Q2 2023 Constellation Brands Inc Earnings Call
Greetings and welcome to the constellation brands fiscal year 'twenty three Q2 earnings call. At this time, all participants are in a listen only mode.
Sure 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 its now my pleasure to turn the call over to Joseph Suarez, Vice President of Investor Relations. Please go ahead.
Thank you Kevin Good morning, all and welcome to constellation Brands' second quarter fiscal 2023 conference call I'm here. This morning, with don't know once our CEO and Garth Hankinson, our CFO as a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed in this call are included in our news release.
Or otherwise available on the Companys website at Www Dot <unk> Dot com.
Please refer to the news release and constellations SEC filings for risk factors, which may impact forward looking statements made on this call before turning the call over to Bill in line with prior quarters I'd like to ask that we limit everyone to one question per person, which will help us end our call on time, thanks in advance and now here's Bill.
Thank you Joe and good morning, all welcome to our second quarter call.
Everyone had a good summer and enjoyed some of it with our great products.
Before we get started today I want to take this opportunity to say that our thoughts are with all those affected by hurricane Dorian.
Thankfully all constellation employees living in Hurricane Andrew path are safe and accounted for.
We're also fortunate to have avoided any adverse impact to our operations in the area to this point and we continue to stay in contact with our local distributors retailers and other partners to best support their needs in this difficult time.
Additionally, thousands of people in Florida, South Carolina, North Carolina, and Virginia have been impacted by this natural disaster. So we are also supporting the American Red Cross with a significant contribution to help provide food shelter and much needed assistance.
We will also matched employee contributions to the American Red Cross two for one as part of this effort and we hope provides at least some comfort to local residents as they work to recover and rebuild.
I also want to remind everyone that we filed our proxy statement in connection with the class B common stock reclassification a couple of weeks ago, we have called a special meeting of shareholders to vote on the reclassification next month on November nine at this point, we are unable to comment further or provide additional information on this topic during <unk>.
Today's call beyond what is available in the proxy statement and our other filings with the SEC. All of these filings are available through our Investor Relations website, and I urge anyone interested in our special meeting or the reclassification to review these documents.
Now as usual I would like to start by emphasizing a few key takeaways from our latest results first consumer demand for our products remains strong.
Consumer led premium position trends continue across beverage alcohol, giving further confidence in the resilience of premium position as a fundamental driver of demand for our brands.
Buy rate, which captures both the number of trips of consumer base and the amount they spend per trip increased in the second quarter for both high end beer and total wine categories in tracked channels and buy rate for Hispanic high end beer consumers, which is particularly relevant to our core beer portfolio is <unk>.
Also improving resilience.
More specific to our brands our beer business posted depletion growth of nearly 9% that is more than 9 million additional cases for the quarter.
And then our wine and spirits business, our wind portfolio gained share and outperformed the entire wine category in tracked channels.
While our craft spirits brands outperform the higher end segment of the spirits category.
Second.
Our beer business also continues to outperform the entire category.
The second quarter, our beer business remained the leading share gainer and U S track channels across the entire beer category and now accounts for 28% of the high end segment.
Importantly, we believe our beer business remains well placed to continue to support the steady growth of our brands with inventories across the supply chain at historical norms and production continuing for our operating plans to meet volume expectations for the fiscal year and incremental capacity.
Unlocked from our existing brewery operations, Mexico through optimization and productivity initiatives and the expansion of our breweries and novel Andover gun as well as the construction process of our new brewery in Veracruz are all advancing as planned.
All of which has given us the confidence to increase the fiscal 'twenty three net sales and operating income growth guidance for our beer business and continued conviction in our medium term top line growth and margin algorithm.
Third the transformation of our wine and spirits business continues to yield results over the past few years. This business has been evolving from a U S. Wholesale our business focus mainly on the mainstream segment to a global Omnichannel competitor, primarily focused on the higher end.
And then in our latest quarter, our largest premium wine brands <unk>.
Robert Robert Mondavi, private selection, Naomi and ruffino, and our largest fine wine brand.
Wind company, all delivered solid depletion growth.
And our craft spirits portfolio high West Casa noble eight and the combo all achieved strong double digit depletion growth.
In addition, our international and DTC channels, each delivered double digit net sales growth year over year, and we continue to gain share and three tier e-commerce.
For our capital allocation priorities remain firm star.
Starting with our investment grade ratings, we expect to remain investment grade, including after funding the expected $1 5 billion cash payment for the class B common stock reclassification, given the strong operating performance and cash generation of our business.
Moving on to cash returns to shareholders as of the end of the second quarter, we were over 97% toward meeting our $5 billion goal and we have now exceeded the share buybacks component of our goal by $300 million and upon payment of today's declared dividend, which.
We expect to take place next month, we will have fully achieved our goal ahead of our fiscal year end deadline.
Shifting to our third priority of reinvesting to support the growth of our beer business as noted earlier, our capacity expansions and construction processes continue according to plan.
And lastly, our M&A focus remains on small acquisitions to fill portfolio gaps, particularly in our wine and spirits business.
This included most recently the investment and our minority stake in Archer Rus as part of our focus on female founders initiative, which is an accessible premium wine brand focused on offering consciously crafted wines to a new generation of legal drinking age wine drinkers, we're proud to say that five years.
And through our focus on female founders initiative, we have fulfilled 76% of our commitment to invest $100 million.
