Q1 2023 Constellation Brands Inc Earnings Call
Good morning, and welcome to the constellation brands first quarter fiscal year 2023 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Todd.
Senior Vice President of Investor Relations for opening remarks. Please go ahead Patty.
Thanks, Kevin Good morning, and welcome to Constellation's Q1 fiscal 'twenty three conference call I'm here. This morning, with Bill Newlands, our CEO and Garth Hankinson, our CFO as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the Companys web.
Site 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 to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance and now here. So thank you Patti and good morning, everyone before we get start.
Today I wanted to take a minute to recognize who after 15 years with constellation has elected to retire next month.
We appreciate patties commitment in helping Shepherd, our investor relations function since joining the company in 2007 and on behalf of all of our team here at constellation, We think Patti for her many contributions to our success over the years, including managing our relationships with a number of folks on this call. We wish her the very best.
Right.
Effective July one leadership of our IR function will transition to Joe Suarez, who joined constellation last November as Vice President of Investor Relations. Joe previously served as managing director at <unk>, a global CEO advisory firm prior to his time there. Joe also served in a range of commercial.
<unk> governance finance and Investor relations roles for a couple of major players in the global resources sector. We look forward to the continued success of our Investor relations function under Joe's leadership with that let's move on to a discussion of our first quarter results.
We're off to a strong start in our new fiscal year. Thanks to the solid fundamentals of our business the disciplined execution of our strategy and the relentless commitment of our constellation brands team as well as that of our distributors and retail partners are.
Our performance in Q1 fiscal 'twenty three continued to build momentum in three key areas tied to our long term goals.
First our beer business once again delivered industry, leading share gains with Modelo especial <unk> and Corona extra taking the number one and number four spot among share gaining brands across channels. The.
The business achieved an important milestone having reached more than five full points and shares gain over the last five years.
Coming back to Q1, our beer business delivered net sales growth of 21% and added nearly 15 million cases and incremental shipment volume.
As anticipated these significant increases were partly driven by the lapping of supply challenges as a result of severe weather impacts in Q1 fiscal 'twenty two for clarity chips and depletes in our current quarter.
Roughly equal on an absolute basis.
Fortunately our shipments mainly were underpinned by continued strong demand for our authentic Mexican beers are consistent and balanced approach to pricing and the effect of ramp up of new brewing capacity from our organic growth investments.
Our wine and spirits business outperformed the U S wine and spirits category in tracked channels, where we gained share supported by a strong performance of our higher end brands.
Our wine and spirits business grew net sales by 2% and saw overall U S. Depletions increased by over 1% with the premium wine and fine wine and craft spirits portions of our portfolio, achieving 8% and 16% depletion growth respectively with brands like Nuomi the prisoner high west.
<unk> and <unk> delivering double digit depletion growth rates.
Third our sustained and strong operating performance and cash flow generation enabled us to continue to deliver against our established capital allocation priorities.
Our balance sheet remains strong we continue to invest behind the momentum of our beer business with a focus on growth and flexibility and we exceeded our planned $500 million accelerated share repurchase activity with an additional 800 million in buybacks.
We have now fulfilled the share buyback portion of the $5 billion goal and cash returns to shareholders that we promised.
Now, let's discuss in more detail our beer business performance.
We maintained our number one position as the number one supplier in high end beer in the U S and achieved depletion growth of almost 9% in the quarter consistent with our expectations and our growth profile target.
As for Memorial day, which celebrations took place within the quarter. We were the number one share gainer for that holiday capturing one five share points of total beer and two three points of high end beer in the U S track channels.
And the on premise our beer business achieved a 30% depletion growth rates across the portfolio and delivered double digit growth for the Corona and Modelo brand families as well as specific.
As mentioned Modelo especial <unk> remains the number one share gainer in tracked channels, adding over one two points and incremental share nearly double the incremental share of the second largest gainer.
Overall, modelo, especially out delivered the total depletion growth above 15% for the quarter.
Our Modelo <unk> brand family grew in line with our medium term double digit CAGR expectations, achieving over 39% depletion growth in the quarter.
The national release of our new remote ESL 12 ounce 12 pack helped this popular flavor of our a lot of brand deliver the 15th largest share gain across the entire U S beer category in tracked channels.
And although it is still very early days for our other madela innovations. We are encouraged by the initial data we are seeing in test markets, particularly for oral <unk>.
We continue to be encouraged by the sustained healthy growth of Corona extra.
This brand delivered over 4% depletion growth for the quarter and as mentioned earlier was the number for share gainer in the U S beer market in tracked channels. We continue to expect modest growth for Corona extra and fiscal 'twenty three.
<unk> delivered depletion growth of more than 20% for the quarter. We continued to expect specific built to grow in line with our medium term, 10% to 15% total annual volume growth forecast in fiscal 'twenty three.
