Q3 2022 Constellation Brands Inc Earnings Call

January 6, 2022

Ladies and gentlemen, thank you for standing by your Comcast will begin momentarily I can think of it standing by your conference calls you have to get no material. Thank you.

[music].

Yeah.

Welcome to the constellation brands Q3 <unk>.

Slide 22 earnings conference call at this time, all participants have been placed in a listen only mode.

Prepared remarks, the call will be place for your questions.

Texas will be given at that time.

I will now turn the call over to Patty butter Allot Senior Vice President of Investor Relations. Please go ahead.

Thanks, Valerie good morning, Constellation's third quarter confirmed <unk> conference call. This morning.

<unk>, our CEO and Garth Hankinson, our CFO as a reminder, reconciliations between the most directly comparable GAAP measure and any non.

non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www Dot <unk> Dot com.

Please refer to the news release and constellations SEC filings for risk factors, which may impact forward looking statements. We make on this call before turning the call over to bill similar to prior quarters I would like absolutely limit everyone to one question per person, which will help us to end our call on time, thanks in advance and now here.

Thank you Patti and happy new year to everyone on the call I sincerely hope you were able to enjoy a safe and happy holiday season with family and friends CAD.

Olander year of 2021 was another challenging year, given the continued effects of the pandemic.

The global supply chain issues impacting nearly every industry inflationary pressures and severe weather events.

I'm incredibly proud of the determination shown by our team at constellation throughout the year.

Relentlessly navigating myriad of evolving dynamics to deliver a very solid performance year to date and in Q3, putting us on pace for another strong year of financial performance and shareholder value creation and festival in 'twenty two.

That said I'd like to highlight a few key takeaways from the quarter.

<unk>.

Our beer business delivered a very strong performance in Q3, while lapping tough comps in fiscal 'twenty one we.

We continue to see robust consumer demand.

High single digit depletion growth.

We extended our leadership position as the top share gainer in the high end of the U S beer market behind the strength of our Modelo and Corona brand families, while improving our inventory position.

Our strong performance to date gives us confidence to increase top and bottom line guidance for our beer business in fiscal 'twenty two.

Second we continue to see significant runway for growth for our core imported beer portfolio in the years ahead, and we are investing in the next increment of capacity additions required to sustain our momentum as this represents one of the most compelling value creating opportunities for our company.

And our shareholders.

Our wine and spirits business has made solid progress in transforming bulk of its brand portfolio and financial profile Q.

Q3 marked another step on our journey as we continue to shift to a higher end wine and spirits business focused on delivering increased revenue growth and margin expansion.

While our wine and spirits business continues to navigate through a series of headwinds impacting its year to date performance, our increased focus and investments behind our fine wine and craft spirits portfolio margin accretion innovation and E. Commerce initiatives continue to gain traction and are enabling an increase.

And our net sales guidance for the business in fiscal 'twenty two.

Finally, our strong overall total company performance in Q3 gives us confidence to increase our comparable basis EPS guidance for the fiscal year.

<unk> will provide additional details relative to our financial performance and fiscal year guidance in just a few minutes.

Today, we are also excited about our announcement of a new agreement with the Coca Cola company in the United States to bring the prestige brands into beverage alcohol through manufacturing and distributing our new line of Fresca mixed cocktails.

<unk> is currently the fastest growing diet soft drinks and Coca Cola portfolio and over half of the prestige consumers already use it as a mixture with spirits bill.

Building on this great Foundation, and an alignment with emerging consumer preferences around convenience flavor and a preference for high quality products. We plan to launch Brusca mix later this year, starting with cut fields using real spirits and inspired by recipes created by Cresta fans from.

Around the globe.

With that let's talk in more detail about our performance in the most recent quarter.

Our beer business posted depletion growth of more than 8% in the third quarter outpacing the high end of the U S beer category.

Especially out continues to be our most significant growth driver with depletions, increasing over 13% that is more than 5 million cases relative to the same quarter last year.

It remains the brightest star in our portfolio as the top share gainer or across the entire U S beer category in IRI channels, while maintaining its position as the number one high end beer brand.

Our Modelo <unk> brand family has been covenant important growth contributor to our portfolio as the number one show lineup in the U S beer market and maintain its explosive growth posting 35% depletion growth in the third quarter.

We continue to build on this extremely successful innovations platform with a new entrant modelo, which a lot of tenet to contest, which was launched in August and is already a top share gainer amongst important brands.

Corona extra sustained its reinvigorated growth trajectory and position as the second fastest import share gainer and number three high end brands in IRI channels with all 11% depletion growth versus prior year.

Similarly, Corona Premier continues its strong performance with 8% depletion growth, which accelerated through distribution gains as supply conditions improve.

From an innovation perspective within the Corona brand family.

And where customers are back in production and contributing nicely to growth in our PVA portfolio.

Meanwhile, Corona hard Seltzer remains a top seltzer brands in IRI following the dramatic slowdown in the Seltzer category, we're making good progress to enhance our flavor profiles and we're on track to rollout the restaging of our variety packs profitable mixed pack and bearing mixed pack in the first quarter.

Fiscal 'twenty three.

And we are diligently working to address the brown glass shortage that is acting as a headwind this year, especially for our pursuit of a cult brand, which continues to see strong demand and has a long runway for growth ahead.

Overall, our outstanding performance gives us confidence to increase guidance for our beer business as we now expect to achieve 10% to 11% net sales growth and 6% to 7% operating income growth in fiscal 'twenty two.

To fuel the continued growth of our imported beer portfolio, we plan to deploy an increased level of investment over the next four fiscal years to support construction of a new brewery in southeast Mexico, and the state of Veracruz, as well as to expand and optimize capacity at our existing Nava and <unk>.

Got on operations.

We will give you additional details on that momentarily.

Now moving onto our wine and spirits business, we remain committed to our vision to become a bold and innovative high end wine and spirits business with distinctive brands and products delivering exceptional consumer experiences.

In an effort to make this vision a reality, we've recently reorganized into two distinct commercial teams within the business.

One focused on our fine wine and craft spirits brands and the other focused on our mainstream and premium brands.

While each team has their own distinct strategy, both remain aligned to our goal of accelerating performance by increasing revenue growth and expanding margins.

Our fine wine and craft spirits business is delivering solid growth this year driven by brands like the prisoner Unshackled, Robert Mondavi winery and high west as well as strong gains in our direct to consumer E Commerce hospitality and international businesses.

Our mainstream and premium business is focused on maintaining share in the mainstream wine segment, while delivering continuing to deliver growth through premium segment brands, such as me Army and Kim Crawford in line with our consumer driven premium innovation strategy.

While we have experienced recent headwinds on mainstream brands like Woodbridge, Robert Mondavi private selection and steadfast IRI trends for these brands have improved since overlapping the peak of the pandemic supported by an increased focus on more relevant branding strategic pricing and innovation.

Throughout our wine and spirits portfolio, we've launched several innovations that are creating momentum and driving growth.

Including Kim Crawford illuminate and the prisoner unshackled, both of which were among the top five share gainers and their respective price points in IRI channels this quarter.

During the quarter. We also launched multiple initiatives first the editors collection and exciting collaborations between our Simi winery and Hello Sunshine Book Club. The book Club community founded by media mogul and innovator Reese Witherspoon.

Second set good ready to drink vodka soda mixed pack.

Third our new Woodbridge three liter box.

We've also experienced successful market expansion for our Woodbridge, Robert Mondavi private selection spirit barrel aged wine.

Within our DTC portfolio, we launched exclusive skus from the Robert Mondavi winery, and the prisoner salvo red blends as well as high West mid winter nights, DRAM and Theyre ready to serve in Manhattan and old fashioned type sales.

Within the three tier e-commerce landscape constellation continues to outpace total U S wine market growth by double digits. In fact may only sales and at a three tier e-commerce channels increased 27% versus the prior year currently about 10% of.

<unk> sales come from three tier e-commerce, which is the highest level among leading U S wine brands in IRI E Commerce channels.

While we advance our strategic agenda and wine and spirits. We continue to address a number of headwinds that have impacted our year to date performance.

We continued to lap last year's Covid, pantry, driven loading where we experienced outsized growth however, upcoming comparable growth rates are less challenging.

Throughout the year, we've experienced out of stocks and other operational challenges related to our SAP implementation, a difficult domestic and international logistics environment.

And our route to market transition of 70% of our distributions just selling lasers wine and spirits. The encouraging that these issues are all stabilizing we are rebalancing our inventories and expect more standard service levels for the balance of the year.

Based on our year to date performance, we are raising organic net sales guidance from 2% to 4% to 4% to 6% for fiscal 'twenty two.

And before I close just a couple of quick notes on canopy growth.

Recent results have been disappointing and there are meaningful near term challenges facing canopy and the overall cannabis market in Canada, our store openings have been slower than previously anticipated due to the pandemic.

However, we continue to believe that the cannabis market represents a significant growth opportunity in the CPG space over the next decade, given the predicted U S market size of roughly $100 billion post legalization, which has doubled the size of the spirits market and approaching the size of the beer category.

We're encouraged by canopies innovation agenda with work with more than 40, new Skus launched globally. During their recently reported a second quarter. In addition cannot be purchased the rights to acquire one of brands upon a U S. Triggering event, which includes U S federal legalization.

<unk> of canvas.

One of our brands as the number one share of the gummy market in Canada with more than 40% market share and the largest multi market presence in the U S market the.

The gummies category is one of the fastest growing segments in both the U S and Canadian cannabis markets accounting for over 70% of all edible purchased.

One is asset light licensing model approach will allow them to scale quickly and the U S and provide canopy a highly distributed brand upon U S legalization.

In closing I would like to reiterate our main takeaways from this quarter.

Our beer business continues to deliver impressive performance.

<unk> remains ahead of the high end of the U S beer market in IRI channels, and we now expect to achieve 10% to 11% net sales growth and 6% to 7% operating income growth for fiscal 'twenty two.

We remain confident in the robust longer term growth prospects of our beer business and we're securing our ability to capture the significant value creation opportunity by expanding and optimizing our production capacity over the next four years.

