Q4 2022 Constellation Brands Inc Earnings Call
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Hello, and welcome to the constellation brands fiscal year 2022 Q4 full year earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It's now my pleasure to turn the call over to Patty Yahn, <unk> Senior Vice President of Investor Relations. Please go ahead.
Thanks, Kevin Good morning, and welcome to Constellation's yearend fiscal 'twenty two conference call.
My name is down.
And our country and our CFO as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures.
On his call yesterday, and that gets released or otherwise.
That's right he brand's dotcom.
Please refer to the news release and constellations SEC filings for risk factors, which may impact already.
Uh huh.
Turning the call over to Bill.
The final corner, that's like asking me when everyone My question for pricing.
For a long time.
Thank you Patty good morning, and welcome to our fiscal 'twenty to yearend call before I get started this morning I'd like to comment on the announcement made earlier this week related to the proposal from the sands family to Declassify Constellation's dual share class structure. According to the family's filing.
The proposal bring significant benefits that will accrue to the company and its shareholders, including increasing market demand from investors, who prefer single class structures.
Awesome is under consideration and what we negotiate it explicitly.
Special Committee, our board of directors and any agreement reached with the fans families will require the approval of that special committee as well as our full board of directors. In addition, pursuant to the terms of our proposal. It would require the approval of holders of a majority of our class a common stock do not all.
So hold shares of our class B common stock.
To remind everyone that Sam's family proposal was not made in connection with a corporate transaction constellation does not intend to comment further on our proposal unless and until a definitive agreement is reached the proposal is abandoned or otherwise deemed advisable in connection with any further public disclosure.
Dan Salmon.
With that let's proceed with the discussion of our excellent results and our guidance for fiscal 'twenty three.
As I reflect on our performance for fiscal 'twenty, two I'm extremely proud of how our team pulled together to deliver a year of double digit organic net sales growth and strong cash flow generation. Our team accomplished this while battling through year to date.
Including various supply chain challenges adverse weather events rising inflation rapidly shifting consumer preferences, and a host of other issues and the surrounding environment.
Through it all we stay true to who we are and remain laser focused on our consumers and building brands that people love.
We launched our consumer innovation, while continuing to invest in future capabilities needed to win long term.
We continue to deliver on our commitments to return value to shareholders and to serve the interests of all stakeholders by making a positive impact on our communities.
And the environment.
In fact earlier this morning as part of our ongoing commitment to environmental stewardship, we announced our new targets to reduce greenhouse gas emissions by 15% by fiscal 'twenty, five and to restore 1 billion gallons of water withdrawals.
A watershed and improved water accessibility in disadvantaged communities, where we operate in each case by fiscal 'twenty five.
That as a backdrop I'd like to frame up what we believe are key takeaways from our performance in fiscal 'twenty two as we head into our fiscal year first our strong overall performance continues to be headlined by our beer business, which delivered its 12th consecutive year of volume growth.
Our beer portfolio led by our Mcdowell and Corona brand families.
Sales growth of 11% and added 30 million cases of high end growth extending its leadership position as the number one high end beer.
Our supplier and the number one share gainer across the U S beer market.
Our wine and spirits business delivered strong organic net sales growth of 9% and solid gross margin improvement is slow here, our enhanced focus on consumer less premium a sanction in wine and spirits continued to yield benefits as our high end brands outpaced the overall U S wine and spirits cat.
Primarily driven by Kim Crawford, Naomi and the prisoner.
Third we continue to execute against our stated capital allocation strategy, returning nearly $2 billion to shareholders in the form of share repurchases and dividends in fiscal 'twenty two.
We continue to demonstrate this commitment with this morning's announcement of a 500 million accelerated share repurchase program, which when completed will bring us to about 75% of our 5 billion Henkel.
Our continued strong performance in fiscal 'twenty, two and the investments we continue to make in our core business.
Nice springboard for another successful year ahead now.
Now, let's dive a little deeper into our business performance in 'twenty two.
For the year ahead.
One outlook of our success, one hallmark of our success.
Again, our beer business over the years has been the strength and continuity of leadership.
Earlier this year, we announced that Jim <unk>, assuming the role Hudson our beer business.
Many of you know Jim has played a key role in the success of our beer business for many years and we look forward to further building on our momentum under his leadership.
Jeff <unk>, Paul Patrick who will continue to work with our beer operations team in Mexico to support ongoing brewery projects and Albert gun as well as the construction of our new brewery in the state of Veracruz.
Paul has been a driving force behind the success of our company, including our beer business for more than 35 years I look forward to continuing to work on GM and the rest of our team to accelerate traction of our high performing beer portfolio in fiscal 'twenty three.
There are several industry trends that provide a solid platform for our portfolio growth in the year ahead.
Total beverage alcohol servings per capita are expected to remain stable with growth of about 1% to 2% annually based on population growth expectations.
And the beer category is projected to continue with the high end segment, taking share from the mainstream segment.
Mexican imports, primarily driven by the constellation portfolio are expected to continue to drive traditional beer growth and will continue to be a key driver.
Overall beer segment.
Significant growth is projected in the flavors category, including Selzer's flavored beer or spirits flavored malt beverages with all categories exhibited strong future growth prospects.
Our on premise segment has rebounded and is expected to continue to recover to drive incremental category growth.
And finally, three tier e-commerce and digitally influenced sales have proven sticky familiar with revenue and share growing significantly in fact, this channel is forecasted to deliver over indexed relative.
Relative to other channels.
Each of these trends combined with.
Demographic tailwind that worked in our favor either alliance with a core strength of our beer business or areas, where we're investing to build the capabilities needed to compete and win.
We have one of the most focused and highly efficient portfolios in the industry with a long runway for growth ahead of our inventory position has been rebuilt and we have plans to invest aggressively behind our brands in fiscal 'twenty three.