And female founded and female led startups in the beverage alcohol sector as part of our efforts to enhance social equity within the industry.
Now, let's move onto a more fulsome discussion of our performance in the quarter.
As I mentioned earlier, our beer brands continue to resonate strongly with the consumer gaining one eight points across the entire category and two five points and the high end segment contract channels.
Modelo, especially out delivered depletion growth of over 10% and was the number one share gainer in the entire U S beer category.
It continues to strengthen its position as the number two beer brand in dollar sales and there is the number one or two beer in 11 states.
<unk> doubled the number of states from just three years ago.
We continue to see further opportunities to maintain the growth momentum of modelo, especially out, particularly given the resilience of premium amortization trends and our relentless focus on striving to close the brand's distribution and awareness gaps.
Corona extra maintained its momentum with 6% depletion growth and as the number three share gainer in tracked channels.
It remains the number one most loved beer brand with both general market and Hispanic consumers in our La Vita Laspina campaign has maintained the number one spot in AD awareness across the beer category.
We continue to expect modest growth from Corona extra supported by distribution gains within certain pockets of the U S where it is underrepresented and the brand's appeal and growth potential with younger legal drinking age and multicultural consumers.
Specific go achieved depletion growth of over 37% and was a top 10 share gaining brand in tracked channels. We continue to see a fantastic growth runway purpose silica as an emerging brand, particularly as the brand has significant distribution potential when compared to <unk>.
And even more so when compared to Corona extra.
Lastly, our modelo <unk> brands posted depletion growth of more than 60% for the second quarter and Modelo <unk> cel was a top 15 share gaining brand in tracked channels.
<unk> remains the number one brand family in the <unk> space and owns nearly 60% market share of enchilada segment nationwide.
However awareness for Modelo Gelato is still relatively low compared to other flavor categories and we continue to expect significant growth as we invest in marketing to broaden the demographic appeal and an additional flavors and package configurations to unlock new consumption occasions for this product.
<unk>.
All in the strong demand for our brands in the second quarter supported a net sales increase of 15% for our beer business and this in turn drove a 25% uplift in operating income, which also benefited from the lapping of higher obsolescence charges last year.
This gives us confidence to increase guidance for our beer business as we now expect to achieve 8% to 10% net sales growth and 3% to 5% operating income growth for fiscal 'twenty, three which Garth will review in more detail shortly.
That said it is important to remember that in the third and fourth quarters of fiscal 'twenty. Three we will be lapping elevated shipments from the second half of the last fiscal year that resulted from the rebuild of distributor and retailer inventories after supply shortages and severe weather driven shipping disruptions that occur.
In the first half of fiscal 'twenty two.
So while on an absolute basis, we continue to expect our shipments for the remainder of this fiscal year to be relatively in line with Depletions. We believe the more comparable indicator for growth for our beer brands in the second half will be the depletion rate.
Looking forward. We are also confident that over the medium term, our beer business remains well positioned to deliver 7% to 9% net sales growth and 39% to 40% operating margin supported by the sustained momentum of our core brands the steady progress of our brewing capacity additions.
And the continued development of our innovation lineup.
Including the momentum of our a lot of brands. The recent launch of Fresca mixed the expansion of Modelo Oro from select test markets to the entire national market next year and the introduction of Corona non alcoholic.
The new nonalcoholic drinking age consumer is an attractive target as they also consume high end beer as well as spirits and hard sensors.
So we are excited about the extension of Corona into this segment and we look forward to sharing more details as we approach the product launch.
Yes.
Moving on to wine and spirits, our wine and spirits business is making headway with its vision to become a bold and innovative high end market leader.
As noted earlier, the largest premium and fine wine brands and craft spirits brands of our portfolio delivered solid depletion growth rates in the second quarter and relative to the market. The higher end portion of our wind portfolio, which includes our premium and fine wine brands outperformed the corresponding category segment.
In the U S track channels.
Our craft spirits portfolio delivered dollar sales growth significantly ahead of higher end segment of the spirits category.
Our wine and spirits business also continues to advance its mainstream strategy through a greater focus on brands and initiatives with higher returns, including through the delivery of relevant and innovative products.
As we also announced this morning, we continue to further premium is our business with a divestiture of a portion of our main streamlined portfolio combined with a couple of select premium brands to the wine group.
When it closes we believe this transaction will further enable us to focus our portfolio and efforts to deliver the industry, leading growth and margins that we continue to work toward.
From an innovation perspective, we have several great. Examples of recently introduced products that are driving growth within our wind portfolio Woodbridge.
Woodbridge box was the number two premium box share gainer in the second quarter.
Only red blend 750 was the number two wind SKU.
Kim Crawford sparkling <unk> was the number for new wine brand.
And the recent launches of the prisoner Pinot noir and blindfold lumped MLR are respectively, seeing early successes and priority accounts and the on premise.
Beyond product innovation, we continue to extend our growth in direct to consumer and three tier e-commerce channels as well as international markets.
Wine and spirits DTC net sales grew 15% in the second quarter as our investments in these channels continue to yield strong performance.
We also continued to outperform and three tier e-commerce delivering dollar sales growth 16 points ahead of the competition in the second quarter.
Importantly, we're also outperforming in three tier e-commerce, with our beer business, which achieved a seven point lead and dollar sales growth versus competition in the second quarter.
Back to our wine and spirits business International net sales grew 10% versus prior year, showing the continued momentum of our brands and the select international markets that we're targeting.
