Q1 2022 Constellation Brands Inc Earnings Call
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Thank you so much and your line is it plays and music hold and fill the conference begins.
Thank you.
Yeah.
And for risk factors, which may and path forward looking statements we make on this call.
Before turning the call over to Bill similar to prior quarters I would like to ask that we limit everyone to 1 question per person, which will help us to and our call on time.
And advance and now here. So thank you Patty and good morning, and welcome to everyone to our first quarter conference call picking right up where we left off and Q4, our constellation brands team with the help of our distributors and retailers and delivered another strong performance in Q1 of fiscal 'twenty 2.
While we overlap the pantry loading phase of the pandemic, which led to record trends and off premise tracked channels last year. Our continued focus on brand building aggressive investments and growth and the continued efforts of our team and trade partners and positioned us to deliver another strong year of performance.
Consistent with our long term goals.
As Garth and I detailed some of the highlights from Q1. There are several key factors, we'd like you to keep in mind that constitute our points of differentiation are competitive strengths and reasons to continue to believe in the future growth potential of our business and our ability to drive industry, leading total shareholder.
Our returns over the long term.
Number 1 our.
Our strong portfolio of core brands across beer wine and spirits continues to gain momentum while offering significant runway for growth and the years ahead and nowhere is this more evident than and our beer business, which is off to an exceptional start delivering double digit depletions and shipments net.
Sales and operating income growth due to ongoing strong consumer demand.
Number 2 we.
We continue to be relentless about keeping consumers at the forefront of our decision, making and this is nowhere more apparent than and the strides we're making to strengthen our innovation capabilities and ensure we're capturing our fair share of growth and emerging categories.
3 our investment in canopy growth along with the continued efforts of the canopy team are positioning this business to emerge as a leader and the global cannabis market as it comes to fruition and we inch closer to legalization and the U S.
And number 4.
Our continued strong operating performance and cash flow generation enabled us to resume share buyback activity with significant repurchases of more than $500 million.
The first 4 months of our fiscal year. In addition, we announced this morning that we will execute and accelerated share repurchase program throughout the remainder of the second quarter to repurchase and additional incremental $500 million.
Of shares.
We believe this demonstrates our strong commitment to maximize shareholder value and we are on our way to achieving our $5 billion goal of which about 50% will be in the form of share repurchases. This activity is also driving an increase and our EPS guidance for this year.
Let's transition to a more detailed discussion of our performance and the quarter.
As mentioned our beer business is off to an exceptional start delivering double digit net sales and operating income growth as well as depletion growth of almost 11% and the quarter.
Excellent execution during the Cinco de Mayo and Memorial day holidays led to market share gains as constellation remains a leading growth driver and the high end of the U S beer market.
Modelo Especial yell led the way as the number 1 share gainer and the entire U S beer category and solidified its position as the number 1 brand and the high and it.
It also became the number 2 brands and dollar sales and IRI channels, posting depletion growth of 12% for the quarter.
Modelo Especial continues to fire on all cylinders with no signs of letting up driven by ongoing strong execution at retail and tactical execution of high profile marketing Activations and a significant increase and digital social and E Commerce media for properties like UFC.
Cup soccer and the summer Olympic games to name just a few.
Corona brand family growth was driven by a return to growth and on premise channels, which now represent approximately 11% of our beer business volume, which accelerated and nearly doubled since fiscal 'twenty 1.
During the quarter, we launched Corona hard Seltzer variety pack number 2 which continues to gain shelf space and is already more than half the size of variety pack number 1 and dollar sales and appears to have about the same incremental <unk> is variety pack number 1 has to the entire portfolio.
Meanwhile, variety pack number 1 has held its distribution and velocity levels since the launch a variety pack too and our hard Seltzer family remains and the number for market position.
Earlier this month, we launched Corona hard Seltzer, Luminato and while it's early and the launch cycle initial consumer response has been very favorable.
Ultimately, we believe the hard seltzer category will be dominated by a few large brands and the long run similar to the light beer category and we are positioning Corona hard seltzer to be 1 of those brands.
We have plans to more than double our seltzer and aviate capabilities. This fiscal year and express and expect to bring another 5 million hectoliter of capacity online next fiscal year, giving us the flexibility to continue to expand with new flavors, new packages and even new platforms and this space.
Overall, the Seltzer category remains competitive we believe it's an important part of the high and and we plan to drive for success with our ambition to ultimately be a top 3 player and this space.
Specific <unk> continued its strong momentum posting depletion growth of more than 35% for the quarter as the number for share gainer within the important segment driven by our focus on Gen Z consumers as.
As expected during the quarter constellation's consumer takeaway trends and the off premise IRI and Nielsen channels were muted due to lapping last year's pantry loading behavior at the start of the pandemic.
Conversely, we experienced robust growth, especially and some of the more sizable non track channels, including the on premise, which grew depletions, 250% versus last year. When this channel was essentially closed and the liquor chains, which grew almost 13% and the first quarter.
These levels of robust consumer demand are impacting availability for certain package sizes and certain geographies.
We are working with our distributor partners to ensure consumers can continue to find our brands on shelf throughout the summer and we plan to make up some of this impact beginning in the third quarter.
As a reminder, beginning in April of last year, our beer business had to significantly slow down production in Mexico due to COVID-19 restrictions. This led to out of stocks and the U S marketplace during the summer months.
Therefore, as we progressed through our second quarter, which runs June through August we will start to lap these out of stock issues and we're already beginning to see improving IRI trends.
Despite the short term supply challenges, we're facing the momentum of our portfolio is stronger than ever and our outlook for the remainder of the year remains extremely bullish.
Our view is reinforced by recent for week IRI trends that show Constellation's beer business is outpacing the high end and continues to significantly outpace the total U S beer industry.