We also got some exciting new consumer led innovation on the way.
The download, especially yeah cause the number to the beer brands and dollar sales in the country and has significant distribution runway over the medium term to facilitate mid to high single digit total annual volume growth in the off premise.
Download, especially out currently under indexes with non Hispanic consumers that has strong momentum and grew household penetration seven 1% I wish it was Saturday, but it was fun with these consumers in the past two years, yet theres still significant opportunity to close the awareness gap in order to drive further.
Household penetration.
For reference the Delaware, especially out currently has only 80%.
The household penetration of Corona extra.
We believe increasing total market penetration for modelo, especially out to Corona extra allowance will enable access to more than 2 million incremental consumers.
And especially now as the number five draft brand in the entire category yet it only has 411% national distribution.
This distribution opportunity along with the velocity of the brands the levers makes madela, especially got off track our biggest on premise priority.
And the F&B space are Mcdonald, Colorado brand family has become an important growth contributor to our portfolio.
Number one <unk> in the U S beer market.
For Modelo Chiller, we're forecasting double digit CAGR in the medium term driven by expanded channel distribution with new pack sizes formats and flavors.
Awareness levels from Mcdonalds July are low relative to other flavor categories and large competitors.
We expect to improve awareness and accelerate growth of modelo, which allowed us to maximize social and digital media investments to broaden our demographic reach to general market consumers as well as Spanish language TV to stay connected to core Hispanic consumers.
Within our chill out a lineup we're aiming for additional growth from a product line that grew over 30% last year has tripled in size over the past five years, and where we own almost 50% of the market nationwide.
In fiscal 'twenty, three we're introducing a 12 well pad.
<unk> cell and a neutral out of flavor, Iran, Picasa and Orange and Chile flavor. We're also extending the modelo brands into new spaces to bring authentic Mexican flair to both lighter beer styles and flavored cocktail inspired beer modelo.
<unk> is a premium sessional licensor base with low calories and carbs rolling out in three test markets Charlotte and Houston.
This is a full flavored beer that fit an active lifestyle.
Another product aimed at the low calories crowd as modelo cancer retail style cerveza.
The fruit juice NXP popular Mexican beverage, it's rolling out in Atlanta, San Diego, and Arizona and celebrates the strong exit and culture and heritage we see throughout the U S.
Shifting gears.
Cited by the resurgence of Corona extra which continues to be one of the most loved brands in the U S beer market well.
Modest growth is projected for Corona extra and fiscal 'twenty three this branches over index brand equity, indicating higher growth potential both for the master brand and broader brand family, including younger and multi cultural consumers, where we see significant opportunity to increase by rates.
Rona extra also has a fairly high household penetration, it's still lags behind some of our competitors.
Distribution opportunities also exist for Corona Premier is there are still significant effective distribution gaps versus corona extra and well.
I'll buy rates continued to grow for Corona premier it still trails behind competing brands, indicating significant opportunity to increase velocity.
Premier because currently underdeveloped in the canned format relative to its competitors.
Variance indicates that cans are the preferred format for like beer drinkers.
And we see a significant unlock with the launch of new packages and format size.
Finally consumers have embraced corona premier in the on premise and our traffic focus this year is designed to accelerate that trend.
But the specific brand, we're forecasting 10% to 15% total annual volume growth in the medium term from distribution.
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We're prioritizing growth in key DMA specific <unk> to expand our points of distribution in key cities, particularly in the west and Midwest regions of the country, which will be supported by digital media to reach target legal drinking age Gen Z consumers.
We'll also add debate consumer and customer specific national accounts retail programs as well as Seo marketing and sponsorships to support targeted investment partners.
Specifically I don't have the hottest draft volume trends in the category. During the last 52 weeks followed closely behind Mattel that trend along with planned unique activations physicians to southern power to continue to gain awareness with consumers.
We've been increasingly focused on upping our game in the spirit space RTD space with unique and compelling new brands.
Last quarter, we announced new agreement with the Coca Cola Company.
S market to create a new state of mind, a spirit based ready to drink cocktails using but.
Fast growing prestige brand.
Prescott Mist will debut this fall and Fox risks and to heal up Obama wafers.
In support of our collective fiscal III portfolio initiatives, we will continue to leverage our official sponsorship of USD. The college football playoffs, as well as numerous NFL NBA and MLB teams Youll see a significant increase in media investments to drive sustained awareness.
Schumer demand.
Overall, we plan to recruit new drivers through advertising investments in digital media and localized programming.
In addition, our portfolio initiatives will be enabled by increasing adoption of our shopper first shelf approach, which continues to drive results and gain traction. We completed 14000 shopper first shelf sets last year, our highest total today.
As you can see our beer portfolio is well positioned to capitalize on prevailing category and consumer trends by leveraging our core brands competitive advantages for existing and new platforms to deliver our medium term net sales growth target of 7% to 9%.
Now, let's move on to our wine and spirits business.
The confluence of factors impacting this business in fiscal 'twenty, two including a major distributor transition migration to rap.
Inflationary headwinds and Covid related logistics and supply chain challenges.
Business delivered strong organic net sales growth of 9% and solid gross margin improvement for the year.
Marketplace performance for our higher end brands continue to outpace the overall U S wine and spirits category, primarily driven by the Army Kim Crawford and the prisoner wine company.
And our increased focus on our higher end price segments yielded benefits as our fine wine craft spirits portfolio achieved double digit net sales growth driven by the prisoner wine company high for us.
Our innovation efforts also produced excellent results with growth contributions coming from my only Cabernet Sauvignon, Kim Crawford illuminate selling all blocks, which together both help the top two spots among new products introduced over the last two years as well as the prisoner varietal extensions high west ready.
It's a certain package deals and Woodbridge is buttery Chardonnay and three liter box.
Heading into fiscal 'twenty three our strategic focus includes commitment to continued premium amortization margin expansion and accelerated growth in DTC channels and continued growth in our international business.
