding performance supported the second largest dollar share gain within the broader beverage industry and reinforced our significant growth outperformance relative to the entire CPG sector. Our Wine and Spirits business is making progress against the operation and commercial execution initiatives identified last quarter to support its trajectory for this year's guidance. All in, we continue to advance toward our enterprise-wide financial targets, including the delivery of double-digit comparable EPS growth, while upholding our disciplined and balanced capital allocation priorities from the last five years, which so far this fiscal year has also included the return of over $240 million to shareholders in share repurchases through June. And with that, I turn the call over to Garth.

Thank you, Bill, and good morning, everyone. I will begin by discussing our Q1 fiscal '25 performance with a focus on our comparable Enterprise results and business segment details. Our Enterprise net sales grew by 6% for the quarter, meeting our full-year expectations and medium-term outlook for our Investor Day targets. This growth was largely driven by our Beer business, which I will discuss further shortly. For fiscal '25, we expect Enterprise net sales to increase by 6% to 7%. Our Enterprise operating income grew by 23% and 12% on a reported and comparable basis, resulting in a reported operating margin of 35.4% and a year-over-year increase of 180 basis points in the comparable operating margin to 34.7%. Despite strong first-quarter operating income growth driven by our Beer business, we anticipate a full-year growth in Enterprise comparable operating income of 8% to 10%. We are also on track to meet our full year comparable EPS guidance of $13.50 to $13.80, having recorded comparable EPS of $3.57 for the first quarter. This guidance reflects a 10% year-over-year increase at the midpoint and aligns with our medium-term goal of achieving low double-digit comparable EPS growth as outlined at our Investor Day last November. Now, turning to the underlying drivers of our Q1 performance, our Beer business is off to a strong start in fiscal '25. Depletion volumes for our Beer business increased by 6.4%, excluding last year's craft brand divestitures, reflecting strong consumer demand and excellent execution during key holidays like Cinco de Mayo and Memorial Day. We led in market share during both holidays, with Modelo Especial emerging as the top gaining brand. Our on-premise depletions rose by 2%, with Modelo Especial advancing to become the fourth most popular draft beer in the U.S. Beer shipment volume increased by 7.6%, outpacing depletions, consistent with our seasonal patterns as distributors prepare for the summer peak. We expect shipments and depletion volumes to align closely this full year, and while we had the same number of selling days in Q1, we will have one fewer in Q2. In addition to volume growth, we benefited from less than 1% in pricing from previous actions taken last fall, leading to net sales growth of over 8% for our Beer business. Looking ahead, we expect our Beer business to maintain momentum due to gains in shelf space and favorable demographic trends among Hispanic consumers, alongside the strength of our brand equity and ongoing marketing efforts. Regarding our Beer business's operating income and margin, we saw a 16% increase in operating income and a 260 basis point gain in operating margin to 40.6%, driven by the strong top-line performance and nearly $50 million in savings from efficiency initiatives. These savings slightly offset a 7% increase in COGS, with about 25% of our COGS exposed to the Mexican peso, for which we are approximately 85% hedged for the fiscal year. Marketing expenses represented 8.4% of net sales for the quarter, in line with our full-year target of around 8.5%. Other SG&A expenses were slightly below expectations at 4.4% of net sales, as we anticipate an increase in the second half due to talent acquisition and investment in our supply chain. We continue to expect Beer operating margins around 39% for fiscal '25, with incremental COGS anticipated in H2 due to normal seasonal volume fluctuations. In contrast, our Wine and Spirits business recorded a 7% decline in net sales in the first quarter, primarily due to a 5.1% drop in shipment volume amid challenging market dynamics in U.S. wholesale. However, we expect the operational and commercial initiatives we implemented will help stabilize net sales throughout fiscal '25. We anticipate better performance in the second half, aligning with the usual seasonality of the business as these initiatives take effect. Our Wine and Spirits operating income declined by around $20 million, resulting in a 370 basis point decrease in operating margin to 15.3%, mainly due to lower volumes and unfavorable product mix, despite some benefits from SG&A expenses and pricing. Marketing expenses in this segment represented 10.5% of net sales, reflecting ongoing investments in major brands. SG&A was 17.5% of net sales, elevated compared to our long-term target, with savings expected to materialize in future quarters. We anticipate a full-year decline of 9% to 11% in operating income for our Wine and Spirits business based on initial fiscal '25 guidance. Looking at the overall P&L, corporate expenses were approximately $59 million for the quarter, reflecting an 18% year-over-year increase mainly due to higher compensation and professional fees. Interest expenses declined by 14% to $103 million for the quarter, and our effective tax rate was 18.2%, compared to 20.7% last year. Our forecasts for corporate expense, interest expense, and effective tax rate for fiscal '25 remain unchanged. We expect a slight increase in corporate expense over the coming quarters due to rising compensation and benefits and digital investments, as well as a minor uptick in interest expense. In terms of free cash flow, which we define as net cash from operating activities minus capital expenditures, we generated $315 million in the first quarter, representing a 19% decrease from last year due to a 35% increase in capital expenditures mainly from our greenfield brewery construction in Veracruz. This project is progressing on schedule, and we expect the brewery to enhance our production capacity and efficiency, with operations expected to commence towards the end of the next fiscal year or early fiscal '27. In conclusion, the strong results for the first quarter of fiscal '25 reinforce our confidence in achieving our financial and strategic goals for the year. We will continue to leverage our robust portfolio of brands while adhering to our disciplined capital allocation priorities. We will closely monitor consumer trends, currency impacts, and input costs to respond appropriately to any market changes. Thank you for your continued support and interest in our company, and we look forward to updating you on our progress throughout the year. Bill and I will now take your questions during our Q&A session. Thank you.