All in our beer business delivered strong net sales growth for the quarter and this in turn supported a double digit increase in operating income.
Looking ahead, we're confident that our beer business remains well positioned to deliver against our net sales and operating income growth targets for fiscal 'twenty three despite the ongoing inflationary pressures affecting consumers.
We will continue to take appropriate pricing and cost management actions to ensure we maintain both the growth algorithm of our brands and our industry leading margins.
We'll also continue to support our consumer led innovation and brand building efforts throughout the remainder of the year, which will include the launch of our Fresca mixed but the spreads and tequila Paloma flavors in early September .
And we continue to make progress with our brewing capacity additions, including our new brewery to be built in the state the Veracruz.
During the quarter, we were pleased to have formally announced the location of our new brewery with the President of Mexico, Andre Manuel Lopez corridor as well as with both the governor of the state of Veracruz, and the mayor of the city of Veracruz, along with federal state and municipal authorities.
The new brewery will be located in the port of Veracruz, one of the most prominent seaports in the region and we will have ample access to water and necessary resources and a highly capable workforce as president Lopez Overdorf himself as stated.
We look forward to continuing the remarkable journey of our strong performance of our beer business with a focus on both growth and flexibility as we deploy the investments needed to meet steadily rising demand for our products.
Now, let's move on to wine and spirits.
Our strategy to increasingly focus on higher end brands aligned with ongoing consumer led premium position trends continues to enhance the commercial performance of our wine and spirits business.
The premium wine fine wine and craft spirits portions of our portfolio all significantly outperformed there a corresponding categories in tracked channels.
May only the prisoner and Kim Crawford remains the driving forces behind our premium and fine line growth with continued share gains in tracked channels and strong increases in depletions in the craft spirits are high less in costume globally brands delivered dollar sales growth ahead of the.
<unk>.
We maintained share in mainstream line with Woodbridge, primarily driving that performance.
Our innovation efforts also continued to produce excellent results with my only red blend, becoming the second largest new product growth contributor in the wine category and just over a quarter since its launch.
And we are seeing incremental growth from the expansion of our wine and spirits brands into international markets, with particularly significant gains of more than 60% and the international shipment volumes for our fine wine and craft spirits products.
As with our beer business, we continue to closely monitor the state of consumer and remain disciplined in our approach to ensure we balance both pricing and growth across our wine and spirits portfolio as economic conditions further evolve.
That said, while consumers are reporting increasing concerns about the economy. These concerns have not yet translated into significant behavior change for beverage alcohol shoppers, particularly for our major brands.
In total beverage alcohol servings per capita in the U S have remained and are expected to remain stable with growth of 1% to 2% based on population growth expectations.
Against that backdrop, we are encouraged by the continued strength of our high end beer and wine and spirits brands in the first quarter of this fiscal year and remain confident in our ability to drive additional growth for both businesses over the medium term.
To that end, we are accelerating our investments in digital capabilities to further support future growth. These.
These investments will be focused on securing the talent and enhancing the technologies needed to further optimize our marketing efforts and reinforce our leading position and three tier e-commerce, and <unk> sales as well as unlock value from enhancements to our procurement supply chain management plant operations.
Back office activities.
Online beverage alcohol sales remained over four times, the pre COVID-19 rates and we're seeing great traction with our DTC and three tier e-commerce efforts, having outperformed the competition by three five points in these channels over the first quarter.
We are now planning additional investments as part of these efforts this fiscal year and expect the total impact of this digital business acceleration program to ultimately result in incremental earnings to be realized over the coming years, driven by more effective marketing as well as more efficient supply chain procurement.
Data and analytics and operations platforms Garth will provide additional details in just a few minutes.
Beyond the growth we continue to expect from our businesses, which will be further supported by our digital business acceleration program. We also continue to believe that our ownership position in canopy represents a compelling opportunity and developing and are developing industry with significant long term growth potential.
Within that context, we think cannot be as focused on premium rising its cannabis branded portfolio to improve performance in Canada as appropriate and we are also supportive of its efforts in the U S to strengthen the distribution of its emerging CPG brands and build a competitive THC ecosystem.
As canopy continues to gain traction.
Canopies agreements with acreage tariffs and one in journey positioned to quickly scale operations across the U S. Upon federal legalization.
We continue to support canopy through our strategic relationship sharing our experience and capabilities to support the continued advancement of their U S strategy, specifically in the areas of commercial sales marketing and operations.
And as announced yesterday part of our holding in canopies convertible debt will be transitioned into equity, which will reduce canopies debt, while maintaining our share of equity ownership without putting additional capital at risk.
On a separate note earlier today, we also announced that our board of directors has approved a proposal to eliminate our class B common stock.