Our innovation strategy will be focused on prevailing consumer trends of premium amortization digital betterment convenience sustainability and enhanced flavor profiles, we have a strong innovation pipeline planned for the coming year, which includes the launch of a second gen and you're only red blend.
Kim Crawford tea wine spirits.
Unshackled, Chardonnay, and Pinot noir, and these commvault ready to serve cocktails.
Today, we announced two small additions to our wine and spirits portfolio to complement our premium innovation efforts in line with constellation's ambition to be the number one player on fine wine and among the top five ultra luxury and icon lines. We have acquired the highly acclaimed already wine brand.
Uh huh.
This demonstrates our commitment to building a strong omnichannel business, Dennis Foods category leadership, DTC, a three tier e-commerce , while building our fine wine portfolio with a diverse collection of best lines from top line regions around the world.
We also require acquired the remaining portion of Boston cocktails, which began in 2018 as constellation Ventures' focus on female founders.
Austin cocktails as a leader in the fast growing premium RTD segment of the U S beverage alcohol market.
Currently is distributed in 28 states posted depletion growth of 135% in calendar 'twenty, one as RTD trends continue to rise in popularity among consumers.
Overall, we expect fiscal 'twenty three to be a dynamic year, and our wine and spirits business, a tighter focus on higher end brands strengthens the business and strategically positioned for future success.
Before I wrap up I'd like to provide a few thoughts on our investment in canopy growth.
We continue to believe that the cannabis market represents a significant long term growth opportunity and we are encouraged by the work cannot be used.
To further sharpen its strategy right sized its operating expense structure, and our capital investments and achieve profitability in Canada, while strengthening its competitive positioning in the U S.
In their most recent quarterly results cannot be maintained the number one share position in premium flower products in Canada and drove record performance for its <unk> and stores and backhaul product lines. We are encouraged by recent Canadian government changes to beverage equivalency regulations, allowing consumers to Peru.
<unk> cannabis beverages, and greater quantities and in the U S. Cannabis THC strategy is anchored by strategic relationships with two profitable msos acreage and terrorist attack both of which are positioned in high growth north eastern markets.
<unk> continues to progress there've USDA strategy by establishing a scalable footprint best in class products and national distribution networks required to unlock the U S market.
Federal legalization.
In closing I once again want to thank our team as well as our valued distributors and retailers from your efforts in delivering another strong year of performance and we're just as excited about our prospects for growth in the year ahead.
Our beer business led by our core iconic brands and consumer led innovation is poised to continue extending its leadership position in the high end of the U S beer market.
<unk> focus on premium innovation and the wine and spirits business is producing results and we have plans to further focus our wine and spirits portfolio towards the higher end and fiscal 'twenty three we.
We remain committed to our previously stated capital allocation strategy and we remain on track to deliver our 5 billion commitment by the end of fiscal 'twenty three.
And finally I'd like to leave you with this we operate in a very dynamic and seemingly ever changing environment, but over the years. One thing has remained constant.
I recently came out with its annual rankings of CTG growth leaders constellation with recognized for being one of the top performers yet again.
Constellation has been recognized as an IRI across leader more than any other CPG company in our peer set over the last 10 years. That's something we are extremely proud of and we look forward to continuing to keep this momentum going into our new fiscal year and with that thought I would like to turn it off.
Over to Garth who will review our financial results from 22, and our financial focus for 'twenty.
Thank you Bill and good morning, everyone.
Fiscal 2020 to Mark another year of solid financial performance and shareholder value creation, despite a myriad of headwinds our fortitude and resiliency.
Our strong operating results and powerful cash flow generation allowed us to return almost $2 billion in capital to shareholders for the year.
Additionally, as Bill mentioned this morning, we announced that we are entering into an accelerated share repurchase or ASR agreement to repurchase $500 million of shares during Q1 of fiscal 2023.
Please note that the ASR agreement substitutes that $500 million share repurchase referenced in this morning's earnings release.
Once we complete the ASR in Q1 will be approximately 75% of the way toward achieving our goal of returning to $5 billion to shareholders by the end of fiscal 2023.
Alright fiscal 2023 in a minute, but first let's review full year fiscal 2022 performance in more detail, where I'll generally focus on comparable basis financial results.
Starting with beer net sales increased 11% landing in the upper end of our previous guidance range, driven by shipment growth of approximately 9% and favorable price, which as expected slightly above our typical 1% to 2% rich.
These <unk> were partially offset by unfavorable sales mix, primarily driven by a shift in package types and the return of off premise tracked skus.
Depletion growth for the year came in at nearly 9% driven by the continued strength of a delaware specially out and Corona extra as well as the strong a strong return to growth in the on premise channel.
Off premise volume accounted for approximately 11% of the total beer depletions during the fiscal year and grew strong double digits versus last year.
As a reminder, the off premise accounted for approximately 50% of our beer depletion by pre Covid and was only 6% of our depletion volume in fiscal 2021, as a result of furnace shutdowns and restrictions due to COVID-19.
When adjusting for two extra selling days in the year, the beer business generated approximately 8% depletion growth.
As previously guided cases shipped to continue to exceed cases depleted during the fourth quarter, which resulted in distributor inventories returning to normal levels at fiscal year end.
Moving on to peer margins as expected beer operating margin decreased 110 basis points versus prior year to 40%.
Benefits from favorable pricing marketing as a percent of net sales and mix were more than offset by unfavorable Cox.
The increase in costs was driven by several headwinds that included the following.
First the previously announced obsolescence charge of approximately $80 million due to excess inventory of our hard seltzer skus, resulting from the slowdown in the overall category.
Second increased brewery costs, driven by incremental head count labor inflation in Mexico, and increased spending related to capacity expansion.
