Q1 2024 Constellation Brands Inc Earnings Call
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Hello, and welcome to the constellation brands Q1 fiscal year, 'twenty 'twenty four earnings call and webcast.
Pretty much require operator assistance. Please press star zero on your telephone keypad.
And answer session will follow the formal presentation you May press star one at any time to be placed in the question queue and we ask that at that time, you limit yourself to one question and return to the queue. As a reminder, this conference call is being recorded.
It's now my pleasure to turn the call over to Joe as far as Vice President Investor Relations. Please go ahead Joe.
Thank you Kevin Good morning, all and welcome again to constellation Brands' Q1 fiscal 'twenty four conference call I'm here. This morning, with Bill new ones, our CEO and Garth Hankinson, our CFO as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in.
In our news release or otherwise available on the company's website at Www Dot <unk> Dot com.
Please refer to the news release and constellations SEC filings for risk factors, which may impact forward looking statements made on this call. Following the call will once again be making available in the investors 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 before turning the call.
Over to bill inline with prior quarters I'd like to ask that we limit everyone to one question per person as noted which will help US end our call on time, thanks in advance and now here's bill. Thanks.
Thanks, Joe and good morning, everyone. We are off to a strong start in fiscal 'twenty four with a solid first quarter. Our beer business delivered net sales growth of 11%, mainly driven by continued strong volume growth in line with our medium term algorithm.
As anticipated depletion performance accelerated throughout the quarter, resulting in a five 5% increase for the period and acceleration that has continued into June supported by our beer teams unrelenting push to increase distribution for our high growth high velocity brands.
<unk> incremental investments in marketing focused on the highest return opportunities and ongoing strong demand for our high end Mexican beer brands aligned with consumer led premium amortization trends, particularly in large markets with significant runway for modelo, especially out like Texas.
Florida, Illinois, and North Carolina, where the brand posted double digit dollar sales growth in sarcoma tracked channels and yes also in California, where our share gains.
Actually accelerated and as expected demand for our portfolio did ramp up after the unseasonably cold weather in early March.
All in our beer business delivered strong growth for the quarter, while consistently advancing all four areas of our strategic initiatives first the business continued to propel its powerful core brands that people love the.
The Delaware, especially out remained the number one dollar share gainer in the entire beer category delivered double digit dollar sales growth in tracked channels and as most of you likely already are aware became the number one beer in America and dollar sales during the first quarter.
Corona extra and Pacifica also achieved share gains and delivered dollar sales growth of approximately 4% and 26% respectively.
Second our beer innovations, which are still centered around the flavor and betterment consumer led trends are off to a great start are.
Our modelo, which a lot of brands remains a top 10 dollar share gainer with further support from our variety pack launched last year, the number for new product and <unk> channels and from the launch of new Sandia Picante flavor the number five new brand.
Modelo oral was also a top 10 share gainer and incrementally has actually been slightly above what we saw an initial test markets.
And Corona N E was the number one share gainer in the non alcoholic beer category in tracked channels.
Third the expansions of our beer brewing capacity continued to advance as planned our latest modular addition to overdone successfully ramped up in Q1, and we are on track with the new a VA facility at Nava for Q4 of this fiscal year.
At Veracruz site development and construction work are underway and we expect that to build up through this year and next.
And fourth the ESG efforts of our beer business further drove progress on our company wide goals, particularly those on water stewardship.
As noted on our last call. We recently surpassed our target of restoring $1 1 billion gallons of withdrawals from local watersheds.
The initiatives in our beer business drove most of this achievement and we plan to announce a new water target later this fiscal year.
Building on our existing water and emissions targets. We also recently announced two new commitments focused on reducing waste and enhancing our use of circular packaging.
In support of that commitment within our beer business, we plan to obtain a true zero waste to landfill certification for our breweries in Mexico and replace high cone plastic rings with recyclable paperboard for all applicable four and six pack skus.
Similarly, within our wine and spirits business. We also plan to obtain the same certification for our key U S operations as well as reducing our packaging to product weight ratio by 10% and ensure that 80% of the business packaging is returnable recyclable or renewable.
With that let's turn more fully to our wine and spirits business.
As noted previously over the last few years, the wine and spirits business has strategically shifted its portfolio to a bold innovative and higher end product mix that continues to be driven by consumer led premium amortization.