Good morning. Bill and Garth, you mentioned the ongoing momentum in beer and the focused marketing strategies contributing to sustainable growth. We are eager to hear about how you finished the quarter. Do you have any insights on June, considering the current consumer landscape and what we're hearing from other companies and the economy overall? Additionally, we hope you are seeing benefits from the market share growth and expansion in distribution. Could you share how the 6.4% depletions you reported break down between same shelf growth and additional distribution? Thank you.

Sure. Let me start with that. First of all, I think the important thing to always keep in mind is that our buy rates for our Beer business remain very strong. We saw high-single digit both at a consumer level and within the Hispanic community, with the Hispanic community being slightly higher than the total consumer. Now that doesn't mean there aren't some shift around in pack sizes and channels, but our buy rates remain extremely strong. And I think this is a consistent theme that we've said time and time again, which is our Beer business has tremendous brand loyalty and therefore it continues to excel despite whatever might be going on with other beer companies or with other brands in the sector. As we noted, we had an unusually strong performance against all other CPG sectors and we're again the number one share gainer within beverage alcohol. To your point, I think the gains that we saw in shelf sets is certainly an additive factor in this. It also gives us plenty of chance to expand things like Oro, which we're very excited about for this fiscal year. So I think it's very difficult to put an exact number on the dimension of it. And I think you've seen, we've consistently delivered year after year after year on exactly what we said we would do and this quarter is no different.

Yes. Hello, everyone. You've been able to sustain pretty good profit margins or pretty stable profit margins here remarkably well despite the Mexican peso having appreciated very strongly in recent years, but that seems to have turned this quarter. If you were to enter a period of peso weakness, can you speak to the sort of flexibility that this might give you or that would enter into your pricing strategy? And look, just to be transparent, the reason I'm asking is because in the 80s and 90s, we went through periods of peso weakness and you were able to successfully close price gaps with mainstream beer and the dividends of that are still coming through today. So if you could just speak to how you're thinking about this, it would be helpful.

Yeah, Carlos. I think the results that you referenced are just an indication of how effective our hedging policies really are. We have a multi-year hedging policy which allows us to layer in incremental hedges over a multi-year period when we see moments of weakness, if you will. In Q1, we actually did see a couple of days there where there was some fairly significant movements, greater than 10%. And we took advantage of that movement with our treasury team again layering in incremental hedges, not just for this year, but also for future years as well. Just as a reminder, when we entered this fiscal year, we were about mid-70% range hedged against the peso. And as a result of these incremental hedges, we now sit at about 85% for the full fiscal year. So again, it's a very robust practice, very methodical, disciplined and flexible approach and it certainly has been paying dividends for us.