Third increased material cost due to rising commodity prices and inflationary headwinds that on average landed at the mid to high single digit increase range predominantly driven by wood pallets cartons steel copper and aluminum.
Please note that this range includes the impact of hedging where possible.
And last one step up in depreciation expense largely due to the incremental 5 million hectoliter at <unk> completed in early fiscal 2022.
These headwinds were partially offset by favorable fixed cost absorption driven by increased production levels in fiscal 2022 versus last year.
On an absolute dollar basis marketing investments increased versus prior year. However, due to a favorable top line leverage marketing as a percent of net sales decreased 40 basis points to nine 2% versus prior year.
Moving to wine and spirits.
Net sales declined 19% as shipments declined approximately 34%.
Excluding the impact of the wine and spirits divestitures organic net sales increased 9%, mainly driven by shipment growth of nearly 3%.
Well mix increased pricing smoke tainted bulk wine sales related to the 2020 wildfires.
Organic shipment growth was largely driven by Omi, Kim Crawford and the prisoner, partially offset by declines for some of our key mainstream brands.
Depletions declined approximately 6%, mainly driven by circa Robert Mondavi private selection and Woodbridge.
These declines were partially offset by the robust growth of our higher end brands led by the prisoner wine company up 16% OEM high west of 13% and Kim Crawford up 9%.
Shipment growth was ahead of depletion growth for the year, mostly reflecting impacts from our distributor transitions during the coming year, we expect to right size inventory levels in the business.
Operating margin decreased 108 <unk>.
180 basis points to 22, 7% as mix benefited from the divestitures and favorable price were more than offset by increased marketing and SG&A spend as a percent of net sales and increased costs.
Higher costs were driven by increased freight and warehousing costs, partially offset by net favorable fixed cost absorption lower break raw materials and cost savings initiatives.
Marketing and SG&A as a percent of net sales increased versus the prior year largely due to the loss of top line leverage resulting from the divestitures.
Now let's proceed with the rest of the P&L.
Fiscal 2022 corporate expense came in slightly higher than our previous guidance, finishing at approximately $238 million up 4% versus last fiscal year.
This increase was primarily primarily driven by higher consulting TV spend and increased depreciation.
These headwinds were partially offset by a decrease in compensation and benefits and a favorable foreign currency impact.
Interest expense for the year decreased 8% to approximately $356 million, primarily due to lower average borrowings partially offset by higher weighted average interest rates.
Our full year couple of basis effective tax rate, excluding canopy equity and earnings came in at 17, 5% versus 18, 2% last year, primarily driven by higher level of stock based compensation benefits.
Effective tax rates on our four businesses came in lower than expected during Q4 driving tax rate favorability versus our previous guidance.
Moving to fiscal 2022 free cash flow, which we define as net cash provided by operating activities less capex.
We generated $1 $7 billion of free cash flow, which reflects strong operating cash capex totaled approximately $1 billion and was in line with our most recent guidance. This included approximately $850 million of Capex for our Mexico beer operations expansion.
Pivoting to our full year fiscal 2023, P&L and cash flow targets for.
For fiscal 2023, we expect comparable basis diluted EPS to be in the range of $11 20.
The $11.50, which excludes canopy equity and earnings.
For fiscal 2023.
Beer business is targeting net sales growth of 7% to 9%.
Reflecting one to two points of pricing benefit within our Mexican product portfolio, which is in line with our typical pricing strategy and operating income growth of 2% to 4%.
This implies operating margin to approximate 38%.
As previously discussed the implied decline in operating margin is predominantly driven by gross margin compression as benefits from price and our cost savings agenda are expected to be more than offset by the following cogs headwinds.
We are expecting elevated inflationary pressures to continue throughout fiscal 2023.
In estimating inflation on the commodity spend component of raw and packaging materials to land on average in the high single digit to low double digit range, including the impact of hedging whereabouts.
The significant inflationary pressures are expected across numerous cost components, but largely driven by aluminum carbons wood pallets and steel.
Second similar to fiscal 2022, we are expecting incremental brewery costs driven by labor inflation in Mexico is estimated to range between 5% and 6%.
Well, it's incremental head count and training expenses to support our continued capacity expansion initiatives.
Third as a result of these brewery expansion plans, we are estimating a step up in depreciation expense as additional capacity is planned to come online throughout the fiscal year.
For fiscal 2023, we are targeting total beer segment depreciation expense to approximate $295 million or an increase of approximately $45 million.
And finally, we expect margin headwinds related incremental logistics costs and fuel and freight rates for both rail and truck, which is expected to drive an increase in the low to high single digit range.
As previously stated we expect to execute against our aggressive cost savings agenda to help partially offset these headwinds.
Along with expected favorable fixed cost absorption driven by increased production levels.
As it relates to beer marketing spend for fiscal 2023, we expect marketing as a percent of net sales the land and the 9% to 10% range.
Shifting to wine and spirits for fiscal 2023, the wine and spirits business is targeting net sales to decline 1% to 3%.
While this range is outside our medium term growth goal for the business. It is an anomaly driven by the significant overlap we have from our distributor transition as well as revenues associated with sales of smoke tainted bulk wine.
Both are anticipated to be onetime in nature, and thus, we do not expect them to be repeated in fiscal year 2023.
Excluding these impacts we expect underlying wine and spirits business to return towards targeted goal of 2% to 4% net sales growth next fiscal year.
On the bottom line, we expect operating income to increase in the 4% to 6% range. This implies operating margin to approximate 24, 5%, which represents almost 200 basis points of margin expansion.
This margin expansion reflects benefits from price mix and cost saving initiatives to help more than offset significant cost inflation headwinds most related to freight and packaging.
Cost savings initiatives include optimizing the Appalachian mix across our portfolio and decreasing the weight of our glass bottles, which also has positive environmental impacts.
This is a good spot update.
Everyone on our white spirits operating margin expectations in the medium term.
