Q2 2023 Constellation Brands Inc Earnings Call
Speaker 1: At this point, we are unable to comment further or provide additional information on this topic during 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 a special meeting or the reclassification to review these documents.
Speaker 1: Now, as usual, I would like to start by emphasizing a few key takeaways from our latest results. First,
Speaker 1: consumer demand for our products remains strong.
Speaker 1: Consumer-led premiumization trends continue across beverage alcohol, giving further confidence in the resilience of premiumization as a fundamental driver of demand for our brands.
Speaker 1: Birey, which captures both the number of trips a consumer makes and the amount they spend per trip, increased in the second quarter for both high-end beer and total wine categories in track channels.
Speaker 1: and buy rate for Hispanic high-end beer consumers, which is particularly relevant to our core beer portfolio, is also proving resilient.
Speaker 1: 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.
Speaker 1: and in our wine and spirits business, our wine portfolio gained share and outperformed the entire wine category and track channels while our craft spirits brand outperformed the higher end segment of the spirits category.
Speaker 2: Check it.
Speaker 1: Our beer business also continues to outperform the entire category.
Speaker 1: In the second quarter, our beer business remained the leading share gainer in U.S. track channels across the entire beer category and now accounts for 28% of the high-end segment.
Speaker 1: 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 in Mexico through optimization and productivity initiatives and the expansion of our breweries at Nava and over God.
Speaker 1: as well as the construction process of our new brewery in Veracruz are all advancing as planned.
Speaker 1: All of which has given us the confidence to increase the fiscal 23 net sales and operating income growth guidance for our beer business and continued conviction in our medium-term top-line growth and margin algorithm.
Speaker 1: 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. wholesaler business focused mainly on the mainstream segment to a global omnichannel competitor primarily focused on the higher end.
Speaker 1: And in our latest quarter, our largest premium wine brands, Kim Crawford, Robert Madavi Private Selection, Maomi and Raffino, and our largest fine wine brand, the Prisoner Wine Company, all delivered solid depletion growth.
Speaker 1: In our Craft Spirits portfolio, High West, Casa Noble, and Mi Compo all achieve strong double-digit depletion growth.
Speaker 1: In addition, our international and DTC channels each delivered double-digit net sales growth year over year and we continue to gain share in three-tier e-commerce.
Speaker 1: Fourth, our capital allocation priorities remain firm.
Speaker 1: Starting with our investment grade rating, 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.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: And lastly, our M&A focus remains on small acquisitions to fill portfolio gaps, particularly in our wine and spirits business.
Speaker 1: This included most recently the investment in a minority stake in Archer-Roos 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.
Speaker 1: We are proud to say that five years into our Focus on Female Founders initiative, we have fulfilled 76% of our commitment to invest $100 million in female-founded and female-led startups in the beverage alcohol sector.
Speaker 1: as part of our efforts to enhance social equity within the industry.
Speaker 1: Now let's move on to a more fulsome discussion of our performance in the quarter.
Speaker 1: As I mentioned earlier, our beer brands continue to resonate strongly with the consumer, gaining 1.8 points across the entire category and 2.5 points in the high-end segment contract channels.
Speaker 1: Medello Especial delivered depletion growth of over 10% and was the number one share gainer in the entire US beer category.
Speaker 1: It continues to strengthen its position as the number two beer brand in dollar sales and is the number one or two beer in 11 states, more than double the number of states from just three years ago.
Speaker 1: We continue to see further opportunities to maintain the growth momentum of Modelo Especial, particularly given the resilience of premiumization trends and our relentless focus on striving to close the brand's distribution and awareness gaps.
Speaker 1: Corona Extra maintained its momentum with 6% depletion growth and is the number 3 share gainer in tracked channels.
Speaker 1: It remains the number one most loved beer brand with both general market and Hispanic consumers And our La Vida Maschine campaign has maintained the number one spot in ad awareness across the beer category
Speaker 1: 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.
Speaker 1: Pacifico achieved depletion growth of over 37% and was a top 10 share gaining brand in track channels.
Speaker 1: We continue to see a fantastic growth runway for Pacifico as an emerging brand, particularly as the brand has significant distribution potential when compared to Medello, and even more so when compared to Corona Extra.
Speaker 1: Lastly, our Medello-Chelotta brands posted depletion growth of more than 60% for the second quarter. And Medello-Chelotta Limoni Sal was a Top 15 share gaining brand in track channels.