After an extensive review and analysis by the special Committee and with the special Committee's recommendation. Our board agreed that there is in the best interest of the company and all constellation shareholders to eliminate the class B common stock.
Under the proposal owners of our class B common stock, which are primarily the <unk> family.
Would convert those shares into class a common stock and received $64 64 per share in cash, which equates to a total amount of $1 5 billion.
The transaction requires shareholder approval, including approval of a majority of the issued and outstanding shares of class a common stock not held by the <unk> family or their affiliates executive officers of the company or directors that also hold class B common stock.
One shareholder approval is received we expect that the proposal would deliver a number of corporate governance and other benefits, including the elimination of the higher vote class B common stock, including the associated voting control of the <unk> family and a reduction in the concentration of voting power.
The simplification of the company's equity capital structure to better align the voting rights and interests of all shareholders.
A broader appeal of our shares to a larger base of investors, who prefer single voting class common stock structures.
Operating cost savings associated with executive salary and benefits as well as administrative savings from maintaining the class B common stock.
We expect the executive salary and benefits cost savings will be about $15 million to $20 million per year using.
Using the $17 5 million midpoint of that cost savings range and our current trading multiple of approximately 21 times p/e that equates to roughly $300 million of value unattached effected basis.
Other corporate governance benefits include a rotation of the lead independent director position on the board at the next available normal cycle opportunity.
And finally, a shift to majority voting in uncontested elections from the current plurality standard that are for our board of directors and the adoption of our board anti pledging policy.
We will be seeking the approval of shareholders at a special meeting and our proxy statement, including all details of the proposal will be available ahead of that special meeting.
In the meantime, the announcement we made this morning related to the proposal can be found on our company website see brands Dot com and at this point, we will be unable to comment further or provide additional information on their proposal during today's call beyond what is available and that announcement.
In closing I once again want to recap the three highlights I shared earlier on our performance in the first quarter of fiscal 'twenty three.
Our beer business continued to achieve industry, leading share gains driven by our high performing modelo, especial modelo, which a lot of Corona extra and Pacific brands, delivering overall strong financial results with double digit growth for both net sales and operating income.
Second our wine and spirits business outperformed the U S wine and spirits category in tracked channels, particularly through the strong performance of our higher end brands and also grew net sales in the quarter.
And third we continued to deliver against our established capital allocation priorities, including through the $1 3 billion returned to shareholders in share repurchases through June and dividends for the first quarter of this year. We are now at over 90% of our 5 billion promised goal.
We were very encouraged by the continued strength of our business in the first quarter of this fiscal year and remain confident in our ability to drive sustained growth over the medium term and with that I'd now like to turn it over to Garth who will give you more detail of our financial results in the quarter.
Thank you Bill and good morning, everyone.
Fiscal 'twenty three is off to a great start.
We're executing against our business strategy and we're on track to achieve our targeted financial performance goals for the year.
Our beer business achieved double digit net sales and operating income growth and our wine and spirits business is progressing as marketplace momentum accelerates for the for the portfolio and.
In addition, our strong cash flow results enabled us to accelerate and complete our share buyback all as we repurchased five 3 million shares for $1 3 billion.
Through the first four months of our fiscal year.
As a reminder, one of our key capital allocation priorities has been to returned $5 billion to shareholders through a combination of dividends and share repurchases by the end of fiscal 'twenty three.
To date, we've completed the share repurchase portion of this commitment well in advance of our year end target.
As such we are now forecasting weighted average diluted shares outstanding of approximately $186 5 million for fiscal 2023, which includes share repurchases through June only.
As is typical since we do not know the timing and cadence of future share repurchase activity any additional share repurchases have been excluded from our guidance assumptions.
Now, let's review Q1 fiscal 'twenty three performance in more detail while are generally focus on comparable basis financial results.
Starting with beer.
Net sales increased 21%, primarily driven by shipment volume growth of over 17% from ongoing robust demand for our core portfolio and favorable price.
As a reminder, we're seeing a favorable shipment volume overlap versus last year's Q1, which was impacted by supply shortages and missed shipping days as a result of severe weather events impacting Texas and northern Mexico.
Depletion growth for the quarter came in at nearly 9% driven by the continued strength of Modelo especial and Corona extra as well as the return to growth in the on premise channel.
Q1 shipments were generally aligned with cases depleted as distributor inventories remained at normal levels.
The on premise channel grew more than 30% in Q1, and now accounts for approximately 13% of our depletion volume versus 11% in Q1 fiscal 2022, when the on premise channel continued to be somewhat affected by the pandemic.
Moving on to beer margins.
As expected beer operating margin decreased 260 basis points to 42%, primarily driven by the expected impact of inflationary headwinds leading to increased cogs for transportation and material costs, including palettes cartons steel corn and aluminum.
Additional factors include higher depreciation and brewery costs associated with planned capacity additions at our <unk> production facility in Mexico.