Now moving on to wine and spirits.
Our transformation of this business to a higher growth higher margin operation continues to gain traction and we made additional progress during the first quarter on a number of fronts, including furthering our fine wine and craft spirits strategy building, a robust innovation pipeline advancing our DTC E Commerce and.
<unk> capabilities, while also implementing disciplined pricing actions, taking out stranded costs and executing other cost and efficiency improvements.
During the quarter, we made progress with the evolution of our fine wine and craft spirits business.
Especially as consumers return to bars, and restaurants and the on premise channel.
Our fine wine and craft spirits performance and the quarter was driven primarily by the prisoner wine company, Robert Mondavi winery and high West and we expect our enhanced capabilities in this space to begin to meaningfully and flat, our wine and spirits business towards the higher and.
Impactful innovations, we're also a driving force for growth during the quarter, including May Omi, Cabernet Sauvignon, Kim Crawford illuminate and the prisoner unshackled, which were among the top 10 innovations across the high end of the U S wine segment and IRI channels during the quarter.
And we have a strong innovation pipeline planned for the remainder of the year, which includes the introductions of Woodbridge wine Selzer's, the prisoner sell though red blend and unshackled selling on block plus Robert Mondavi private selection and 100, our new lineup composed of 100% Cabernet 7.
And Chardonnay varietals.
We've also been investing to build a world class 3 tier e-commerce team by expanding our sales and marketing resources building, new selling capabilities and investing millions of dollars, where consumers shop and integrating our teams to put focus and expertise closer to our accounts.
While our 3 tier e-commerce business is cycling the tremendous acceleration that was experienced last spring at the beginning of the pandemic. It is still growing 3 to 4 times compared to the spring of 2019 across beer wine and spirits and.
And the DTC portion of our e-commerce business saw impressive growth of 45% versus last year and the first quarter.
We continue to forge partnerships with existing and emergent pure play retailers like Amazon go Puff and wine Dot com.
Omnichannel retailers like Walmart, Kroger, and Albertsons and third party marketplaces like instant card and Drizzly, so that our consumers can shop whenever and wherever on their own terms.
In addition, as part of our commitment to invest a $100 million over 10 years and black Black Latinx and minority owned small businesses. We recently made investments and looked at through rose and so Perry out a sparkling wine both of these brands aligned with constellation is premium <unk>.
<unk> strategy and presents significant growth opportunities with differentiated high end brands and growing sectors of the market.
And <unk> Rose has taken a consumer first approach to building a distinctive authentic rose brand that appeals to multicultural consumers.
And so Perry our day has taken and entrepreneurial approach to build a uniquely California and sparkling wine with no residual sugars low alcohol content and find bubbles and a refreshing brand identity that is simple and clean.
We look forward to working with these brands and their dynamic founders to expand their access to key markets and consumers and to help realize their full potential.
At the same time, our wine and spirits results for the quarter were impacted by a convergence of isolated factors for us.
Our international brands like Kim Crawford, Ruffino, which are produced and in their respective regions, but sold primarily in the U S are experiencing global supply chain logistics issues, including shipping delays and transport interruptions like so many other imported products.
Second we've experienced some startup issues and certain markets associated with our route to market transition to southern Glazers wine and spirits, which now has distribution responsibility across 70% of our U S wine and spirits brand portfolio.
This transition and became effective April 1 and we expect the transition issues to be resolved and the second quarter Lastly.
Lastly, like many ERP system implementations with the cutover to S&P, we have encountered a few transitional challenges, which we don't see as a prolonged issue <unk>.
Collectively these issues caused some supply challenges at retail for some of our larger key brands, which drove the negative depletion trend during the quarter and while we are seeing lower inventory levels and normal for Kim and ruffino and they continue to drive growth.
Despite these temporary challenges, we are confident and our ability to accelerate the growth and profitability of this higher and portfolio of industry, leading brands and achieving our targeted goal of 2% to 4% organic sales growth for the fiscal year.
Moving on to canopy growth the synergies between constellation and canopy growth continued to create value for both companies.
Canopy recently signed a U S distribution agreement with southern Glazers wine and spirits for canopies Cuatro CBD beverage portfolio, which will be launched across 7 U S States with additional states to be added later this year as well as their Martha Stewart and CBD product lineup, which has seen early success.
Extending into top selling gifts for occasions, including mother's day, and Valentine's day, which sold out prior to the holidays due to high consumer demand <unk>.
Constellation and canopy will continue to work closely together to develop canopies route to market strategy and the U S.
We remain optimistic about the prospects for federal and U S. Legalization. During this congressional session and are bullish about canopies growth prospects and their ability to achieve profitability by the end of their fiscal year.
As I close I want to take a minute to thank our constellation team members and our distributors and retailers for an excellent first quarter business performance.
Thanks to all of you our strong portfolio of core brands across beer wine and spirits continues to gain momentum and we are well positioned to deliver another strong year of performance consistent with our long term goals.
Our beer business continues to be a top growth driver within the U S beer market and delivering market share gains and accelerating depletion trends as consumer demand and takeaway remains extremely strong our.
Our higher and wine and spirits brands continue to outpace the overall U S market.
We continued to strengthen our innovation capabilities to ensure we're capturing our fair share of growth and emerging categories.
Our continued strong operating performance and strong cash flow generation allowed us to make significant share repurchases in line with our commitment to return $5 billion to shareholders by fiscal 'twenty, 3 and drove an increase and our EPS guidance for the year and with that I would like to turn the call over to Garth.
And who will review our financial results and the quarter.
Thank you Bill and Hello, everyone. Our fiscal 2022 is off to a great start demonstrated by our strong segment operating results and cash flow generation.