Going forward, we will continue to focus on growing our omni channel and international footprint. As we believe these channels will continue to grow as a portion of our mix over time and be an important opportunity for higher end growth.
Now, let's move on to canopy growth while.
While the impairment of our canopy investment is clearly disappointing it is not indicative of the significant long term market opportunity that still exists for the legal cannabis market.
Particularly in the U S where the market was estimated at 25 billion at the end of 2021.
As expected to nearly double in size by 2026 as more states continue to legalize cannabis.
In fact, the companies the canopy invested in to establish its U S ecosystem continued to perform strongly and to scale.
We also remain supportive of <unk> efforts to restructure its Canadian operations and its plan to further drive <unk> growth and believe these actions will also strength of their business and ultimately provide an opportunity to enhance the value of our holdings.
Before I conclude I also wanted to take this opportunity to highlight that we expect to release, our 2022 ESG impact report later this month.
The report seeks to provide a comprehensive review of our ESG ESG strategy and key initiatives designed to make a positive difference in our communities safeguard our environment and advocate for responsible consumption of beverage alcohol.
We will also for the first time be reporting with references aligned to the sustainability accounting standards Board framework and taking into consideration the recommendations from the task force on climate related financial disclosures.
We believe these planned enhancements to our reporting will be valuable steps intended to better align with stakeholder expectations on the information we provide on these important topics reflect our company values and better showcase our ongoing efforts to address pressing environmental and societal needs that are important.
To our communities, our consumers and our employees.
I invite all of our stakeholders to spend some time reviewing the report when it is released which will be available through our company website.
In closing I'd like to reiterate our main takeaways from this quarter number one consumer demand for our higher end beer and higher end wine and spirits products continues to be strong and we remain confident in the long term prospects of our portfolio and our runway for growth.
Number two.
Our core imported brands.
<unk> to outperform the industry Modelo especial <unk> further strengthened its position as the number two beer in the U S market and continues to gain ground as the number one share gainer in Corona extra also maintained its momentum delivering solid growth rates and taking the number three share gainer spot and the <unk>.
Beer category.
The strong performance of our brands in the first half of the fiscal year now puts us on track to deliver better than expected growth for our beer business in fiscal 'twenty three.
Number three we continue to see the benefits of our wine and spirits strategy, taking hold our largest higher end wine and spirits brands are delivering growth and we're also performing strongly internationally with our higher end brands and in ecommerce and DTC channels and number four we continue to deliver on.
Capital allocation priorities by maintaining our investment grade credit rating.
And cash returns to shareholders through dividends and share buybacks.
Advancing the brewery capacity expansion and construction processes in our beer business to support its continued strong growth and executing on disciplined tuck in M&A to fill gaps in our portfolio and with that I would now like to turn the call over to Garth who will review our financial results in the quarter.
Thank you Bill and good morning, everyone.
Phil mentioned, our business continued to perform well in the second quarter delivering another strong set of operating results, we're making good progress against our operating plans and strategic initiatives and.
And we are now expected to exceed our previously stated fiscal 2023 net sales goals for the beer and wine and spirits businesses and our operating income goal for the beer business.
Our strong Q2 results were led by a 12% increase in net sales driven by growth in both our beer and wine and spirits businesses. Additionally.
Additionally, we achieved a 10% uplift in operating income underpinned by significant double digit increase in the operating income of our beer business.
Our strong cash flow results supported dividends and incremental share repurchases in Q2 that put us on track to exceed our $5 billion goal and cash returns to our shareholders by the end of this fiscal year.
With that let's review Q2 performance and our full year outlook in more detail, where I'll generally focus on comparable basis financial results.
Starting with beer net sales increased 15%, primarily driven by shipment volume growth of over 12% from strong demand for our core beer portfolio and higher average annual price increases.
Q2 shipment volumes were generally aligned with depletion volumes and inventories across the supply chain remained at historical norms.
From a broad perspective depletions for the quarter were up nearly 9%, which was propelled by the continued strength of Modelo especial Corona extra specific.
And the Modelo <unk> brands.
Selling days in the quarter were flat year over year and will continue to be flat in Q3.
Moving onto beer margins, we continued to experience headwinds driven by the inflationary economic environment, particularly in packaging material costs and shifts in mix.
However, beer operating margin increased over 330 basis points to 45%, primarily driven by more favorable.
Favorable impact from pricing lower obsolescence charges, and lower marketing spend as well as the favorable impact of fixed cost absorption and strong shipment volume growth.
As you May recall, we reported higher obsolescence charges in Q2 of fiscal 2022 due to the slowdown in the overall hard seltzer category during the summer of last year.
Marketing as a percent of net sales decreased 170 basis points due to the timing of our media spend.
We continue to expect that marketing as a percent of net sales will be in the 9% to 10% range for the full year as we anticipated as we anticipate marketing spend to ramp up in the second half of the year with the launch of new campaigns, particularly from our media investments around college and NFL football.
Given the strong performance of our beer business. We are now targeting full year fiscal 'twenty three net sales growth of 8% to 10% and operating income growth of 3% to 5% for that business.
Our updated fiscal 'twenty three outlook includes a 2% to 3% price increase which is higher than the previously anticipated.
One to two expectation and medium term algorithm rage.
As elevated cost continued to create pressure across the supply chain.
However, we continue to expect an implied operating margin of approximately 38% for fiscal 'twenty three.