These headwinds were partially offset by the favor overlap from two items, one fixed cost absorption related to increased production levels compared to last year's Q1, driven by the weather events I, just mentioned and two decreased obsolescence primarily related to hard seltzer.
On an absolute dollar basis marketing investments increased versus prior year. However, due to favorable top line leverage marketing as a percent of net sales decreased 40 basis points to 9% versus prior year.
We continue to expect marketing as a percent of net sales to be in the 9% to 10% range for the year.
For full year fiscal 'twenty three we continue to target net sales growth of 7% to 9%, which includes 1% to two points of pricing within our Mexican product portfolio and operating income growth of 2% to 4%. This.
This implies an operating margin of approximately 38% for the year.
Throughout the remainder of the year gross margin will be negatively impact as benefits from price and our cost savings agenda are expected to be more than offset by the following cogs headwinds.
First elevated inflationary pressures will continue throughout fiscal 2023 across numerous cost components, but largely driven by aluminum cartons wood pallets and steel and.
In addition, we will see increased logistic costs for fuel and freight rates for truck and rail.
Second we're expecting incremental brewery costs, driven by labor inflation in Mexico, as well as increased head count and training expenses to support our continued capacity expansion initiatives at both novel and <unk>.
Third as a result of these brewery expansion plans the step up in depreciation expense will continue as additional capacity is planned to come online throughout the fiscal year.
Moving to wine and spirits.
Q1 fiscal 'twenty three net sales increased 2% driven by combination of increased shipments and favorable price and mix.
Q1 depletion growth was driven by double digit contributions from Naomi.
Prisoner brand family high West and Casa noble.
Operating margin decreased 330 basis points to 19, 6% as mix and price benefits combined with a favorable inventory adjustment were more than offset by higher cogs, driven by inflationary headwinds, including higher material cost for grapes and glass as well as increased transportation and warehousing cost.
<unk>.
SG&A and marketing increased as a percent of net sales versus the prior year, primarily driven by increased head count and marketing initiatives to support key growth areas of our business.
For full year fiscal 2023, the wine and spirits business continues to expect net sales to decline, 1% to 3% with an increase of 4% to 6% and operating income.
Operating margins of about 24% for fiscal 'twenty three.
Despite muted Q1 margin results, we expect to achieve our wine and spirits margin goals for the year through a combination of the following initiatives that are primarily weighted to the second half of the year.
We expect ongoing premium position and mix improvement driven primarily by our fine wine business and the timing of the vintage transition for these products.
We have planned incremental pricing actions beginning in the second quarter.
A strong New Zealand vintage coming online is projected to drive volume and enhanced margins.
And finally, we expect to see benefits from our ongoing cost savings initiatives.
Now let's proceed with the rest of the P&L.
This is a good point to provide additional detail regarding the digital business acceleration initiatives that bill outlined a few minutes ago.
Constellation is already an emerging digital business today with impressive progress in key areas, such as DTC, three tier e-commerce and digital marketing.
The digital business acceleration effort will help to create a more cohesive digital strategy and is an entirely new way of doing business that isn't designed to enable us to come to become best in class. Initially in the areas that include procurement and supply chain planning and marketing optimization.
The implementation of our new SAP platform last year enabled a framework for US to proceed with this initiative, which is expected to add $35 million to $40 million in corporate expense this year.
As a result, our initial corporate expense guidance increased from $230 million to a range of $265 million to $270 million.
We expect to start to see some benefits from these investments later this year.
Our fiscal 2023, EPS comparable guidance of $11 20.
To $11 50.
Remains unchanged, despite the lower share count.
Corporate expenses as a percent of net sales remains at about 3%, which is at the level. It had been trending during the SAP implementation.
In fact, the Q1 increase in corporate expense of approximately $7 million was primarily driven by investment spending for our digital business acceleration initiatives.
You can expect to see the majority of the remaining fiscal 2023 spend for this project to occur to occur in Q2.
Coupled with basis interest expense for Q1 increased slightly due to higher average borrowings and we ended the quarter with a net leverage ratio of three two times, excluding canopy equity earnings.
During Q1, we entered into an agreement that amended and restated our senior credit facility.
This resulted in an increase in our existing revolving credit facility from $2 billion.
To two and a quarter billion and extended.
Its maturity to 2027.
In addition, we use we issued senior notes and subsequently repaid the 2018, three 2% senior notes and the 2013, 4.25% senior notes that were coming due next year.
We believe that this was the appropriate action to take in a rising interest rate environment.
Moving to free cash flow, which we define as net cash provided by operating activities less capex for.
For Q1, we generated free cash flow of $562 million, which represents a 7% discrete decrease versus prior year driven by a 73% increase in capex investments to support planned capacity expansions and related activities in Mexico.