As bill highlighted our beer business achieved double digit depletion volume top line and operating income growth, our wine and spirits business is nicely positioned to drive accelerated growth and profitability from its portfolio of higher and industry, leading brands and.
And our robust cash flow generation enabled us to resume share buyback activity reaffirming our commitment to execute our goal of returning $5 billion to shareholders through dividends and share repurchases through our fiscal 2023.
As bill outlined through June we've repurchased 2.2 million shares of common stock for $523 million.
In addition, this morning, we announced that we entered into an accelerated share repurchase or ASR agreement.
To purchase $500 million of incremental shares which is expected to be completed no later than October of 2021.
Please note that the ASR agreement constitutes a $500 million incremental share repurchase referenced in this morning's earnings release.
As a result, we've increased our full year comparable basis diluted EPS to be and the range of $10 to $10.30.
This range excludes excludes canopy equity earnings impact and reflects the decrease and weighted average diluted shares outstanding driven by the year. The June year to date share buyback activity as well as the ASR agreement.
For approximately $1 billion of share repurchases.
As such we are forecasting weighted average diluted shares outstanding of approximately $193 million for our fiscal 2022.
We plan to repurchase additional shares during the back half of the fiscal year and excess of the $1 billion of share repurchases previously outlined however.
However, we do not know the timing and cadence and as such these expected share repurchases have been excluded from our guidance assumptions.
We will continue to update our outstanding shares Accordingly, when we report quarterly earnings throughout the fiscal year.
Now, let's review, our Q1 fiscal 2022 performance and more detail, where I'll generally focus on comparable basis financial results.
Starting with beer.
Net sales increased 14% driven by shipment volume growth of over 11% and favorable pricing.
The increase and beer net sales was impacted by some missed shipping days and supply shortages as a result of severe weather events impacting Texas and northern Mexico early in the first quarter of our fiscal year.
Depletion volume accelerated from fiscal 2021 year and trends and achieved nearly 11% growth for the quarter. Despite overlapping the peak of last year's pandemic related pantry loading behavior, driven by continued strong demand and both tracked and non tracked off premise channels as well as the return to.
Growth and the on premise channel.
And on premise volume accounted for 11% of total beer depletions during the quarter, which accelerated and nearly doubled since fiscal 'twenty 1.
And as a reminder, the on premise accounted for approximately 15% of our depletion volume pre COVID-19 and accounted for only 3% of our depletion volume in Q1 fiscal 2021 as a result of on premise shutdowns due to COVID-19.
Lastly, when adjusting for 1 extra selling day in the quarter the beer business generated nearly 10% depletion volume growth and in Q2 depletion selling days are flat year over year.
Due to continued robust consumer demand and muted shipment volume driven by supply challenges due to severe winter weather early in the quarter depletion volume exceeded shipment volume during the first quarter.
<unk> and lower than normal distributor inventory on hand at the end of Q1.
Let me assure you that we are fully producing and shipping product out of our breweries.
However, inventories will remain tight throughout the second quarter as we enter our peak summer selling season.
As a result, we expect distributor inventory levels to return to more normal levels during the second half of the fiscal year.
Moving onto beer margins.
Beer operating margin increased 110 basis points versus prior year to 42, 8%.
Benefits from favorable pricing SG&A as a percentage of net sales and foreign currency were partially offset by unfavorable logistics and operational costs and increased marketing.
The increase and logistics cost was driven primarily by increased obsolescence, resulting from initial conservative exploration dates are new skus, partially offset by the transition of a portion of our co packing capabilities to our Nava brewery.
The increase and operational cost was driven primarily by brewery costs, largely due to labor inflation, and Mexico and increased head count and incremental spend to bring the additional 5 million hectoliter online at <unk>.
And these headwinds were partially offset by favorable fixed cost absorption related to the overlap of reduced production and the first quarter of fiscal 2021 due to COVID-19 safety measures.
Depreciation expense had a minimal impact during the quarter as we began to depreciate the incremental 5 million hectoliter and overdone late in Q1, but expect depreciation expense expenses to ramp up during Q2.
Marketing as a percent of net sales increased 70 basis points to 9.4% versus prior year as we have returned to our typical spending cadence, which is weighted more heavily towards the first half of the fiscal year.
As a reminder, marketing spend in the first half of the prior year with significantly muted, resulting from COVID-19 related sporting and sponsorship event cancellations and <unk>.
And our postponements.
As communicated last quarter, given the current state of activities and Mexicali.
And we will be unable to repurpose this site for future use.
As such and impairment of approximately $665 million was recorded for the quarter, which was excluded from our comparable basis results.
For full year fiscal 2022, we continue to target net sales growth of 7% to 9%, which includes 1 to 2 points of pricing within our Mexican product portfolio and operating income growth of 3% to 5%.
This implies operating margin to land and the low to midpoint of our stated 39% to 40% range.
As previously discussed we continue to expect our gross margins to be negatively impacted for the fiscal year as benefits from price and our cost savings agenda are expected to be more than offset by the following headwinds.
First a significant step up and depreciation expense and other brewery expansion costs relating to the incremental 5 billion heck. The leaders that was completed and <unk> earlier in the fiscal year.
Substantial inflationary headwinds across numerous cost components and.
And lastly negative mix as we expand our Eva and hard seltzer portfolios.
As it relates to timing and cadence as mentioned earlier during the second quarter, we will begin to see and impacts from depreciating, the incremental 5 million hectoliter, and <unk>, which will be a significant margin headwind for the balance of the fiscal year and.
Additionally, due to benefits from our commodity hedging program, we did not experience the expected cost inflationary pressures during this quarter. However.
However, we expect significant inflation headwinds to ramp up during the second half of our fiscal year as current hedges roll off.
In addition, we believe the depth and duration of inflationary pressures are becoming more uncertain as the year unfolds.
