Q4 2023 Constellation Brands Inc Earnings Call
Greetings and welcome to the Constellation Brands' fourth quarter and full year 2023 earnings call.
At this time all participants are in a listen-only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Joe Suarez, Vice President of Investor Relations. Thank you. Joe Suarez, Vice President of Investor Relations,
Thank you, Daryl. Good morning all and welcome to Constellation's brand ERN fiscal 2023 conference call. I'm here this morning with Bill Newlands, our CEO , and Garth Hankinson, our CFO . As a reminder, reconciliation between the most directly comparable GAAP measures and the most directly comparable ERN measures is a
and any non- GAAP financial measures that's got undisclosed are included in our news release or otherwise available on the company's website at www.cbrands.com
Please report the news release and consolation's SET filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we'll also be making available in the investor section of our company's website a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. TAnalysts.gov Wayneamine Fellow
Before turning the call over to Bill, in line with prior quarters, I would 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 is Bill.
Thank you, Joe, and good morning, everyone. I'm pleased to report that our team delivered another solid year of performance in Fiscal 23, driving a 7 percent increase in net sales and a 3 percent increase in comparable operating income despite elevated inflationary headwinds faced throughout the year.
We delivered record net sales and comparable operating income of $9.5 billion and $3 billion respectively.
We were recognized as the number one growth leader among large CPG companies by IRI and Boston Consulting Group in calendar year 22.
and we're the only CPG company of scale in recent times to make their top 10 ranking for 10 consecutive years.
Our performance was driven by strong execution of our strategy, which centers on continuing to build powerful brands that people love.
to introduce consumer-led innovations that address emerging trends and consistently shape our portfolio for profitable growth.
to deploy capital with discipline while balancing priorities and operate in a way that is both good for business and good for the world.
Here's how each of our segments delivered against each of these objectives in fiscal 23
Our beer business delivered another year of double digit net sales growth and its 13th consecutive year of shipment volume growth while maintaining best-in-class margins.
We extended our lead as the number one high-end beer supplier in the U.S. and as the leading share gainer in IRI channels with a 12% increase in dollar sales.
We increased depletions by nearly 27 billion cases and delivered net sales and operating income growth well above the initial top end of our guidance range.
We continue to build momentum for our anchor brands.
Medelos Speciale maintained its position as the top-sheer gainer and the number one high-end beer brand in the category increasing to patients by 9%.
Karana Extra was the third largest share gainer and the number three high-end beer brand in the category, increasing depletions by nearly 4%.
Pacifico gained significant momentum as a top 10 share gainer in track channels delivering completion growth of over 30%.
Several consumer-led innovations within our Medello-Chelotta franchise served as growth catalysts in fiscal 23.
Our Iran Apakosa flavor and new variety pack added over 1.6 million new cases of depletions large allotta brands.
Our new Le Monde Sal 12 ounce 12 pack helped to more than double the depletions of that flavor to over 5.6 million cases.
and in track channels the LeMans E-Sal 12 pack with a top 15 new package SKU and a variety pack of top 10 new breads.
We continue to invest in our beer business, deploying over $800 million in capital investments in fiscal 23, which supported the ongoing expansions of our brewing capacity at Overgon.
the continued development of our new ABA alcohol production line at Nava, and the early stage work at our new site in Veracruz.
As part of our commitment to water stewardship, we recently worked with local officials and Water Authority.
to complete a project that updated water infrastructure in the city of Zeragosa near a novel facility which improved water accessibility for most of the families in this town that is approximately 13,000 people.
This is just one of the number of efforts we have underway in Mexico as part of our water stewardship commitment.
As we look to fiscal 24, we will continue to prioritize investments against our core brands, the Delos Speciale, Hurana Extra, and Pacifico.
We believe that the fundamental growth drivers to these brands, including awareness,
distribution, and demographic upside opportunities remain as strong as ever.
We're excited about several consumer-led innovations that are currently hitting the market, including Moderna's B
which exceeded both external and internal benchmarks in three test markets where we trialed it last fiscal year, and Corona non-alcoholic, which addresses the rapidly growing Betterment trend.
We'll also continue to build momentum for our gelato franchise with the introduction of a second 12 ounce 12 pack for our best selling traditional gelato flavor and with the new spicy watermelon flavor Sandia Biconte.
And, we'll continue deploying cattle to enhance our brewing capacity to meet the anticipated continuing robot demand for our products, both near and long term.
years, our wine and spirits business has transformed from a U.S. wholesale business, mainly serving the mainstream segment, to a global omnichannel competitor with a higher-end focused portfolio.
And this strategy is working as the strength of our higher-end brands supported our outperformance against the broader market.
While lower demand for our mainstream brands drove a 2.1% volume decline for our Lion and Spirit portfolio and IRI channels, we outperformed the 2.6% volume decline for the combined U.S. Lion and Spirit categories in fiscal 23.
We continue to focus on the growth of our consumer preferred higher end brands within our portfolio. Our Espiro portfolio, which includes our fine line and craft spirits brands, deliver double digit shipment growth.
In addition, it significantly outpaced the fine wine and craft spirits segment led by the Prisoner Wine Company, which delivered depletion growth approaching 10% and our craft spirits portfolio, which achieved depletion growth approaching 29% in US wholesale.