We continue to expect fiscal 2023 free cash flow to be in the range of one three to $1 4 billion.
Which reflects operating cash flow in the range of two six to $2 8 billion in.
And Capex of one three to $1 4 billion.
Including investments targeted for Mexico beer operation expansions.
In closing our excellent performance and strong business fundamentals demonstrate that we are committed to generating net sales and operating income growth, while returning value to shareholders.
Our path to impressive Q1 results were paved by great execution in growing our core business supported by investments to enhance our portfolio and operations.
That bill and I are happy to take your questions.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.
<unk> told indicate your line is in the question queue. You May press star two if you'd like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions. Our first question is coming from Bryan Spillane from Bank of America. Your line is now live.
Thanks, operator, good morning, guys.
Just two questions for me one is.
As we think about the.
Assuming that the.
The shareholder proposal gets approved and there is the $1 $5 billion outlay.
How would we finance that and are there any offsets to offset the incremental cost of financing and then second is just as we think about the incremental.
The accelerated investment in digital.
Should we think about that as being part of the kind of the cost base going forward. So is it a multiyear investment or you're just having a good year and you figured you'd spend you'd sort of pull forward. Some of the expenses. So probably those two things how do we think about offsetting.
The incremental cost I guess of the $1 5 billion and then how to think about the digital investments.
Yeah, Thanks, Bryan so.
So I'll take those in that order first on the funding of the one 5% first year first of all we're in a very enviable position given the strength of our balance sheet and given our investment grade rating.
We're obviously given the timing of this proposal were still thinking through exactly how we're going to.
Fund the one five.
But likely will include some new debt and may or may not include some of some of our existing debt that we have available to us under the revolver. So there will be more to come on that as we move forward.
That being said whatever we do we do we do remain committed to our investment grade rating and.
And we intend to remain within our targeted leverage range.
And can do so as we support this commitment.
On the digital business acceleration.
Cost. So this is this will be a multi year program. That's in place what the spend will be in future years.
We will work on that as we move through this year and into next.
But this is not a pull forward per se this will be incremental investment.
And so youll see more about that as I said as we move through this year and into next.
Thank you. Our next question is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.
Alright. Thank you good morning, everyone.
One.
Thank you for your question. This morning that we're hearing from investors is on your full year guidance and why you maintained despite the significant outperformance in Q1 and also thinking about the significant repurchases. So I guess, we're all trying to understand your level of conservatism, especially considering.
It implies that your European.
Mirror shipments only grow about 3% for the balance of the year. Despite what I think is pretty darn good momentum behind your yeah.
Sure Brian So what are we missing I mean, maybe you guys could sort of lay out some of the key.
To help us better understand that.
Yes, <unk> so building on a probably try to tag team a little bit in response to your questions. So I would say first of all Q1 was on our estimates for the quarter keeping in mind as we stated as we entered the year that this year would be a bit lumpy just like last year was a bit lumpy as we've been overlapping.
<unk>.
The production issues, we had last year, so youll continue to see some of that Lumpiness.
<unk>.
For the balance of the year I would say that we continue to we continue to expect that we're going to have strong depletions and we and we will continue to have shipment growth that is in line with our long term algorithm. So the business will continue very much.
Going forward in a very strong manner as it relates specifically to the guidance.
I kind of alluded to this in my script.
While we did get a benefit from the share repurchases, obviously from retiring more shares and reduce share count. We also introduced today that the incremental spend on the digital business acceleration initiative and those two things kind of.
Net out against one another.
And for that matter as we look again to the balance of the year. It's just a little bit too early for us to make any adjustments given that we're still monitoring macroeconomic conditions as well as what those economic conditions, including inflation have on the consumer.
Yes, the only thing Bonnie that I would add to that is I always try to look at what our depletion rate looks like and to make sure that you are seeing the consumer takeaway and as we stated we're gaining significant share in our beer business, we're gaining share in almost every sector of our wine and spirits business.
Both of those were very positive within the quarter.
And don't get confused or.
But funnel if you will by by the Lumpiness of the shipment timing because last year as we know because of weather related events was a bit unusual and so therefore, the overlaps in particular quarters of this year will be a little different.
I look at the Depletions and our Depletions were very strong yielding share gaining performance within the market more importantly, we are continuing to see strong consumer demand.
Throughout the year and certainly.
The consumers continues to be interested.
Our with our business despite.
And understanding that there is going to be an interesting year relative to questions around inflation and around recession.
But we remain very confident in.
In the performance of our business and I think it was reflected in the quarter we delivered.
Thank you. Our next question today is coming from Dara <unk> from Morgan Stanley . Your line is now live.
Hey, guys good morning.
So maybe we could just take a step back and talk about how you think your.
Your business is positioned if we do move into a recession.