Our wine and spirits business continues to move toward its long term revenue growth and margin expansion vision, which is further enabled by the clear strategic focus of its newly configured fine wine and craft spirits and mainstream and premium teams.

And in spite of an ongoing challenging environment. Our strong overall total company performance gives us the confidence to increase our comparable basis EPS guidance for the year.

We look forward to continuing to build a portfolio of products that consumers love and delivering another strong year of financial performance and shareholder value creation in fiscal 'twenty two.

And with that I'll now turn the call over to guard.

Thank you Bill and Hello, everyone Q3 was another quarter of strong execution by our beer business.

Continued strength, coupled with tax favorability enable us to deliver 8% comparable basis diluted EPS growth for the quarter, Excluding Canada.

As a result, we have increased and narrowed our full year fiscal 2022 comparable basis diluted EPS target to a range of $10 50 to $10 65.

Versus our previous guidance of $10 15 to $10 45 sites.

This range excludes canopy equity earnings includes an increase in beer operating income guidance and reflects a decrease in the tax rate for fiscal 2022.

Now, let's review, our Q3 performance and full year outlook in more detail, where I'll generally focus on comparable basis financial results.

Starting with beer net sales increased 4% driven by shipment growth of 3% and favorable pricing, partially offset by unfavorable mix. As a reminder, we are lapping a significant inventory rebuild in Q3 of the prior year, which generated 28% shipment growth.

Depletion growth for the quarter came in above 8% driven by the continued strength of modelo especial and explosive growth of Corona extra as.

As well as the continued return to growth in the off premise channel.

Again keep in mind that difficult overlap we encountered during the quarter as we faced a 12% depletion growth comparison, driven by robust inventory replenishment at the retailer and the prior year.

On premise volume accounted for approximately 12% of the total beer depletions during the quarter and grew strong double digits versus last year.

As a reminder, the on premise accounted for approximately 15% of our beer depletion volume pre Covid and was only 8% of our depletion volume in Q3 fiscal 2021 as a result of off premise shutdowns and restrictions due to COVID-19.

Selling days in the quarter were flat year over year and please note that in Q4, there is one additional selling day.

Cases shipped exceeded cases depleted as distributor inventory levels will began to rebuild during the quarter inventories.

So I expect it to return to normal normal levels by the end of the fiscal year as shipment volume is expected to continue to exceed cases completed for the remainder of the fiscal year.

Moving on to beer margins.

Beer operating margin decreased 130 basis points versus prior year to 41, 3% better.

Benefits from favorable pricing and marketing timing were more than offset by unfavorable cost.

The expected increase in costs was driven by several headwinds that included the following.

First.

Increased material cost due to rising commodity prices and inflationary headwinds that on average are in the mid to high single digit range predominantly driven by wood pallets aluminum steel and cartons.

Please note that this range includes the impact of hedging where possible.

Second.

Increased brewery costs, driven by labor inflation in Mexico increased head count incremental spend related to capacity expansion and annual brewery maintenance that was performed during the quarter.

As a reminder, the annual brewery maintenance took place during the fourth quarter last fiscal year.

And third step up in depreciation expense largely due to the incremental 5 million hectoliter at <unk> completed earlier this fiscal year.

These cost headwinds were partially offset by favorable fixed cost absorption driven by increased production levels.

Marketing as a percent of net sales decreased 130 basis points to 8% versus prior year.

As we have returned to our typical spending cadence, which is weighted more heavily towards the first half of the fiscal year.

In the prior year, a significant amount of marketing spend which shifted from the first half second half of the fiscal year due to COVID-19 related sporting and sponsorship event cancellations and postponements.

Additionally, we continue to expect full year spend as a percent of net sales to land in the 9% to 10% range, which is in line with fiscal 2021 spend of nine 7% of net sales.

For full year fiscal 2022, we now expect net sales growth to land in the 10% to 11% range and operating income growth to land in that 6% to 7% range, reflecting the continued strength of our core beer portfolio.

As previously communicated we expect price increases within our beer portfolio to land slightly above our typical 1% to 2% range.

However, we anticipate this incremental pricing favorability to be partially offset by unfavorable net sales Miss mix, primarily driven by a shift in packaged types and the return of on premise draft Skus.

We continue to expect our gross margin to be negatively impacted for the fiscal year as benefits from pricing and cost savings agenda are expected to be more than offset by cost headwinds predominantly driven by significant step up in depreciation and increased inflation across numerous cost components as the inflationary environment, resulting from.

Economic supply chain and other byproducts of the pandemic continues to be dynamic and variable.

We now anticipate these elevated inflationary pressures to persist well into fiscal year 2023, and expect inflation on the commodity spend component of direct materials to land on average in the high single digit to low double digit range next fiscal year.

We will continue to maintain our disciplined approach to address these evolving conditions through our commodity hedging program cost saving initiatives and balanced price adjustments. However.

However, due to a persistent and tough inflationary environment.

And incremental depreciation driven by our capital expansion plans operating margins could land below our stated 39% to 40% range in fiscal 2023.

Let me reiterate that these are still best in class operating margins within our industry, which reflects the strength of our core beer portfolio and efficiencies of our operations. We will continue to refine our outlook for fiscal year 2023, and will provide more details and official guidance during our Q4 earnings call in April.

Moving to wine and spirits.

Q3 fiscal 2022 net sales declined 25% of shipments declined approximately 39%.

Excluding the impact of the wine and spirits divestitures organic net sales increased 3% driven by shipment growth of approximately 3%.

Favorable price incremental sales it creates for opus, one and smoke tainted bulk lifestyles.

Partially offset by unfavorable mix.

Depletions declined approximately 7% during the quarter and continued to be challenged by port delays for our international brands and distributor route to market changes and transition markets.

Additionally, depletion has faced a difficult overlap, especially for our premium and luxury brands, which experienced robust growth during Q3 from the prior year.

However, we expect depletion growth to accelerate during the fourth quarter driven by the continued strength of our higher end brands led by the prisoner brand family Naomi and Kim Crawford.

Our robust <unk>.

<unk> agenda, and an easier by overlap versus a year ago.

From a shipment perspective, we expect shipment growth for the fourth quarter to decelerate versus Q3, as we continue to right size distributor inventory levels for our mainstream brands.

Moving on to license spirits margins operating margin increased 140 basis points to 25, 4% as decreased Cogs mixed benefits from divestitures and favorable pricing were partially offset by increased marketing and SG&A as a percent of net sales and unfavorable mix from.

The existing portfolio.

As expected lower costs were driven by net favorable fixed cost absorption lower grade raw materials and cost savings initiatives, partially offset by increased transportation costs.

The net favorable fixed cost absorption resulted from lapping the unfavorable impact of $20 million in the prior year, which was a result of decreased production levels due to the 2020 U S wildfires.

This benefit for the quarter was partially offset by unfavorable fixed cost absorption, resulting from decreased production levels in New Zealand due to a late frost during their harvest season earlier this year.

Marketing and SG&A as a percent of net sales increased versus the prior year due to a loss of topline leverage resulting from the divestitures.

In the prior year, a significant amount of marketing spend which shifted from the first half second half of the fiscal year due to COVID-19 related cancellations <unk> postponements.

As a result marketing as a percent of net sales for Q4 is expected to be lower than the prior year.

For the full year, we expect marketing as a percent of net sales to be in the 10% range.

For full year fiscal 2022, we now expect net sales and operating income declined 21% to 22% and 23% to 25% respectively.

Excluding the impact of the white spirits divestitures organic net sales is now expected to grow in the 4% to 6% range versus our previous guidance of 2% to 4%.

It is important to note that the increase in our topline guidance is mainly due to incremental shipments to support our route to market transition earlier this fiscal year and revenues associated with sales of smoke tainted bulk wine.

Both are onetime in nature, and thus, we do not expect them to be repeated in future years.

As such going forward, we remain confident in our medium term topline growth algorithm from the white spirits business, 2% to 4%.

Looking ahead to fiscal year 2023, we expect significant cost increases for the business, including supply chain disruptions and inflationary cost pressures on product freight and warehousing costs.

However in order to mitigate some of these cost headwinds, we intend to take incremental price that will be staggered throughout the first half of calendar year 2022.

We will continue to work through the puts and takes of our fiscal full year fiscal 2023 outlook I will provide more details and official guidance during our Q4 earnings call in April.

Now let's proceed with the rest of the P&L.

Fiscal year to date corporate expenses came in at approximately $162 million down 6% versus Q3 year to date last fiscal year.

The decrease was predominantly driven by compensation and benefits due to the reversal of an accrual for performance share units, which will not be earned due to not achieving the threshold level of earnings performance from our canopy investment.

A favorable foreign currency impact.

<unk> were partially offset by an increase in consulting services and <unk> spend.

We now expect full year corporate expenses to approximate $230 million, reflecting the year to date compensation and benefits favorability.

Comparable basis interest expense for the quarter decreased 8% to $88 million versus prior year, primarily due to lower average borrowings.

We expect fiscal 2020 to interest expenses to land towards the midpoint of our previous guidance range guidance range of $355 million to $365 million.

Our Q3 comparable basis effective tax rate, excluding canopy equity earnings came in at 14% versus 17, 7% in Q3 last year, primarily driven by the timing and magnitude of stock based compensation benefits, partially offset by higher effective tax rates on our <unk>.

Businesses.

We now expect our full year fiscal 2022 comparable tax rate, excluding canopy equity earnings.

To approximate 19, 5% versus our previous guidance of 20%.

This half point decrease primarily reflects the impact of increased stock based compensation tax benefits received during the quarter.

<unk> stock based compensation tax benefits were weighted towards Q3 versus our previous expectation of Q4, resulting in a sequential rate increase to our implied Q4 tax rate, which is now expected to approximate 23%.

Moving to free cash flow, which we defined as net cash provided by operating activities less capex we.

We generated free cash flow of $1 $8 billion for the first nine months of fiscal 2022.

Afflicting, a 3% increase in operating cash flow offset by an increase in capex spend.

Capex spend totaled approximately 600 million, which included approximately $500 million of beer Capex, primarily driven by expansion initiatives at our Mexico facilities.