In addition, these brands deliver exciting consumer-led innovations such as the Prisma's Winefold Blanc de Noir, Casa Noble's Ultra Premium Marquez Tequila, and our Mi Capo Ready to Drink cocktails.
which are still in early stages of the life cycles, are contributing to our expanded process.
at the higher end of the market.
Meanwhile, our ignite portfolio continued to drive the momentum of our premium brands, such as Miyomi and Kim Kroger, which delivered the fusion growth of 5% and 7% respectively, both gaining share in their respective segments.
We continue to complement the growth of our core premium products with innovations that broaden the offerings of these consumer preferred brands. As an example, Naomi's new Red blend remains the number two wine skew since its launch and Kim Crawford's Prosecco was the number two new wine brand.
Within our Ignite portfolio, the performance of our hiring premium brands was offset by our remaining mainstream wine and spirits brands, namely Woodbridge Inspecta, which experienced declines versus the market in the US. We continue to focus on stabilizing and revitalizing these brands.
To further support our strategy to reshape our wine and spirits portfolio to the higher end, we've invested several residual mainstream brands and acquired a smaller higher end wine brand and a ready to drink cocktail brand.
Of note, our relatively recent acquisition, the My Favorite Neighbor portfolio, is delivering substantial growth and performing above our initial expectations.
So overall on fiscal 23, well net sales for our Lion Spirits business declined just under 4%. A large part of that was due to the recent divestiture of primarily mainstream brands that I just referenced.
Despite the strong performance of our higher-end brands, on an organic basis, net sales declined by 2%, mainly driven by lower demand for our mainstream brands reflecting continued consumer-led premiostation trends, which I also noted earlier.
We continue to build momentum for our higher-end brands and continue to accelerate our performance in key channels such as direct-to-consumer and international markets, which grew net sales by 29% and organic net sales by 4%, respectively.
Looking forward, we see an opportunity to continue to grow the ETC and international markets by investing in our premium line, fine line and craft spirits brands that tilt their growth.
for DTC and international routes to market.
Importantly, our Wine and Spirits business delivered Operating March expansion in fiscal 23, further demonstrating the benefits of its strategy and making additional progress toward its medium-term targets.
Overall, we are exiting the year in wine and spirits on solid footing and I remain confident in the pathway of that business. The solid performance driven by our beer and wine and spirits teams enable us to return nearly $2.3 billion to shareholders.
and share with purchases and dividends in fiscal 23.
And we further demonstrated our capacity to conduct opportunistic share buybacks with an additional nearly $300 million of repurchases in the fourth quarter.
This means our dividend payments and buybacks since fiscal 2020 total more than $5.4 billion, well above our $5 billion goal.
Moving forward, we plan to continue to deliver against our capital allocation priorities with our disciplined approach. Our fiscal 24 earnings and cash flow outlook should enable us to move closer to our net leverage ratio target to support dividend payments in line with our payout ratio target.
to continue to deploy capital to bear brewing capacity additions and hospitality investments in line and spirits business, and to opportunistically pursue additional share repurchases and small-gap billing acquisitions.
Lastly, we remain committed to making meaningful progress against our enterprise ESG goals, which include reducing Scope 1 and 2 greenhouse gas emissions by 15% by fiscal 25 from a fiscal 20 baseline and restoring more than 1 billion gallons of water withdrawals from local watersheds.
while also improving accessibility and quality of learner for communities where we operate between fiscal 23 and 25.
Water stewardship in particular has been a top priority for our team.
And I'm pleased to announce that we have already surpassed our fiscal 25 goal related to water restoration.
We'll look to announce later this year new targets for our water stewardship efforts, as well as other important areas that are part of our ongoing commitment to ensuring the long-term viability of our local communities and this environment.
We have also significantly enhanced RESG reporting, adding references aligned to the Sustainability Accounting Standards Board framework and considering recommendations from the Task Force on Climate-related Natural Tumblr Values that advisersshows. Pokestrel millennium, removing the moisture content and frequency of the radiation flavours from the commanding
As we look ahead, we intend to continue to take steps to more fully integrate ESG into our core business planning process.
establishing thoughtful, specific, measurable, and time-bound targets.
supported by robust strategies and operating plans that we can make map plus progress against.
We believe this approach bests our interests of our business, shareholders, other stakeholders and our surrounding communities as it seeks to integrate ESG into our business operations.
and helps ensure that we can clearly deliver on our stated commitments.
So in summary, we delivered another solid year of performance, resulting in record net sales and comparable operating income, despite elevated inflationary head rents based throughout the year. Our performance was driven by strong execution of our strategy, and we continued to make good progress against all dimensions.
building brands that people love, complementing growth of our core products with consumer-led innovation.
deploying capital with discipline while balancing priorities against our organization.
and continuing to operate in a way that is both good for business.
and go to the world.
With another strong ear of execution against our strategy behind us, we're quite confident in our ability to continue building momentum in Festival 24. And with that, I will turn the call over to Garth.
Thank you, Bill, and good morning, everyone.
Fiscal 23 was another solid year for our company as we continued to relentlessly deliver on our operating plans and strategic initiatives.
Despite the inflationary pressures that both our industry and consumers have been facing, we demonstrate, yet again, the strength of our adaptable businesses, higher-end brands, and resilient teams.
We expect the same focus and dedication to further support our momentum in fiscal 24.
So, let's review in more detail our full year fiscal 23 performance and fiscal 24 output.