Lastly, we continue to expect marketing as a percent of net sales to be and the 9% to 10% range for full year fiscal 2022, which is in line with fiscal 2021 spend of 9.7% of net sales.
We expect to invest significantly during Q2 of fiscal 2022 to support strategic initiatives and continue generating strong marketplace performance throughout the key summer selling season.
As such <unk> marketing as a percentage of net sales is expected to be and the range of 10% to 11% versus Q2 fiscal 'twenty, 1 which came in at 8.4%.
Moving to wine and spirits.
Q1 fiscal 2022, net sales declined 22% and shipment volume down 38% excluding.
Excluding the impact of the wine and spirits divestitures organic net sales increased 16% driven by organic shipment volume growth of 6% smoke tainted bulk wine sales and favorable price and mix, while depletion volume declined approximately 8%.
There are several dynamics to point out as it relates to organic net sales as well as shipment and depletion volume trends for the quarter.
Starting with organic net sales and our and organic shipment volume.
Growth of 16% and 6% respectively was impacted by the following.
First smoke tainted bulk wine sales accounted for approximately 4 points of the year over year organic net sales growth in the quarter.
Second from an organic shipment volume perspective, we under shipped.
Depletions in Q1 fiscal 2021, as we were unable to fulfill excessive consumer demand driven by pantry loading, creating and easy shipment volume compare to Q1 fiscal 2022.
Conversely, we over shipped in Q1 fiscal 2020.2 as a result of the distributor transition to southern glaciers and order to ensure that.
And the ample inventory during the quarter as there was a delay and transitioning constellation inventory from canceled distributors to southern and glaciers.
Moving to depletion volume trends down approximately 8%, which were impacted by the following for.
First we are experiencing a challenging overlap due to last year's pandemic related consumer pantry loading behavior.
Second as a result of the SAP transit transition, we experienced challenges that impacted the shipping process early in the quarter, while we were able to rectify the situation during the quarter the timing of shipments throughout Q1 negatively impacted depletions and created out of stocks for some of our larger key brands.
Lastly, global supply chain logistics issues, including shipping delays and transport interruptions have also created out of stocks and certain areas for Kim Crawford and Ruffino, which are imported from New Zealand and Italy, respectively.
As Bill mentioned, we believe these challenges are temporary and continue to improve and we expect to refill retailer inventory in Q2.
Yeah.
Moving on to wine and spirits margins.
Operating margin decreased 540 basis points to 22, 9% as mixed benefits driven by the wine and spirits divestitures and favorable price were more than offset by margin dilutive smoke tainted wine bulk wine sales and increased marketing and SG&A as a percent of net sales.
Keep in mind that we're lapping lower marketing and SG&A spend in Q1 fiscal 2021 due to Covid and have a smaller business posted divestitures, resulting in significant marketing and SG&A deleveraging impacting operating margins.
For full year fiscal 2022 for wine and spirits business continues to expect net sales and operating income to decline, 22% to 24% and 23% to 25% respectively.
This implies operating margin to approximate 24%, which is flattish to prior year on a reported basis, but show significant margin expansion on an organic basis.
Excluding the impact of the wine and spirits divestitures organic net sales is expected to grow and the 2% to 4% range.
Lastly, please keep in mind, and we will continue to lap significantly reduced marketing spend during Q2 as many of our plan and media and event sponsorship investments were suspended or canceled and Q2 fiscal 2021.
Furthermore, we continue to expect marketing and SG&A deleveraging as a result from the wine and spirits divestitures as such we expect marketing and SG&A to continue to be a significant drag to operating margins and Q2 fiscal 2022.
Now let's proceed with the rest of the P&L.
Q1, corporate expenses came in and approximately $55 million up 8% versus Q1 fiscal 2021.
The increase was primarily driven by higher consulting services and compensation compensation and benefits, partially offset by favorable foreign currency impact.
We continue to expect for full year corporate expenses to approximate $235 million.
Coupled with comparable basis interest expense for the quarter decreased 13% to approximately $87 million.
Primarily due to lower average borrowings as we continue to decrease our net leverage ratio and ended the quarter at 3.06 times, excluding canopy equity earnings.
Our previous guidance assumed to free cash flow would be used to pay down debt versus share repurchases. However, as discussed earlier updated guidance now reflects approximately $1 billion of share repurchases through the first half.
As such fiscal 2 interest expense is now expected to increase and be in the range of $360 million to $370 million.
Our comparable basis effective tax rate, excluding canopy equity earnings came in at 21, 1% versus 19, 3% last year, primarily driven by higher effective tax rate on our foreign businesses.
We expect our Q2 fiscal 'twenty, 2 comparable tax rate, excluding canopy equity and earnings impact to approximate 20%.
However, we continue to expect the full year to approximate 19% as expected stock based compensation and benefits are weighted more towards the second half of the fiscal year.
Moving to free cash flow, which we define as net cash provided by operating activities less capex.
For Q1, we generated free cash flow of $602 million, which.
Presents and 11% increase versus prior year, reflecting strong operating cash flow and lower capex.
Capex totaled $114 million or 21% last year spend.
This included approximately $86 million of beer, Capex, primarily driven by expansion initiatives and our Mexico facilities.
Lower Capex spend is primarily due to timing as we have significant spending planned for the balance of the fiscal year.
As such our full year Capex guidance of 1 billion to $1.1 billion, which includes approximately $900 million.
Target for Mexico beer operations expansion remains unchanged.
Furthermore, we continue to expect fiscal 2022 free cash flow to be and the range of 1.4 to $1.5 billion.
This reflects operating cash flow and the range of 2.4 to $2.6 billion and the Capex spend previously outlined.
Moving to Canada and.