We anticipate second half operating income margins to be negatively affected as we expect the benefits from our pricing adjustments and cost saving actions will be more than offset by ongoing inflationary pressures across raw materials and packaging, particularly as more favorable hedges will continue to roll off.
Additional head count and training as well as increased depreciation from our brewery capacity expansions.
And higher marketing spend as previously referenced.
Now shifting to wine and spirits.
Q2 fiscal 'twenty three net sales increased over 1% driven primarily by an increase in bulk sales and favorable pricing.
And as Bill noted Q2 depletion growth was solid for our largest premium wine brands Kim Crawford, Robert Mondavi private selection, Naomi and ruffino, our largest fine wine brand the prisoner wine company and our largest craft spirits spirits brands high West Carson nobly and be comparable.
Operating margin decreased 40 basis points to 19, 3%, primarily driven by the continued impact of inflationary headwinds and higher general and administrative expenses.
The increase in Cogs was mainly a result of higher supply chain costs, particularly container surcharges, and warehousing and higher material costs, including grapes and glass.
Partially offset by favorable fixed cost absorption as a result of the lapping of the New Zealand Frost and the wildfires in the U S.
The increase in general and administrative expense was driven by compensation and benefits primarily to improve marketing effectiveness.
Marketing was favorable due to the time timing of spend.
For full year fiscal 'twenty, three we now expect wine and spirits net sales to come in flat to down 2% and operating income to increase 3% to 5%. This implies operating margins of about 24% for fiscal 'twenty three.
Despite significant inflationary pressures and the inclusion of Cooper <unk> thief, and the divestiture previously referenced by Bill.
We continue to expect a considerable improvement in operating margins, albeit at a lower point than previously anticipated.
As noted in our Q1 earnings call, we expect to achieve the uplift in operating margins in the second half through the following key drivers.
Consumer led premium position and mix improvement mainly in our fine wine brands.
Incremental pricing actions executed in Q2 that will be fully reflected in the second half.
A bountiful New Zealand harvest.
Which will drive volume and enhanced margins for Kim Crawford.
Lowering marketing as a percent of net sales and finally continued benefits from our cost savings initiatives.
Now let's proceed with the rest of the P&L.
As we all those also discussed in our Q1 earnings call increased investment in our digital business acceleration initiative was the primary driver of our higher corporate expense.
The majority of the spend in our digital business acceleration program or DBA for short.
Was incurred in Q2, and we expect to start to see some small benefits from these investments later this fiscal year followed by larger benefits.
FY 'twenty four.
As a reminder, the goal of our DBA initiative is to support our aim to become a digital leader and capture value.
It is a combination of data technology, and operating models, including evolving ways of working organizational structures and acquiring talent.
DBA builds on the implementation of our SAP <unk> platform that was completed last year and we anticipate it will enable us to deliver cost savings and greater efficiency and a number of areas by taking our digital strategy. The next level.
The first phase of our DBA program is focused on three key areas supply chain marketing and procurement each with their own objectives. The aim of these initial efforts is to maximize efficiency across end to end supply chain to build a world class procurement function with greater spend visibility.
And to unlock demand for our products by analyzing and connecting multiple consumer data sources.
We continue to expect $35 million to $40 million of spend in our DBA program for fiscal 'twenty three as part of our totaled $265 million to $270 million of corporate spend anticipated for the full year.
Comparable comparable basis interest expense for the quarter was relatively unchanged.
However, we now expect interest expense for fiscal 'twenty three to be between 360 and $370 million as a result of the July acquisition of the cannot be debt securities and rising interest rates.
This excludes the impact of any interest expense associated with the funding of the $1 $5 billion cash consideration payable in the event the class B common stock reclassification closes.
From a balance sheet perspective should the reclassification be approved on a Q2 FY 'twenty three pro forma basis, our net leverage would increase to approximately three five times when considering funding for the premium payment and excluding canopy equity earnings.
We ended the second quarter with a net leverage ratio of approximately three times, excluding canopy equity areas.
As Bill noted we have nearly completed our goal of returning $5 billion to cash to shareholders.
We will continue towards our goal through planned dividend payouts and opportunistic share buybacks throughout the remainder of this fiscal year.
This remains a top capital allocation priority and we now expect to exceed our cash returns to shareholders goal by the end of this fiscal year.
That said, we continue to expect our weighted average diluted shares outstanding to be approximately $186 5 million for fiscal 'twenty, three including shares repurchased in Q2.
As a result of the adjustments to our beer business growth outlook for fiscal 'twenty, three and the partial offset from higher interest expense, we now expect EPS comparable guidance to be in the $11 in 'twenty.
To $11 60 range, which represents a <unk> increase the top end of our prior guidance range.
Moving to free cash flow, which we define as net cash provided by operating activities less capex.
We generated free cash flow of $1 2 billion for the first half of fiscal 'twenty three which.
Which is a 4% increase versus prior year, reflecting strong operating cash flow, partially offset by 23% increase in capex investments as we continue to make good progress on our brewery capacity expansion plans to support the robust growth of our beer business.
In addition, our brewery optimization and protect productivity initiatives have enabled us to utilize incremental capacity from our existing footprint.
We now estimate our current total capacity to be approximately 41 million hectoliter is giving us additional production flexibility and enhancing the returns of our prior capital investments.
We continue to expect fiscal 'twenty, three 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.