Speaker 1: Modelo Chilada remains the number one brand family in the Chilada space and owns nearly 60% market share of the Chilada segment nationwide.
Speaker 1: However, awareness for Medela Chilata 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 in additional flavors and package configurations to unlock new consumption occasions for this product.
Speaker 1: 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.
Speaker 1: This gives us confidence to increase guidance for our beer business as we now expect to achieve 8-10% net sales growth and 3-5% operating income growth for fiscal 23, which Garth will review in more detail shortly.
Speaker 1: That said, it is important to remember that in the third and fourth quarters of Fiscal 23, we will be lacking 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 occurred in the first half of Fiscal 22.
Speaker 1: 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.
Speaker 1: Looking forward, we are also confident that over the medium term our beer business remains well positioned to deliver 7-9% net sales growth and 39-40% operating margin supported by the sustained momentum of our core brands.
Speaker 1: the steady progress of our brewing capacity additions.
Speaker 1: and the continued development of our innovation lineup.
Speaker 1: including the momentum of our gelato brands, the recent launch of Fresca mixed, the expansion of Medello Oro from select test markets to the entire national market next year and the introduction of Corona non-alcoholic.
Speaker 1: The new non-alcoholic drinking age consumer is an attractive target as they also consume high-end beer as well as spirits and hard seltzers. 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.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: and relative to the market, the higher end portion of our wine portfolio, which includes our premium and fine wine brands, outperform the corresponding category segments.
Speaker 1: end portion of our wine portfolio, which includes our premium and fine wine brands, outperform the corresponding category segments and US track channels.
Speaker 1: Our Craft Spirits portfolio delivered dollar sales growth significantly ahead of higher-end segments of the spirits category.
Speaker 1: Our wine and spirits business also continues.
Speaker 1: to advance its mainstream strategy through a greater focus on brands and initiatives with higher returns
Speaker 1: including through the delivery of relevant and innovative products.
Speaker 1: As we also announced this morning, we continue to further premiumize our business with the divestiture of a portion of our mainstream wine portfolio combined with a couple of select premium brands to the wine group.
Speaker 1: When it closes, we believe this transaction will further enable us to focus our portfolio and efforts to deliver the industry leaning growth and margins that we continue to work toward.
Speaker 1: From an innovation perspective, we have several great examples of recently introduced products that are driving growth within our wine portfolio.
Speaker 1: Woodbridge Fox was the number two premium box share gainer in the second quarter.
Speaker 1: Naomi Redblend 750 was the number two wine skew.
Speaker 1: Kim Crawford's sparkling Prosecco was the number four new wine brand.
Speaker 1: and the recent launches of the prisoner Pinot Noir and blindfold Blanchon Noir are respectively seeing early successes.
Speaker 1: in priority accounts and the on-premise.
Speaker 1: Beyond product innovation, we continue to extend our growth in direct-to-consumer and three-tier e-commerce channels as well as international markets.
Speaker 1: Wyanden Spirits' DTC net sales grew 15% in the second quarter as our investments in these channels continue to yield strong performance.
Speaker 1: We also continue to outperform in three-tier e-commerce, delivering dollar sales growth 16 points ahead of the competition in the second quarter.
Speaker 1: Importantly, we're also outperforming in three-tier e-commerce with our beer business, which achieved a seven-point lead in dollar sales growth versus competition in the second quarter.
Speaker 1: Back to our wine and spirits business.
Speaker 1: International net sales grew 10% versus prior year, showing the continued momentum of our brands in the select international markets that we are targeting.
Speaker 1: 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.
Speaker 1: Now, let's move on to canopy growth.
Speaker 1: 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.
Speaker 1: particularly in the US, where the market was estimated at $25 billion at the end of 2021 and is expected to nearly double in size by 2026 as more states continue to legalize cannabis.
Speaker 1: In fact, the companies that Canopy invested in to establish its U.S. ecosystem.
Speaker 1: continue to perform strongly and to scale.
Speaker 1: We also remain supportive of Canopy's efforts to restructure its Canadian operations and its plan to further drive Biosteel's growth and believe these actions will also strengthen their business and ultimately provide an opportunity to enhance the value of our holding.
Speaker 1: Before I conclude, I also want to take this opportunity to highlight that we expect to release our 2022 ESG impact report later this month.
Speaker 1: The report seeks to provide a comprehensive review of our ESG strategy and key initiatives designed to make a positive difference in our communities, safeguard our environment, and advocate for the responsible consumption of beverage alcohol.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: 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.