And Q1, we recognized an unrealized loss of $745 million from the decrease in the fair value of our canopy investments. This was excluded from our comparable basis results.
The total pretax net gain recognized since our initial canopy investment in November of 2017 is $366 million.
In closing I want to reiterate our expectations to continue to have significant capital allocation flexibility throughout our fiscal 2022, which will enable ongoing progress and returning cash to shareholders, while making strategic investments to support long term growth opportunities.
We believe the combination of strong cash flow and future growth prospects and both our beer and wine and spirits businesses positioned constellation for success.
The growth and margin profile of our high end beer business is best in class and we expect it to remain as such well into the future while the transformation of our wine and spirits business is underway and we expect to continue to achieve margin expansion as we migrate to operating margins of approximately 30%.
And with that Bill and I are happy to take your questions.
As a reminder to ask a question and you will need to press star 1 on your telephone.
Please limit yourself to 1 question to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Bonnie Herzog from Goldman Sachs. Your line is now open.
Thank you hi, everyone.
Hey, Bonnie.
Hi.
And just hoping to.
And a little more color on the audit stock question keep in Beijing.
We're aware that you guys had timberlake quarter gentlemen.
Kevin Hester, Brian demand wise.
A relation to your forecasted supply so.
For us.
For these cap still in place and then specifically have you seen these pressures may be get better or worse and June and finally are there any missteps.
Thank you impact on certain skus or pack sizes.
More broad base and your portfolio.
Sure obviously.
The 2 main things driving the tightness of inventory are first and foremost robust consumer demand or consumer demand has been well in excess of what we anticipated and.
And my opinion, that's always good news the second piece of it obviously was the the point that <unk> made and I made in my script, which is the.
The power outage that occurred at the end of February which is made for somewhat tighter inventory position than we would normally want to hold with that said all of that will take care of itself over the course of the fiscal year.
We it's quite different and quite frankly from last year, where we mainly produced the skus that represented 75% of our total portfolio. This year, we are producing all of our skus.
So it's very different from what we saw last year and while we do expect tightness.
During the course of the summer, we're working actively with our distributors to make sure that we are providing.
The right mix of product to make sure that we continue to supply the the very strong demand, we're seeing and against our portfolio.
Thank you. Our next question comes from the line of Nik Modi from RBC capital markets. Your line is now open.
Yes, and good morning, everyone.
So just quick housekeeping Bill and wouldn't mind sharing perspective on June Depletions I know the month isn't over yet, but any early color would be helpful. And then the broader question as you know during the pandemic many brands, including constellation's portfolio of beer brands gained a lot of new households, and I was just wondering if you've done a postmortem.
And what those new households look like have you recruited new consumers.
And to the portfolio that you werent recruiting prior and any any context around that would be would be William.
Certainly so first your first part of your question Ari June and Youre, correct, well it isn't over yet.
Enthused by how June is setting up and it is certainly consistent with our long term algorithm.
Assuming we finished the last couple of day strongly. So we think June is going to look pretty good.
Secondly relative to households, Nick.
We obviously are continuing to develop and broaden our reach across our core brands, particularly in beer. If you think about modelo and Garth I think said this on and prior quarters, we are rapidly increasing our penetration and the non Hispanic community, it's a little difficult for us at this point.
To break that out of how much of that was COVID-19 versus non COVID-19, because we're just seeing such an acceleration of modelo not only in its core Hispanic market, but and the broader market as well so it's a little difficult for us to put an exact.
Exact percentage on any of those things what I would say is we're gaining consumers and our portfolio of that has been obvious.
And we expect that trend to continue part of that has been driven by our innovation agenda, we're meeting more consumer needs more consumer drinking occasions than we ever have before because of our successful innovation agenda across the whole portfolio across the company. So I would expect that we're going to continue to see some acceleration.
And bringing new consumers and because we are opening up occasions for those people to come into our franchise.
Thank you. Our next question comes from the line of Lauren Lieberman from Barclays. Your line is now open.
Hey, Thanks, good morning, and.
Was curious about the beer pricing.
Price mix was north of 2% and I was just curious if you could talk a little bit about how much of that was driven by mix.
Or is there some greater pricing starting to come through and the market and and your thoughts broadly on pricing for bird this year. Thanks.
Sure.
We continue to keep our algorithm about beer pricing as we have said on prior calls we see it as a 1.1% to 2% growth profile over the course of the year and we're sticking with that we think that's appropriate.
And given the all the factors that we weigh when we decide about what we're going to do with our pricing.
I think it's also important to say our number 1 growth driver and our business continues to be modelo, which which is very accretive on a mixed basis. So as we continue to see all of our businesses grow.
When you see that kind of acceleration and modelo.
It certainly is mixed accretive to us as well so I think.
Both of those things were additive and the quarter and we would expect them to be additive over the course of the year.
Thank you. Our next question comes from the line of call Maile Kaiser Wilhelm from Credit Suisse. Your line is now open.
Hey, Thanks for everybody.
Digging into the supply and maybe connecting the supply.
Issues with Depletions, and how youre thinking about inventories getting better and the back half does that we think about you being running at a 10. It looks like you've continued to run at a 10 selling day adjusted do you need depletions to really start to come off maybe back to that high single digit range to get inventories back to where you want them to be or do you <unk> you.
Feel like just the <unk>.
<unk> minimum for any of the supply pressures will be able to get you're going to want to be.
Yes.
We expect that the abatement of supply issues to take care of themselves over the course of the year.
Remember and I think we probably made this reasonably clear we lost several points of topline growth because of the power outage that occurred at the end.
February and northern Mexico, and in Texas. So, we certainly had a muted shipping scenario, we will expect to pick that up over the course of the remainder of the year.