In Q1, the higher end wine portion of the business gained share in the U S wine category and outpaced the dollar sales growth of the corresponding segment in tracked channels.
Mayo me in Kim Crawford, the portfolio's largest premium wine brands and the prisoner wine company. The largest fine wine brand group were main drivers of this strong performance.
The innovation efforts across these brands also continued to deliver excellent results with Mayo me bright the brands lower alcohol lower calorie offering aligned with consumer led betterment trend capturing the number one new brand spot in the category.
In the mainstream wine portion of the business. The reinvention of Woodbridge is underway to address the growth headwinds facing that segment of the category, while keeping the brands core consumers engaged.
And while there are certainly more work to be done here the brands year over year dollar sales decline in U S track channels improved throughout the quarter.
The overall spirits portfolio maintained its share in U S track channels with notably strong dollar sales performance across its higher end tequila and RTD products in particular, the combo tequila and high west ready to drink cocktails, both delivered significant double digit dollar sales growth.
Beyond the evolution of the portfolio over the last few years, the wine and spirits business has also been investing in capabilities to accelerate its performance and key growth channels.
This omnichannel focus has provided additional pillars of consumer led growth such as international and direct to consumer the latter of which grew the channels net sales, 13% in Q1 and in fact, the e-commerce and customer loyalty portions of our DTC business DTC business pardon me, we're up over 40.
Percent in Q1.
From a volume perspective, the wine and spirits business continued to face lower demand primarily for our mainstream brands, reflecting continued consumer led premium position trends noted earlier, which in turn affected top line performance.
And the higher end wine portion of our portfolio, our larger premium and luxury brands faced softer segment demand in April while we did see solid acceleration in may and that has continued into June .
Meanwhile, in our spirits portfolio are higher and craft brands posted very strong depletion growth of 40%.
The wine and spirits business also delivered significant operating margin expansion in Q1 adjusted for the contribution after marketing of the divested brands. This further demonstrates the benefits of the strategic refocusing of the portfolio to higher and higher growth higher margin brands and channels.
To sum up the shift of the wine and spirits business towards driving growth and margin improvement through its pivot to the higher end brands and broader channels and markets remains well on track.
All in we are confident in our outlook for the wine and spirits business in fiscal 'twenty four as performance is expected to continue to accelerate throughout the course of the year in line with seasonality and the businesses annual plan, particularly as the share of net sales from our spirits buying wine and craft spirits portfolio.
Increases over the coming quarter.
In closing I once more want to highlight that our solid performance for the first quarter of fiscal 'twenty four was anchored by the consistent execution of the annual plans and strategic initiatives across both businesses and with that I would like to turn the call over to Garth who will review in more detail our financial results for the quarter.
[laughter].
Thank you Bill and good morning, everyone.
As Bill noted fiscal 'twenty four is off to a solid start with.
We steadily executed against our annual plans remaining both focused and adaptable as the economic and consumer backdrop continues to evolve and we remain on track to deliver against our stated financial performance goals for this fiscal year.
As Bill noted our beer business achieved double digit net sales growth in the higher end segment of our wine and spirits business outperformed the higher end of the wine category.
We also continued to execute and deliver against our capital allocation priorities and we are reiterating our guidance for the year.
Now, let's review our Q1 fiscal 'twenty four results in more detail, where I will mainly focus on comparable basis financial results.
Starting with our beer business net sales increased by $200 million.
Representing an uplift of 11%.
This was driven primarily by our volume growth of seven 5% as strong demand continued across our industry leading portfolio.
We also benefited from favorable pricing, which contributed $60 million of the overall net sales increase.
Staying on the topic of price for just a moment the incremental pricing we realized this quarter primarily reflects the wrap around impact from the elevated pricing taken in fiscal 2023 that was above our typical 1% to 2% algorithm.
As a reminder, we expect pricing to account for 1% to 2% of our net sales increase this fiscal year.
Which represents the combined uplift from the wraparound impact and the average of any other additional pricing actions to be taken in fiscal 'twenty four on a market by market channel by channel and SKU by SKU basis.
Beer depletion growth for the quarter came in at five 5%, which reflects a slower start but strong finish in the three month period between March and May as significantly accelerated through the quarter driven by the.