Our full year capex guidance of 1% 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 in the range of one four to one 5 billion.

This reflects operating cash flow in the range of two four to $2 $6 billion and the Capex spend previously.

Okay.

As Phil mentioned, our beer business continues to significantly outperform the U S beer industry, driven by robust consumer demand and it is essential that we invest appropriately to support the expected ongoing growth momentum for our exceptional beer brands.

As such we have updated and increased our brewery expansion investment plans in Mexico.

Total capital expenditures for the beer business are now expected to be.

Five to $5 $5 billion over the fiscal 2023 to fiscal 2026 timeframe with a majority of spend expected to occur in the first three years.

In total this investment will support an incremental 25 to 30 million hectoliter of additional capacity and includes construction of a new brewery in southeast Mexico, and the state of Veracruz, as well as continued expansion and optimistic optimization of our existing sites and Nava and <unk>.

Please note that this investment includes the previously disclosed beer capex guidance of $700 million to $900 million annually. During the fiscal 2023 to fiscal 2025 timeline to support a 15 million hectoliter buildup between our Nava and overdraft facilities.

As a reminder, our existing brewery footprint currently supports a 39 million hectoliter between Nava and overcome.

In closing I'd like to reiterate our medium term growth expectations for our beer business as Bill and I outlined we expect continued momentum and thus continue to target topline growth in the 7% to 9% range over the next three to five years, which includes one to two points of price and implied five growth in the mid to high single digit range. This.

Patients provides us with a conviction to support the incremental capital investments in Mexico.

With that Bill and I are happy to take your questions.

Thank you, ladies and gentlemen can I ask a question. Please press star two.

That's helpful.

Like to ask a question please press.

We do ask you please limit yourself to one question.

Please go ahead the queue. Thank you.

Our first question comes to Dara.

I'm Morgan Stanley Your line is open.

Hey, guys.

Hey, Dara.

So on beer Depletions. Another strong result, it was the best two year average we've seen in recent history. So in regards to Q3 can you discuss the underlying strength behind the business and maybe specifically the market share performance, which we saw improved in tracked channels.

And then also on a go forward basis on Depletions.

How sustainable do you think those trends are perhaps give us an update on December you sounded bullish on fiscal Q4, but an update specifically on December and any thoughts around.

Mcallen Marion impact an attacker pose any risk to your business. If we look at the on premise channel or overall to the business.

Sure.

We'll try to unpack that obviously, we have a very very strong Q3.

As you saw we saw.

Acceleration during in IRI channels during the quarter.

As both a couple of things happened first of all acceleration of our brands Modelo was up 13% Depletions in R&D IRI takeout was up in the high teens in the most recent four week trends.

Corona extra has just been tremendous for us.

<unk> been great to watch and see that iconic brand do as well as the past. So we're very excited about both of those to your question about December.

Our year to date is up almost 9% depletions.

And I'm very pleased to say December was ahead of that trend.

And certainly it puts us in a position to deliver the fourth quarter and the year than we had anticipated.

Certainly the Covid scenario with different you do see more consumers.

Consuming more meals at home than what we probably saw before the start.

The start of the pandemic.

And you do see a lot of variation depending on the individual market.

Clearly the on premise is the one that gets nailed in these types of instances.

And again, there's a lot of variability there.

But consumers are going out more than they did certainly a year ago.

And we're all very hopeful that the.

This particular variant of the virus.

Comes and goes more quickly it certainly appears that.

That those who are Halloween vaccinated.

The less overall experience and concerns around that which ultimately should help the entire country and our business as well as people continue to go out in the marketplace.

As you know we have a chief Medical officer, who continues to guide us on these important topics. So that we make sure we not only keep our people safe, but do everything we can to meet consumer needs. While we're at it so.

All in we think that we hope we're progressing against that but we're very excited about the position. We currently hold across our business and certainly our bullish about how the rest of the year and the close of the fiscal it's going to go.

Yeah.

Okay.

Thank you.

Our next question comes from Vivien <unk>.

Cowen Your line is open.

Hi, good morning, and happy new year.

In your prepared remarks, you noted that beer pricing is going to be I think you said specifically slightly ahead of your historic library, but if we observe the broader pricing backdrop.

Separate to alcohol as well as packaged food and beverage.

The consumer is able to absorb a fair bit more pricing than we've seen historically. So can you just kind of comment on your appetite to take incremental pricing and perhaps some of your views around your brands right.

Specifically do you mean.

The premium pricing thank you.

Yes. Thanks.

As you know our typical.

Rage for price increases.

In any given year is kind of in that 1% to 2%. So.

What we do as we go through the year, we're looking at we're looking at our portfolio. We're looking at the competitive set and we're looking at individual markets. We take our price increases on a brand by brand and in a market by market basis.

And so we could do this and as I say in a very disciplined approach given given the current economic environment. This year. We've we've determined that we can take more pricing than we typically have and that's what's driving us to say it will be slightly above the 2% keep in mind, we have to make sure that we're balancing the right level of price increases with what's going on with our consumer.

As you know we have a we are a consumer set that excuse.

More Hispanic.

Hispanic with some of our competitors and any.

Times of economic.

Downturn, if you will or weakness.

They tend to get hit with a little bit harder and they will cover a little bit slower. So we want to make sure that we're not leaving any pricing on the table, we're going to we want to take as much as we can but we also want to take so much pricing.

The performance of our brands or impair the growth of our brands.

Yeah.

Thank you. Our next question comes will come available our credit.

Credit Suisse. Your line is open.

Hi, if I could just follow up on that.

I think you explained how you take pricing in the market by March those sorts of things but.

It seems pretty clear from everything that we're seeing as it relates to inflation. That's pricing you have in place now is covering it but can you maybe just talk a little bit further out is that.

It feels like that's also likely to be the case for next year.

Some context on pricing for next year.

Sure.

And thanks for the question look we're in the middle of our annual planning process and so we're taking a look at what we think we can cover next year as you heard in my prepared remarks, we continue to think that inflation is going to be.

A big factor for Us next year.

<unk>.

Still intend to take significant amount of pricing.

Where that falls within our range that remains to be seen but.

But that pricing.

We do get it as I said in my script, it's likely not to cover all of our inflationary headwinds next year, but just like we did this year, we're going to look at this on a market by market basis spread Blackberry basis, and what it will take as much pricing as we think.

The consumer can absorb.

Okay.

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

Alright, Thanks, good morning, and happy new year.

I actually just wanted to make sure I understand the different puts and takes for beer operating margins next year. You you did mention you expect.

Your op margin to likely be below the 39% to 40%. So just maybe wanted to make sure. We understand the key drivers of this first I think you mentioned the higher cost pressures, including depreciation expense. So could you guys maybe quantify it.

Thank you Brian.

And then should we.

You'll be able to generate your typical high single digit topline growth next year with maybe possibly better than planned pricing that you just mentioned, partially offset by negative mix.

Yes, so in general.

In general, but we are sticking to our long term growth of our midterm growth out revised so as I said in my script, we continue to target over the next three to five years in beer to have topline growth in that high single digit range.

And as we've said historically, we think the right way to think about our margin is between 39 at 40%. However, we've also said that in any given in any given year, depending on market dynamics.

Or what's going on in the business that we could fall above or below that range.

So I mentioned in my comments are is pretty consistent with what we said previously we're still as I said, we're still in the process of going through our annual planning process. So we'll give a more more update on margins as we as we close out the year and move into next year.

But it is a tough inflationary environment.

As I mentioned, we're seeing.

Inflationary and commodity pressures that are in the high single digit to.

The double digit range and.

Again, what we'll absorb as much of that we can with pricing and with.

With.

Robust cost savings initiatives that we haven't both wine and spirits and beer and wine will alter our hedging strategy to take care or take advantage of weakness in commodity prices as we as we see some weakness as we recently have.

In aluminum and heating oil.

Those are all things that we'll do to try to offset.

Offset inflationary pressures, but we'll have more details on.

On the actual margins and I'll look for margins at our Q4 earnings call.

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

Hi, good morning, and happy new year.

I guess my question is around the brewery.

Brewery in Veracruz, and maybe just tying back to the.

The 39% to 40%.

Margins overtime for beer I guess given that.

The distance that brewery will sit relative to the border.

Was there any negative mix implication I guess to margins over time as you begin to produce more beer there or are there other offsetting factors that would sort of mitigate that.

Thanks, Brian.

Yes, so we're still going through the planning process there, but we do think that there are some some offsets so you're right. It's further away from the board and say Oh, we got our Nava. However.

It does open up some really interesting shipping lanes for the eastern half of the U S.

Across the Gulf of Mexico.

We're we're looking at those now to see what the impact is we also as we're thinking about building.

The brewery up what products, we're going to put into that for you is what's the level of complexity what brands, what we put in there cannot be highly efficient so that it offsets.

Any any margin impact so still a lot of work can be done on that I would expect that we'd have more details on that in our Q4 earnings call as well.

Okay.

Thank you.

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

Hi, Hi, good morning can you.

You just expand on the press with partnership how it came about.

Envisioned the timeline of the rollout I know you said this year, but let's see.

The rollout and how.

Distribution do you think this can get.

Whether you envision doing more partnerships with the Coca Cola company. Thank you go outside of the U S. So just a little bit more perspective, thanks, so much.

Sure Chris.

This particular partnership around the <unk>.

Fresco brand was one that was very exciting to us fresca hits on a number of key consumer attributes everything from convenience to flavor.

And is the hottest diet.

Soda in their portfolio so the idea.

Do you consider that more than 50% of huska consumers already mix it with spirits. It seem like a natural one four for us and certainly very felt the same way. So we're very excited about the potential for this obviously it starts in the United States, we're still putting a lot of finishing touches on.

Exactly how and what this will be as we get later in the year and certainly we will give you a lot more information about that.

As we get closer to the time, where we will launch this product.

Certainly this opens a very interesting door and one that's exciting I think for both companies.

Thank you.

Question comes from Lauren Lieberman of Barclays. Your line is open.

Great. Thanks.

And I know we've covered a lot I wanted to ask about Corona Depletions because thats. The brand has had building momentum.