Periods of weaker consumer spending both looking at past cycles, and what you've seen so far this cycle.
Second maybe just an update on June Depletions have you seen any trade down impact on your business so far.
So maybe first conceptual then.
Be a bit more concrete what are you seeing near term. Thanks.
Sure.
Let's deal with a few facts that I think are very strong and supportive of our business.
Finding that seven out of 10 shoppers, who purchase beer have that as a planned purchase before leaving their homes.
I think thats very strong and speaks very well to our business. We then look at things like buy rate and buy rate.
The way we discussed by rate is equal to the number of trips times the spend that occurs during the trip and thats actually up versus pre pandemic levels and is actually accelerating in Q1 for beer versus the prior three months.
He was a very strong indications of the strength of our portfolio, particularly when you look at the share gains that both Garth and I have alluded to up to this point.
June looks consistent with our with our yearly algorithm I think it was another very solid month, and it's consistent with what our expectations are for the for the year as we've said earlier. So just just to recap modelo continues to be on fire.
Continue to see strong results in Corona extra.
Once we get over the supply chain issues and Pacific, Although you saw very very strong quarter in Pacific.
So our anticipation is that we.
We're going to continue to see a very solid year in our beer business.
The year progresses recognizing.
There's a lot of unknown variables that are going to go on relative to the economy.
Thank you. Our next question is coming from Nik Modi from RBC. Your line is now live.
Hey, Good morning, guys. This is felipe good morning on for Nick How're you doing.
Okay.
Sure.
Pricing.
On beer pricing came in a little bit before.
I expect that in your 1% to 2% target for the full year.
How you're thinking you're pricing will evolve in the balance of the year and do you think the narrowing price gaps versus domestic beer.
Could be a benefit potentially accelerating market share gains going forward as we get into a more uncertain macroeconomic environment.
So we've been very clear that our long term algorithm on pricing is 1% to 2%.
As you know last year, we were slightly above that result.
And frankly, we think that it is particularly important.
To keep the consumer in mind as we make choices around our pricing algorithm.
Our current algorithm works very well for us and it's fairly flexible and the benefit of that approach is it does provide the flexibility as we watch and see how things develop over the course of the year. So what I can assure you of is we are closely monitoring what.
What is going on both from an inflationary standpoint, as well as pricing and we'll be ready to adjust our approach if that proves to be necessary or appropriate.
But what I would say is it's not going to change our long term algorithm, we still believe that 1% to 2% over over time is correct for our business and helps us maintain.
Our consumer base, which ultimately at the end of the day is what it's all about.
Thank you. Our next question is coming from Chris Carey from Wells Fargo Securities. Your line is now live.
Hi, good morning.
Good morning, just to start Bill just a clarification you said that depletions are consistent with your yearly algorithm, where you referring to the beer growth algorithm of seven to nine or the volume component within that algorithm. So thats just a clarification in the main question is.
I hear you in response to the resilience of the consumer I was wondering if you could just maybe frame consumer risk within your portfolio for example.
The relatively higher consumer sensitivity and modelo versus corona given different demographic exposure and maybe just offer some thoughts on how you could evolve your strategy as you just noted that you're starting to see a change in consumer habits.
Sure. So to answer your first question, it's both depletes and volume, we expect to be roughly equal over the course of the year.
Because there is growth shipments are always a little bit higher because you are working off a bigger base. So there's always a bit more shipment in any year, because fortunately, we have a strong growth profile.
Our business.
Premium amortization rates and I think this is an important one also relative to our portfolio are continuing to hold.
In fact in beer, 59% of dollars are now in the high end.
Just a few years ago, when we were predicting that would pass 50.
It has continued up to 59.
5%.
As of this point in time, which is up a 0.11 points versus prior year.
Youre also seeing similar activity in the wine business, where the premium is that premium amortization that's occurring.
Continuing to occur there as well all of those things speak very well.
To the sustainability of our growth profile for our business and as we've said before there is still plenty of room for growth.
Within all of our franchises, but using modelo as an example.
<unk> is still growing substantially and a lot of secondary markets, where theres a lot of distribution opportunity as well as gaining share in markets that have more sustained and long term strength.
We're very comfortable that we have a long and sustained runway for growth.
Cross all of our brands and certainly the facts are backing that up.
Thank you. Our next question today is coming from Lauren Lieberman from Barclays. Your line is now live.
Great. Thanks, good morning.
<unk>.
So I guess I'm totally different.
Different questions.
Industry volume standpoint, <unk> spoken very clearly to the strength of your brands momentum in your portfolio.
But industry wide in the army my understanding is historically, a pretty strong correlation between gas prices.
And beer consumption.
And so I think from the industry data that's out there or anecdotal has been that there has been a deceleration in industry volume in recent weeks.
So I was just curious if you could comment on that if you guys are not seeing that if you think something different if you don't think there is a relationship with gas pricing.