As always, I will focus on comfortable basis financial results. Starting with the fiscal 23 performance of our beer business, net sales increased $713 million, or 11%, exceeding the upper end of our guidance range.
This was primarily driven by solid shipment growth of approximately 7% as strong demands continue across our portfolio.
supporting a 464 million dollar uplift in net sales for incremental violence.
NetSails also benefited from favorable pricing in excess of our unusual 1-2% average annual pricing algorithm. NetSails also benefited from favorable pricing algorithm.
As we previously noted, the incremental pricing actions taken in Fiscal 23 were in response to cost pressures across the value chain due to inflationary headwinds.
We introduced larger pricing increases and made pricing adjustments in certain markets ahead of our regular case.
Depletion growth for the year was over 7%, which as Bill noted, was driven by continued strong growth in our largest brands.
Modelo Speciale, Rode Extra, Pacifico, and the Modelo Chilada brands.
On premise depletions through 15% year over year and on premise volume accounted for approximately 12% of total depletions in fiscal 23. During the mid-teen volume share.
from prior to the start of the pandemic.
As previously guided, our shipments and deletions were closely aligned on an absolute basis. Moving on to the bottom line for our beer business.
Operating income increased 6% also seating the upper end of our guide's range.
This increase was largely driven by a $492 million benefit from net sales growth and yielded an operating margin of 38.3%.
which was in line with our implied guidance range. As expected and noted over fiscal 23, operating margins were negatively affected by inflationary evidence.
For the import portion of our beer business, which represents nearly the entirety of CODS, we face an increase of approximately 16% in our raw materials and packaging costs.
which was largely driven by inflationary pressures that resulted in an 8% increase on a per case basis. This reflected some benefits from the lapping of the Seltzer Oscillation Charge in fiscal 22.
As excluding any obsolescence impact, the increases in our raw materials and packaging costs would have been 20% on an absolute basis and 12% on a per case basis.
Note that these two cost categories, including the obsolescence impact, represented just over 55% of the import portion's cost in fiscal 23.
We also saw a 12% year-over-year increase in freight costs.
mainly driven by incremental shipment expenses that were offset by efficiency initiatives. The rate costs were 5% up on a per case basis and account for just under 25% of import costs.
we faced a 14% rise in labor and overhead costs that was mainly driven by our brewery capacity investments.
Labor and overhead were up 7% on a per-taste basis and accounted for just under 15% of the import costs. In addition, operating margins for the beer business were also affected by a $41 million or nearly 22% increase in depreciation and
almost entirely associated with our brewery capacity investments.
A $55 million or nearly 9% increase in marketing spend related to incremental investments in corporate sponsorships.
and a 48 million or nearly 14% increase in other SG&A driven by incremental sales support to align with the momentum of our beer branch.
Note however, that while our marketing investments increased when compared to the prior year, they were still within our 9 to 10% range as a percentage of net sales.
All of that said, it's important to note that we still delivered best in class margins for our beer business in fiscal 23.
Now shifting to our wine spirit business. First, please recall that we divested a collection of primarily mainstream wine brands from our wine portfolio in fiscal 23. So during today's remarks, I will also be discussing top line on an organic basis, which excludes the contributions from the divested brands.
As Bill noted, despite the strong performance of our higher-end wine and spirits brands, on an organic basis, net sales declined 2%, ultimately landing in our guidance range.
The decline in net sales, excluding the impact of the divestiture, was primarily driven by our mainstream brands as they faced challenging market conditions and lapping of prior fiscal year inventory bills. The decline in net sales, including the impact of the divestiture, was primarily driven by
Again, this decline was partially offset by strong growth in our higher end brands, which outperformed in the U.S. in the higher end category for both linospheres and total U.S. line mark.
Our higher-end brands also had strong growth in our emerging and rapidly expanding direct-to-consumer channels and international markets.
Over time, we expect our portfolio to continue to migrate toward the higher end and for these higher end brands, channels and markets.
to support our top-line growth acceleration. Shipments on an organic basis decreased by under 8% and depletion decreased by 3%.
As just noted, this volume decline, which reduced organic net sales by $148 million, was driven primarily by our mainstream brands, as mix in price, largely driven by our higher end brands, provided a $111 million uplift to organic net sales. B Rift seems to suggest Bpi is going to be difficult to produce, so they are stepping
excluding the gross profit, less marketing of the brands that are no longer part of the business, following their divestiture in fiscal 23, increased 2%.
and operating margin increased 80 basis points to nearly 23%.
increased 80 basis points to nearly 23% also reflecting the same exclusion.
This margin increase was driven by a $12 million uplift from net sales flow-through.
A stable product mix was supported by lower grade costs as well as a strong New Zealand harvest.
Benefits from other cost savings actions primarily resulting in lower break costs that help to partially offset higher logistics and material costs.
and more efficient marketing expense from enhanced investment strategies which increase focus in the highest return opportunities.
which supported a $20 million tailwind to operating in-hill. These benefits were partially offset by $17 million in higher SG&A from increased headcount as we continued to strategically invest in our growing DTC channels. We remain well positioned to
to continue to expand margins in our wine and spirits business over time with mixed improvements and productivity initiatives in the future.
Now moving on to the rest of the piano.
Now moving on to the rest of the P&L. In fiscal 23 our corporate expense...
included approximately $270 million from SG&A and $20 million from unconsolidated investments related to our venture's portfolio.
All in, landing at the low end of our guidance at $290 million.