Getting up to double digit depletions. This quarter. So I think when I had asked previously you didnt have a great sense for how much of this is driven by on premise recovery versus the brand performing better in take home channels.

And if it's the latter kind of what's really been driving that that change in momentum for the brand just would love any additional color on that you can offer thanks.

Sure Mark.

We've noted a number of things as it relates specifically to Corona extra first of all as retailers have begun to address their shelves shelving opportunities. We've taken advantage of that and improved our distribution profile versus what had previously been second our marketing effort is doing extremely well and it has been very very well.

Receipt.

And that's driving consumer demand. So we're very excited about that particular element and we've said this many many times before but it remains as true as it ever has been Corona is one of the most loved brands in.

In the in the beer landscape. So I think one of the things that you've seen a little bit.

In this particular timeframe is that the consumer is returning to many of those iconic brands. The date that they love and trust and Corona is really at the top of the list.

We still saw.

In.

<unk>.

Off premise continued growth as you've seen in the IRI channels that continue to develop on premise has not gotten itself all the way back to where it was.

For the pandemic, but as we've always said I'm kind of was a little bit smaller in the total profile of the Corona brand.

Then than it is for some other industry players. So overall, we couldn't be more excited about it and.

Certainly we're going to continue the great work and the advertising sector. We have a very robust plan for advertising in the fourth quarter and we're sure that's going to continue to bear excellent results for our brands.

Yes.

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

Yes, hi, happy new year, and good morning, everyone.

Thank you.

Hey, just a quick follow up on them and then my question is just if you can give some perspective around the double digit inflation, just kind of some of the build there and what's driving that.

And then.

The question is Abi recently announced they are going to be launching corona.

Non beer.

I was curious if you guys have access to that innovation.

How quickly that that thing you had some gentlemen.

Yeah.

Yeah. Thanks, Nik I'll take the first part and then bill can respond to the second so just on the inflationary front as I mentioned, we're seeing sort of a wide range of increases year over year.

Some kind of low to mid single digit things for things like.

Corn and hops and glass, which obviously is a big a big driver of our RM cost buildup, but then you're seeing some really some really some really large increases on things like cartons, which is up in kind of in the mid teens wood pallets, which is up.

Over 30%.

And then there's a number of other line items that range sort of in between those two bookends. So all of that is driving what we expect to be.

High single digit to high single digit inflation.

Overall across the for the beer portfolio.

Net relative to your question about the particular launch the IP would certainly be available to us in the United States, but keep in mind that the regulatory environment of what you can put in as additives.

And in the United States is very different than it is in Canada, and it would remain to be seen whether or not that would fly in the United States. So.

So it's sort of a yes or no who knows on that particular answer.

Our next question comes from Bob.

Evercore Your line is open.

Great. Thank you very much.

I was wondering if you could give us your updated view on the the hard seltzer market and in particularly the interaction between hard seltzer and in beer and Corona.

Specifically and maybe for the thoughts in terms of where you where you look to take that business going forward. Thank you.

Obviously, Robert there was a lot of change in the Seltzer business over the course of the last calendar year.

Certainly the growth profile slowed substantially up we still think that there is going to be some growth in that particular segment.

You know we have we have both reformulated and repackaged some of our variety packs, which will be bringing out in the first quarter of 'twenty three.

We still think that that's going to be an important part of the overall beer sector.

We're going to participate in itself.

We are.

We are optimistic that that's going to continue to see growth, albeit it's probably significantly lower than what everybody anticipated say a year ago.

And so it a little bit remains to be seen most predictions have proven to be challenging.

<unk> will not over predicts the question what we will say is we think where we're putting the right products in the market that have the right flavor profiles, they're going to attract consumers going forward.

Yes.

Thank you. Our next question comes from Sean King of UBS. Your line is open.

Hey, good morning.

Sort of related to Brian's question, but.

How should we think about the capacity expansion CAGR to 2026 with the long term beer algorithm.

Is it safe to safe to say that the capacity will be exceeding the utilization based on the 979% growth model and get incremental capacity typically more flexible or automated because part of your success of the company has been the high utilization of the capacity that you have in place. So just curious your thoughts on that.

Yes, certainly I mean, one of the challenges that we've also identified in prior calls and it remains true today as we've said we wanted to create some redundant capacity some of the challenges that we've had is we've had some one off events that have caused us some inventory challenges.

We think it would be highly beneficial to have some redundancy in the system and part of our expansion plan not only gets after Scott pointed out high single digit growth profile for our business for the foreseeable.

Near term future, but also gives us some redundancy. So in the event that there are any external factors that are in play it should have less impact on us going forward, we continue to maintain the 7% and 9%.

Growth profile going forward that we've consistently said.

And certainly we believe that our brands are going to continue to grow with a significant for the for the foreseeable future. So.

This is about investing in growth and it's one of the very best value creation opportunities for our shareholders and our judgment.

Okay.

Thank you.

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

Great Hey, good morning, everyone.

Bill I was hoping you could spend a moment on your decision to split the wine and spirits segment into fine wine and spirits for mainstream and premium brands just the factors driving that decision. How you expect it to drive improved results and then more broadly taking a step back your openness to further divestitures through this reorganization not drive the results you are.

Looking forward in the segment. Thank you.

So.

Our thinking around that was in many instances it's very different.

Approaches to how the consumer buys and engages with the fine wine and craft spirits sector that area tends to be higher DTC. It tends to be higher on premise and in many cases, it's a little bit of a different skill set and we realized by by segregating those two things it would give us a chance to both maximize that.

Potential in the mainstream and premium sector.

As well as maximizing our potential at the very high end, where some of those different kind of evolving channels are becoming more and more important to us.

I think there's both.

Both understand that our strategy, which is we want to grow our business, we want to improve our margin position.

Two black to best of class margin structures.

And we're well on our way to doing that but our view was this was this was an opportunity to maximize the potential to do that that also matches up very nicely with how many of our distributors go to market with a separate their portfolio.

And their sales organizations.

Online craft sectors and mainstream and premium so it also matches our organization with the route to market approach that that many of our distributors.

Yeah.

Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is open.

Hey, Thanks, everybody and good morning.

Maybe circling back on Bonnie and Brian's earlier line of questioning on beer margins, just just rounded out if I could.

Depreciation presumably ramps further alongside the Capex build over the next few years.

Are you do you think you can get back to that consistent 39% to 40% range beyond fiscal 'twenty three as you catch up on the current inflation dynamics or is there risk.

The depreciation build could keep you at least toward the lower end of that range for the next couple of years, but it's just kind of a follow up clean up and then I guess relatedly.

As the incremental Capex commitment.

Just run through the cash flow statement, just any commentary you have on how you think about cap allocation in terms of.

How it may impact M&A or further from the return to shareholders over the next couple of years alongside that ramp. Thank you.

You bet.

And I've been very consistent about this now for years quite frankly.

<unk>, 39% to 40% is what we expect to do on a consistent basis, there will be individual years and times, where we have seen that when when things go in our favor and there may be occasions, where based on certain headwinds should fall slightly below that but it's gone up in fact pointed out earlier today.

<unk> remains best in class margins, and we very strongly believe 39% to 40 is a very appropriate long term algorithm.

For for this business.

Yes, and just to put a final point on that as I said, you know youre right depreciation will ramp up but.

But we're going through the process right now where we're looking at the impacts of.

What's the right, what's the right sort of capacity utilization capacity to have our capabilities to have in our breweries and optimizing that we're looking at optimizing our of our transportation. So to the extent to the extent we have any news on that then we'll share with you with our Q4 earnings call.

As it relates to capital allocation with this increased investment nothing changes we continue to add.

The best portfolio in terms of growth and in terms of margins that growth net margins generates significant amount of cash flow that cash flow allows us to continue to prioritize investment grade rating returned capital to shareholders and to invest in the growth of our business.

So our capital allocation strategy.

Hasn't changed and then the last piece of that is is acquisitions and we continue to say that acquisitions will be used as a portfolio a gap filler.

And in large part we're going to use our venture fund too.

To fill those gaps.

Okay.

Thank you. Our next question comes from Nathan <unk> of Bernstein. Your line is open.

Hi, everyone. Thanks for taking my question two quick follow ups, if I may 1st regarding the fresco agreement could you give us a sense of the economics of the agreement what would the impact on margins be.

Thank you and coke can bring them to win in an already crowded space.

The second one on Pacific All I know you mentioned brown glass bottles, which are initiatives do you have in place to mitigate this negative impact and when can we expect that typically to return to its previous growth profile. Thank you.

Sure relative to the brand we will be buying.

Concentrates from the Coca Cola company in manufacturing marketing and selling.

They're there that brand through our network.

We're very excited about and frankly because of the strength of the fresh beer brands.

As I said earlier it is a growing brand it's a brand that's already use more than 50%.

The users use it as a mix.

With alcohol beverage, we think it's it's a natural play.

While also recognizing the locale and great flavor characteristics of that individual brand. So we're very excited about that we are making progress on brown glass I think.

It remains to the team when we will be back to full proposition and obviously.

It had some bearing on our ability to deliver in the quarter as we said.

Brown glass has been a drag against otherwise outstanding results.

I expect as we get into the new fiscal year that that will balance out.

Quite a bit and that we will see but certainly don't get back to the double digit growth profile that we've enjoyed for the last several years.

Thank you. Our next question comes from Andrea.

J P. Morgan your line is open.

<unk> I was just to ask the beer margin question with plenty of different if I may.

Given the new Capex and depreciation one on giving guidance on that.

Our basis.

Related to that can you please pass.

The operating margin assumptions for next year lending below 39, if you. If you are assuming no additional no if there's no pricing, which you normally take I believe in November.

And it only would impact the fourth quarter of.

Of 2023.

And then if there is any nonrecurring impacts of the Mexican peso appreciation on that on any of the hedges and all that.

Follow up on the guidance for fiscal fourth quarter.

I don't think you you were planning any impact of the new variant Balkan beyond what you were expecting so but if you can give us some comfort on why you were seeing on the trade and the ability.

For the distributors to get the beer.

South end and also on premise.

So it's those commentary.

Let me answer the second part personnel.

Garth to answer the first.

As we said.