Speaker 1: In closing, I'd like to reiterate our main takeaways from this quarter. Number one.
Speaker 1: Consumer demand for a 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.
Speaker 1: 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.
Speaker 1: our core imported brands.
Speaker 1: continue to outperform the industry.
Speaker 1: Adele Especial further strengthened his position as the number two beer in the US market.
Speaker 1: and continues to gain ground as the number one share gainer.
Speaker 1: And Corona Extra also maintained its momentum, delivering solid growth rates and taking the number three share gainer spot in the beer category.
Speaker 1: 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 2023.
Speaker 1: 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 are also performing strongly internationally with our higher end brands and e-commerce and DTC channels.
Speaker 1: And number four, we continue to deliver on capital allocation priorities by maintaining our investment grade credit rating, delivering cash returns to shareholders through dividends and share buybacks. We continue to deliver on capital allocation priorities by maintaining our investment grade
Speaker 1: 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.
Speaker 3: Thank you, Bill, and good morning, everyone.
Speaker 3: As Bill mentioned, our business continued to perform well in the second quarter, delivering another strong set of operating results.
Speaker 3: We are making good progress against our operating plans and strategic initiatives.
Speaker 3: And we are now expected to exceed our previously stated fiscal 2023 net sales goals for the beer and wine spirits businesses and our operating income goal for the beer business.
Speaker 3: 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.
Speaker 3: Additionally, we achieved a 10% uplift in operating income underpinned by a significant double-digit increase in the operating income of our beer business.
Speaker 3: Our strong cash flow results support dividends and incremental share repurchases in Q2 that put us on track to exceed our $5 billion goal in cash returns to our shareholders by the end of this fiscal year.
Speaker 3: 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.
Speaker 3: 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.
Speaker 3: Q2 shipment volumes were generally aligned with depletion volumes, and inventories across the supply chain remain at historical norms.
Speaker 3: From a growth perspective, depletions for the quarter were up nearly 9%, which was propelled by the continued strength of the Modelo Speciale, Corona Extra, Pacifico, and the Modelo Chilada brands.
Speaker 3: Selling days in the quarter were flat year over year and will continue to be flat in Q3.
Speaker 3: Moving on to beer margins.
Speaker 3: We continue to experience headwinds driven by the inflationary economic environment, particularly in packaging material costs and shifts in mix.
Speaker 3: However, beer operating margin increased over 330 basis points to 40.5%.
Speaker 3: primarily driven by favorable impact from pricing.
Speaker 3: lower obsolescence charges, and lower marketing spend, as well as the favorable impact of fixed cost absorption from strong shipment volume growth.
Speaker 3: 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.
Speaker 3: Marketing as a percent of net sales decreased 170 basis points due to the timing of our media spend.
Speaker 3: We continue to expect that marketing as a percent of net sales will be in the 9-10% range for the full year, 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.
Speaker 3: Given the strong performance of our beer business, we are now targeting full year fiscal 23 net sales growth of 8 to 10 percent and operating income growth of 3 to 5 percent for that business.
Speaker 3: Our updated Fiscal 23 outlook includes a 2-3% price increase, which is higher than the previously anticipated
Speaker 3: 1 to 2 expectation and medium-term algorithm range.
Speaker 3: as elevated costs continue to create pressure across the supply chain.
Speaker 3: However, we continue to expect an implied operating margin of approximately 38% for fiscal 23.
Speaker 3: 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.
Speaker 3: additional headcount in training, as well as increased depreciation from our brewery capacity expansions.
Speaker 3: and higher marketing spend as previously referenced.
Speaker 3: Now shifting to Hawaiian Spirits.
Speaker 3: Q2 fiscal 23 net sales increased over 1%, driven primarily by an increase in bulk sales and favorable pricing.
Speaker 3: And as Bill noted, Q2 depletion growth was solid for our largest premium wine brands, Kim Crawford, Robert Mondavi Private Selection, Maomi, and Raffino, our largest fine wine brand, the Prisoner Wine Company, and our largest craft spirits brand, High West Casa Noble, and Mi Campo.
Speaker 3: Operating margins decreased 40 basis points to 19.3%, primarily driven by the continued impact of inflationary headwinds and higher general administrative expenses.
Speaker 3: 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.
Speaker 3: partially offset by favorable fixed cost absorption as a result of the lapping of the New Zealand frost and the wildfires in the US.
Speaker 3: The increase in general and administrative expense was driven by compensation and benefits, primarily to improve marketing effectiveness.