And we are still expecting demand to be very solid. So we are fully expecting to meet the demand that we'll see in the marketplace, which we continue to say, we will be in that 7% and 9% range over the course of the year.
Thank you. Our next question comes from the line of Sean King from UBS. Your line is now open.
Great. Thanks for the question.
Yes, I appreciate the color you gave and the on premise and 11% and I guess not greater than greater than 250% growth for for beer.
And that at the close of the quarter or is that like the average of the quarter overall and.
Inside that what are you seeing in terms of drafts demand.
Yes.
That's the average over the course of the quarter is Garth pointed out in his remarks that still is below what we were pre pandemic, but it's a really big increase and what it was last year. So we still think.
Certain markets or developed more quickly than others.
We've said in prior discussions as well so we certainly expect that's going to continue to be and accelerator over the over the course of the summer and let's face. It I think it would be fair to say there is a lot of pent up consumer demand for simply go out of your home.
And that people are looking forward to the opportunity is as some of the COVID-19 restrictions come off we would expect to see some continuing acceleration in the on premise channel as we progressed through the summer recalling the and.
On premise channel was a fraction of what it was.
Last year versus the prior year. So we think that that's all going to take good care of itself as the year goes on.
Thank you. Our next question comes from the line of Brian Spillane from Bank of America. Your line is now.
Hey.
Good morning, everyone.
Quick question for <unk>, just wanted to follow up on.
The commentary around inflation.
It will be coming more uncertain and so just maybe if you can comment on 2 things related to that.
What areas so what.
And types of inputs.
Are becoming more certainties that freight is it packaging labor cost just trying to understand kind of where the potential pressure points could be and then if you could tie to that as well.
And if we step back and today versus where we were at the beginning of the fiscal year.
Can you give us a sense and just how much flexibility.
Is it eaten up by inflation coming higher.
Or are you and the same place in terms of just flexibility to hit your profit growth goal for this year.
Thank you.
Yes, Thanks, Brian.
Just as a reminder, when we issued our Q4 guidance, we talked about inflation and we said overall, we're expecting inflation kind of and a low to mid single digit range and that was taken your accounts at any given line item within our cost structure, we were seeing inflation kind of a low to high single digit range.
We have as we talked about at that time, we have a pretty effective hedging policy in place and and we entered the year and it could position.
<unk>.
As I said, so so as we look out this year.
First of all the outlook for inflation still kind of remains the same our outlook as well as kind of the external advice, we get on this and there's still that.
Inflation is going to have a bit of a spike, but it's going to be temporary in nature and the question just like how temporary right and it seems as though that kind of blip it might take a bit longer to kind of come down from there and so the things that are that.
We're watching mostly right now really are around as you indicated logistics and transportation and labor and those things are somewhat intertwined if you will.
The labor market has made it difficult to get to.
Dedicated trucking lines, and so that's becoming more and more competitive.
It is absolutely a concern we continue to watch.
Aluminum.
And then and then we look at natural gas or glass <unk> glass because classes impacted by.
Natural gas. So those are those are the areas that were kind of most watchful for as we go through the year I would say that as we sit here today, we're feeling like.
We're in a similar position to be able to to.
To cover.
Our inflationary headwinds and as long as they don't get.
Significantly worse as we go through the year.
Thank you. Our next question comes from the line of Eric <unk> from Evercore. Your line is now open.
Great. Thank you bill, hoping to get a little bit more granularity as to what youre expecting from the hard Seltzer category.
And the broader <unk> Pat.
Pat.
Category or the EBITDA category and more broadly.
And related to that.
You reiterated that you're more than doubling Corona seltzer capacity. This year and you will have the additional 5 million heck the leaders of the EBITDA capacity at Nava I believe for next year.
If your forecast on EBITDA growth don't Pan out how flexible is that capacity to produce traditional beer.
So related to the hard seltzer and capacity point.
We're still expecting that the hard seltzer category is going to grow somewhere in the 30% to 50% range somewhere in that range. This year.
Overall, and obviously we.
And did roughly 10 million cases last year with 1 SKU. We've introduced our second variety pack, we're very excited about that process. So far and Illumina is just hitting the market really as we speak.
I got to remind you again, what I said earlier, which is despite doubling the size of our.
EBITDA and hard seltzer capability for this year the number 1 growth driver and our portfolio will remain modelo.
Irrespective of that significant growth so we're very comfortable with.
Our growth profile across the business.
What I would say is this is we do have significant flexibility around the capacity that we put in and how that can be used within the business and many of the things like packaging and so forth really service the entire business anyway. So we do have a fair amount of flexibility depending on if there is any changes and any other.
<unk> sub segments of the beer category.
At any point in time, we've worked very hard to make sure there is flexibility within our production capacity capabilities so that.
So that we can adjust to any change in consumer demand.
Thank you. Our next question comes from the line of Chris Carey for Wells Fargo Securities. Your line is now open.
Hi, Thank you so I actually have a question just about wine and spirits.
Price mix has been a good story and the business Thats accelerated this quarter, obviously margins got hit.
I'm just trying to frame, where you think we are on the path to the medium and longer term margin targets here. We knew there was always going to be a step.
Step back before before recovery and certainly it seems like the price and makes it a premium edition of the portfolio and deliver what you think it can.
But we also have a much more inflationary backdrop.
And things are evolving so I wonder if you can just maybe.
Take a look at this quarter and how it.
And forms how youre continuing to look at the capacity of this business to deliver those margin targets over time and perhaps the timeline on what you think that that can happen.
Yeah, Chris Thanks for the question.
So as you indicated the topline is doing quite well so we're very pleased with our.
With our transformation as it relates to top topline growth.
In terms of the margin journey and what we've always said around that is it was going to take us about.