Since we provided our original targets back in 2019, the operational environment has changed considerably.
<unk> pressure stepped up significantly worse driving increased freight and warehousing cost in fiscal 2022 that are expected to continue well into fiscal 2023.
Additionally, while we continue to remove stranded costs from the business, we strategically decided to reinvest more of these savings back into the areas of businesses that are driving growth.
Specifically DTC e-commerce are fine wine and craft spirits portfolio and consumer like products that are fueled by category <unk>.
As such we've updated our operating margin goal to reflect these impacts and now expect medium term operating margins to migrate to a range of 28% to 29% and EBIT margins that approximate 30%.
<unk> margin margin structure for our industry.
Before we move on to guidance for the rest of the P&L I'd like to highlight the new additions to our wine and spirits portfolio that Bill mentioned earlier.
As part of the evolution to the high end.
We acquired lingua franca as well as the remaining interest in Boston cocktails from our ventures portfolio.
Two businesses positioned in categories with significant growth tailwind behind it.
From a finance perspective, these transactions collectively along with my favorite neighbor.
Which was fully acquired in fiscal 2022.
Almost entirely self funded through the sale of one of our successful venture investments, which generated a significant return on investment.
Other fiscal 2023 guidance assumptions include the following.
Corporate expenses to approximate $230 million interest expense to be in the range of $350 million to $360 million.
In a comparable tax rate, excluding canopy equity earnings of approximately 20%.
The increase in our tax rate is mainly driven by a lower level of anticipated stock based compensation benefits versus fiscal 2022.
Rounding out the P&L Noncontrolling interest is expected to approximate $40 million and weighted average diluted shares outstanding are targeted at approximately $198 million.
This share count assumes we executed a $500 million of share repurchases in Q1.
We plan to repurchase repurchase additional shares throughout the remainder of the fiscal year. However, we do not know the timing of case and as such you should.
Share repurchases have been excluded from our guidance assumptions.
We will continue to update our outstanding shares Accordingly, when we report quarterly earnings throughout the fiscal year.
Additionally, this EPS guidance range does not reflect a prolonged impact from the volatility associated with the ongoing headwinds we've been experiencing about fuel prices and other commodities as the sustained impact of the recent geopolitical events remains unclear.
Thankfully, we have no employees, who live or work in Russia, where you trade.
And we have minimal minimal commercial exposure to this part of the world.
That said, our thoughts and prayers are with those impacted by this growing humanitarian crisis.
And we wish for quick resolution to this conflict and return to peace in the region.
Turning to cash flow, we expect fiscal 2023 free cash flow to be in the range of one three to one $4 billion.
Which reflects operating cash flow in the range of two six to $2 8 billion and Capex of one three to $1 $4 billion.
Including approximately $1 2 billion target for Mexico beer operations expansion.
To wrap up I'd like to reiterate that our capital allocation strategy remains unchanged in fiscal 2022 below our strong operating results and powerful cash flow generation capabilities enabled us to return almost $2 billion in capital to shareholders as part of our overall goal of returning $5 billion by the end of our fiscal 2023.
Yeah.
Our capital allocation priorities augment our organic growth strategy to enable strategic reinvestment, where we see category talents. We believe this strategy combined with excellent execution and returns to shareholders positions us to be a top tier sharp top tier shareholder return generator for many years to come.
With that.
Happy to take your questions.
Thank you will now be conducting a question and answer session. As a reminder, we ask you. Please ask one question and then return to the queue if you'd like to be placed in the question queue. Its star one to be placed into question Hugh.
One moment, please what would you poll for questions.
First question today is coming from Lauren Lieberman from Barclays. Your line is now live.
Great. Thanks, so much I wanted to talk just a little bit about corona.
<unk> I was actually surprised that in your prepared remarks, you talked about expecting more modest growth from Corona extra in 'twenty three but the momentum on that brand has been so strong. This year you know my understanding of anecdotes around performance and the superbowl, Terry and tremendous so just curious why expecting things to slow down the debt in 'twenty three.
<unk>.
Well, we're actually very optimistic that we'll continue to see strong Corona extra performance, obviously as you pointed out it was a very pleasant.
Situation for us this past fiscal year, and it's significantly outperform but we expect it but we also have a lot of other priorities and the Corona brand family as you know as I stated in my remarks, we expect premier to be a heavy focus both in the on premise as well as building out our distribution capabilities in the off premise.
So we're just trying to be sort of aware of that we're going to have a lot of overall work across the family.
We expect to continue to see a corona extra.
A continuing growth driver in our overall business.
Thank you. Our next question is coming from Dara <unk> from Morgan Stanley . Your line is now live.
Hey, good morning.
So I wanted to focus on beer margins first just how much visibility do you think you'd have on the fiscal 2023 beer margin guidance given there's a number of moving pieces. There's also a tremendous external volatility.
<unk>, how hedged are locked in on contracts you are on some of your key commodities and Mike and what might be some of the bigger risk points in terms of margins and then second just on the pricing front.
Playing Devil's advocate why not be more aggressive than the long term, 1% to 2% algorithm I'm, just having a hard time, believing that a $1 <unk>.
Incremental per case cost on beer is going to be that much of a factor in a trade down decision relative to consumers seeing much much higher dollar pressure from other areas, whether it's grocery gas or electricity costs. So just your thoughts around why not be more aggressive on pricing, particularly given the market share volatility and if youre seeing any signs of true.
Deaths so far.
Thanks, Pierre I'll take the first part of that question on margins and the bill coming out on pricing.
As we start to tell you at the second half of last year.
Shneur requirement, obviously, you've got that gotten a little bit deeper and more protracted than anyone expected.
And so.
That's why we Larry folks in January as to the facts, where it would be facing some additional headwinds this coming year.
Typically we're seeing inflationary increases on a year over year basis, and that kind of low to mid single digit range and this year, we're experienced them in the high single digit to a.