Hey, good morning. So just to follow-up on Andrea's question in terms of macros and potential impact on the Beer business, can you unpack a little more maybe what you're seeing from low versus middle versus high-end consumers in terms of demand for your Beer business? And then also just any update on on-premise channel trends and what you're seeing throughout the course of fiscal Q1 and so far this summer, just in terms of if we're seeing any big channel shifts or any types of impact on that front? Thanks.

Sure, let's begin with the second question. The on-premise performance was a bit weaker than we anticipated. However, we did experience notable growth in our franchises, especially with Modelo, which improved its position compared to previous years. This can be attributed to several factors. One major factor is the weather conditions during early spring and the start of summer, which were not favorable and affected the on-premise segment, similar to its impact on the overall business. We expected the summer months to demonstrate some resilience in this area. Regarding your question about consumers at different income levels, I want to emphasize that our consumers show exceptional brand loyalty. Particularly among Hispanic consumers, who make up over 50% of our overall mix, their buying rate increased compared to the total consumer base. This highlights the strong loyalty within that demographic, regardless of income. This loyalty will continue to be a significant advantage for our business as this community often views beer as a staple. Overall, we are very satisfied with our buying rates, and despite some fluctuations during the quarter, we see this reflected in our depletion rate of 6.4%, which is a solid quarterly outcome.

Hey. Good morning, everyone. First, just a quick follow up on Andrea's question, if you can just provide any update on just what you're seeing exiting the quarter into June. And then a bigger picture question on innovation. Last year, obviously, you had Modelo Oro, which was pretty successful and you have some runway for this year. Can you talk a bit about this year's innovation including Corona Sunbrew and the Modelo Aguas Frescas expansion and anything else we should think about in terms of innovation contribution in beer. Thank you.

You bet. As we've mentioned in previous quarters, we won't provide quarterly depletion guidance. However, we are very pleased with the weather conditions heading into this quarter, which is a significant factor for our business delivery. In fact, the forecast for tomorrow looks great, and we are looking forward to July 4th being another successful event, similar to what we experienced during Memorial Day. Regarding our innovation agenda, we have expanded Modelo Aguas Frescas to 20 new markets. It was test marketed last year in Las Vegas, where it became the number-one ready-to-drink malt beverage in that area and had a strong initial performance. This variety pack is now available in 20 additional markets, which accounts for approximately 70% to 75% of the anticipated consumption for that product. We are excited to see its progress throughout the year. In addition, we are in the early stages of testing Corona Sunbrew in the Northeast, and while it’s still early, we are encouraged by the consumer response so far. The sampling done around that product indicates it has the potential to be a big success with consumers. Both products are still in the early phases, but they were introduced only after thorough consumer testing to ensure we had the right product, packaging, and pricing to enhance their chances of success.

Great. Thanks. Good morning. So the strong start to the year on profitability would seemingly create more flexibility to hit that 10% to 12% operating profit guide for Beer for the year. Particularly there's nothing too material from a timing perspective in the quarter. So kind of what do you see as the key variables that influence the high versus the low-end of that operating profit guidance range from here? Thanks.

We are very confident about the full-year guidance we provided and the results we reported today. In April, we indicated that we expected our operating income growth from a Beer perspective to be in the 10% to 12% range, which we reaffirmed today. This implies our operating margins would be around 39%. It's important to clarify that this margin guidance applies on an annual basis rather than quarterly. As a result, we may not achieve approximately 39% every quarter. We anticipate the usual seasonality we experience each year, with higher volumes in the first half and lower volumes in the second half, which can lead to some fixed overhead absorption impact and lower margins in the second half due to maintenance activities at our breweries. However, as we mentioned earlier, we do expect some positive year-over-year results in Q4, especially because of the comparison to last year's VAT write-off.