2 years post divestiture to get 30% operating margins and and in order to get to that 30% operating margin. It was going to take a number of different things and there was pricing theres mix. There is the cost takeout that we've talked and talked about previously stranded cost takeout of around $130 million not all of which will fall to the bottom line and some of that we will reinvest behind.
For brands to.
And to make sure that we have strong brands that can generate the top line growth.
As well as other initiatives around footprint optimization as a result of the Gallo divestiture not only did we shed a large number of brands, but we also.
707 winery some facilities.
That transaction. So there is a footprint optimization as well as doing some some some cost optimization.
Make sure that the products and we're putting in the bottle most reflect what the consumers are looking to get when they pick up those those brands. So that we are well underway, we certainly didn't.
We certainly didn't sit back and wait for the transaction to close to identify those cost savings and those initiatives. So we're just now executing against those but as you say we're at that interim period, where the business is a bit deleveraged and so until the rest of those cost comes out.
We.
You'll see that kind of.
And that downward uplift as you noted this year as we moved to the 30% operating margins at the end of.
Sort of 2 years post divestiture.
Thank you. Our next question comes from the line of Kevin Grundy from Jefferies. Your line is now open.
Hey, guys, it's actually Greg on the line for Kevin just 1 quick follow up question on some of the on premise channel and trends that you guys had been seen many of your peers have noted and it's been running in front of plan. So far in terms of and a number of reopening the velocity that that they've seen.
You guys gave some helpful context on what you've seen over the last quarter, but maybe could you talk about how your expectations for the full year has changed have you seen the reopening pays faster than you thought it would be.
And maybe how you think that would impact full year results. Thank you.
Sure, let me take that 1 Greg.
We have seen it accelerate tremendously, but as we've seen over the course of the last 18 months around the pandemic you often see some things where you get starts and stops and things improve and certain states and don't improve and other states and so on and so forth I think the important thing from our perspective to look at is.
While we have seen 250% growth and our depletions in the quarter versus prior year. The overall percentage of our business that the on premise represents is still a bit less and it was and fiscal year and calendar excuse me calendar year 19, So we still think theres still some opportunity and acceleration.
To come.
We also have had an exceptional and our distributor network does an exceptional job of winning them.
For the times that matter and things like the fourth of July Labor Day, We had net it was cinco de Mayo, we did it with memorial day. So we still think there's going to be some good opportunities for acceleration.
The challenge to predict how much of the channel shifting that occurred there was a massive amount of channel shifting that occurred a year ago. When you went and heavily to the off premise. You are now seeing the on premise comes back on and the IRI and Nielsen data has been somewhat muted so.
We also have seen as we noted in our scripts a significant increase and our 3 tier e-commerce and direct to consumer across the business. So how all of those channels.
Shake out as a real question I think the encouraging part remains the consumer demand against our business across all channels that we can track has been extraordinarily strong and we're excited and we think that will continue irrespective of which channel the consumer chooses to engage in.
Thank you. Our next question comes from the line of Andrea Teixeira from Jpmorgan. Your line is now open.
Yes. Thank you for taking the question. So I wanted to just follow on this 1 and this last commentary bill on where customers are engaging and it seems like David and just.
And now that.
So below the COVID-19 level.
Can you comment a little bit on how you see that transition like you put somebody consuming gazing at home and the consumption of your obviously your your big brands.
Very strong at home, despite the share and how youre seeing that and then just for clarification.
And on also on the inventory and shipments is it fair to say that given that you have a very easy comp on that on the production in April right, So going to I'm going to have a lot of like and.
Inventory that you are having to deal with Stephens.
Stephens Inc.
So Mexico is that something that gives you some call for that.
Even though you said you only see day no monetization by the third quarter, the second quarter soup and it'd be a very strong shipment quarter.
Sure, let's start with the <unk>.
Western around the on premise.
Keep in mind based on what we can see per capita consumption.
Has remained pretty steady.
Throughout the pandemic, it's just that where and how people consume has moved around quite a bit. So it's really difficult to precisely predict how consumers are going to operate and I think it's going to vary as as I said, a moment ago quite a bit by state depending on the individual restrictions and.
Whether or not and certain certain states are still allowing takeaway from and from a restaurant environment for alcoholic beverages and some are not so and.
So all this dynamic plays itself out I think it is going to be very difficult to predict exactly how the consumer will land other than I would say some of the sheer shopping behavior, where you see 3 tier e-commerce and direct to consumer changes are going to continue.
As we said in prior calls we may have made major investments to increase our capability and 3 tier e-commerce and direct to consumer and I'm very glad that we did it's playing out well and its showing tremendous takeaway.
And those sectors, which have grown around the pandemic as it relates to inventory.
Continue to believe we're going to have a very solid year, where and a good position to make up the challenge that was the 1 time challenge around the power outage that occurred in February.
And we expect to have as we said a very strong year and I would expect it would include the second quarter, which is which is upon us.
Thank you. Our next question comes from the line of Steve Powers from Deutsche Bank. Your line is now open.
Hey, guys. Thank you very much.
I know you've got a lot of questions already bill, but just to round out that last topic on beer supply.
I guess is there a is there a ceiling we should think about in terms of how much youre just physically able to ship and <unk>. I think consensus has you shipping around 100 million cases, and the second quarter relative to $85 million and the first quarter and I guess, just given all of that you said I'm just trying to understand or dimension, whether that kind of step up is doable and broad brush strokes.
Or.
And it's in the back half and then.
And what I really wanted to ask about was.
For garden.
You ran through a number of items.
Hopefully that will kind of way explained.
With the beer margin.
Dr <unk> sequentially, and what will weigh on beer margins over the remainder of the Euro if you could provide any more deep.
Detailed there may be a rank order.
In terms of the.
And the items that we should be focusing on them as having the biggest impact there that'd be very helpful. Thank you Bob Thank you for Bob.