Speaker 3: Marketing was favorable due to the timing of spend.
Speaker 3: For full year fiscal 23, we now expect wine and spirits net sales to come in flat to down 2% and operating income to increase 3-5%.
Speaker 3: This implies operating margins of about 24% for fiscal 23.
Speaker 3: Despite significant inflationary pressures and the inclusion of Cooper and thief in the divestiture previously referenced by Bill.
Speaker 3: We continue to expect a considerable improvement in operating margins, albeit at a lower point than previously anticipated.
Speaker 3: 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.
Speaker 3: consumer-led premiumization and mix improvement, mainly in our fine wine brands.
Speaker 3: Incremental pricing actions executed in Q2 that will be fully reflected in the second half.
Speaker 3: A bountiful New Zealand harvest.
Speaker 3: which will drive volume and enhance margins for Kim Crawford.
Speaker 3: lowering marketing as a percent of net sales, and finally continued benefits from our cost savings initiatives.
Speaker 3: Now let's proceed with the rest of the P&L.
Speaker 3: As we also discussed in our Q1 earnings call, increased investment in our Digital Business Acceleration initiative was the primary driver of our higher corporate expense.
Speaker 3: The majority of the spend in our Digital Business Acceleration Program, or DBA for short,
Speaker 3: 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.
Speaker 3: in FY24.
Speaker 3: As a reminder, the goal of our DBA initiative is to support our aim to become a digital leader and capture value.
Speaker 3: It is a combination of data, technology, and operating models, including evolving ways of working, organizational structures, and acquiring talent.
Speaker 3: DBA builds on the implementation of our SAP platform that was completed last year, and we anticipate it will enable us to deliver cost savings and greater efficiency in a number of areas by taking our digital strategy to the next level.
Speaker 3: The first phase of our DBA program is focused on three key areas.
Speaker 3: supply chain, marketing and procurement, each with their own objectives.
Speaker 3: 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,
Speaker 3: and unlock demand for our products by analyzing and connecting multiple consumer data sources.
Speaker 3: We continue to expect $35 to $40 million of spend in our DBA program for fiscal 23 as part of our total $265 to $270 million of corporate spend anticipated for the full year.
Speaker 3: The comparable basis interest expense for the quarter was relatively unchanged.
Speaker 3: However, we now expect interest expense for fiscal 23 to be between $360 and $370 million as a result of the July equitization of the Canopy debt securities and rising interest rates.
Speaker 3: This excludes the impact of any interest expense associated with the funding of the $1.5 billion cash consideration payable in the event that Class B common stock reclassification closes.
Speaker 3: From a balance sheet perspective, should the reclassification be approved, on a Q2 FY23 pro forma basis, our net leverage would increase to approximately 3.5 times when considering funding for the premium payment and excluding Canopy Equity Earnings.
Speaker 3: We ended the second quarter with a net leverage ratio of approximately three times, excluding canopy equity areas.
Speaker 3: As Bill noted, we have nearly completed our goal of returning $5 billion to cash to shareables.
Speaker 3: We will continue towards our goal through planned dividend payouts and opportunistic share buybacks throughout the remainder of this fiscal year.
Speaker 3: 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.
Speaker 3: That said, we continue to expect our weighted average diluted shares outstanding to be approximately $186.5 million for fiscal 23, including shares were purchased in Q2.
Speaker 3: As a result of the adjustments to our beer business growth outlook for fiscal 23 and the partial offset from higher interest expense, we now expect EPS comparable guidance to be in the $11.20 to $11.60 range, which represents a 10-cent increase at the top end of our prior guidance range.
Speaker 3: Moving to free cash flow, which we define as net cash provided by operating activities less CapEx.
Speaker 3: We generated free cash flow of $1.2 billion for the first half of fiscal 23.
Speaker 3: which is a 4% increase versus prior year, reflecting strong operating cash flow, partially offset by a 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.
Speaker 3: In addition, our brewery optimization and productivity initiatives have enabled us to utilize incremental capacity from our existing footprint.
Speaker 3: We now estimate our current total capacity to be approximately 41 million hectolears, giving us additional production flexibility and enhancing the returns of our prior capital investments.
Speaker 3: We continue to expect fiscal 23 free cash flow to be in the range of $1.3 to $1.4 billion, which reflects operating cash flow in the range of $2.6 to $2.8 billion.
Speaker 3: unchanged capex of 1.3 to 1.4 billion dollars.
Speaker 3: Lastly, on Canopy Growth.