A low to mid <unk> mid <unk>.
Double digit range.
Are you seeing that across things like glass, which is our biggest component of beer, which is up 6% cartons are up 17% crowds were up 26% with costs up 35%.
So costs are definitely under pressure for sure that being said, we think that we're fairly well positioned as we enter into the year to be very proactive around this we've gotten more aggressive with our hedging policy, our IC practices I shouldn't say.
We typically enter a year somewhere in the neighborhood of sort of 50% to 60% on any given line.
This year, we've we've taken a more defensive posture to make sure that were really protecting the P&L as we entered the year this year.
About 75% of aluminum, 70% of natural gas, 60% of the core and 90% of diesel. So we're in a pretty good spot that being said as you articulated there's a lot about a lot of volatility around commodities and that's what we're watching as we go through the year and we're being opportunistic to layer in either even further hedged.
As we see weaknesses.
On a day to day basis. So we think we're pretty good shape, but certainly there is still some there's still some exposure just given that the depth and the duration of the inflationary environment. We're currently in.
So relative to your question on price, we certainly understand the question.
Behind it so let me let me remind you how we price we repriced, we price on a SKU by SKU basis market by market basis.
And we're going to continue to do it that way. We also are probably a bit more judicious on the price.
Perhaps we could be the reality is we need to be sensitive to our consumers.
It's a challenging time for our consumers.
Across many many industries.
And it's our view that this is not the time to try to put extra burden on one of the critical things that many people have in their in their basket, which happens to be our beers. So so we're a bit probably more judicious then we might be able to be but we think this is in the long term interests. We always say, it's a whole lot easier to keep her concern.
Then to lose them and have to reacquire and that's part of what drives our thinking.
Thank you. Our next question is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.
Alright. Thank you good morning, maybe just a little bit of a follow on question to Bill. What you were just mentioning I was just hoping to get some color from you on the consumer and sort of the spending behavior. So far this year you know I certainly know your products are premium but.
I'm curious are you seeing any signs of down trading pressure and then could you talk about how well you think your portfolio will hold up if you know our when we enter a recession I know bill in the past you've kind of mentioned your portfolio its pretty defensive so I'd just be curious to kind of hear you revisit that for us. Thanks.
You bet.
Unfortunately, so far things are holding up very well.
One of the things that I've seen over the course of my career in the alcoholic beverage business, yes. Many many times when there is a recessionary environment consumers are still interested in our category and almost view it as a small luxury that they can still experience where they might have on buying a new refrigerator or something like that.
That's a bigger purchase if theyre, having personal challenges they still want to engage in some things that that they are enjoying their life. Unfortunately, our category is one of those so so far this continuous to haul and I think it speaks directly to my answer to Dara a minute ago, which is.
We're trying to be sensitive to our consumer and to make sure that that we continue to provide our great products to them.
Pricing that that's reasonable given a tough environment.
Thank you. Our next question is coming from Chris Carey from most Fargo. Your line is now live.
Hi, Thanks, so much just one follow up on the pricing and then related question.
Are you planning on pricing on Corona or is that all going into modelo any other skus can you just maybe comment on where the pricing is going to be going in and then just specifically on Modelo. I think you said mid to mid single digit to high single digit in the off premise.
Can you maybe review expectations for on premise penetration for this fiscal year.
And just in general where you see that as far as kind of a developing your own credit score for that specific offering.
Sure you bet. So I'll just remind you what what.
I said earlier, which is we look at pricing on a SKU by SKU basis, and a market by market basis. So it's not any individual.
Let's say.
Where we focus our pricing, it's really on a SKU by SKU a brand by brand. So there's not any generality.
To your question on a particular brand relative to Mcdonald's.
I also stated earlier one of our biggest opportunities is really on premise draft with a number five player.
Strauss is only 11% penetration nationally in that particular format, that's a great opportunity for us to expand our reach.
Particularly on the Delaware, especially out interestingly enough. It was only beaten out and it's broke last year by Cisco, which I guess is not the worst thing.
But certainly modelo, we think has great opportunity.
To continue to expand its reach particularly as we continue to see much greater penetration in non Hispanic households, that's good on both the on premise and off premise numbers.
That's both you and I quoted earlier.
Thank you. Our next question today is coming from Columbia Gulf Robalo from Credit Suisse. Your line is now live.
Hey, everybody.
Can you maybe talk about the logic behind doing an ASR versus just buying in the open market over the course of the first quarter.
Sure. Thanks, Scott I'll look you know we're going to use the same approach. This year that we used last year, which is we're going to use all sorts of tools that are available to us too.
To buyback of shares that we need to buyback in order to meet our obligations. So last year, we used an ASR or the <unk>.
Second quarter. We also took advantage of it tend to be five to 10 million ATM program. So we're going to do that then we can optimize the <unk>.
Timing of the of our repurchases as well.
Appropriate the dollar cost averaging.
A dollar cost averaging it out here to make sure we're getting the best value for us.
We opted to use the ASR in the first quarter.
We're going to get the benefits earlier in the year and and honestly I think that you know.
It's a good time, possibly by them.
Thank you. Our next question today is coming from Vivien <unk> from Cowen and company. Your line is now live.
Yes.
Hi, good morning.
I just wanted to offer I think it's really reassuring to investors how consistent you guys have been in terms of the commentary on capital allocation today. So thank you for that in.
In terms of my question I also wanted to focus on pricing and the health of the consumer a bit perhaps pivoting to the wine and spirits business. Clearly you guys have done a ton of work to premium nicer portfolio. So given the portfolio evolution in wine and spirits, how does that change your thinking around your ability to take price there. Thank you.
I think it's.
Largely depends on the sector of the mining business in which we're discussing.
As you know mainstream is actually down although we're gaining share in a down in a down market and that's the way we think about it let's let's gained share in the mainstream of the business on the other hand as you move up the price ladder Youre seeing significant acceleration in many of our brands are performing extremely well and it does give us some opportune.