Within the SG&A portion of corporate expense, the implementation of our DBA program, which stands for Digital Business Acceleration, accounted for $47 million.
As a reminder, we introduced our multi-year DBA initiative in Fiscal 23 and expect similar investments to carry into Fiscal 24.
Interest expense for the year increased 12% to approximately $400 million coming in at the upper end of our guidance range.
This increase was driven primarily by the financing of the stock reclassification, which took place in Q3 of fiscal 23.
as well as the impact of rising interest rates on approximately 15% of our debt with adjustable rates.
Our full year, comparable basis effective tax rate, excluding Canopy Equity Earns, came in at 19.2% vs 17.5% last year.
as we've lacked favorability in fiscal 22, primarily driven by higher stock-based compensation activity.
Pre-cash flow for fiscal 23, which we find is net cash provided by operating activities, less capex, was above the upper end of our guidance range at 1.7 billion.
CapEx totaled $1 billion including over $800 million of investment in our beer business.
CAFEX came in below our guides primarily due to timing shifts in the spend for certain materials and equipment of our Mexico brewery investments at our Nava and Overgone facilities.
As of the end of fiscal 23, our Mexico brewing operations had a total nominal capacity of approximately 42 million hectoleaters.
This includes 32.5 million hectoliters at our novel facility and 9.5 million hectoliters at our overgrown facility. This represents a 1 million hectoliters uplift at our novel facility relative to the capacity we communicated a few months ago.
This uplift is once again the result of our continued productivity initiatives that have unlocked additional production flexibility from the existing footprint of our breweries.
As a reminder, earlier this year we shared that these initiatives had unlocked additional capacity of 1.5 million hectoliters at NAVA and half a million hectoliters at Oregon.
In light of the 2.5 million hectoliters of productivity capacity unlocked at Nava in fiscal 23, we have slightly adjusted the ramp-up plans for our new ABA production line at that facility, which I will discuss shortly. With that, I will turn it over to the next speaker.
Let's move now to our outlook for Fiscal 24. We expect a comparable basis diluted EPS to be in the range of $11.70 to $12.
excluding Canopy, Equity, and Urics. For fiscal 24, our beer business is targeting net sales growth of 7-9%.
As Bill discussed earlier, we expect continued strong volume growth momentum to be largely driven by our ICON brands, the Dello Speciale and Corona Extra, and Nextwave brands Pacifico and the Dello-Chelada brands. We anticipate our full year fiscal 24 shipments and depletions to track each other closely both on an absolute basis.
and in terms of the year-over-year comparison. As a reminder, despite some fluctuations in the last few years in our quarterly shipment of the vaccine, El pensioner El pensioner El L strips bottle and makes the bottle eligible
and year-over-year growth rates due to severe weather and pandemic-related impacts, we expect the cadence of our shipments in fiscal 24 to follow a more traditional seasonal pattern.
We anticipate approximately 55% of our fiscal 24 buy-ins to shift in the first half as we meet peak summer demand for our products.
In addition, from a quarterly perspective, particularly when looking at year-over-year growth rates, we also expect shipping and depletion comparisons to be a little bit more
to still show some variability, as they always have, as we manage inventory levels around seasonality throughout the year and our regular brewery maintenance activities in Q3.
All of that said, we do not expect to have any incremental overlapping variability in our shipment growth rate for Q4, as we did in fiscal 23 from a pricing perspective.
At this stage, we are planning for average annual pricing within our 1-2% algorithm.
We are mindful that consumers will likely continue to face challenging macroeconomic conditions for the foreseeable future and that our pricing increases in the last two fiscal years were above this algorithm.
As we advance throughout the year, we will continue to monitor inflationary dynamics and potential recessionary risks to ensure our pricing is appropriately balanced to support the momentum of our brands.
We will provide any further updates in that regard as part of our future quarterly calls.
In terms of operating income growth, our beer business is targeting 5-7%, which implies a fiscal 24 operating margin of approximately 38%.
As we have discussed, we continue to expect our beer operating margin to be negatively impacted by inflationary COGS headwinds.
The majority of these relate to year over year adjustments in our packaging and raw material costs, which on average represent a high single digit increase in absolute terms for these inputs in the import portion of our beer business. All prices for some of these inputs are off their peaks.
Most are subjects to contractual terms that reflect annual adjustments based on trailing pricing data and some still remain significantly elevated relative to pre-pandemic prices. In fiscal 24, we expect packaging and raw material for imports to account for approximately 55 to 60% of costs.
In addition, we expect freight to be approximately 20% to 25% of costs and reflect a high single-digit year-over-year absolute increase.
as we continue to face annual volume and contractual increases. And labor and overhead to be approximately 15% of cost and reflect a high teen increase in absolute terms largely driven by increased tech count and training tied to our brewery capacity investments.
For our beer business, we expect incremental depreciation of approximately $35-40 million as we continue to bring into production incremental brewing capacity from our investments, particularly at Obergon in fiscal 24.
As noted earlier, the incremental capacity unlocked from our existing NAWPA facility footprint through productivity initiatives has given us additional flexibility on the ramp up of our new ABA line.
We now intend to spend a bit more time optimizing that new additional ABA production to better support the strong growth of our Modelo Xilata brands.
Accordingly, we anticipate the ABA line will be ramping up in Q4 of FY24.
Conversely, we have been able to accelerate the ramp up of our next 5 million hecta-liter investment at Overgon to Q1 of fiscal 24.