And unchanged Capex of one three to one 4 billion.
Lastly on canopy growth.
We recorded a $1 1 billion impairment on our investment which was excluded from our comparable basis results. This noncash item was driven by the following factors.
The period of time for which the fair value has been less than the carrying value.
Uncertainty surrounding canopy stock price recovery in the near term.
Canopies previously announced goodwill impairment for their cannabis operations.
And the uncertainty of U S federal cannabis legalization.
In addition, we also recorded a $651 million equity loss from our share of ownership in canopy, which includes $461 million of cannabis goodwill impairment.
While disappointing we continue to believe that cannot be as focused on premium rising it's canvas branded portfolio to improve their performance in Canada is appropriate and we also remain supportive of <unk> efforts in the U S to strengthen their emerging CPG brand distribution.
Build of a competitive THC ecosystem.
In closing we continued to deliver strong business performance and are proud of the continued progress we're making against our operating plans and strategic initiatives. Our beer business continues to outshine, the market and our wine and spirits business is showing the benefits of its strategy to become a global omnichannel competitor in line.
With consumer preferences, primarily focused on the higher end.
With that Bill and I are happy to take your questions.
Thank you, we'll now be conducting a question and answer session. As a reminder, please ask one question and then return to the queue if you'd like to be placed in the question queue. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our first question today is coming from Dara <unk> from Morgan Stanley . Your line is now live.
Hey, guys.
So they.
Our business there.
Been a pretty nice halo the last few quarters between scanner data and our reported Depletions just as on premise recovers post COVID-19.
And as much the case this quarter so can.
Can you just give us some detail on on premise.
Our channels are generally Q2, and what Youre seeing there and then on the beer margin side, obviously, a big beat in the quarter versus consensus that's great news, but the.
The implied each to margins of 36%.
Are well below what you saw in the first half obviously, there's some seasonality there.
But just help us understand as we think about margins for fiscal 'twenty four.
Should we think about it more relative to a 38% full year base is it more relative to 36% in the back half.
Again, there's some seasonality there, but just conceptually how you think about that would be helpful.
I want to clarify when I take the first part.
So yes.
Relative to the on premise, it's very typical of us to see a stronger Q1 on premise because it includes cinco, which is the single biggest.
Event, an occasion for our beer business in the on premise.
On premise was roughly 11% of our volume in this particular quarter, which was slightly less than it was in the prior quarter.
The other thing I think it's always important to look at is our depletion volume has been very consistent with what we look at IRI trends.
As an example in our beer business in the most recent IRI trends the 26 week data showed.
<unk> seven 5% growth and purely the import business showed nine 4% growth, that's very consistent with our roughly 9% depletion growth.
This particular quarter the other place where you will also see strength within our business is in some of the untracked channels and smaller Hispanic particularly Hispanic accounts.
Particularly out west, which are not tracked by IRI or Nielsen channels. So all the way and I think again, our depletion growth profile looks exactly like what the take out trends in tracked channels are and I think as we've said many many times. This year in particular that is really the way to look at.
Our business.
Due to the variance that we saw last year and weather related activities in our and when we ship and when we did maintenance and things of that nature, which I'm sure Garth I'll touch on here in a moment.
Yes on the <unk>.
Arjun piece, so what I would say that you would expect that this year's margin profile on a first half versus second half would reflect something a bit more normal, which we really haven't had the last couple of years due to sort of production.
Issues that we had to contend with which led to a sort of a rebalancing of.
Shipments again this will be more because we are in a more typical production environment.
You will see a more sort of normal first half versus second half.
Margin profile.
We are expecting margins in the second half to be neck.
<unk> negatively impacted as I said in my remarks, as the benefits from pricing and some of the cost saving actions.
Be more than offset again by ongoing inflationary pressures from a materials.
<unk> perspective, we continue to see.
Some some pressure from corn.
As well as cans in cartons and glass as.
As you know we have a relatively robust hedging policy, but the way that we layer in those hedges and then the way that those hedges.
Roll off.
We saw the greatest impact from those in the first half of the year.
While we are nicely hedged they just won't be at the favorable rates. If you will as we were in the first half.
And then again as is typical.
And then and then it is typical as we're laying on incremental capacity.
We will be impacted by incremental costs as we bring on people to trained in advance of the capacity coming online and then finally, we're expecting to see a significant increase in marketing in the second half versus the first step as we support new marketing campaigns around oncology and NFL football.
For FY 'twenty four.
Our guidance is continues to be clear on that we continue to view the right way to think about our margins is in that 39%, 40% range and we're not coming off of that.
Great. Thank you.
Our next question is coming from Kevin Grundy from Jefferies. Your line is now live.
Great. Thanks, good morning, everyone.
So I wanted to pivot to the wind sale. This morning, given the continued premium as they can focus, but youre holding onto woodbridge more value oriented brand.
The view there in the past has been at that brand offers scale.
Just a little bit on how the deal came about whether you can comment whether you're done and are generally pleased with the shape of the portfolio.
At the conclusion of this transaction and I think just kind of taking a step back just given the change here and I think it's sort of been.
In some state of transition for a period of time, it sort of begs the broader question, whether the wind portfolio, albeit a narrow down one and more focused on premium the premium end of the category, whether you think it still makes sense within the broader portfolio relative to our beer business much higher growth margins and return on capital.
If you get your thoughts there thanks, so much.
Sure.