We have had a very strong start to our fourth quarter. Our depletions in the beer business are up as of our year to date trends in the month of December and we feel very confident comfortable and confident in our ability to deliver what we've said around the fourth quarter and the overall fiscal year.

Darcy you could take the first one just on the EBITDA.

Yes, so first of all.

The good point, if it's actually something that we think about doing.

Do we want to provide that level of detail.

Very much.

Frontal upfront way.

Again as we go through as we go through sort of the planning process here and when we look at the effects of inflation, we look at the FX depreciation we look at the effects of our.

Capacity expansion to the extent that we think that that's a meaningful way to show our financial results and then we will act.

Yeah.

Thank you our next.

Our next question comes from the line brand that we can.

Your line is open.

Please make sure your phone is on mute.

Oh, sorry, sorry.

Good morning, everyone and wish you all very happy.

I'd like to talk about on Frisco, I mean at first and now that you reported that brand, we'd be reporting to the spirits or segments or beer segments.

That's what level of margin should we think of them should we be concerned about the labor market theme you would have to spend to launch for Brian Remember I mean, you said that to launch.

And I've said, Saar, which was Mitch.

No brand I mean that you have to spend about $40 million. So I'd like to understand more about the technology and now we should see comfortable for that brand.

Okay.

Well relative to.

The whole price cost story, we will bring that to U S.

And our next earnings scenario when we are when we are much further along on the exact launch planning and launch timing and won't give you a more fulsome view of what we plan to do what we would say as we said in our release today. This will be going through our distribution network, which will largely.

Largely be driven by the gold network on the beer side.

And in some states it will go through the wine and spirits network, depending on the regulatory environment of the particular statement.

Thank you.

This does conclude today's conference I'd like to turn the call over to Bill Doyle for any closing remarks.

Thank you everyone I appreciate your joining our call today. Despite the challenges faced thus far driven by the continued effects of the pandemic to global supply chain issues in a volatile and dynamic inflationary environment combined with severe weather events. We are on track to deliver again, another strong year of finance.

Performance, our beer business continues to remain extremely solid as consumer demand for our core beer brands continues to be robust, while our incremental capacity investments in Mexico will position us to capture the ongoing growth opportunities, we see within the higher end of the U S beer market well into the future.

Additionally, our wine and spirits business continues to move towards its long term revenue growth and margin expansion vision overall, we remain bullish on the future performance of our powerful collection of consumer connected brands, which provides us with strong momentum as we head into the fourth quarter as a reminder.

During our next quarterly call, we'll be providing our guidance for the upcoming fiscal year. So thanks again, everyone for joining the call and I wish you all a safe happy and prosperous new year. Thank you.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great deal.

Yes.

Okay.

[music].

Yes.

[music].

Yeah.

Okay.

[music].

Welcome to the constellation brands Q3 <unk>.

Slide 22 earnings conference call at this time, all participants have been placed in a listen only mode.

Prepared remarks, the call will be place for your questions.

Trucks will be given at that time.

I will now turn the call over to Patty bought our lab senior Vice President of Investor Relations. Please go ahead.

Thanks, Valerie good morning, Constellation's third quarter fiscal 'twenty two conference calls.

Good morning, guys.

<unk>, our CEO and Mark <unk>, 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 Dot tea brand Dot com.

Please refer to the news release and constellations SEC filings for risk factors, which may impact forward looking statements we make on this call.

Turning the call over to Bill similar to prior quarters I would like to ask that we limit everyone to one question per person.

Help us to end up calling time, thanks in advance and now.

Thank you Patti and happy new year to everyone on the call I sincerely hope you were able to enjoy the safe.

The holiday season with family and friends.

Calendar year 2021, with another challenging year, given the continued effects of the pandemic.

Most of global supply chain initiatives impacting nearly every industry inflationary pressures and severe weather events.

Yes.

Incredibly proud of the determination Shanghai our team at constellation throughout the year, they've worked relentlessly navigating periods of evolving dynamics to deliver a very solid performance year to date and in Q3, putting us on pace for another strong year of financial performance and shareholder value.

<unk> creation and festival in 'twenty two.

That said I would like to highlight a few key takeaways from the quarter.

First our beer business delivered a very strong performance in Q3, while lapping tough comps in fiscal 'twenty one.

We continue to see robust consumer demand, yielding high single digit depletion growth.

We extended our leadership position as the top share gainer in the high end of the U S beer market behind the strength of our Modelo and Corona brand families, while improving our inventory position.

Our strong performance to date gives us confidence to increase top and bottom line guidance for our beer business in fiscal 'twenty two.

And our shareholders.

Our wine and spirits business has made solid progress in transforming both with brand portfolio and financial profile Q3 marked another step along our journey as we continue to shift to IRI in wine and spirits business focused on delivering increased revenue growth and margin expansion.

While our wine and spirits business continues to navigate through a series of headwinds impacting us year to date performance, our increased focus and investments behind our fine wine and craft spirits portfolio margin accretion innovation and E. Commerce initiatives continue to gain traction and are enabling an increase.

And our net sales guidance for the business in fiscal 'twenty two.

And finally, our strong overall total company performance in Q3 gives us confidence to increase our comparable basis EPS guidance for the fiscal year.

<unk>, who will provide additional details relative to our financial performance and fiscal year guidance in just a few minutes.

Today, we are also excited about our announcement of a new agreement with the Coca Cola company in the United States to bring our prestige brands into beverage alcohol through manufacturing and distributing our new line of Fresca mixed cocktails.

<unk> is currently the fastest growing diet soft drinks and Coca Cola portfolio and over half of prestige consumers already use it as a mixture with spirits.

Building on this great Foundation, and an alignment with emerging consumer preferences around convenience flavor and a preference for high quality products, we plan to launch.

The mix later this year, starting with cut fields, using real spirits and inspired by recipes created by Preska fans from around the globe.

With that let's talk in more detail about our performance in the most recent quarter.

Our beer business posted depletion growth of more than 8% in the third quarter outpacing the high end of the U S beer category.

The Delaware, especially out continues to be our most significant growth driver with depletions, increasing over 13% that is more than 5 million cases relative to the same quarter last year.

It remains the brightest star in our portfolio as the top share gainer across the entire U S beer category in IRI channels, while maintaining its position as the number one high end beer brand.

Our Modelo <unk> brand family has be covenant important growth contributor to our portfolio as the number one show lineup in the U S beer market and maintained its explosive growth posting a 35% depletion growth in the third quarter.

We continue to build on this extremely successful innovation innovation platform with the new address modality, which a lot of Pega can campaign, which was launched in August and is already a top share gainer amongst important brands.

Corona extra sustained its reinvigorated growth trajectory and position as the second fastest import share gainer and the number three high end brands in IRI channels with 11% depletion growth versus prior year.

Similarly, Corona Premier continues to get strong performance with 8% depletion growth, which accelerated through distribution gains as supply conditions improve.

From an innovation perspective within the Corona brand family, where fresca ever customer are back in production and contributing nicely to growth in our aviation portfolio.

Meanwhile, Corona hard Seltzer remains a top celgene brand in IRI following the dramatic slowdown in the Seltzer category, we're making good progress to enhance our flavor profile and we're on track to rollout the restaging of our variety packs profitable mixed pack and bearing mixed pad in the first quarter.

A fiscal 'twenty three.

And we are diligently working to address the brown glass shortage that is acting as a headwind this year, especially for our <unk> brand, which continues to see strong demand and has a long runway for growth ahead.

To fuel the continued growth of our imported beer portfolio, we plan to deploy an increased level of investment over the next four fiscal year to support construction of a new brewery in southeast Mexico, and the state of Veracruz, as well as to expand and optimize capacity at our existing Nava and <unk>.

Got on operations.

We'll give you additional details on that momentarily.

Now moving on to our wine and spirits business, we remain committed to our vision to become a bold and innovative high end wine and spirits business with distinctive brands and products delivering exceptional consumer experiences.

In an effort to make this vision a reality, we've recently reorganized into two distinct commercial teams within the business one focus on our fine wine and craft spirits brands and the other focused on our mainstream and premium brands.

While each team has their own exchange strategy, both remain aligned to our goal of accelerating performance by increasing revenue growth and expanding margins.

Our mainstream and premium business is focused on maintaining share in the mainstream wine segment, while delivering and continuing to deliver growth through premium segment brands, such as my Army and Tien property in line with our consumer driven premium innovation strategy.

While we've experienced recent headwinds on mainstream brands like Woodbridge, Robert Mondavi, private selection and setup IRI trends for these brands have improved since overlapping the peak of the pandemic supported by an increased focus on more relevant branding strategic pricing and innovation.

Throughout our wine and spirits portfolio, we've launched several innovations that are creating momentum and driving growth.

Including Kim Crawford eliminate and the prisoner unshackled, both of which were among the top five share gainers and their respective price points in IRI channels this quarter.

Second <unk> ready to drink vodka soda mixed pack and third our new Woodbridge three liter box.

We've also experienced successful market expansion for our Woodbridge, Robert Mondavi private selection spirit barrel aged clients.

Within our DTC portfolio, we launched exclusive skus for the Robert Mondavi winery, and the prisoner salvo Red glass as well as high West mid winter nights, DRAM and Theyre ready to serve Manhattan and old fashioned type sales.

Within the three tier e-commerce landscape constellation continues to outpace total U S wine market growth by double digits. In fact may only sales in the three tier e-commerce channels increased 27% versus the prior year currently about 10% of.

My only sales come from three tier E Commerce, which is the highest well among leading U S wine brands in IRI E Commerce channels.

While we advance our strategic agenda and wine and spirits. We continue to address a number of headwinds that have impacted our year to date performance.

We continue to lap last year's Covid, pantry, driven loading where we experienced outsized growth however, upcoming comparable growth rates are less challenging.

Throughout the year, we've experienced out of stocks and other operational challenges related to our SAP implementation, a difficult domestic and international logistics environment and our route to market transition of 70% of our distributions to southern Glazers wine and spirits. The encouraging notes. These issues are all stabilizing.

We are rebalancing, our inventories and expect more standard service levels for the balance of the year.