The disciplined execution of our distribution and marketing plans, including during the key Cinco de Mayo and Memorial day holidays.
Ongoing consumer led premium position trends, including solid buy rates for high end beer.
And as Bill noted significant growth in several of our top five markets and beyond as well as improving conditions in California.
These results give us confidence as we head into the peak summer selling season.
Our largest brands Modelo especial and Corona extra delivered mid single digit and low single digit depletion growth respectively.
Our emerging brands, the Madela charter brands and Pacific.
Each delivered double digit depletion growth.
On premise Depletions grew three 2% and accounted for approximately 12, 4% of total volume, reflecting more normalized year over year performance. Following this the distortions caused by the pandemic closures and post pandemic reopening.
For the first quarter of fiscal 'twenty four shipment volume ran slightly ahead of depletion volume on an absolute basis.
Shipments were in line with our plan throughout the quarter and Depletions ultimately wrapped up over the course of the three months as previously noted.
This difference in timing was the primary driver of the variance between shipment and depletion volumes.
Additionally, as it has been the case historically strong shipment volume in the first quarter also reflects inventory preparations with distributors and retailers for the peak busy summer season.
That said distributor inventories remain at normal seasonal levels. So we do not expect this variance to generate any further distortion in Q2.
And expect both shipment and depletion volume to be aligned for the full fiscal year.
Importantly, we also we're also well equipped with capacity.
Capacity flexibility to meet any incremental demand as we move through the year.
In regards to selling days they were flat year over year for the quarter. Please note that for fiscal 'twenty four there will be one more selling day in Q4.
Moving on to beer margins operating margin decreased by 220 basis points to 38%.
This decrease was primarily driven by continued inflationary headwinds and our Cogs as we faced an overall cost increase of approximately 4% for the quarter.
As anticipated in our guidance for the year, we continued to face higher packaging and raw materials freight and overhead costs in Q1, we experienced low double digit percent increases in packaging and raw materials as inflationary pressures continued throughout the period, albeit.
And in a declining rate over the three months.
We also continued to face higher overhead costs related to our brewery expansion as well as increased logistics cost largely related to higher shipment volumes.
As we have previously stated it is important to note that for fiscal 'twenty, four and consistent with recent years, roughly 70% of our Cogs are subject to annual pricing adjustments.
These are based on trailing indicators, such as producer price indices, and therefore typically reflect inflation from the preceding year.
The remaining 30% of Cogs are subject to fluctuations throughout the year and we can manage the volatility for about half of that 30% through our multi year hedging program.
While our full year Cogs expectations currently remain unchanged.
We are monitoring closely any potential favorability indirect commodity and pass through.
Raw material prices.
Approximately 15% non hedged portion still subject to intra year adjustments and we'll provide any relevant updates in future quarters.
Additional operating margin headwinds for the beer business were comprised of.
A $29 million or 17% increase in marketing expense, primarily driven by ongoing media spend to build awareness of our core products as well as recent investments to support the new Modelo oral product launch and as a result, please note that marketing as a percent of net sales came in at nine five.
5% for the quarter.
Yeah.
A $15 million or 18% increase in SG&A expense, which was primarily the result of increased legal costs.
And an $11 million or 16% increase in depreciation almost entirely associated with our brewery capacity investments.
To help offset the increase in costs to our beer business. We are executing on various levers to partially offset the full year high single digit inflationary headwinds and our overall packaging raw materials and logistics costs through productivity initiatives.
These initiatives have yielded savings of over $30 million for the first quarter of fiscal 'twenty, four and are focused on unlocking efficiencies and cost savings across procurement operations and supply chain.
For fiscal 'twenty for our guidance for the beer business remains unchanged as we continue to target, 7%, 9% of net sales growth and operating income growth of 5% to 7%, implying an operating margin of approximately 38%.
Now moving on to the wine and spirits business as Bill noted over the last few years, our wine and spirits business has been effectively shifting its portfolio to be more focused on higher end brands that are better aligned with consumer led premium innovation trends, while broadening sales channels to also expand into higher.
<unk> avenues.
To that effect. Please recall that we divested a collection of primarily mainstream wine brands from our portfolio during our third quarter and fiscal 'twenty three.