Look we're very pleased with the progress that we're seeing in the wind business and the divestiture that you saw this morning.
<unk> helps to reshape the portfolio.
The way I think you should think about our total business as we are increasingly focused our attention on the higher end. We've noted that for many many years as it relates to <unk>, we have now specifically related to that on our wine and spirits business as well.
As you probably noted most of the.
The tuck in work that we've done in our wine and spirits business has been focused on craft spirits as well as higher and wine brands that fill portfolio gaps all of which focus on the high end, where we believe the growth and margin profile.
Our significantly improved so.
I would think about this today as as just a further step in the reshaping of our business.
As we've said, we're very focused on I'm seeing a growth profile and an improved margin profile on that business and we believe we are well on our way to delivering that and today is just again, one more step in the process of achieving that goal.
Thank you. Our next question is coming from Lauren Lieberman from Barclays. Your line is now live.
Great. Thanks, so much good morning.
I was just curious on the second half outlook with some of the thing just in terms of the cost structure for some of the things you've called out in terms of rolling hedges and so on.
I would've thought you might have had some visibility into previously.
Curious on what's changed in the second half cost outlook, rather than just why second half is different than first half.
And then the second thing was you made a pretty clear statement on the medium medium term algorithm still looking for 39% to 40% margins on CR. So outside of the timing shifts that are impacting the second half margins. I was just curious if you can maybe look forward fiscal 'twenty four and beyond like do we get back to 39 to 14.
In 24 or is it a longer rebuild because of where you think that does relative hedge positions kind of.
Roll through when we look into 'twenty four.
Yes.
On the first half of that around what changed from Q from the first half of the second half of the year and I would say that really nothing has changed in our mind.
We give we give guidance on a on an annual basis not on a quarterly basis.
And we're going to deliver.
Margins in line with where we said at the beginning of the year.
You want to answer the second half, yes sure.
I think the way that we will obviously give specific guidance on fiscal 'twenty four when we get to that that timeframe, but I think what we are what we are seeing as we continue to see a long runway for growth in our in our beer business.
And we think thats in the 7% to 9% range consistently we think we're going to see consistent delivery of 39% to 40% on the margin play.
His garden I have always said over the last several years.
Have opportunities to be ahead or behind that in any one particular year. This year, we're below behind that algorithm because of a number of factors that we've touched on before but we still believe that is a solid expectation for the medium term.
And we will give specific guidance around 24, when we get there, but we believe that's a consistent approach.
We are going to be able to deliver on with consistency for the next several years.
Thank you. Our next question today is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.
Alright, Thank you goodbye.
Good morning, Tony.
More color on your beer shipments versus Depletions I guess first it would be helpful to hear how your quarter to date.
<unk> had been tracking and then second you mentioned depletion should outpace shipments in the second half of it is.
It really kind of think through how we should think about your shipment.
<unk> your top line guidance.
It does imply barely any shipment growth in the second half. So I guess I'm really trying to understand is given youre lapping some of the brewery maintenance you had last year in Q3, and then you have the rollout of some really strong innovations such as Modelo Aro.
In Q4, so I'm, just kind of thinking through your top line guidance and it feels pretty conservative. So I just want to make sure I understand that.
Sure well to answer your first part of your question.
Johnny.
At the start of the quarter September was very solid and its consistently in line with with what we expect our annual numbers to be so.
We certainly think we're off to a good start in Q3.
Yes.
Guards said this at the beginning of the year, there was going to be a very lumpy year.
The important part that I think everyone should think about as our depletion the actual volume of our Depletions and our shipments year to date are almost on top of one another.
However, because you compare it to last year and because we had shipping disruptions last year. It looks very different on a percentage basis on an actual volumetric basis, they're very similar and youre going to see the same thing for the rest of the year, but this is why we have consistently said the best thing to do to look at the.
<unk> of our business is the depletion rate and our depletion rate year to date on our beer business is in just under 9%.
And obviously, that's why we increased our guidance because.
We have further confidence that we are going to outpace the growth profile that we set out at the beginning of the fiscal year. So that's the way.
We have consistently urged that people think about it around the depletion rate because it's just going to be lumpy. This year on the shipment side doesn't takeaway one iota for the outperforming success in our beer business continues to have in the marketplace.
Thank you. Our next question today is coming from Andrea Teixeira from Jpmorgan. Your line is now live.
Thank you.
So I just wanted to go back to this question because it does imply though that of course, you ship more than you had in depletions.
In the 9% so what youre seeing now we should be seeing.
Shipment volume negatively in the third and fourth which is that's what's implying because we see it as flat.
Avenues, if I understood it correctly minus two to plus two given your guidance.
And you have pricing so youre, just selling us to assume volumes will decline in the second half I just wanted to clarify that and then another question related to that given the pressures that you had in and commodities are rolling over and all the hedges isn't there it makes sense to take another pricing pricing usually in the <unk>.
Fall two kind of like offset those pressures. Thank you.
Yes, Andrew Thanks for the question. So first of all just to reiterate with both just said our shipments and our Depletions for the first half of the year have been in line with one another so we have not over shipped beyond depletions. The issue between the first half and the second half is strictly due to the timing of shipments related to some production.
Outages that we had to deal with last year. So that's.
That's the differential.
As it relates to your point on pricing as we said in our scripts we are taking more pricing. This year, we update for this year from our normal 1% to 2% algorithm to 2% to 3%.