Speaker 3: We recorded a $1.1 billion impairment on our investment, which was excluded from our comparable basis results.
Speaker 3: This non-cached item was driven by the following factors.
Speaker 3: the period of time for which the fair value has been less than the caring value.
Speaker 3: and the uncertainty surrounding Canopy's stock price recovery in the near term.
Speaker 3: Canopies previously announced goodwill impairment for their cannabis operations.
Speaker 3: and the uncertainty of US federal cannabis legalization.
Speaker 3: In addition, we also recorded a $651 million equity loss from our share of ownership in Canopy which includes $461 million of Canopy's goodwill empowerment.
Speaker 3: While disappointing, we continue to believe that Canopy's focus on premiumizing its cannabis-branded portfolio to improve their performance in Canada is appropriate.
Speaker 3: And we also remain supportive of Canopy's efforts in the U.S. to strengthen their emerging CPG brand distribution and build of a competitive THC ecosystem.
Speaker 3: In closing, we continue to deliver strong business performance and are proud of the continued progress we are making against our operating plans and strategic initiatives.
Speaker 3: 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 omni-channel competitor in line with consumer preferences, primarily focused on the higher end.
Speaker 3: With that, Phil and I are happy to take your questions.
Speaker 1: Thank you and I'll be conducting a question and answer session. As a reminder, please ask one question then return to the queue. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. One moment please while we poll for questions.
Speaker 4: Our first question today is coming from Dara Moshinian from Morgan Stanley . Your line is now live.
Speaker 5: Hey guys.
Speaker 3: So, on your business, there's been a pretty nice halo the last few quarters between scanner data and the reported depletions just as on-premise recovers post-COVID. Wasn't as much the case this quarter, so can you just give us some detail on on-premise and untracked channels in general and Q2 and what you're seeing there. And then on the beer margin side, obviously a big beat in the quarter versus consensus. That's great news.
Speaker 3: think about that would be helpful.
Speaker 1: So, 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 and occasion for our beer business and 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 is always important to look at.
Speaker 1: is our depletion volume has been very consistent with what we look at in IRI trends. As an example, in our beer business, in the most recent IRI trend, the 26-week data showed in totality 7.5% growth and purely import business showed 9.4% growth. That's very consistent with our roughly 9% depletion growth in this particular quarter. The other place where you'll also see strength within our business is what we looked at in our?? Gustaf Revolution dated as 9and 20 Acceptance, as we've seen in Auto Uhvery A We were – the
Speaker 1: is in some of the untracked channels in smaller Hispanic, particularly Hispanic accounts, particularly out west, which are not tracked by IRI or Nielsen channels. So, you know, all of that I think, again, our depletion growth profile looks exactly like what the takeout trends and track 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.
Speaker 1: due to the variance that we saw last year in weather-related activities and when we shipped and when we did maintenance and things of that nature which I'm sure Garth will touch on here in a moment.
Speaker 3: Yeah, they're on the margin piece. So one, 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 sort of a rebalancing of shipments. Again, this will be more—because we're in a more typical production environment, you will see a more sort of normal first half versus second half margin profile.
Speaker 3: We are expecting margins in the second half to be negatively impacted, as I said in my remarks, as the benefits from pricing and some of the cost-saving actions will be more than offset. Again, by ongoing inflationary pressures, from a materials perspective, we continue to see some pressure from corn, as well as cans and cartons and glass. 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...
Speaker 3: capacity coming online. And then finally, we're expecting to see a significant increase in marketing in the second half, the first half as we support new marketing campaigns around college and NFL football.
Speaker 3: For FY24, our guidance 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.
Speaker 6: Thank you..
Speaker 4: Our next question is coming from Kevin Grundy from Jeffries. The water line is now live.
Speaker 3: Great, thanks. Good morning everyone. I wanted to pivot to the wine sale this morning, given the continued premiumization focus, but you're holding on to Woodbridge, a more value-oriented brand. I think the view there in the past has been that that brand offers scale.
Speaker 3: Just a little bit on how the deal came about, whether you can comment whether you're done and 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 wine portfolio, albeit a narrowed down one and more focused on the premium end of the category, whether you think it still makes sense.
Speaker 3: within the broader portfolio relative to a beer business, much higher growth, margins, and return on capital. So I'd love to get your thoughts there. Thanks so much.