Accordingly during today's discussion I'll, referring to the top line of the wine and spirits business on an organic basis, which excludes the contribution from the divested brands.
Consistent with the strategic transformation.
Wine and spirits business has undertaken the higher end brands of the wine portfolio continued to resonate with the consumer and outperformed the corresponding segment of the category in the U S track channels in Q1.
More recently, we've seen even greater strength in our three largest premium and fine wine brand families with Mayo Mi Kim Crawford and the prisoner wine company, showing dollar sales growth and acceleration in tracked channels.
Similarly, we were also pleased to see the overall spirits portfolio deliver strong dollar sales growth in.
In tracked channels led by me capo and high west ready to drink cocktails.
However, wine and spirits organic net sales were down 6% largely as a result of the continued impact of ongoing consumer led premium position affecting the entire category and the lapping of a particularly strong prior year first quarter for our higher end brands due to distributor.
Balancing actions.
From a channel perspective, we continue to see success through our direct to consumer efforts, which delivered 13% net sales growth and our overall DTC channel.
While still small compared to the rest of our wine and spirits business. This channel accounted for 4% of total net sales an increase of 100% versus just a few years ago.
Shipments on an organic basis decreased by 9% and depletions decreased by approximately 6%.
As noted earlier this volume decline was primarily driven by our mainstream brands Woodbridge SVEDKA as their respective segments of the categories face ongoing growth headwinds driven by consumer led premium position.
Again, the wine and spirits business continues to diligently work on the reinvention of Woodbridge and SVEDKA to address these headwinds.
In particular spread could declines have stabilized and we continue to look at incremental opportunities to revitalize the brand and accelerate improvements.
And more broadly in our spirits portfolio, our craft brands posted nearly 40% depletion growth driven by new compo posting depletion growth of over 80%.
Wine and spirits operating income excluding the gross profit less marketing of the brands that are no longer part of the business. Following the divestiture were relatively flat and operating margin increased 90 basis points to 19%.
Also reflecting the same exclusion.
The margin improvement was primarily driven by the favorable impact of the pricing actions taken last year that primarily focused on our higher end brands.
Lower materials and packaging costs, including great blend optimization.
Lapping of higher freight and warehousing costs.
And lower marketing expense as we have streamlined our approach to marketing focusing on the highest return areas of our portfolio.
Looking ahead, we expect the performance of the wine and spirits business to accelerate throughout the remainder of the fiscal year through the combination of increased growth.
<unk> from the portfolios higher end brands, which are already seeing depletions improve in line with our sales efforts and seasonal trends.
Ongoing growth in DTC channels, as well as a return to growth in international markets.
Lower marketing spend as we shifted towards higher growth areas focusing on the spirit portfolio.
And continued work toward a revitalization of SVEDKA and Woodbridge in the mainstream category.
Accordingly, we remain confident in the outlook for wine and spirits for the year and our guidance for that business for fiscal 'twenty four remains unchanged.
Now let's proceed with the rest of the P&L, starting with corporate expense, which for the quarter was approximately $50 million from SG&A.
And overall corporate expense reduction of 19% when compared to the prior year.
And $33 million from unconsolidated investments related to canopy and our ventures portfolio investments.
The overall corporate expense reduction is primarily driven by reduced spend in the second wave of our digital business acceleration program.
I want to take a moment to talk briefly about the next wave of our digital business acceleration program.
For fiscal 'twenty, four or DBA program will have three main goals first scaling our prior year's focus areas of marketing procurement and supply chain across the business.
Introducing a new focus area logistics, which will center around improving end to end visibility and planning as well as enhancing our network capabilities across the business.
And third reducing third party consulting fees as we begin to shift the support of our DBA program to in house, increasing efficiencies and reducing overall cost.
Interest expense for the quarter was approximately $118 million. This is a 34% increase from the prior year driven by higher average borrowings and rising interest rates on approximately 10% of our debt with adjustable rates.
We ended the quarter with a net leverage ratio of approximately three five times, excluding canopy equity and earnings and expect to continue to make progress towards our approximately three times ratio target throughout the year.
Our comparable effective tax rate, excluding canopy equity and earnings for the quarter was 27% versus 26% last year.
For fiscal 'twenty four we continue to expect the comparable effective tax rate, excluding canopy equity and earnings to be approximately 19%.