Based on our year to date performance, we are raising our organic net sales guidance from 2% to 4% to 4% to 6% for fiscal 'twenty two.

And before I close just a couple of quick notes on canopy growth.

Clearly recent results have been disappointing and there are meaningful near term challenges facing canopy and the overall cannabis market in Canada, our store openings have been slower than previously anticipated due to the pandemic.

We're encouraged by canopies innovation agenda with work with more than 40, new Skus launched globally. During their recently reported a second quarter. In addition canopy purchased the rights to acquire water brands. Upon a U S. Triggering event, which includes U S Federal <unk>.

Elevation of candidates.

<unk> brands is the number one share of the growing market in Canada with more than 40% market share and the largest multi market presence in the U S coming market.

The government category is one of the fastest growing segments in both the U S and Canadian cannabis markets accounting for over 70% of all edible purchase.

One is asset light licensing model approach will allow them to scale quickly and the U S and provide canopy a highly distributed brand upon U S legalization.

In closing I would like to reiterate our main takeaways from this quarter.

Our beer business continues to deliver impressive performance.

<unk> remains ahead of the high end of the U S beer market in IRI channels, and we now expect to achieve 10% to 11% net sales growth and 6% to 7% operating income growth for fiscal 'twenty two.

Our wine and spirits business continues to move toward its long term revenue growth and margin expansion vision, which is further enabled by the clear strategic focus of its newly configured fine line and craft spirits and mainstream and premium teams.

And in spite of an ongoing challenging environment. Our strong overall total company performance gives us the confidence to increase our comparable basis EPS guidance for the year.

We look forward to continuing to build a portfolio of products that consumers love and delivering another strong year of financial performance and shareholder value creation in fiscal 'twenty, two and with that I will now turn the call over to Garth.

Thank you Bill and Hello, everyone Q3 was another quarter of strong execution by our beer business this could be.

<unk> strength, coupled with tax favorability enable us to deliver 8% comparable basis diluted EPS growth for the quarter, Excluding Canada.

As a result, we have increased and narrowed our full year fiscal 2022 comparable basis diluted EPS target to a range of $10 50 to $10 65.

Our previous guidance of $10 15 to $10 40 process.

This range excludes canopy equity earnings includes an increase in beer operating income guidance and reflects a decrease in the tax rate for fiscal 2022.

Now, let's review, our Q3 performance and full year outlook in more detail, where I'll generally focus on comparable basis financial results.

Starting with beer net sales increased 4% driven by shipment growth of 3% and favorable price, partially offset by unfavorable mix. As a reminder, we are lapping a significant inventory rebuild in Q3 of the prior year, which generated 28% shipment growth.

Depletion growth for the quarter came in above 8% driven by the continued strength of modelo especial and explosive growth of Corona extra.

As well as the continued return to growth in the off premise channel.

Again keep in mind that difficult volume overlap we encountered during the quarter as we faced a 12% depletion growth comparison, driven by robust inventory replenishment at the retailer and the prior year.

On premise volume accounted for approximately 12% of the total beer depletions during the quarter and grew strong double digits versus last year.

As a reminder, the on premise accounted for approximately 15% of our beer depletion volume pre COVID-19 and with only 8% of our depletion volume in Q3 fiscal 2021 as a result of our premise shutdowns and restrictions due to COVID-19.

Selling days in the quarter were flat year over year and please note that in Q4, there is one additional selling days.

Cases shipped exceeded cases depleted as distributor inventory levels will began to rebuild during the quarter.

Inventories are expected to return to normal normal levels by the end of the fiscal year as shipment volume is expected to continue to exceed cases completed for the remainder of the fiscal year.

Moving on to beer margins.

Beer operating margin decreased 130 basis points versus prior year to 41, 3% benefits.

Benefits from favorable pricing and marketing timing were more than offset by unfavorable cost.

The expected increase in costs was driven by several headwinds that included the following.

First.

Please note that this range includes the impact of hedging where possible.

Second increased brewery costs, driven by labor inflation in Mexico increased head count incremental spend related to capacity expansion and annual brewery maintenance that was performed during the quarter.

As a reminder, the annual recurring maintenance took place during the fourth quarter last fiscal year.

And third a step up in depreciation expense largely due to the incremental 5 million hectoliter at <unk> completed earlier this fiscal year.

These cost headwinds were partially offset by favorable fixed cost absorption driven by increased production levels.

Marketing as a percent of net sales decreased 130 basis points to 8% versus prior year as we've as we have returned to our typical spending cadence, which is weighted more heavily towards the first half of the fiscal year.

In the prior year, a significant amount of marketing spend which shifted from the first half second half of the fiscal year due to COVID-19 related sporting and sponsorship of event cancellations and postponements.

Additionally, we continue to expect full year spend as a percent of net sales to land in the 9% to 10% range, which is in line with fiscal 2021 spend of nine 7% of net sales.

For full year fiscal 2022, we now expect net sales growth to lag in the 10% to 11% range and operating income growth to lag and a 6% to 7% range, reflecting the continued strength of our core beer portfolio.

As previously communicated we expect price increases within our beer portfolio to last slightly above our typical 1% to 2% range.

However, we anticipate this incremental pricing favorability to be partially offset by unfavorable net sales mix mix, primarily driven by a shift in package types and the return of on premise draft and Skus.

Economic supply chain and other byproducts of the pandemic continues to be dynamic and variables.

We will continue to maintain our disciplined approach to address these evolving conditions through our commodity hedging program cost saving initiatives and balanced price adjustments. However.

However, due to a persistent and tough inflationary environment.

And incremental depreciation driven by our capital expansion plans.

Operating margins could land below our stated 39% to 40% range in fiscal 2023.

Moving to wine and spirits.

Q3 fiscal 2022, net sales declined 25% as shipments declined approximately 39%.

Excluding the impact of the wine and spirits divestitures organic net sales increased 3% driven by shipment growth of approximately 3%.

Favorable price incremental sales lift bridge for Opus, one and smoke tainted bulk lifestyles.

Partially offset by unfavorable mix.

Depletions declined approximately 7% during the quarter and continued to be challenged by port delays for our international brands and distributor route to market changes and transition markets.

Additionally, depletions faced a difficult overlap, especially for our premium and luxury brands, which experienced robust growth during Q3 from the prior year.

However, we expect depletion growth to accelerate during the fourth quarter driven by the continued strength of our higher end brands led by the prisoner brand family Mayo Me Kim Crawford.

<unk> innovation agenda, and an easier by overlap versus a year ago.

From a shipment perspective, we expect shipment growth for the fourth quarter to decelerate versus Q3, as we continue to right size distributor inventory levels for our mainstream brands.

<unk> from the existing portfolio.

As expected lower costs were driven by net favorable fixed cost absorption lower grade raw materials and cost savings initiatives, partially offset by increased transportation cost the.

The net favorable fixed cost absorption resulted from lapping the unfavorable impact of $20 million in the prior year, which was a result of decreased production levels due to the 2020 U S wildfires.

Marketing and SG&A as a percent of net sales increased versus the prior year due to a loss of top line leverage resulting from the divestitures.

In the prior year, a significant amount of marketing spend that was shifted from the first half to the second half of the fiscal year due to COVID-19 related cancellations and postponements.

As a result marketing as a percent of net sales for Q4 is expected to be lower than the prior year.

For the full year, we expect marketing as a percent of net sales to being 10% range.

For full year fiscal 2022, we now expect net sales and operating income declined 21% to 22% and 23% to 25% respectively.

Excluding the impact of the wine and spirits divestitures organic net sales is now expected to grow in the 4% to 6% range versus our previous guidance of 2% to 4%.

Both are onetime in nature, and thus, we do not expect them to be repeated in future years.

As such going forward, we remain confident in our medium term topline growth algorithm for wine and spirits business, 2% to 4%.

Looking ahead to fiscal year 2023, we expect significant cost increases for the business, including supply chain disruptions and inflationary cost pressures on product freight and warehousing costs.

However in order to mitigate some of these cost headwinds, we intend to take incremental price that will be staggered throughout the first half of calendar year 2022, we will continue to work through the puts and takes of our fiscal of our full year fiscal 2023 outlook I will provide more details and official guidance during our Q4 earnings call in April.

Now let's proceed with the rest of the P&L.

Fiscal year to date corporate expenses came in at approximately $162 million down 6% versus Q3 year to date last fiscal year.

The decrease was predominantly driven by compensation and benefits.

Due to the reversal of an accrual for performance share units, which will not be earned due to not achieving a threshold level of earnings performance from our canopy investment.

And a favorable foreign currency impact.

These tail winds were partially offset by an increase in consulting services and <unk> spend.

We now expect full year corporate expenses to approximate $230 million, reflecting the year to date compensation and benefits favorability.

Comparable basis interest expense for the quarter decreased 8% to $88 million versus prior year, primarily due to lower average borrowings.

We expect fiscal 2020 to interest expenses to land towards the midpoint of our previous guidance range of guidance range of $355 million to $365 million.

On our foreign businesses.

We now expect our full year fiscal 2022 comparable tax rate, excluding canopy equity earnings to approximate 19, 5% versus our previous guidance of 20%. This half point decrease primarily reflects the impact of increased stock based compensation tax benefits received during the quarter.

<unk>.

Additionally, stock based compensation tax benefits were weighted towards Q3 versus our previous expectation of Q4, resulting in a sequential rate increase to our implied Q4 tax rate, which is now expected to approximate 23%.

Moving to free cash flow, which we define as net cash provided by operating activities less capex.

We generated free cash flow of $1 8 billion for the first nine months of fiscal 2022, reflecting a 3% increase in operating cash flow offset by an increase in capex spend.

Capex spend totaled approximately 600 million, which included approximately $500 million of beer Capex, primarily driven by expansion initiatives at our Mexico facilities are full year capex guidance of 1% 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 in the range of one four to $1 5 billion.

This reflects operating cash flow in the range of two four to $2 6 billion and the Capex spend previously.

As Bill mentioned, our beer business continues to significantly outperform the U S beer industry, driven by robust consumer demand and it is essential that we invest appropriately to support the expected ongoing growth momentum for our exceptional beer brands.