This is being enabled by the move of brewery and packaging equipment that we have previously attended for use in Mexico.
Now, going back to operating margins, we plan to execute a number of productivity initiatives to help offset inflationary pressures. The expectations shared for our beer business costs in fiscal 2024 have operational efficiencies and cost-saving actions embedded into them.
These initiatives include benefits from our ongoing HEDG program and contractual negotiation
as well as from our Fiscal 23 DBA program.
To that end, it is relevant to note that only around 25% of our beer business cogs are subject to contractual pricing adjustments within fiscal 24, and that we expect our hedging program to reduce our exposure to those adjustments.
for about 10 to 15 percent of cogs.
In addition, we expect to deliver marketing and other SG&A efficiencies.
including an even greater focus on optimizing these types of investments toward our icon and next wave brands. So despite remaining slightly below our medium term operating margin target, we expect our fiscal 24 efforts to still yield best in class results for our beer business.
and we expect all quarters within Fiscal 24 to deliver operating margins above this latest quarter's result.
Moving to the outlook for our wine and spirits business. For fiscal 24, we are targeting organic net sales to be relatively flat, within half a percentage point from fiscal 23 net sales.
Excluding $38.5 million of net sales from the brand's domestic fiscal 23.
We expect to continue the strong growth of our premium wine, fine wine, and craft spirits brands and in our DTC channels and international markets.
These segments of our business will help to offset the headwinds we expect to face with our mainstream US wholesale brands.
which are facing challenging market conditions due to ongoing consumer-led premiumization. Conversely to our beer business, we expect our wine and spirits business to ship approximately 55% of our fiscal 24 volumes in the second half.
Again, in line with seasonal demand for our Alliance and Spirits products. More notably, despite continued inflationary pressures, we are targeting operating income growth between 2 to 4%, exclusive of $19.5 million of gross profit, less marketing, and quantitative care.
Relating to brands divested in fiscal '23, this implies an operating margin improvement of at least 40 basis points.
The primary margin improvement drivers for fiscal 24 include additional mix improvement, particularly with our further optimized portfolio driven by ongoing growth in our higher end brands from continued consumer led premiumization trends.
Enduring growth momentum in our higher-margin direct-to-consumer channels and targeted international metro areas, primarily throughout our Spiro portfolio brands. Additionally, innovation with new consumer-led products helps extend our higher-end offerings.
and stabilize our mainstream brands. Reduced marketing spend relative to net sales with optimized investments increasingly focused on high growth, high return areas.
And additional HTNA reductions in cost management initiatives.
Similar to our beer business, we expect approximately 25%
Of our line, periit business costs to be subject to adjustments within fiscal twenty-four.
Now moving to expectations for the rest of the PO. In fiscal 2024, corporate expense, including just the DNA portion, is expected to be approximately $27 million.
We expect to see favorability from the termination of certain compensation and benefits that will not be payable in fiscal 24 following the retirement of Rob and Richard Sands from their executive roles for the reclassification agreement approved by shareholders in fiscal 23, offset by the impact of inflationary pressures and merit-driven salary increases.
Interest expense is expected to be approximately $500 million dollars for the year. This is a 25% increase from fiscal 23 and is primarily due to the incremental interest expense associated with the financing of the reclassification. The comparable tax rate excluding Canopy, Equity and Earnings is a significant increase.
184 million.
Turning to cash flow, we expect fiscal 24 free cash flow to be in the range of $1.2 to $1.3 billion, which reflects operating cash flow in the range of $2.4 to $2.6 billion and a capex of $1.2 to $1.3 billion.
CAPEX includes approximately $1 billion to support our Mexico brewery investment and most of the remainder will support our wine and spirits hospitality updates.
To wrap up, I would like to reiterate that our refreshed capital allocation priorities that we have introduced and discussed throughout fiscal 23 and earlier by bill remain unchanged.
We remain committed to a disciplined financial foundation by maintaining an investment-grade rating as we move towards our net leverage ratio target, delivering returns to shareholders via both dividends in line with our payout ratio goal and through incremental share repurchases to cover dilution.
While remaining opportunistic for any additional repurchases, continuing to support the growth of our businesses through deployed capital in our future growing additions and in our atmosphere hospitality investments.
And lastly, through smaller acquisitions that would fill gaps or enhance our existing portfolio. We believe that this strong discipline, this capital allocation strategy, combined with exceptional execution, will empower us to be a premier shareholder return generator for the foreseeable future.
With that, Bill and I are happy to take your questions.
With that, Bill and I are happy to take your questions. Thank you. We will now be conducting a question and answer session.
If you would like to ask a question, please press star 1 on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment please while we poll for your questions. Our first question comes from the line of Andrea Tescher with JP Morgan. Please proceed with your question. Thank you. Good morning. Can you comment on what you're seeing most recently and that makes you feel confident about the 7 to 9%?
moving to the first quarter and throughout the year. And if I can squeeze on the pricing front, you mentioned the 1% to 2%, but I understand some of the competitors decided to just push back. And given the dynamics that you had towards the fall last year, if you're going to be mostly looking to do pricing for the fall. Thank you.
Thanks for the question and good morning to you. A couple of things that give us confidence in the 7 to 9% range. First of all, we saw a very strong start to the year in markets like Texas and Florida, which have both seen double digit increases in the first month of the year.