Moving to free cash flow, which we define as net cash provided by operating activities less capex.
For the first quarter of fiscal 'twenty, four we generated free cash flow of $388 million, a 31% decrease versus prior year, driven by a 41% increase in capex investments driven primarily by the capacity expansions at our Nava and <unk> facilities and the construction.
Of our new brewery located in Veracruz.
Our capacity expansions are underway as planned.
The planned additions for this year, we fully ramped up 5 million hectoliter at our <unk> facility in Q1 and are planning on another 5 million hectoliter is to support our AEP a production to be online at our Nava facility towards the end of fiscal 'twenty four.
In total by the end of fiscal 'twenty four we expect to have about 52 million hectoliter of capacity online, which as you recall includes nearly 3 million hectoliter of additional capacity from operational efficiency initiatives executed last fiscal year.
Looking ahead as we continue to consider incremental operational opportunities for our production facilities, we will seek to ensure that we align our additional modular capacity expansions to the timing the best balances both any further enhancements to our existing production footprint and our expectations for continued strong <unk>.
And for our brands.
Yeah.
Turning to cash flow, we continue to expect fiscal 'twenty four free cash flow to be in the range of one two to one 3 billion.
Reflective of operating cash flow between two four to $2 6 billion and Capex of one two to $1 3 billion.
Comparable EPS for the quarter, excluding canopy equity and earnings was $3 <unk> with an announced dividend of 89.
Bringing our dividend payout ratio to approximately 30% for the quarter.
Our fiscal 2004, EPS comparable guidance of $11 70 to $12 remains unchanged.
In closing, we believe that this solid start to fiscal 'twenty four sets us up for a great year ahead.
We delivered net sales and volume growth in our beer business, while implementing cost savings and efficiencies to help counteract the continued inflationary headwinds we face.
Our wine and spirits business is honing in on becoming a multi channel global competitor primarily focused on the higher end segment.
The growth in our core businesses and execution against our strategies makes us enthusiastic about what the rest of the year will bring and to shareholder value, we will be able to create.
With that Bill and I are happy to take your questions.
Thank you, we'll now be conducting a question and answer session. As a reminder, we ask you. Please ask one question then return to the queue, if you'd like to be placed in the question queue. Please press star one at this time one moment, please while we poll for questions.
Our first question today is coming from Dara <unk> from Morgan Stanley . Your line is now live.
Hey, guys.
Hey, Dara.
So you sounded pretty bullish about beer depletions towards the end of fiscal Q1 in May and June so far with <unk>.
Just hoping for a little more detail there and more specifically if you.
You can sort of juxtapose that versus the slowdown we've seen in the November to April timeframe. It does seem like a fairly sizable in flex and the other way so.
More detail there would be helpful and just if these factors driving the better may and June look more extendable and how you think about that and if I can slip in a second part that I'll pretend as related to the first part.
Industry pricing worsens going forward, given there's obviously a lot of potential changes on the API side, how do you think about that.
Domestic beer pricing.
The risk factor to your volume trends as you look going forward. If in fact, there is any change for the industry backdrop standpoint. Thanks.
Sure Dara.
Let me cover that one.
As we have told you before March was a particularly challenging month.
But as we've also noted there was great acceleration I think the easiest way to look at it is to look at sort of kind of data.
The 12 week is better than the 26 week to four week is better than the 12 week.
And as I noted this morning, the acceleration that we saw coming out of the first quarter.
Is continuing into the second quarter, which I think is very positive to give you. Some other perspective that I think would be important and I think people often ask if you'd think about modelo, especially out.
Had 24 states in the first quarter growing double digits.
In our <unk> a lot of business we.
We had 47 states grow double or triple digits during the first quarter and as we've already noted those things were accelerating coming out of the quarter. So I think we're quite comfortable that the largely challenging issues that we faced in sort of that.
Winter time period are now behind Us and we're looking forward to a very strong summer period.
Relative to your question about pricing.
We haven't seen any particular challenges around pricing.
In fact, as we run our normal drivers and drags the effective pricing has actually decreased.
In our business as we've gone through the early part of this year as.
As we've noted other times, we have not seen much trade down at all away from our business.
And believe that trend is likely to continue given the strong consumer engagement with with all of our brands.