As such we have updated and increased our brewery expansion investment plan in Mexico.

Total capital expenditures for the beer business are now expected to be.

Five to $5 $5 billion over the fiscal 2023 to fiscal 2026 timeframe with a majority of spend expected to occur in the first three years.

As a reminder, our existing brewery footprint currently supports a 39 million hectoliter between Nava and overdone.

In closing I'd like to reiterate our medium term growth expectations for our beer business as Bill and I outlined we expect continued momentum and thus continue to target a topline growth in the 7% to 9% range over the next three to five years, which includes one to two points of price and implied volume growth in the mid to high single digit range.

Expectation provides us with a conviction to support the incremental capital investments in Mexico.

With that Bill and I are happy to take your questions.

Thank you, ladies and gentlemen can I ask a question. Please press star one.

That's helpful.

To ask a question please press.

We do ask you please limit yourself to one question and the inks who joined the queue. Thank you.

Our first question comes from Dara <unk>.

Danielle Morgan Stanley Your line is open.

Hey, guys.

Hey, Dara.

So all beer Depletions. Another strong result, it was the best two year average we have seen in recent history. So in regards to Q3 can you discuss the underlying strength behind the business. So maybe specifically the market share performance, which we saw improved in tracked channels and.

And then also on a go forward basis on Depletions.

How sustainable do you think those trends are perhaps give us an update on December you sounded bullish on fiscal Q4, but an update specifically on December and any thoughts around.

Macfarlane varying impacts that affect could pose any risk to your business. If we look at the on premise channel or overall of the business.

Sure.

We'll try and unpack that Humira, obviously, we had a very very strong Q3.

As you saw we saw.

Acceleration during in IRI channels during the quarter.

As both a couple of things first of all the acceleration of our brands Modelo was up 13% Depletions and IRI takeout was up in the high teens in the most recent four week trends.

Corona extra has just been <unk>.

Tremendous for us.

It's been great to watch and see that iconic brand do as well as it has so we're very excited about both of those to your question about December.

Our year to date is up almost 9% in depletions.

And I'm very pleased to say December was ahead of that trend.

And certainly puts us in a position to deliver the fourth quarter and the year than we had anticipated certainly.

Covid scenario with different you do see more consumers.

<unk> more meals at home than what we probably saw before the start of the pandemic and.

And you do see a lot of variation depending on the individual market.

Clearly the on premise is the one that gets nailed in these types of instances.

Again, theres a lot of variability there, but consumers are going out more than they did certainly a year ago.

And we're all very hopeful that the.

This particular variant of the virus.

Comes and goes more quickly it certainly appears that.

That those who are heavily vaccinated.

The less overall experience and concerns around that which ultimately should help the entire country and our business as well as people continue to go out in the marketplace.

Thank you.

Our next question comes from Vivien <unk> of Cowen Your line is open.

Hi, good morning, and happy new year.

In your prepared remarks, you noted that beer.

Is it going to be I think you said specifically slightly ahead of your historic Library.

The broader pricing backdrop.

Beverage alcohol as well as packaged food and beverage.

The consumer is able to absorb a fair bit more pricing than we've seen broadly historically. So can you just kind of comment on your appetite to take incremental pricing and perhaps your views around your brands right.

Specifically given your premium prices. Thank you.

Yeah. Thanks Vivek.

As you know our typical.

Rage for price increases.

In any given year is kind of in that 1% to 2%. So.

What we do as we go through the year, we're looking at we're looking at our portfolio. We're looking at the competitive set and we're looking at individual markets.

We take our price increases on a brand by brand and in a market by market basis.

And so we could do this and as I say in a very disciplined approach given given the current economic environment. This year, we have determined that we can take more pricing than we typically have and that's what's driving us to say it will be slightly above the 2% keep in mind, we have to make sure that we're balancing the right level of price increases with what's going on with our consumer.

We have we are a consumer set that skews a bit more.

Our Hispanic and some of our competitors and.

Times of economics.

Now I'll turn if you will or weakness.

They tend to get hit with a little bit harder and they recover a little bit slower. So we want to make sure that we're not leaving any pricing on the table, we're going to we want to take as much as we can but we also don't want to take so much pricing that we impaired the performance of our brands or impair the growth of our brands.

Thank you. Our next question comes will come available <unk> of credit Suisse. Your line is open.

Hi, if I could just follow up on that.

I think you explained how you take pricing in the market by March those sorts of things but.

It seems pretty clear from everything that we're seeing as it relates to inflation. That's pricing you have in place now is covering it but can you maybe just talk a little bit further out is that.

It feels like that's also likely to be the case for next year. So just some context on pricing for next year.

Sure.

A big factor for Us next year.

<unk>.

Still intend to take significant amount of pricing.

Where that falls within our range that remains to be seen.

But that pricing.

The consumer can absorb.

Okay.

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

Alright, Thanks, good morning, and happy new year.

I actually just wanted to make sure I understand the different puts and takes for beer operating margins next year. You you did mention you expect.

<unk> likely be below the 39 to 40 percentages maybe wanted to make sure. We understand the key drivers of this first I think you mentioned the higher cost pressures, including depreciation expense. So.

Could you guys maybe quantify it.

Markets are there and then should we.

You'll be able to generate your typical high single digit near topline growth next year with maybe possibly better than planned pricing that you just mentioned, partially offset by negative mix.

Yeah.

Yes, so in general.

Not in general, but we are sticking to our long term growth of our midterm growth upward bias.

As I said in my script, we continue to target over the next three to five years in beer to have top line growth in that high single digit range.

And as we've said historically, we think the right way to think about our margin is between 39 or 40%. However, we've also said that in any given in any given year, depending on market dynamics.

Or what's going on in the business that we could fall above or below that range.

So I have said in my comments are is pretty.

Pretty consistent with what we said previously we are.

Still as I said, we're still in the process of going through our annual planning process. So we'll give more more update on margins as we as we close out the year and move into next year, but it is a tough inflationary environment.

As I mentioned, we're seeing.

Inflationary and commodity pressures that are in the high single digits.

The double digit range and.

Again, we'll absorb as much of that return with pricing and with.

With.

Robust cost savings initiatives that we haven't both wine and spirits and in beer and we'll alter our hedging strategy to take care or take advantage of weakness in commodity prices as we as we see some weakness as we recently have.

In aluminum and heating oil.

Those are all things that we'll do to try to offset it.

Offset inflationary pressures, but we'll have more details on.

On actual margins and outlook for margins at our Q4 earnings call.

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

Hi, good morning, and happy new year.

I guess my question is around the brewery.

Brewery in Veracruz, and maybe just tying back to the.

The 39% to 40%.

Margins overtime for beer I guess given that.

The distance that that brewery will sit relative to the border.

Was there any negative mix implication I guess to margins over time as you begin to produce more beer there or are there other offsetting factors that would sort of mitigate that.

Yes, Thanks, Brian.

Yes, so we're still going through the planning process there, but we do think that there are some some offsets. So you are right. It is further away from the board, let's say over got are now however.

It does open up some really interesting shipping lanes for the eastern half of the U S.

Across the Gulf of Mexico.

We're looking at those now to see what the impact is we also as we're thinking about building.

Brewery up what products, we're going to put into that for you is what's the level of complexity what brands, what we're putting there can it be highly efficient so that it offsets.

Any any margin impact so still a lot of work can be done on that I would expect that we'd have more details on that in our Q4 earnings call as well.

Okay.

Thank you.

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

Hi, Hi, good morning.

Can you just expand on the principal partnership how it came about.

Envisioned the timeline of the rollout I know you said this year, but.

Pizza rollout and how.

Distribution do you think this can get.

Whether you envision doing more partnerships with Coca Cola company.

Outside of the U S. So just a little bit more perspective, thanks, so much.

Sure Chris.

This particular partnership around the.

<unk> brand was one that was very exciting to us fresca hits on a number of key consumer attributes everything from convenience to flavor.

And is the hottest diet.

So in their portfolio. So the idea when you consider that more than 50% of husky consumers already mix it with spirits. It seem like a natural one four for us and certainly they felt the same way. So we're very excited about the potential for this obviously it starts.

In the United States, we're still putting a lot of finishing touches on exactly how and what this will be as we get later in the year and certainly we will give you a lot more information about that as we get closer to the time, where we will launch this product.

But certainly this opens a very interesting door and one that's exciting I think for both companies.

Thank you. Our next question comes from Lauren Lieberman of Barclays. Your line is open.

Great. Thanks.

I know we've covered a lot I wanted to ask about Corona Depletions because thats. The brand has had building momentum.

And if it's the latter kind of what's really been driving that that change in momentum for the brands would love any additional color on that you can offer thanks.

Sure Mark.

You've noted a number of things as it relates specifically to Corona extra first of all as retailers have begun to address their shelves up shelving opportunities, we've taken advantage of that and improved our distribution profile.

Versus what it had previously been second our marketing effort is doing extremely well and it has been very very well received.

In the in the Bureau landscape. So I think one of the things that you've seen a little bit of in this particular timeframe is that the consumer is returning to many of those iconic brands. The date that they love and trust and Corona is really at the top of the list.

We still saw.

And.

Off premise.

<unk> growth as you've seen in the IRI channels that continue to develop on premise does not gotten itself all the way back to where it was.

Before the pandemic, but as we've always said on premise was a little bit smaller in the total profile of the Corona brand.

Then than it is for some other industry players. So overall, we couldn't be more excited about it.

Certainly we're going to continue the great work and the advertising sector, we have a very robust plan for advertising in the fourth quarter.

Sure Thats going to continue to bear excellent results for our brands.

Yes.

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

Yes, hi, happy new year, and good morning, everyone.

Yeah.

Hey, just a quick follow up on them and then my question. Just if you can give some perspective around the double digit inflation, just kind of some of the builds there and what's driving that.

And then.

The question is.

<unk> recently announced they are going to be launching.

Rona.

Non.

Beer.

And I was curious if you guys have access to that innovation.

Given how quickly that <unk> had some gentlemen, thanks.

Yeah.