The other thing I think is important to consider as we have seen significant mixed benefits and our business as well.
There has been a because in part from the growth of <unk>, which are which are almost entirely single serve although we have added some innovation and different size and pack configurations, but the single serve pieces of our business has been very strong.
Great example of that is mix accretive. So in addition to purely the fact that we are going to be taking a bit more price than we had originally anticipated.
We also were seeing mixed benefits within the portfolio as well.
Which will be advantageous.
Thank you. Our next question is coming from Rabat and steam from Evercore. Your line is now live.
Great. Thank you very much I was wondering if you could talk to us a little bit about what's.
What's going on with Modelo, and Corona Corona being somewhat stronger than we would've expected madelle O still very strong but slightly.
Slower than it has been in prior years.
Is there anything going on there.
In terms of the interaction between those two brands of the brand families that we should be aware of.
No Robert I don't think so I mean again, when we look at.
The kind of growth profile that modelo especial <unk> using that as the example.
And any of the the volumetric trends timing, we're growing in double digits, all the way along and that becomes obviously.
The bigger it gets the more double digits is a very enjoyable proposition.
We're very excited admittedly about corona extra Corona extra has grown a bit ahead of what we had expected, but I think that speaks to the just the long term belief amongst both Hispanic and non Hispanic consumers and in that brand. It's the most loved brands.
We continue to benefit from that and we continue to advertise against that business very heavily.
<unk>.
It wouldn't read a lot into the fact that Modelo is continues to grow double digit, but it's slightly less than the last double digit I would view it as we have a comprehensive brand portfolio.
Whether you talk about Modelo especial.
Donna extra the gelato business specific though that just continues to radically outperform and that in combination allowed.
Allowed us to raise our expectations for the beer business for the year.
Great. Thank you.
Our next question today is coming from Bryan Spillane from Bank of America. Your line is now live.
Thanks, operator, good morning, guys.
I just wanted to ask a question about.
I guess beer inventories and <unk>.
Given that you've had more supply this year.
It seems like you're in stock levels are better and assortment.
Is it just being.
More in stock with you with a full array of assortment is that how much of a benefit has that been to depletions.
Well, obviously any time you have all the packages and you have all the the availability that you would expect it certainly is beneficial.
I must say as our team did an outstanding job of making sure throughout the challenging time, when we had some product outages to make sure that we had availability of the brand.
<unk> size switching meaning package size switching within the beer business is very strong because most consumers come into the store planning to buy a corona or modelo and therefore, we will adjust their package size selection based on what's available.
We've seen that through in depth consumer research. So so yes. It certainly helped some because it provides the wide array of selection that we owe to consumers.
But.
It doesn't change the algorithm radically.
Because as you've seen we continue to show high single digit volumetric in double digit.
Top line growth within the business almost throughout the entire thing.
The other thing that I would say, though where where you do see some real change by availability of specific though we've said a couple of quarters ago, we had some challenges around brown glass, which significantly impacted the cyclical but didn't really change in fact, some of you on the call and ask questions about that and we are we can.
<unk> the Pacific those growth profile isn't what it once was and then it comes roaring back with 37% in the IRI data shows over 50% takeout increases. So I think it shows and confirms what we had said to you on prior quarters is the Pacific does a tremendous potential brand for us going forward and it is a great example to you.
Your question.
In instances, where we've had some challenges on inventory.
What can really happened on the strength of our inherent brands.
Thank you. Our next question today is coming from <unk> <unk> from Credit Suisse. Your line is now live.
Perhaps your phone is on mute.
Talk to us coming out.
I'm, sorry about that guys.
Hey, good morning.
Can we can.
Can you talk a little bit about the price increases you're.
Looking for a little more pricing, perhaps than you had expected for are they in place what's the magnitude and then.
On price gaps you gave pretty compelling reasons.
In previous quarters, and why you are going up perhaps less than the market given kind of our outlook for inflation.
Most of which has come through.
Can you maybe talk about kind of this new outlook.
And what has changed.
I think theres, two or three things that fall into that equation, you're correct. We have raised our expectation from one to two to two to three I think there's several things that are in play there we've been very excited by the buy rates.
Is that we've seen our cross our business one.
We obviously are doing our best to recover as best we can some of the inflationary pressures that Garth noted in his remarks, but we really haven't changed how we do pricing, we do our pricing SKU by SKU market by market all the way across the board.
But it will probably come into that two to three range, which again is up from what we expected.
Thank you.
An important part and I touched on a couple of questions ago is we're also seeing mixed benefits, which which does flow through in terms of how it presents itself.
When you have things like single serve is doing better which is a better mix item for US you see a lot of which are all almost all single serve being a better mix item for us. So you've got a combination of yes, we're going to take a bit more pricing, yes, youre seeing better mix.
In the overall equation and yet we're still doing it the way we're doing it which is skew by skew market by market.
And I believe it's remained judicious, we always keep the consumer in mind as we think about what we're doing relative to pricing and Thats certainly isn't going to change.
Thank you. Our next question is coming from Vivien <unk> from Cowen and company. Your line is now live.
Hi, good morning.
Hey, Bill.
Hi, I wanted to touch on your comment on safe banking I mean, I fully agree right like it's so hard to know but in the base case assumption is that Republicans.
It seems like there is maybe better than a 50% chance that.
Quick path historically canopy has indicated that.
Constellation Board sensitivity in your lenders sensitivity.