Yeah.
Thank you. The next question today is coming from Lauren Lieberman from Barclays. Your line is now live.
Great. Thanks.
Just curious if you could talk a little bit about on premise.
Thank you.
And Paula just 3%.
Pardon.
It's a deceleration versus Q1.
I just need to what you've been seeing in terms of antenna.
Craig.
Later in the quarter and if you can talk to me that the acceleration is on that.
And Neil in excuse me in some kind of data that also applies.
Yes.
Our Lauren on premise is still not quite back to where we saw pre pandemic.
Pre pandemic and it's still in that 12% to 13% range as we have come out.
Of the pandemic and it's probably been a little more volatile hit and Miss compared to what you see in tracked channels.
We believe it's going to continue to do well and it's going to continue to improve over the course of the summer as we put the final touches hopefully on the pandemic behind us, but it's admittedly not back to quite where it was.
Ahead of ahead of time the thing that we've often been very pleased about is we've seen many accounts in the on premise get much more focused on well known recognized brands and obviously whenever that happens it's to our advantage.
Because of the strength of those brands.
Thank you next question is coming from Peter Grom from UBS. Your line is now live.
Thanks, operator, and good morning, everyone. So I kind of wanted to ask about beer margins.
Maybe two parts here, maybe first I think marketing.
Almost 17% this quarter and I think the expectation.
And the initial guidance was for a low single digit increase for marketing for the year. So I guess, how should we think about the phasing of marketing spend moving forward and I guess has the outlook changed at all given the high teens, increasing once you and then just related you mentioned that you are monitoring some favorability across some of your key inputs and we'll provide an update later.
I guess conceptually should there be any CAGR.
Would you anticipate those benefits dropping to the bottom line or would you look to take out marketing further thanks.
Well thanks for the question I mean, as we noted in our prepared remarks, the increase in Q1 marketing spend was largely supportive of the momentum behind our existing products as well as support of the launch behind Modelo Oro, So marketing as a percent of net sales for the quarter came in at nine 5%.
The outlook for the full year is unchanged, we will continue to spend in our normal algorithm that 9%, 10% of net sales on a full year basis, and so again nothing changed in that regard.
As it relates to some of the improvement that we're seeing obviously, we're off of some of the highs from a commodity perspective.
With the exception of one or two things that have continued to be a little bit.
A little bit.
Did.
They haven't quite come off their highs just yet.
We do think that there could be some favorability as we move through the year on the commodity side.
However, some of that favorability could be offset with the strength of the peso.
We look at the outlook right now on the favorability, we're seeing on some commodities as being somewhat.
Completely offset by the strength of the peso so.
Now, we're not seeing necessarily when you take into account that the peso and the.
Improving commodity market, but we're not necessarily seeing a.
Big change for the balance of the year.
Thank you. Your next question today is coming from Bryan Spillane from Bank of America. Your line is now live.
Operator, good morning, everyone just.
Just one quick one for me Garth I think back on.
On the <unk> call when you talked about cadence.
He was 55% of beer volume first half and 55% of wine and spirits in the back half. So just wanted to see if that was still directionally kind of where we should be thinking as we're beginning to kind of re <unk>.
<unk> our models for the balance of the year.
Yes, Brian absolutely no changes in that and obviously, that's one of the reasons why we think wine we will continue to improve through the year.
Again, no change to that.
Beer businesses is a pretty seasonal and tried true. So that's absolutely what the outlook is for the beer business.
Thank you next question is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.
Alright. Thank you good morning, everyone.
Yes, I had a question about the Bud light issue and you know how it may be impacting your business as well as your distributors and any changes you might be making there and then also in light of this wondering if there might be an opportunity.
For you to possibly secure you know more cap panels from Modelo, just thinking about the on Prem business.
And then just finally any changes that you might be making to your marketing strategy or possibly spend levels in light of all of that.
Well, obviously the single biggest change that we've seen Bonnie has been that modelo has taken over as the number one beer buy dollars in the U S.
Jim Sabia has often said that that was going to happen in the next few years, but obviously it happened a little sooner than we had anticipated.
I think one of the things that you're likely to see if some of that challenge continues as when we look at shelf sets in the back half of the year.
Many retailers look at velocities.