Yeah. Thanks, Nik I'll take the first part and then bill can respond to the second so just on the inflationary front as I mentioned, we're seeing sort of a wide range of increases year over year from kind of low to mid single digit fixed for things like <unk>.

Corn.

Hops and glass, which obviously is a big big driver of our RM cost buildup, but then you're seeing some really some really some really large increases on things like carbons, which is up in kind of in the mid teens and wood pallets.

Which is up.

Over 30%.

And then there's a number of other line items that range sort of in between those two bookends. So all of that is driving what we expected.

High single digit to high single digit inflation.

Overall across the for the first beer portfolio.

Net relative to your question about the that particular launch the IP would certainly be available to us in the United States, but keep in mind that the regulatory environment of what you can put in as additives.

And in the United States is very different than it is in Canada, and it would remain to be seen whether or not that would fly in the United States. So.

So it's sort of a yes or no who knows.

Particular answer.

Our next question comes from Bob on that one.

Your line is open.

Great. Thank you very much.

I was wondering if you could give us your updated view on the hard seltzer market.

And in particularly the interaction between hard seltzer and beer and Corona.

Specifically and maybe further thoughts in terms of where you where you look to take that business going forward. Thank you.

Obviously, Robert there was a lot of change in the Seltzer business over the course of the last calendar year.

Certainly the growth profile slowed substantially we still think that theres going to be some growth in that particular segment.

You know we have we have both reformulated and repackaged some of our variety packs, which will be bringing out in the first quarter of 'twenty three.

We still think that that's going to be an important part of the overall beer sector.

We're going to participate in it so.

We are.

We are optimistic that that's going to continue to see growth, albeit it's probably significantly lower than what everybody anticipated say a year ago.

And so it a little bit remains to be seen most predictions have proven to be challenging.

<unk> will not over predicts the question what we will say is we think we're putting the right products in the market that have the right flavor profiles, they're going to attract consumers going forward.

Yes.

Thank you. Our next question comes from Sean King of UBS. Your line is open.

Hey, good morning.

Sort of related to Brian's question, but how.

How should we think about the capacity expansion CAGR to 2026 with the long term beer algorithm.

Is it safe to say the state of the capacity will be exceeding the utilization based on the 979% growth model and get.

Incremental capacity typically more flexible our automated I mean part of your success of the company has been the high utilization of the capacity that you have in place. So just curious your thoughts on that.

Certainly I mean, one of the challenges that we've also identified in prior calls and it remains true today as we've said we wanted to create some redundant capacity some of the challenges that we've had is we've had some one off events that have caused us some inventory challenges.

Think it would be highly beneficial to have some redundancy in the system and part of our expansion plan not only get faster scarred pointed out high single digit growth profile for our business for the foreseeable.

Near term future, but also gives us some redundancy. So in the event that there are any external factors that are in play it should have less impact on us going forward, we continue to maintain.

7%, 9%.

<unk> growth profile going forward that we've consistently said and.

And certainly we believe that our brands are going to continue to grow with a significant for the for the foreseeable future. So.

This is about investing in growth and it's one of the very best value creation opportunities for our shareholders and our judgment.

Okay.

Thank you.

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

Great Hey, good morning, everyone.

Looking forward in the segment. Thank you.

So.

Our thinking around that was it.

Many instances, it's very different.

Approaches to how the consumer buys and engages with defined wine and craft spirits sector that area tends to be higher DTC. It tends to be higher on premise and in many cases, it's a little bit of a different skill set and we realized by by segregating those two things it would give us a chance to both maximize that.

Potential in the mainstream and premium sector.

As well as maximizing our potential at the very high end, where some of those different kind of evolving channels are becoming more and more important to us.

I think this.

Both understand that our strategy, which is we want to grow our business, we want to improve our margin position.

Two black to best of class margin structures.

And their sales organizations.

Online craft sectors and mainstream and premium so it also matches our organization with the route to market approach that that many of our distributors that.

Thank you. Our next question comes from Steve Powers of Deutsche Bank. Your line is open.

Hey, Thanks, everybody and good morning.

Maybe circling back on Bonnie and Brian's earlier line of questioning on beer margins, just just rounded out if I could as depreciation presumably ramps further alongside the capex build over the next few years.

Do you think you can get back to that consistent 39% to 40% range beyond fiscal 'twenty three as you catch up on the current inflation dynamics or is there risk.

The depreciation build could keep you at least towards the lower end of that range for the next couple of years, but just kind of a follow up cleanup and then I guess relatedly.

As the incremental Capex commitment.

Just run through the cash flow statement, just any commentary you have on how you think about cap allocation in terms of.

How it may impact M&A or for the for the return to shareholders over the next couple of years alongside that ramp. Thank you.

You bet, Steve Gardner and I've been very consistent about this now for years quite frankly, I was saying, 39% to 40% is what we expect to do on a consistent basis, there will be individual years and times, where we exceed that when when things go in our favor and there may be occasions, where based.

On certain headwinds should fall slightly below that but it has gone up in fact pointed out earlier today. These remains best in class margins and we very strongly believe 39% to 40 is a very appropriate long term algorithm.

For for this business.

Yes, just to put.

A final point on that as I said, you're right depreciation will wrap up.

But we're going through the process right now.

We're looking at the impacts of.

What's the right, what's the right sort of.

Capacity utilization capacity to have our capabilities to have it in our breweries and optimizing that we're looking at optimizing our of our transportation. So to the extent to the extent we have any news on that but we will share with you with our Q4 earnings call.

As it relates to capital allocation with this increased investment nothing changes we continue to add.

The best portfolio in terms of growth and in terms of margins that grow from that margins generate a significant amount of cash flow that cash flow allows us to continue to prioritize investment grade rating returned capital to shareholders and to invest in the growth of our business.

Capital allocation strategy.

That hasnt changed and then the last piece of that is is acquisitions and.

Continue to say that acquisitions will be used as a portfolio of capsular.

And in large part we're going to use our venture fund too.

To fill those gaps.

Thank you. Our next question comes from Nathan <unk> of Bernstein. Your line is open.

Hi, everyone. Thanks for taking my question two quick follow ups, if I may 1st regarding the fresco Cleveland could you give us a sense of the economics of the agreement what would the impact on margins. What do you think you and coke can bring in to win in an already crowded space.

And then the second one on Pacific go I know you mentioned Brown glass bottles, which are the initiatives you have in place to mitigate this negative impact and when can we expect the typical to return to its previous growth profile. Thank you.

Sure relative to the brand we will be buying.

Concentrates from the Coca Cola company in manufacturing marketing and selling.

There there that brand through our network.

We're very excited about and frankly because of the strength of the prestige brands adjust rates as I said earlier, it's a growing brand.

It's a brand that's already use more than 50%.

The users use it as a mix.

With alcohol beverage, we think it's a natural play.

While also recognizing the locale and great flavor characteristics of that individual brands. So we're very excited about that we are making progress on brown glass I think.

It remains to be seen when we will be back to full proposition and obviously.

It had some bearing on our ability to deliver in the quarter as we said.

Brown glass has been a drag against otherwise outstanding results we have.

Expect as we get into the new fiscal year that that will balance out.

Quite a bit and that we will see Pacific I will get back to the double digit growth profile that we've enjoyed for the last several years.

Thank you. Our next question comes from Andrea.

J P. Morgan your line is open.

Happy new year.

Just to ask the beer margin question slightly differently, if I may.

Given the new Capex and depreciation one on giving guidance on that.

Basis.

Later, Quebec can you. Please pass the D operating margin assumptions for next year, but maybe below 39% fewer.

No additional no seasonal pricing, which you normally take I believe will come in November.

And it only would impact the fourth quarter.

Of 2023.

And then if there is any nonrecurring impacts of the Mexican peso.

Jason on that on any of the hedges and all that.

Follow up on the guidance for fiscal fourth quarter.

Thank you you are planning any impact of the new variant Balkan beyond what you were expecting so but if you can give us some comfort on why you were seeing on the trade in their ability.

For the distributors to get the beer.

On shelf and and also on premise.

Those commentary.

Let me answer the second part first and then I'll have.

Garth to answer the first.

As we said we have had a very strong start to our fourth quarter. Our depletions in the beer business are up as of our year to date trends in the month of December and we feel very comfortable and confident in our ability to deliver what we've said around the fourth quarter.

And the overall fiscal year <unk> to take the first one yes, so just on the EBITDA.

Yes, so first of all.

Good point, if it's actually something that we think about.

Do we want to provide that level of detail.

Very much.

Frontal upfront way.

Again as we go through as we go through sort of the planning process here and we look at the effects of inflation, we look at the FX depreciation we look at the effects of our.

Capacity expansion to the extent that we think that that's a meaningful way to show our financial results and segment will add.

Yeah.

Thank you our.

Our next question comes from the line of Guggenheim. Your line is open.

Please make sure your phone is on mute.

Oh, sorry, sorry.

Good morning, everyone and wish you all a very happy new year.

I'd like to talk back on <unk>.

You reported that brand will be reporting to the spirits or one segment or beer segments.

That's what level of margin should we think of should we be concerned about the level of marketing.

You would have to spend to launch for Brian Remember I mean, you said that to launch core in that sense.

Mitch.

Yes.

No brand I mean that you have to spend about $40 million. So I'd like to understand more about the technology in them that we should see comfortable for that Brian.

Sure well relative to.

The whole Preska story, we will bring that to U S.

And our next earnings scenario when we are when we are much further along on the exact launch planning and launch timing and we will give you a more fulsome view of what we plan to do or what we would say as we said in our release today. This will be going through our distribution network, which will largely.

Largely be driven by the gold network on the beer side.

And in some space here, we will go through the wine and spirits network, depending on the regulatory environment of the particular state.

Thank you.

This does conclude today's conference I'd like to turn the call over to Bill Newlands for any closing remarks.

Thank you everyone. I appreciate you joining our call today, despite the challenges faced thus far driven by the continued effects of the pandemic to global supply chain issues in a volatile and dynamic inflationary environment combined with severe weather events. We are on track to deliver again, another strong year of financial.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.

Yes.

Q3 2022 Constellation Brands Inc Earnings Call

Request a DemoDemo

STZ

Constellation Brands

Earnings