Yeah. Thank you. Good morning, everyone. Bill, just more of a philosophical question. I mean, the sentiment on the beer category has been pretty poor for a while now. Obviously, investors see it, but the trade talks about it as well. And obviously, your business has been very disconnected from that. So I'm just curious as you engage with your supply chain partners, distributors, retailers, what's the conversation look like? I mean, are they coming around the fact that maybe they can't index your business relative to the beer category anymore because there's a lot of moving pieces and cross consumption? It's really about occasions versus just some holistic category. I mean, I'm just curious like what that discussion looks like right now especially as you're in the middle of shelf resets and probably discussions for what's going on in the fall and even next year?

And I'll have to start, Nik, by giving a little tip of the cap to you because you pointed out what we think is a critical point, which is this is all about brands. The reason our brands have gotten double-digit increase in their shelf position during this period of time is because of the strength of those brands and the takeaway. As we've said on prior calls, our average SKU takeaway in dollars is five times the rate of our cheaper competitors. So if you're a distributor or you're a retailer, you're going to put the emphasis on where you get growth and profitability and growth in takeout and strong velocities. And our brands represent that. That's why you see Pacifico with 20% growth and being the number four share gainer. That's why you see Modelo Especial now being the number one play in off-premise dollar volume. Our brands are very strong and they stand out distinctively from other brands in the category and I think you've made that note many times and we happen to agree fully with that. Lastly, I'd say, we continue to invest in our brands. Part of what we are doing is we believe there's still significant upside on the longer-term in terms of our brands and the investment that we put behind them. Despite Modelo being number one, there's still a lot of awareness opportunity and we're planning to go get it. We feel the same way about things like Oro and Aguas Frescas and Sunbrew. We're bringing new scenarios and new occasions to more consumers. I think that all speaks to the strength of our brands. And I think whether you speak to retail or whether you speak to distributors, they're all very excited about our prospects, not only today, but for the long-term.

Hey. Thanks, operator. Good morning, guys.

Good morning.

I have just two questions. I guess the first one is just Garth or Bill. If you can just comment on Veracruz, I know you made a comment in the prepared remarks, but just how far along you are in the construction or do we have a foundation yet? Have we piped in water? Just some sense of kind of where you are and where that is relative to plan? And then I have a follow-up.

Brian, as I mentioned earlier, we are on track with our plan. We anticipate opening the brewery at the end of the next fiscal year or early the following fiscal year. Our CapEx is at its peak this year, as we stated during Investor Day that FY '25 would be when we see the highest levels of CapEx due to active construction. By the end of our medium-term outlook in FY '25, we expect to reduce our CapEx from the low double-digit percentage range of net sales to the mid-single-digit range. It’s important for everyone to understand this. As for Veracruz specifically, we are progressing as planned.

Thank you. I want to follow up on some earlier discussions. Bill, the stock is down today due to concerns about tough comparisons in beer sales, and possibly some apprehension related to the election, especially considering how the stock reacted when Trump was elected in 2016. Could you share your thoughts on the comparisons? The comparisons were established when you set your plan, so they shouldn't be a surprise. Can you provide some insight on that and whether there is any real reason for concern about the election outcomes in relation to FTC?

I think it's important to be cautious about getting too focused on short-term results instead of the long-term outlook. Year after year, we have consistently met the goals we've set, and we don't anticipate any changes to our expectations for this year, particularly because of the strong performance we delivered in Q1. As previously mentioned, there can be fluctuations due to factors like fewer selling days or other variables, but looking at the overall picture is crucial. Our brands have consistently performed well and have significant potential for future growth. This will hold true regardless of the outcome of the upcoming election. Our brands remain committed to meeting consumer demands, and that consumer loyalty is a major factor, regardless of who is President. Additionally, our government affairs team actively engages with officials in the United States and Mexico at both federal and local levels, which strengthens our position no matter which political party is in power.

Thanks, operator. Good morning, everyone. Hope you're doing well. So Garth, I was hoping to get some updated perspective on just kind of the puts and takes as it relates to the beer profit outlook. Back in April, you touched on volume leverage, price/mix, cost savings being tailwinds versus commodities and FX being headwinds. I mean, I'd just be curious, have your expectations for those buckets changed at all over the last few months? I totally understand you've reiterated the outlook this morning, but just have the building blocks changed at all versus your prior expectations? Thanks.