Is the key determinant in terms of their ability to close their purchase obligation on acreage that would certainly be meaningfully accretive to their bottom line and in turn how you guys are reporting that isn't it. So can you just offer any updated insight on how the board and your lenders are thinking about in the current kind of house version very narrow.
Thanks.
Sure.
We've failed miserably of predicting how that was all going to play out so I would take my answer with a slight grain of salt admittedly.
But we are cautiously optimistic that there will be progress what I'm, particularly.
Happy about relative to canopy is I think they are positioned to be a winner in the U S. They're wanna jetty and acreage lay.
Layouts.
Which are all ready to go.
<unk> are an important part of being a winter we still believe that in the longer run brands are going to matter and I think they are positioning themselves to have the right brands that will matter.
Over the long run here in the U S.
But we're optimistic I think everybody is optimistic that we're going to start to see the legislation loosen up.
Although again being able to predict that.
Would've failed miserably on that score, but we're hopeful.
Thank you. Our next question is coming from Nadine <unk> from Bernstein. Your line is now live.
Hi, guys I'd like to kick off with two long term questions here.
Sticking on the canvas points in the past you've alluded to U S. Federal legalization as being one of the key factors behind your continued confidence in the canopy investment.
But it is now one of the stated reasons for the meaningful impairment you took today, how long are you willing to wait to see U S legalization happen.
And do you see the size of your stake changing and canopy anytime soon.
And then similarly, a bigger picture question, you're Super premium beer brands continue to perform strongly in the last quarter, but the consumer is seeing increasing pressure on their wallets from macro pressures. So are you seeing anything if any changes in consumer behavior quarter to date from that macro pressure.
Yes.
Sure.
Okay.
Let me take the wallet question, then we can decide and take the other.
No. Unfortunately, we haven't one of the things that we recognize.
As beer Fortunately is a staple for many of our much of our consumer base.
So we've seen some variation in terms of the pack sizes that have been taken out but as I alluded earlier and we view this as a critical component the buy rates that we've seen have been increasing.
That's one of the first things you look at a number of times that people go to the store and what they take out when they are in the store.
So we are cautiously optimistic.
This is going to continue to go well for US I think it speaks to the strength of the brands and I think it speaks to the strength of the brand confidence that consumers have with us relative to cannabis I wouldn't expect you to see the size of our investment in that change.
And as to outlook I would just say that.
In terms of the first part of your question around legalization.
First of all that was one part of a multipart analysis to determine whether or not we needed to take to take the impairment that we announced today.
And that we.
We continue as Bill has said we continue to be.
Pleased with how the canvas category has unfolded in the U S. As Bill noted in his remarks, it's now a $25 billion retail sales opportunity in those states, where it's legal so it is it is starting to convert consumers consumers are adopting to the category.
And we are happy with the position that that canopy has in the U S and with the improvements that they're making in Canada.
Thank you. Our next question today is coming from Bill Chapell from true Securities. Your line is now live.
Thanks, Good morning.
Uh huh.
Couple of questions on Modelo.
Hello <unk>.
I can't remember is that the shipments.
You expand nationwide going to have an impact or a meaningful impact on the back half of year kind of shipments or is that more into next year or is it not meaningful and then second and I.
No that I should probably understand this but why isn't just coming out its modelo light I mean, it seems like with some of the confusion of Corona Premier.
The.
Consumer doesn't always understand that.
But it is a light beer or it's a low calorie beer so any.
Clarification would be helpful. Thank you.
Yeah, you bet Oro.
<unk> is going to be taken nationwide next fiscal year. So.
It will have no impact per se in the back half of this current fiscal year. It's in three test markets now and obviously those will continue but it'll be taken nationwide next year.
Look we did a lot of study as to what we thought was the best answer.
We if you actually look at the can.
We're really talking about the gold standard of life here.
I think the consumer will understand what theyre going to get our understanding from the researches that they do understand what it is and.
And certainly we were very pleased with the results of the test market.
Anxiously looking forward to seeing how it does on a national basis next year.
It's highly incremental.
And we're very excited about that as well so we're very optimistic about what.
Oral can do.
When that when Modelo has a quote light version unquote.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to Mr. Kneeland for any further closing comments.
Thank you again and appreciate all you joining our call today hopefully as you could hear we delivered another quarter of strong growth performance consumer demand for our higher end beer wine and spirits brands remained robust, giving us further confidence in their runway for future growth our core beer brands Modelo especial.
Seattle and Corona extra continue throughout shine the market and our next wave brands like Pacific out and Modelo, which a lot of our achieving very strong double digit growth. We continue to see opportunity ahead for our beer portfolio supported by continued consumer led premium position and our ongoing investments in brewery capacity.
The expansions the benefits of our wine and spirits strategy are also taking hold as our higher end brands continue to resonate with consumers and our global and Omnichannel efforts are yielding benefits, our largest premium wine fine wine and craft spirits brands, all delivered positive depletion growth and we achieved double digit.
Net sales growth in both DTC channels and international markets and we continued to demonstrate again that we are committed to capital allocation priorities to maintain our strong financial foundation balanced returns on reinvestment and deploy excess cash with discipline.
In closing as our next earnings call is not until January I'd like to wish everyone, a safe and happy holiday season, and as always we hope your celebrations will include enjoying some of our great products with your family and friends. Thanks again, everybody I appreciate your joining the call.
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.