Speaker 1: Sure. Look, we're very pleased with the progress that we're seeing in the wine business and the divestiture that you saw this morning, again, helps to reshape the portfolio. The way I think you should think about our total business is we are increasingly focused our attention on the higher end. We've noted that for many, many years as it relates to beer. We have now specifically related that on our wine and spirits business as well. As you probably noted, most of the
Speaker 1: the tucking work that we've done in our wine and spirits business has been focused on Craft spirits as well as higher-end wine brands that fill portfolio gaps all of which focus on the high end Where we believe the growth and margin profile Are 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 on
Speaker 1: on seeing a growth profile and an improved margin profile on that business and we believe we're well on our way to delivering that and today is just again one more step in the process of achieving that goal.
Speaker 4: Thank you. Our next question is coming from Lauren Lieberman from Barq LaserLine is now live.
Speaker 7: Great, thanks so much. Good morning.
Speaker 7: I was just curious on the second half outlook, just in terms of the cost structure, because some of the things you've called out in terms of rolling hedges and so on, I would have thought you might have had some visibility into previously. I was just more curious on what's changed on the second half cost outlook rather than just why the second half is different than the first half. And then the second thing was you made a pretty clear statement on the medium term algorithm still looking for.
Speaker 3: So, Lauren, on the first half of that, around what changed from the first half of the year to the second half of the year, and I would say that really nothing changed in our mind. We give guidance 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.
Speaker 1: You want to answer the second half of that, Phil? Yeah, sure. I think the way that, you know, we'll obviously give specific guidance on Fiscal 24 when we get to that timeframe, but I think what we are saying is we continue to see a long runway for growth in our beer business, and we think that's in the 7 to 9% range consistently. We think we're going to see consistent delivery of 39 to 40% on the margin play. As Garth and I have always said over the last several years...
Speaker 1: You know, you have opportunities to be ahead or behind that in any one particular year. This year we're a little 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'll give specific guidance around 24 when we get there. But, you know, we believe that's a consistent approach that we're going to be able to deliver on with consistency for the next several years.
Speaker 4: Thank you. Our next question today is coming from Bonnie Herzog from Goldman Sachs. Her line is not live.
Speaker 8: All right, thank you. Good morning everyone. I was hoping for a little more color on your beer shipments versus Depletions, I guess first it would be helpful to hear, you know, how your quarter to date Depletions have been tracking and then second, you know, you mentioned the depletion should outpace shipments You know the second half but just really trying to think through how we should think about your shipments You know in the context of your your new top line guide
Speaker 8: it does imply barely any shipment growth in the second half. So I guess I'm really trying to understand this given, you know, you're lapping some of the brewer maintenance you had last year in Q3, and then you have the rollout of some really strong innovations such as Medela Oro that will, you know, need to be shifting Q4. So I'm just kind of thinking through your new top line guidance and it, you know, it feels pretty conservative. So I just want to make sure I understand this. Thanks.
Speaker 1: Sure, well to answer your first part of your question, Bonnie, the start of the quarter of September was very solid and it's consistently in line with what we expect our annual numbers to be. So we certainly think we're off to a good start in Q3. You know Garth said this at the beginning of the year, that it was going to be a very lumpy year. The important part that I think everyone should think about is...
Speaker 1: Our depletion, the actual volume of our depletions and our shipments year to date are almost on top of one another.
Speaker 1: 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 biometric basis, they're very similar. And you're 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 success of our business is the depletion rate. And our depletion rate year to date on our beer business is in just under 9%. So, we're going to see the best thing to do to look at the success of our business.
Speaker 1: 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, you know, we've 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 take away one iota for the outperforming success that our beer business continues to have in the marketplace.
Speaker 4: Thank you. Our next question today is coming from Andrea Tichera from JP Morgan. Your line is now live.
Speaker 9: Thank you. So I just want to go back to this question because it does imply though that of course you shipped more than you had in the plations in the 9%. So what you're saying now we should be seeing shipment volume negative in the third and the fourth, which is that what's implying because we see it at flat revenues if you understood it correctly, minus 2 to plus 2, given your guidance, and you have pricing so you're just telling us to assume.
Speaker 3: for the first half of the year have been in line with one another. So we have not overshipped beyond the 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 the differential. As it relates to your point on pricing, as we said in our scripts, we are taking more pricing this year. We upped it for this year from our normal 1-2% algorithm to 2-3%.
Speaker 1: 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 are seeing mixed benefits within the portfolio as well, which will be advantageous.
Speaker 4: Thank you. Your next question is coming from Rob Ottenstein from Evercore. Your line is now live.