<unk>.
To increase our pricing and Stuart probably even a better job of covering some of the inflationary increases.
That we see in the beer business. So I think you should expect them to see a bifurcated answer where we need to be sensitive to what the marketplace is giving us some of the mainstream but there's probably some opportunity as you look at the premium end up sections to be a little bit more aggressive in.
In the pricing arena.
Yeah.
Thank you. Your next question today is coming from Nik Modi from RBC capital markets. Your line is now live.
Yes. Thanks, good morning, everyone. So just a quick housekeeping item.
The real question just Bill if you can just comment given the rules around air Sars and material nonpublic information.
I presume that constellation is not sitting on some news regarding a large M&A transaction. So that was just a clarification and the real question is.
Any update on how March Depletions look some of the channel work that we did suggested some very strong results that look to be an acceleration sequentially from what you guys showed this February quarter. So any any thoughts on that would be helpful. Thanks.
Hey, Nick this is Garth I'll take the first part of that and I'll turn it over to Bill.
I think it speaks for itself that constellation is fully aware of it.
Complies with all of our obligations under state and federal Securities laws.
And relative to your question of how Mark Schwartz, Nick we're pleased that it's at least consistent with our annual algorithm. Despite huge comps that we face March of last year. So.
We're pretty pleased that we got off to a good start.
Thank you. Our next question is coming from Bryan Spillane from Bank of America. Your line is now live.
Hey, good morning, guys.
So I had a question about just the wine and spirits margin outlook medium term and one thing just in terms of thank you gave kind of two sets of numbers one was 28% to 29% operating margin and then the other was approximating a 30% EBIT margin over time.
Or are those different or are we just saying that we still think we can get back to the 30% margin was a little confused about the language there.
Yes, sure so on the operating profit margin question.
Question, Yes, so we are coming into 2029 the difference between operating margin EBIT is.
The addition of our while we take it from.
And equity earnings.
In Opus one.
Thank you. Our next question is coming from Nadine sorry, Rod from Bernstein. Your line is now live.
Hi, Good morning, everybody I wanted to touch on Corona hard seltzer for a little bit so that brand continues to underperform the broader seltzer market. So what's your strategy going forward with the brand.
And then maybe taking a step back a broader question related to this what lessons have you learned from launching Corona hard Seltzer and how this is going to influence your approach to rolling out innovation in the future I think Tim you called out a number of those in your prepared remarks. Thank you.
Obviously, the seltzer market has developed very differently than what we had anticipated and frankly, it's been more of a challenge than what we had anticipated as well.
As you know this year, we're doing a number of things we're repackaging as we said in prior quarters.
We are getting much more focused on where we bring differentiated products rather than me too products into that particular sector. Although we still feel that that's going to be a growth segment of the overall beer business and we're going to participate at so relative to lessons learned I think.
A couple of things are are always important.
It's important to test.
Really doing tests as it relates to arm adult franchises to make sure that we have consumer propositions that are best of class and that are going to win with consumers and we're.
We're going to continue to operate under that approach going forward.
Thank you. Our next question is coming from Rob <unk> from Evercore. Your line is now live.
Terrific. Thank you very much.
Just kind of swinging back to the question on Seltzer and taking it a little bit broader.
Clearly a lot of the excitement on that segment has gone you know from your perspective.
Is there actually a silver lining in that such that retailers and distributors will spend more time energy on your brands and that should be something that you should benefit from.
Going forward and then connected to that.
Are you starting to get a little bit more of the shelf space that you guys have earned.
Given the tremendous brands in velocity that you've had and the fact that you've been under shelved in the past. Thank you.
Robert you've definitely put your finger on a benefit of the scenario that the seltzer business has not been quite what we expected which is its very mixed at pretty good. So if the market demand for beer, we sell the better mix. So that's the flip side of the shelter business for US is not developed quite the way we had anticipated.
As you pointed out.
Did you make a very good point relative to shelf space you know one of the one of the things that occurred during the pandemic as many retailers just didn't redo their shelves to the degree that we would have expected or that you would see on a typical annual basis and there is no question that the growth profile of our overall portfolio not only demands.
It really should have.
More shelf space. So this is going to be a critical part of our sales organization is driving for this year is to broaden our reach and package sizes in depth within within stores I mentioned, the shopper first shelf initiative, which we actually had a pretty good year on last year, we expect to extend out this year. It's good for the category, which is good for us.
So a lot of work will be done on that very topic. This year as you pointed out and we think it'll be in everyone's interest ours, plus the retailer to give our brands more shelf space. They garner.
Thank you. Our next question is coming from Kevin Grundy from Jefferies. Your line is now live.
Great. Thanks, Good morning, everyone. Firstly, a housekeeping question on the Sands proposal, which bill I think you can comment on when do you expect the board to vote on that proposal before potentially putting it out to the class a shareholders and then the broader question Bill just your perspective on the slow start to the year for the U S beer industry. So your data looks good.
The results were obviously very good today the Nielsen data continues to look good in the month of March for constellation and probably even a bit better given some of the noise. We understand in the Nielsen data in the last week in March but I just wanted to get your perspective more broadly.
What do you think is driving that I think there is some year over year comps at play to sell through slow down as you commented, but anything youre seeing as potentially sort of concerning that you're watchful, particularly around the consumer that may sort of play out here as it pertains to your portfolio. So your thoughts there would be helpful. Thank you.
You bet. So just relative to your question about the Sam's proposal, we've been advised the transactions of this nature typically takes 60 to 90 days.
Beyond that it's really out of our hands. The management is not involved in the discussion the discussions between the <unk> family and the special Committee of the independent directors of the board. So I don't have it exact answer to that question, but we even had by 60 to 90 days is very typical so we shall see.