Now, acknowledging the state of California has been challenging, but I'll tell you what I'm very excited about about California. In Q4 we saw our distribution growth, our effective distribution growth by 3.6%, Q4 versus the Q4 prior.bachler simple distribution despite a very Join the conversation. Go query.
Broad market capability. There was a simple distribution up 2% and it is turning up. Hand went up over 9%.
With this, it seems to me that we are well prepared when California gets back into their normal weather pattern versus what we saw this year. So, we're very comfortable. Obviously, we wouldn't be giving you this guidance that we brought otherwise, but we feel very comfortable that we'll be in that 7-9% range, as we noted.
Our approach to pricing gives us the flexibility throughout the year to monitor what the macroeconomic Historically there has been more range of trends inya
And the inflationary recession impacts potential recession impacts are on our consumer, allowing the commotary competitor behavior and giving us the flexibility to act agile when we see a reason to move on price. So, that would, as I said of my prepared remarks, be the extent to which we make any changes throughout the.
Just a quick cleanup, I'm not sure if you commented on March depletion trends. I mean, presumably, given the importance of California, I suspect probably running a bit below what we saw in the fourth quarter. Maybe you could comment on that. But my broader question is on the oral launch, and maybe just follow up there on your expectations. Comment on cannibalization risk, and then I think importantly, sort of.
I'm sure, so that I don't step on myself after I just got on saying Academy that I thoroughly to talk about the depletions anymore. I want to specifically think about March depletions other than to say they're pretty much in line with what we expected, because they didn't notate to my prior answer to and a Texas Florida, were off double digits.
Certainly California was challenged this particular start to the year, but I think it's safe to say that as we progress in the year, it's extremely unusual to have rain, snow, or flooding once you get into May, June , July , and August in the state of California. So much like we've seen many other times when there's a dislocation of a particular market.
we expect that that would pass over time. Second, related to your oral question, we've said we're going to be very sensible about the rollout of oral. I'm pleased to say that our beer group has done an extremely good job of getting distribution into the marketplace. As you know, we're less than a month in.
on that particular project. But we were very positive about the cannibalization rates that we saw in the three test markets. We saw incrementality above 60% in those markets, which we were very pleased with. And we really think it fills a gap, particularly with our core Hispanic consumer.
who has been looking for an alternative to some of the other light beer scenarios. So we're very positive about that, but we're going to do it in a very sensible and approachable way. For those of you who watched March Madness, you will have noted we started our media campaign during that particular event.
with Morgan Stanley . Please proceed with your question. Hey guys.
Please proceed with your question. Hey, guys.
On the beer depletion side, can you discuss a bit the trends you're seeing on-premise? The gap looked better in terms of on-premise and some of the smaller store on-track channels relative to track channels versus Q2 and Q3. So just would love to get an update there. And then also…
Do you think you're seeing any broader macro impacts in your portfolio? Maybe give us a bit of update on trade down in general and beer and what's occurring there and any impacts to your business. Thanks. You bet. So in terms of on-premise, on-premise continues to grow as we noted in our prepared remarks.
We continue to see acceleration in the on-premise, which we think is very good. We're not quite back to where we were from a normal standpoint, where we sat before the pandemic, but we continue to make progress against that as we're seeing more and more often that consumers are being out in the marketplace and consuming on-premise.
We remain optimistic in our growth profile and the on-premise arena continues to accelerate as I think many many on-premise accounts are looking more and more for Brands that resonate consistently with consumers and obviously we have those and that speaks very well You know, I used the example of a well-known
Down against our portfolio. Certainly, there has been some, it appears, but it tends to occur at lower price points than ours. So, there are some consumers who are showing concern about general inflationary macroeconomic trends. However, by and large, that has occurred at lower price points.
Then, where our brands compete, and that's fairly consistent with what we've seen relative to the pure loyalty we see against our brands. It's a benefit of having consumer-preferred brands in our portfolio.
Thank you. Our next question comes from the line of Rob Aenstein with Evercore. Please proceed with your question.
Great, thank you very much. Just a follow-up on Garth on some of your guidance comments, and I don't know if I just maybe I didn't follow you, but I think you were talking about productivity measures.
that would help get to the margin target. And then you talked kind of very quickly or.
would help get to the margin target. And then you talked kind of very quickly or with some points on hedging programs.
and the amount hedged or not. I apologize, I lost you on that, but I was trying to connect what hedging would have to do with productivity and trying to exactly the point you were trying to make. Yes, so sure, Robert, thanks for the question and just so we know, as Joe indicated at the
We are going to be posting some slides for our website immediately following this call, specific to efficiency and productivity efficiencies as well as hedging. The point of that is, just like in any given year, we have certain productivity goals and efficiency goals; savings help offset these.
the impact of cost increases related to inflation. So that's no different than any other year. And the point of the comment was that those increases that I had stated previously, those are net of those efficiencies. And then...
On the point around hedging is just that you know we continue to have a fairly robust hedging policy and program You know typically we can we are only able to hedge around you know 10 to 15 percent of what's in our cost of goods And so we are hedging against those things right now
As we enter this year, we're at where we would normally be in terms of the percentage of commodities that are hedged.
Thank you. Our next question comes from the line of Nick Mote with RBC Capital Markets. Please proceed with your question. Please proceed with your question.