Thanks, Peter. The short answer to that question is no. As I previously mentioned, we will experience quarterly variability as we do every year, primarily due to seasonal factors. The full-year guidance we provided during our April conference call remains unchanged. As we've noted multiple times, we are taking actions to capitalize on opportunities, such as further hedging against the peso when it weakens. Beyond that, the business continues to operate as expected, following the established framework.

Hey. Thank you very much. I'm going to follow up on Peter's question there around gross margins in beer specifically. Garth, can you maybe frame how the Q1 gross margin came in relative to your expectations on paper? It certainly looks like strong delivery specifically in the context of the rest of the year. And then just regarding the commentary around taking advantage of the weaker peso, does that give you more confidence on this fiscal year? And how much can you actually take advantage of for fiscal '26 at this point? Thanks.

Yeah. So I would say that the gross margins kind of came in within our expectations just to give you a little bit of color around what drove that. We essentially saw about 100 basis-points of improvement in gross profit margin on a year-over-year basis. About 30% of that or 30 basis points of that, I should say, is volume, price, and mix driven. About 80 basis points are what I would just call cost of goods, logistics materials, labor, offset by depreciation and things of that nature. We got about a 20 basis points bump due to the craft divestiture, and then we had about 30 basis points hit just due to the exposure against the FX that's unhedged. So that's really what the building blocks or not, the makeup of the changes. We feel really good about where we are for the balance of the year. Certainly, we continue to progress against our aggressive cost savings initiatives that we outlined at our Investor Day. As I mentioned in my comments, we've already got $50 million or about $50 million in Q1 that we think is sustainable and we'll certainly continue to execute against the cost savings initiatives as we go through the balance of the year.

All right. Thank you. Good morning. I had a question on just marketing. Your outlook for marketing and advertising spend this year, it's below historical levels. And I guess there's some concern that you may be starving your brands. So could you touch on this and provide a little more color on the efficiencies you've gained and may continue to gain, how you're approaching investments this year? And I guess why you feel good about these investment levels? Thanks.

Yeah. You bet, Bonnie. We're actually going to be spending more dollars this year than we have in prior years as you would expect because our brands demand it and our growth profile allows us to continue to do it. With that said, you did point out an important point is we have created some efficiencies within our spend and therefore the percentage is slightly less than we've done in prior years, purely driven by efficiency. That doesn't change the fact that we are spending more against our brands than we've ever spent and that process will continue. We strongly believe engaging our consumer with critical national media and digital advertising platforms are critically important to continue to create awareness and to bring consumers into our franchises. In fact, you're seeing spend against many of our new initiatives. You're seeing that against Sunbrew, you're seeing that against Aguas Frescas. We just kicked off our Oro spend for the year. We are very strongly supportive as we have been for many, many years against our brands, and that process will continue.

Yeah. And if you don't mind me, Bill, I'll explain a little bit more. I mean, we've said this publicly multiple times now. We will continue to invest in the growth of our business, both in marketing just like we did, just like we do with the investments we're making in our brewery capacity. We will not starve our brands for marketing in order to hit a margin profile. Instead, we will continue to invest for growth.

So since we're piling on, Garth, do you mind if I pile on too?

Yeah.

One of the reasons why we saw the improvement in the Modelo penetration and the double-digit growth in Modelo's business in the quarter is exactly what we're just talking about, which is we spend against our business. That's why Modelo in 10 years has gone from a tiny little brand to the number one brand by dollars in the United States.

Hi. Thank you. I want to come back to the November election. So former President Trump has mentioned the potential of a 10% universal baseline tariff should he win. Given your Mexican import beer business, how do you think that potential scenario would play out for Constellation? And how would you add color on the risk that it would place? Thank you.