Relative to the start of the year.
I think everybody recognized January what's been a bit of a tough month.
I think everybody in the industry, a little bit of that with where new year's fell there were weather events superbowl about pushed out an extra week versus what it was the year before but I think the exciting part for US is it was a very very strong February and as I responded to <unk>.
Questions ago.
So it's been very strong as well and the strike learning fiscal year. So I don't think there's anything that's overarching issue within the category and it's certainly not as it relates to our business.
Continue to be very pleased with how our brands are performing and as Scott pointed out in his prepared remarks, we've gotten our inventories back in the right positions. So brands like the cyclical, which we were a little challenged for a while on brown glass, we have gotten through that.
Some of those types of things, which were sort of tetra.
Detrimental to another otherwise very strong performance here, we've now fixed so we're in a much better position heading into this fiscal year than we were last year, where there were just a lot of extraneous things that were not helpful to us.
Thank you. Our next question today is coming from Andrea Teixeira from Jpmorgan. Your line is now live.
Thank you I just wanted to double click on the opportunity to improve mix with the shift to on premise.
You had I think two 8% priced sneakers expansion in the quarter can you still have around my calculation is around 100 basis points tailwind.
And do you expect this to be price mix to be embedded in your guide around 400 basis points I, just want to double check that and and one and one in spirits I think Brian Vivien asked good questions regarding the outlook.
Is that any reason why it was a bit disappointing I know, you're making a lot of investments soup immunize the portfolio.
But anything to kind of give us more call for that.
<unk> please.
One impact what is impacting there and if there is a better outlook towards the long term. Thank you.
Sure Let me, let me touch on the second piece first.
We're still very pleased with the development, particularly at the higher end of our wind business as Greg pointed out we have two or three one off items that were a bit challenging based around the distributor transition that occurred last year and some sale of smoke tainted wine from prior years, if you exclude those things weren't up.
Growth profile for our wine business, and that's being driven by the higher Ed.
Work that Robert Hanson or the rest of the team have done too.
To refocus our attention towards a high end internal growth sector of the wine business I think is exactly what we expected to do it's the strategy strategy, we began and undertook.
A couple of years ago, and we're continuing to execute against it.
Despite significant headwinds as I said earlier in the mainstream sector of the business. We're very pleased with how things are developing at the higher end.
And we're comfortable that our longer term algorithm up 2% to 4% in the wind business will be achieved sooner rather than later.
Thank you.
Relative to your first the first part of your question.
If I understood. It correctly, you were pointing out that in Q4, we had sort of a 4% points of pricing.
And then whether or not that's going to continue.
Our outlook for next year.
It assumes that we're going to get more in line with our typical 1% to 2% pricing.
That's.
Sticking in line with our normal Oliver.
Thank you. Our next question is coming from Steve powers from Deutsche Bank. Your line is now live.
Yeah, Hey, great I actually wanted to follow up on on both of those those two are those two questions and your answers there so on the on.
On the beer side of things, the 1% to 2% pricing outlook, so you're saying that that's inclusive of any mix mix impacts I want to clarify that.
And then on the on the wine Bill you're given given the Oh.
The decision to reinvest a stranded overheads.
Towards additional growth.
Where do you think about that that 2% to 4% objective are you are you biased overtime higher within that range because of the accelerated reinvestments or is the is the takeaway that the just sort of the cost of achieving that that top line has just gone up a tick because of probably because of the mainstream dynamics.
Just your perspective there. Thank you.
I think relative to the second piece of that.
There is no question that there is.
There's obviously been a inflation, which is making that more challenging than what it had been prior but I'd like to point out something.
Related to what <unk> said in his prepared remarks, which is you know.
We've been very judicious in thank you Vivian for your comment about our careful capital allocation, but I think this is a great example of we made.
Three small purchases in the wine and spirits business almost entirely funded by the sale of one of our venture businesses.
<unk>, which was sold at a significant increase versus what we paid so again I think this begins to reflect a very judicious view.
How do we think about capital allocation and it was very consistent with.
With what we've promised that externally.
We do believe that that way.
We are going to see significant success going forward, particularly at the higher end of the best in the sector.
I think that's going to potentially challenge that or b or b, a challenge to it that's where the mainstream business goes you know as I said earlier that that's at a category thats been declining and we're gaining share. So we're still winning in that category, but it's a tougher segment of the category certainly we expect.
High single digits.
Growth profile or even better at the higher end portion of our business and Youre seeing that brands like Kim Crawford, Naomi and the prisoner and high west So.
I think over time, you're going to be pleased with what you see in the profile of our wine business and this year will be a continued step in that direction.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to Mr. <unk> for any further or closing comments.
Well. Thank you everyone for joining our call Tonight. So in closing I want to reiterate that I'm extremely proud of what our team accomplished in fiscal 'twenty. Two we delivered strong financial results continued to launch consumer led innovation and reinforce our efforts to making a positive impact on our communities and the environment our beer.
Business extended its leadership position with its 12 consecutive year of volume growth and we are confident in our ability to maintain this momentum in fiscal 'twenty three.
Over the medium term, we continue to see a strong runway for growth supported by favorable industry trends for our portfolio and our ongoing investments in brewery capacity expansions, our wine and spirits business also delivered solid performance in fiscal 'twenty, two with organic net sales growth and gross.
Margin improvement, we are enhanced focus on consumer lending premium position continue to yield benefits as our high end brands outpaced the overall U S wine and spirits category.
Overall, we remain bullish on the future performance of our business and our ability to deliver to deliver value our shareholders as reflected in our announcement of a $500 million accelerated share repurchase program again I. Thank you all for joining today, we look forward to speaking with you in late June during our next quarterly.
Call and before then we hope you will certainly choose some of our fine products, where you are Cinco de Mayo and Memorial day celebrations. Thank you very much again I have a great day everybody.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Yeah.