Yea, thanks. Good morning everyone. Just a follow-up, good morning. Just a follow-up, so, just curious on Bill, you mentioned some of the distribution gains you've seen in California. Just was hoping to get some context on your view on resets and kind of what you're seeing more broadly, especially in the markets where.
and you're under shared relative to where you are in California. And then the second question is just, you know, there's been a lot of discussion in the trade about some of the other brewers, you know, perhaps rolling back some pricing or promoting back some of the recent price increases. Just wanted to get some context on kind of philosophically how you think about, you know, if that were to happen, kind of would you need to react or not and just would love your context and perspective on that.
Yes, you met. Thanks for your question. One of the things that Don did was to reset. We are doing extremely well in reset situations, and I think it's just several good businesses because, with our portfolio representing more than 80% of the growth in the total beer category, it just makes sense for retailers.
Increase our shelf in our shelf positions versus the competition. If you see, as we said it on the prepared marks, Medea being the number one growth driver and Corona being a number three growth driver. Specifically, being a top 10 growth driver is: brands demand more space on the shelf and we're very fortunate that our team is specifically focused.
that very topic Relative to pricing as Garth noted, you know We carefully analyze the elasticities against our brands and I've said this on many other occasions we're very mindful that we want to keep our consumer and and our pricing strategies over time have been
To be sensible and approachable. To ensure that we keep margin stores. We're going to raise that, our incremental algorithm this year, and the 1% to 2% as guard noted. But we shouldn't expect any rolling back of pricing scenarios from us this year because we have been judicious and accessible about keeping the consumer.
engaged with us as we move pricing in the past. We'll continue to monitor that carefully as the year goes on as we always do. On a monthly basis, we analyze elasticities and drivers and drags, which you've all heard from Jim Savio over time. But we see absolutely no need to be rolling back pricing in any market because we think we were very appropriate in what we have done historically.
In this year, it is, you know, a fair amount below your historical runway. So maybe you could highlight the key factors that are going to impact your free cash flow this year. And then, you have completed your share repurchase goals to date and your $5 billion return to shareholder target, but you didn't necessarily announce a new return.
Thanks.
Thanks M. So, is there free cash? But I guess we should start with cash flow. We need to start at operating cash flow, operating C flow, right? So, operating cash flow is a bit down this year versus last year. The primary drivers of that are really a couple of folds. One is the increase in interest that I referenced in my opening remarks.
pretty much a 25% increase in a year-over-year basis, and that's really reflected primarily of the debt and the interest associated with the collapse. And then to a lesser extent, the remaining floating rate debt that we have on our books. And then to a lesser extent, the remaining floating rate debt that we have on our books.
Additionally, I will have higher cash paid taxes next year due to the US A&T and some non-recurring tax benefits that we had in FY23 and then to a smaller extent some changes in working capital.
Moving further down the list, we'll continue to have significant investment in...
in CapEx as you heard. And so those are the factors that are driving the operating cash flow and free cash flow ranges that we outlined earlier. As it relates to the share return or returns of capital to shareholders through shareable purchases.
We still have nearly $1 billion left under our existing board authorization for share purchases. As we mentioned in our comments, at the very least we will buy back pollution throughout the year, but we will continue to be agile and be able to take advantage of market conditions just like we did in Q4, where as Bill noted in his remarks, we will continue to be agile and be able to take advantage of market conditions.
We aggressively bought back almost three hundred million dollars worth of shares, as we saw what we consider this dislocation in price. So that's how we will continue throughout here. We actually like the ability to have that flexibility, and so it's something that we will obviously continue to be a very critical component of our capital allocation.
on your strategy. Thank you. Our next question comes from the line of Peter Grum with UBS. Please proceed with your question.
Good morning everyone, I hope you're doing well. I wanted to ask about the pricing cadence, and in the commentary, you mentioned that you're going to be monitoring the deal for the consumer. You provided a lot of color in the response about Andre's next question, but I guess if you don't plan to roll back prices, can you maybe just talk about what actions you would be willing to take if the environment were to deteriorate? Would that just be pricing at the lower end? I guess what I'm really trying to understand is if...
If the pricing outlook were to significantly change overall, how would that impact your ability to achieve your beer margin targets? Could you lean in more elsewhere, or would it be more difficult to achieve?
Well, there's a lot of negative what-ifs in the question, which frankly we don't see coming to pass. If you look historically at what your business has been able to accomplish, we have maintained a very consistent approach to pricing over time, 1-2%.
Year after year, the last couple of years, as you know, we've significantly gone beyond that in an effort to hedge against some of the strong inflationary pressures that all consumer companies have faced. Our belief is that we are in a very good position to implement our historical one cent to 2% pricing increase. This is based on a lot of analytics and elasticity assessments.
that we do on an ongoing basis. We are very comfortable with that and we feel like that's going to be an appropriate play for the course of this fiscal year, which should allow us to do everything we said. I would also note, just as an adjunct to that, you know, one of the things that I said at Academy was how strong the Medello share was.
To the strongest markets, which were California and Nevada, where we saw double-digit growth, I am pleased to report that at this point, that number has increased to four states, which now include both New Jersey and Texas. This again just continues to show that our growth profile outside of the state of California remains a tremendous growth opportunity for our business over the long term, and also helps to support what we just talked about relative to...
our ability to price within our one to two percent algorithm. Thank you. Our next question comes from the line of Chris Carey with Wells Fargo. Please proceed with your question.