As they are doing their reach shelf, setting, which which again often happens in the fall and that always works to our advantage I think when you. The retailing environment has gotten very very sophisticated about seeing where the growth profiles are and the velocities against those we're particularly excited.
In our beer business and the fact that the buy rate both on core our core as well as our as high end beer, including the Hispanic consumer went up year on year. During the first quarter I think that's going to continue to be positive for us and I think it's going to help us accelerate <unk>.
Spansion of shelf.
And again some of that is coming because of the the growth in velocities that youre seeing on our brands, but also the decrease that you've seen as you note from from some of our competitors.
Thank you next question is coming from <unk> <unk> from Bernstein. Your line is now live.
Hi, Thank you for taking my question you mentioned.
Commentary at the start.
The key to get a little bit more color there in terms of either repeat rates cannibalization.
Back from consumers.
Now that it's been out in the market for a while thank you.
You bet <unk>.
It is the incremental <unk>.
On on the actual market has been better.
Slight bit better than what we had anticipated coming out of our test markets.
We are quite pleased with it in the test markets.
So we're getting very good response on that.
It is already a top 10 share gainer as I noted in my prepared remarks.
And again, we've done this with I would say a careful approach we only have two skus in that in that particular product at this point in time, recognizing as Glen pointed out in his remarks.
Should that continue to show positive signs that it has to date.
We do have the capacity now to more aggressively go after that as the year continues which I think again is very very positive and speaks to the success that we've had in our operations in Mexico of creating some ability to go beyond what our initial plans are when those opportunities present themselves.
It's early days I don't like to get too far over my skis too soon on any new product introduction, but so far this is going at least according to plan if not better and we're very pleased with the instrumentality that we're seeing as I said, it's slightly better than we saw in our test markets. So all thumbs up.
For us at this point on that product.
Thank you.
Thank you next question is coming from Andrea to share from J P. Morgan. Your line is now live.
Thank you good morning, everyone.
I wanted to go back to the marketing spend I think you.
You mentioned for the year.
The 7% to 9% on the top line.
We started well with 9%. So I was just hoping to reconcile because you also said you expect it to be optimal single question I think it's probably.
Great. Thank you start well, especially now as these columns.
Commentary about obviously, what's happening with I believe Bud light.
And then related to just a clarification on.
On the gross margin side, and I think you mentioned that.
Obviously, you've got 30 million of cost.
Cost benefit for savings you also have some benefits from packaging is that I believe we all in this call. We're pleased to see margins the way they came through.
For beer. So can you comment on that a little bit of a lag do you feel even more confident with you guys being conservative.
Thank you.
So let me take the first half and I'll, let Gary take the second half of that.
Our marketing approach has been consistent for years, that's one of the things that we think has been tremendous.
For our brands and why they continue to accelerate in the market.
We believe in spending against our brands, we have refined it some we're getting much more capable in the digital arena than what we were just a few years ago and I think that's very positive, but we have the number one share of voice in the market and we expect to continue to be.
To have that continue going forward and we believe in it it's shown tremendous success.
For our brands as we've gotten to this point and we believe it's going to be an important part of our continued success moving forward.
Let you answer the other a few words on the margin front look I mean, the 38% for the quarter was roughly in line, maybe slightly better than what our expectations were as far as we entered the year with <unk>.
Certainly feel confident in our ability to deliver a margin profile that we laid out at the beginning of the year as I said in my prepared remarks, since we reminded everyone last quarter, roughly 70% of our total Cogs.
Our subject to annual adjustments that are backward looking and only 30% have any fluctuation are exposed to fluctuations throughout the year.
Again, we feel really good about the position that we're in right now and our and our ability to deliver the margin profile, that's consistent with the with our earnings guidance.
Thank you next question is coming from Chris carrying from Wells Fargo Securities. Your line is now live.
Yeah.
Hi, good morning.
Just one clarification and then a question on wine and spirits.
Just a clarification.
You said that you didn't expect any distortion.
Shipments versus Depletions going forward after Q1.
And I think you were clear in response to Brian's question about the mix of cases front half versus back half.
Should should the rate of growth of shipments.
Below the rate of growth of Depletions in Q2 or any quarter go forward and basically what I'm trying to clarify here.