I believe it's premature to make predictions about what might happen in November. Honestly, our business thrived during the previous Trump administration, and I anticipate we would continue to do exceptionally well under a new administration, regardless of who leads it. It's crucial to acknowledge that our business relies heavily on inputs from the upper Midwest in the United States, which form a key part of our overall input strategy. We have a lot of trade flow, with Mexico being our largest trading partner, and I expect that to remain the case. We are confident in our ability to navigate any challenges that may arise, and we will actively work to ensure we do so successfully.

Great job on the quarter, and it's good to see the guidance reiterated, showing a lot of confidence. However, it's disappointing that the stock is down, especially since it hasn't risen much since 2018. I'd like to hear your thoughts on share buybacks in light of this. Also, I'm interested in your perspective on the overall beer industry and its recent developments. There was a previous question about your performance in June; I'm not sure if you addressed that. If you'd rather not discuss your June performance, can you share how the industry performed in June compared to May? Thank you.

Thanks, Rob. Hey, just in terms of the share buybacks, I mean, I think as Bill alluded to in his opening remarks, in Q1, we continued to make and show the same progress that we have over the last five years in terms of all of our capital allocation priorities that included our share buybacks. As Bill noted, we bought back $200 million worth of shares in the first-quarter. And then through the end of June, I bought back an additional $40 million plus. So we've continued to do what we said we would do. As we've come out of the Q1, we still have about $2.4 billion, $2.6 billion left on our share reauthorization and we will continue to use the same discipline that we have exercised over the last several years and by when we see periods of dislocation.

And relative to your question about the overall beer category, certainly, it appears that there's been some positive momentum as we've come out of June. I think a lot of that relates to the development of the summer. We're heading into the peak summer selling season, which we're always excited to see given we tend to win all of the major holidays during those seasons and would expect to do so tomorrow as well. But certainly, it looks like there's been some improvement. I think a lot of that, we've covered this and you hate to note this too often, but the reality is there were a lot of sort of bad weather moments at key times around weekends and holidays over the first part of this calendar year, which certainly hasn't been beneficial for the category overall. But I got to go right back to what I said a couple of times already today, which is our brands have outperformed this category for a long, long time and we expect that to continue because of the strong brand loyalty that we have amongst our consumers.

Hi. Thanks for the question. I guess I'll ask about wine. The guidance for the year implies a pretty substantial pickup in sales growth, I guess, in the second-half. What kind of visibility do you have with your distributors on how the commercial turnaround is going? Are they making bigger commitments about what they're willing to take on? And because it does imply a pretty steep ramp. Thanks. We already always said, especially after our prior quarter, that we were going to take nine to 12 months to get our wine business back into the position that we expected to do.

We are satisfied with the work completed thus far. I believe we are progressing ahead of schedule on several operational aspects, while recognizing that many results will manifest in the second half of the year. Once efforts are initiated, there is often a wait for tangible outcomes. Additionally, we've observed significant improvements in engagement, especially within our wholesale network, which we anticipate will create valuable opportunities later this year. Some of the reallocation of our marketing budget has already started to show positive signs, and we look forward to sharing more on these developments as time goes on. However, we do expect enhancements in our business to be concentrated in the latter half of the year, as previously mentioned. It is also important to note that both our international and direct-to-consumer businesses are performing better than initially planned. We are investing considerable effort in our wholesale sector, collaborating closely with our key wholesale partners to meet expectations. Fortunately, we are aligned on what needs to be accomplished and anticipate successful outcomes as we continue through the year.

Thank you, Daryl, and thank you all again for joining today's call. We're certainly off to a solid start in fiscal '25 and clearly today brings a great buying opportunity for our stock. Our beer business continues to deliver excellent top-line performance underpinned by leading volume growth while achieving solid margin expansion through our cost-savings and operational efficiency initiatives. While our Wine and Spirits business continues to face challenging market dynamics, it is making progress on commercial and operational execution initiatives expected to drive improved performance. Altogether, at an enterprise level, we continue to significantly outperform the entire CPG sector with our strong volume-driven growth and we remain confident in our momentum and our outlook for the full-year, including delivery of our double-digit comparable EPS growth. And with that, I wish you all a happy 4th of July holiday and certainly hope that you contribute to our outstanding performance that we expect to have during this critical holiday period. Thank you all for joining the call and have a good summer.