Hi, everyone. So just two quick ones for me. On the gear margin outlook, you gave a lot of great detail. I guess you're looking for flat operating margins for the year. Is there any way or flatish? Is there any way to frame expectations? production should point use.
for a gross margin relative to operating margin. And I say that in the context of productivity initiatives, which I suppose can play out in both line items. So I just am curious if you have any comment there. The second observation is, you know, Wine and Spirit's just delivered what I think is the best operating margin in a few years. And yet the outlook would imply that you're giving a lot of that back. So is that just conservatism or is there something, you know, just...
But we're actually forecasting wine margins to increase by at least 40 basis points on a year-over-year basis.
And so you'll be able to see that detail on the website.
As it relates to operating margins, or a gross profit margin with beer, I mean all of the headwinds that we're facing really in beer this coming year will be in gross margin and not below the line. We'll continue to effectively manage.
Our marketing and SG&A spend can focus on the highest return, highest priority initiatives. And we'll manage that effectively. So the largest drag for us, as we've said, for the last several months now is going to just be the inflationary impact that again will hit through COGS as well as some incremental depreciation from here.
Thank you. Our next question comes from the line of Ade Sarte with Bernstein. Please proceed with your question.
I think you've been mentioning everybody too. Just coming back to the beer margin point, if I take the midpoint of your beer guidance for the top line and operating income, it comes a touch below your initial 38 that I think you've discussed. Was there anything in particular that changed to the downside versus your previous commentary? Or, I mean, is this just a situation of rounding here?
And then just to follow up on the margin point, given the margins of last year and what we'll be seeing on the back of your guidance for this fiscal year, should we still be thinking about 39 to 40 as your medium-term margin for the business and would it be fair to 25. Thank you. So I'm going to apologize because you broke up there at the end.
Various different outputs relate to what the margin will be. And so, you know, we fully have full conviction that we're going to deliver operating margins for our beer business at approximately 38%. As it relates to the outlook going forward, you know, we've just provided our outlook – our margin outlook for our beer business – at point twenty-four.
We're not providing any guidance for future years. We typically don't do that at this point. That's not part of our process, certainly. The biggest driver again this year that we have for FY24 is again,
driven predominantly by inflation and the inflation that we're seeing which I outlined in my scripts as well as some incremental depreciation. Offsetting that, we'll continue to take pricing as we have it as we've said earlier. We'll be pricing in our 1 to 2 percent range.
We continue to drive incremental volume which helps offset fixed overheads and appreciation as we grow into our economy.
Expanded footprint, and we'll continue on with the efficiency drivers that I mentioned as well. So that's where we stand for why of 24- and you know, we'll talk about it- F thousand 25 when we're closer to the end of the year, thank you, I'm F.
Dedka and Woodbridge are affecting margin and maybe margin progression there. And I asked it in the context of they're a much larger contributor to volume than they are to revenue. And I guess my assumption is the margins are lower than the average. So just trying to understand.
Is getting volume stabilization or volume growth in those two brands an important component to sort of building margins there? Or is that not really a big factor? So really just trying to understand Woodbridge, Spedka, and kind of the longer term impact on profitability and wine and spirits. Yeah, well you're absolutely correct that the...
Given the size of those brands that they do have a bit of a drag on our overall margin profile given the price points in which they compete and therefore their margin profile which is below the average profile for the entire business unit.
On a positive note, the Wine Experience team has pretty aggressive revitalization plans in place for both of those brands so that we can stabilize those brands and continue to outperform the price segments that they participate in.
As such, as we continue to make those efficiency improvements and revitalize those brands, we expect that we'll be able to achieve our margin targets as laid out.
Thank you. We have reached the end of our question and answer session. I would now like to turn the call back over to Bill Newlands for closing remarks.
Thank you very much. Fiscal 23 was a big year for Constellation Brands. We achieved record net sales and comparable operating income and were recognized for the 10th year as a CBG growth leader, despite some of the most significant inflationary headwinds affecting our company and consumers in recent history.
Our beer business outperformed our initial expectations and continued to lead in share gains, growth, and margins despite some volatility across the year as we lap the storages in our performance from prior periods and navigating incremental pricing actions beyond our annual algorithm intended to offset cost pressures across the chain.
And we've delivered many other transformational milestones, including our transition to a single share class structure and other important corporate governance enhancements. The start of our construction activities at our new brewery site in Veracruz and some additional refinement of our wine and spirits portfolio as well as continued progress against the strategy of that business.
Lastly, the performance of our business coupled with our disciplined and balanced capital allocation priorities allowed us to maintain our investment grade rating despite the incremental financing associated with the transaction for our transition to a single shared class structure to surpass our share repurchases and dividend cash returns goal.
by over 400 million and continue to grow our beer production capacity while executing small growth accretive M&A. As we look forward to fiscal 24, we remain focused on delivering sustainable growth and value creation for our shareholders through the execution of our annual plan and by continuing to advance our strategic initiatives.
And we are confident in our ability to continue building momentum across our full portfolio with strong volume growth and targeted pricing actions. We are bullish on the future performance of our line of spirits business as it continues to advance strategy, and we are committed to our capital allocation priorities and our ESG efforts.
Thanks again, everyone, for joining the call. We hope you will choose to enjoy your SEO for a mile and the morrow's day celebrations with some of our great products, and we look forward to speaking with all of you in late June on our next quarterly call. Thank you very much, and have a great day.
This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.