Yeah, you bet. So let me start with the first half and then Garth will cover the second half.
1 thing that we Havent mentioned today, but it's an important 1 but we did mentioned in prior quarters are overdone opening of the extension of <unk> was delayed roughly a quarter.
Last year at the end of last year, because of we weren't able to construct during COVID-19. So that is certainly going to help our inventory position as we move forward as that's now up and running it's not it's not running as efficiently as it will once we get everything locked and loaded because it's just normal startup, but it is certainly helping the.
And we certainly expect to be able to meet consumer demand during our key summer selling season as I said earlier, we're being we're working very carefully with our distributor network and our retail partners to make sure that we're able to.
To meet the demand admittedly the demand has been robust and continues to be very strong.
But we're expecting and be able to meet that demand and certainly overdone and is a big helper and that area argument and take care of that yeah. Just just to follow up on the margin question. So.
As we stated in Q4 really it's those 3 big drivers of depreciation inflation and mix and those are really kind of equally weighted in terms of the impact on margins and so on the depreciation front that was.
We have an increase of about $65 million this year.
And Thats comprised of Oregon for.
Full year for <unk> 5 and.
And the glass joint venture.
Day.
Depreciation and as well as well and some other things inflation I think we've covered and and the fact that that hits us more in the second half of the year as our hedges roll off and then mix I think mix is also something thats going to impact US again more as we go through the year as we started the year really with kind of 1.
SKU and and Corona hard Seltzer variety pack number 1.
And sell to a variety pack number 2 was just launched at the beginning and then we launched Lima and out of here in June So there will be more mix impact as we go through the balance of the year as well, but but really it's equally the impact is equal across those 3 buckets.
Thank you. Our next question comes from the line of Lauren <unk> from Guggenheim. Your line is now open.
Thank you and hi, everyone and thanks for squeezing me in the queue.
And up to recently and cleanser.
And then penetrate mushroom and descending household anymore for about 15%.
For the white kinds and we're onto a record for the test.
Pleasingly, our planet, So now with new board of flavors sensor and Brown bag Topo Chico.
Targeting specific spending and we are seeing them ask for penetration that we see now it's been going up to 25% to 35.
So my question is do you see that.
And the risk to your both for your Mexican beer and <unk>.
If not why.
And what are you doing to reach more spend and consumer with your current since your portfolio. Thank you.
Certainly.
As you know.
We are very fortunate with with our Mexican beer portfolio to have the strength of brands that we do these are iconic authentic brands from Mexico that are our Hispanic community is very much behind and.
And we continue to see strength and growth as I've said to you.
And I think or not to you, but I have said in prior calls we can see we continue to see opportunities with modelo. The household penetration with modelo. Despite the rapid growth of and Dell, It's still not at the level of Corona as an example, we're also seeing overdevelopment and the Hispanic community with our Corona hard Seltzer.
So we are reaching into that community by again, meaning new occasions and meeting new.
Consumer needs with those particular products. So we're very comfortable.
With the growth profile that we see and the Hispanic community with our iconic portfolio for Mexico, and we think the seltzer element is going to be and important and are hopeful part of continuing the relationship with it with the Hispanic community recognizing that we're also doing a great job of expanding those those brands into the non <unk>.
And then a community as well.
Thank you. Our next question comes from the line of Trevor Stirling from Bernstein. Your line is now open.
Good afternoon, and Goss and built 2 quick questions from my side. Please.
For you as you sit today and you compare with 3 months ago.
If anything change to change your point of view either for F. 'twenty 2 or the outlook is for the second thing related to that given the cadence of inflation you talked about given the aluminium spot price staying as high as these and those hedges rolling off.
Toric and you've had that 1% to 2% pricing algorithm do you think that might need to change 12 months.
I'll take the price per Garth and maybe you can take the first part.
Relative to the price, we continue to believe 1% to 2%.
Is going to be our long term expectation, we think that balances appropriately.
And the dynamics that occur with price sensitivity when you raise your price.
And recognizing it does obviously help you cover any inflationary effects during the course of the year. So we're pretty comfortable that that algorithm of 1% to 2% is the right answer the balances all of those factors and we would see that continuing well into the future.
And in terms of the first part of your question Robert.
The Q1 change our point of view for the full year and I would say that at this time, it's too early for us to make any changes to our.
And our outlook for the year, given 1 quarter and the.
And 1 thing that I would highlight right is built as bill noted in his script deplete.
Depletions and our beer business.
<unk> exceeded our expectations as well as the expectations of our distributor and our retail partners. So that's something that.
And we'll watch very very closely as we move through Q2 and through the balance of the year and.
And look when.
As we go through the year and we do see changes to our business, we will be sure to update.
<unk>.
You all on our on our guidance expectations, but as of right now we're very comfortable with the with the guidance that we've provided and reaffirm today with with a bit of a tick up on our EPS related to the share repurchase program.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Bill Newlands closing remarks.
Thank you everyone for joining our call today I think it should be clear that fiscal 'twenty..2 is off to a strong start providing us with continued momentum as we head into our key summer selling season, our powerful collection of consumer connected brands across beer wine and spirits continues to gain traction and we are well positioned to deliver another.
<unk> strong year of performance consistent with our long term goals, our robust cash flow generation allowed us to make significant share repurchases in line with our commitment to returned $5 billion to shareholders by fiscal 'twenty, 3 and we look forward to updating everyone throughout the fiscal year as we expect to make continued progress during fiscal <unk>.
2002, and closing I'd like to wish all of you happy fourth of July and hope that your celebrations with family and friends include our fantastic beer wine and spirits products. Thank you again, everyone and have a good summer.
This concludes today's conference call. Thank you for participating you may now disconnect.
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