I'd be curious at that broader industry perspective would be helpful. Because I have no doubt that within that.
Your brands are in a great spot.
Certainly it's something we're all watching one of the benefits that you've seen in historic added historical times.
Recession, a refreshing or recessionary style trends.
Ill call beverage tends to be an affordable luxury and therefore tends to continue to be consumed during that window of time, let me give you an exact set around our beer drinking households.
It holds an essential status.
For many many consumers in fact, if you look at 172 edible categories beer ranked 15th about and therefore, what it says is the consumer is consistently wanting to continue to participate in this category that doesn't mean that there won't be short term impacts.
Because of gas prices and other inflationary pressures, but overall it tends to be a category.
That that is.
That is a staple for a lot of people and that's probably particularly true for our Hispanic consumer base.
As you know we over index with our consumer base. So I think it speaks pretty well too.
Two our position at least being able to to work our way through a recessionary environment pretty in a pretty healthy way.
Thank you. Our next question is coming from <unk> <unk> from Bernstein. Your line is now live.
Hi morning, everybody two questions from me if I may the first could you just help us understand exactly why the Q1 price mix was above.
That longer term one to two that you mentioned is that the phasing of pricing is there a mix component, we're not taking into account or perhaps some distributors taking pricing color on that would be appreciated and then my second question on canopy growth I. Appreciate your comments in the prepared remarks that you remain committed to that investment.
But the company does continue to lose share in Canadian recreational cannabis.
<unk> continues to face challenging challenges, reaching profitability U S. Federal legalization is looking increasingly less likely at least in the short term. So could you maybe provide more color as to what gives you conviction that this business can meaningfully improve in the long term. Thank you.
Sure Let me let me take the first part of that because you are correct. If you look at the at the data. It certainly shows that the pricing scenario at the moment is above the one to two algorithm. There is a number of things involved in that one is.
It only reflects tracked channels. So that's that piece of it it is partly mix.
As you see different sizes and different products and different subs categories within beer affecting it you see different scenarios, it's partly retailers, making choices about hitting specific price points, which in some instances will drive will drive the percentage of China, but doesn't reflect a change in our.
Our pricing strategy.
As I said earlier I think this all goes back to two.
Our algorithm being particularly important and.
And particularly flexible in our ability to see what's happening in the market and adjust as necessary as part of it but all of those elements weigh into what what is certainly some higher pricing to what we have noted in our in our.
And our words.
Yes.
On the canopy question, there's no doubt that over the past couple of years canopy canopy has.
A number.
Of headwinds that being said, we remained very very positive on the category.
Very optimistic for canopy. The reason that we feel that way right is that number one in Canada, we believe that the canopy team.
Through its recent announced a restructuring programs have a renewed focus on driving the premium end of that business, which is profitable and that ended the team up there is on a path to.
Profitability in the near term.
In the U S. We continue to see very good green shoots for the category in general.
And in terms of consumer consumption.
Whether you look at retail sales or you look at.
State by state.
<unk> income associated with.
With cannabis sales.
They're growing very very quite nicely showing that the consumer is adopting.
The category, we also really like the the approach that the canopy team has taken in the U S. If you look at some of the.
Some of the options that bill outlined in his prepared remarks canopies position with acreage in Paris, and in Jedi and want to have them very well positioned to take advantage of the U S market. Once it does open up.
And whats legalization occurs.
So that's why we remain.
That's why we continue to have conviction on the category.
Thank you. Our next question is coming from Rabat and style from Evercore ISI. Your line is now live.
Great. Thank you very much.
Just one just wanted to follow up a little bit on the.
The pricing question and that is.
If you could talk a little bit about your views about what appears to be happening based on channel checks trade checks that retailers are essentially taking or increasing their margin.
Given the much higher price increases for other brands.
And just the fact that distributors right.
Pressures.
In terms of their cost and they are likely to want to see higher prices. So if you could talk maybe a little bit about that dynamic.
And I think we all understand the long term algorithm why that makes sense, but these are extraordinary times.
Okay.
They are extraordinary times and I think.
The one thing Thats important Robert in extraordinary times is to remain balanced sensible.
And not sort of get caught up in the the whirlwind of the moment and doing things that what I would describe as anti consumer.
So that's why we are again, saying that we're going to be judicious as how as to how we look at this balancing the understanding that there are a lot of pressures that are consumers and all consumers are under because of inflationary pressures in the market.
You have seen some increase in pricing is one of the prior callers.
That is being taken either at the distributor level or at the.
At the retail level to hit specific price points and it's being reflected.
So we're trying to walk the diligent line of what's appropriate.
What can we do to reflect and address the rising costs that we're all facing while keeping our consumer base.
We think thats in the long term interest not only of our company, but for the category as well.
And as I said.
We're going to be very judicious, we are watching it very closely and as I said earlier not to repeat myself, but we do have very flexible algorithm that allows us to address questions in real time and I can assure you we keep our eye on and almost on a daily basis.
Thank you. Our next question is coming from Andrea Teixeira from Jpmorgan. Your line is that right.
Okay.
Thank you good morning.
So.
We all listen to what you said.
Like how are you actually consumptions indications it sounds like this you are still quite confident that as you exit the quarter and entered the Q2 and correct me if I'm wrong, what would be your quad.
Even in the guidance for the balance of the year should we summarize then interpret that youre monitoring how volumes would flow through as you are shipping more than depletion.
And at this point to a healthy wholesale to retailers to take that larger shale the prospects.
At this point.
Everything goes well in the summer.
Perhaps you could.
Pricing as you go into the fall, which is a typical.
Pricing point pricing action point.
And if you can comment on how you are going to balance because.
Low single adjacent implied shipment volume for the balance of the year obviously.
Investors is that anything we should be noting.
In terms of like the level of conservatism.
Let me now or is that just a function of that.
Again looking at how your typical consumer will behave given higher quite a bit.
So let me let me try to hopefully I'll answer most of.
Those here as I tried to answer it first of all let me go back to something that I said in my prepared remarks, which is while it looks like we shipped a lot more than we depleted in the first quarter that is purely because of the overlap of last year, where there was weather events in the absolute.
On the beer side.
The ships and depletes in the absolute were roughly the same and we expect that to remain over the course of the year as Garth noted a little earlier it is going to be a little lumpy because we had a time in the first quarter, where we went against.
Weather related activities, we obviously in the back half of the year.
<unk> times, when we were rebuilding the inventories.
For last year. So it will just be a bit of a lumpy year relative to pricing most of our pricing as we look at how we do it is roughly 60% in the first half of 40% in the second half. That's just the way. It has always worked consistently so we do have pricing moments and as you know we look at a SKU by SKU Mark.
By market, we don't do broad based pricing answers. It is a very micro view.
Our pricing.
And how we look at it so again that gives us the opportunity to see how the year's developing one opportunities exist in the marketplace and we look at that as I said on an ongoing basis. So we think that that remains the best way for US to proceed it's worked very well for our.
Our company over the course of time, and we think it's going to continue to serve us well going forward.
Thank you. Our next question is coming from Bill Chapell from <unk> Securities. Your line is now live.
Thanks, Good morning, Thanks for squeezing me in.
Yes.
The scene.
<unk> that you've gotten on elasticity and market environment and bet on beer, but applied to y.
Any thoughts or whats youre seeing and would expect to see that.
How this environment. Thanks.
When I think of that.
As you said affordable luxury, but just wondering if youre seeing consumers go from $25 wind down to $20 line or if theres, a net benefit for the Woodbridge franchise as more and more people are looking at popular price line.
Didn't know if youre seeing any of that or expect to see that and how that would affect your kind of outlook.
Sure you bet. So in line and I quoted the beer example, earlier and winding entry levels of the high end or frankly, the most robust growth profiles and that sort of in that 11% to $25 range that represents about 28% to 29%.
Total dollars and Thats also interestingly enough. It's the exact same number one one points versus year ago I quoted the pier. One was also $1 one point a bit earlier, but thats also up one one points and of course, that's perfect for us because we've got brands like Kim Crawford May Omi.
Unshackled and various other brands that fit right into that that price point, so thats, where it is not surprising that those brands are doing extraordinarily well.
As I said earlier, our premium wine and our fine wine and craft spirits businesses had a very strong quarter with strong depletion growth of eight and 16% respectively. So we had a very strong start in line and certainly the <unk>.
Premium amortization that you are seeing continues it would be a different answer if we've talked about mainstream line, where frankly, it's been more challenged even though we're very pleased that our Woodbridge brand.
As gaining share in a challenged sub category. So overall.
It's very similar in style to what I responded earlier in beer and we're quite pleased that it is.
Thank you we reached end of our question and answer session I would like to turn the floor back over to bill for any further or closing comments.
Great. Thanks again, thank you all for joining our call today.
Here, we're off to a very good start to the year, we delivered excellent operating performance underpinned by strong business fundamentals, which provides us with great momentum as we head into our key summer selling season consumer demand and takeaway, especially for our beer brands remains robust as Ive stated before and we're well positioned to achieve our <unk>.
Targeted financial goals for the year overall, we've demonstrated again that we are committed to pursuing our strategic growth initiatives, while returning value to our shareholders.
Closing I would like to wish everyone in the United States and happy fourth of July holiday weekend, and hope yourself durations with your friends and family includes some of our fantastic beer wine and spirits products. Thanks, again, everybody and have a safe and healthy summer.
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.