Absolute cases versus the rate of change, but I would just need a clarification on the.
Question on wine and spirits would be.
Can you just perhaps Jeff.
Juxtapose the premium is eastern efforts with the.
Margin delivery in the quarter and perhaps just.
Reaffirm our confidence in a way on the margin trajectory of the wine and spirits business go forward here. Thank you.
Yes, so on the shipments and Depletions. So look as we said, we expected shipments and depletions to be on a nominal basis to be largely in line with one another on a full year basis I think if you look and you go back.
To the years that are that are unaffected by the pandemic or weather related operational.
Difficulties youll see that there is some there is some seasonal differences between depletions and shipments Q1, as we noted we typically do have.
Some some outpacing of shipments relative to depletions on a nominal basis as you're building for the summer season.
So and Youre getting.
Distributors and retailers and are positioned there.
To meet the demand of that key summer selling season, so that's fairly typical.
Just ask you to go back and look at some some prior periods again pre pandemic.
As it relates to our wine and spirits business.
Again, as we said on the call we do expect to see continued improvement through the year.
On the margin front as we continue to see.
Increased traction with our with our premium portfolio.
Again, we're seeing good growth out of brands like <unk>, and Kim Crawford and the prisoner wine company will continue to get the benefit of pricing on those and there are a number of cost initiatives underway in our wind business as well as seeing improvements there as we said on both logistics and on grape input costs. So again.
That's a business also.
As Brian .
Noted.
<unk>.
We've guided will the volume there is about 55 backend loaded so so for all those reasons, we're confident that we can deliver the year and delivered a margin profile that we are.
Previously guided to.
Thank you. Your next question is coming from Felipe <unk> from Citi. Your line is now live.
Hey, good morning, everyone.
Quick question on the U.
Health of the U S consumer, particularly if you look about your core Hispanic consumer base.
Any changes that you're seeing in terms of purchasing behaviors in Panama package size.
You know trade down or any signs of that and clearly your business has improved as the weather improved in California.
But any signs there also in terms of.
And consumer behaviors, particularly again in the Hispanic consumer base.
Thank you.
Yes, as you can imagine that's something that we track very carefully as well.
And we're pleased to report that the buy rate, which again is trips times the spend.
For high end beer and this includes the Hispanic consumer was up year on year in the first quarter.
It's one we track very carefully it's an important element to us.
And it's one that we are very pleased to see in a positive vein.
As you point out.
We have continued to see acceleration of our share in California, which is an important market.
During the course of the first quarter as well.
And in that particular market as you would expect.
Hispanic consumer base is very important to us. It's also very important for instance in the state of Texas, which saw a double digit growth profile in the first quarter as well so we're pretty comfortable.
That the consumer side of our business.
<unk> is very strong and as I noted on.
The prior call from.
The prior question excuse me that we are continuing to invest heavily against our marketing approach to make sure that we continue to maintain that same consumer demand that we've enjoyed.
Okay.
Thank you next question is coming from Andrew <unk> from BMO capital markets. Your line is now live.
Great. Thank you thanks for taking the question.
My question is around opportunities around price pack architecture, as a beer volume growth driver.
Yes.
I'm, hoping you can help us understand exactly where you are in that process is that something that over the medium term we should expect.
To accelerate as a contributor and maybe the.
The next 12 months versus over the medium term, where the focuses within that strategy.
Yes, you're entirely right, Andrew that's something that our beer leadership team is working on aggressively day in and day out.
And frankly, we think we can learn a lot from some other players in the beverage arena, particularly in the soda area where pretty.
Pretty much a few tell me what you've got to spend Theres, a pack size or a pac appropriate for a particular price point. So a lot of things we are looking at things like <unk>.
We're looking at different.
Quantities ounce quantities against some of our packaging. So all of these things are critically important part of the reason youre seeing the massive acceleration in the high 40% tile and <unk> Gelato business is what used to be only a 24 ounce can is now available in both multi pack and 12.
Bounce opportunities. So again, we think and that's been part of the big acceleration.
The gelato area. So this is an area that we're spending a lot of time on.
Ourselves to make sure that whatever the consumer has available to spend against our brand that we have something available to them within our portfolio.
<unk> two to.
To make sure that they can take our products home with them when they leave the store.
Thank you we've reached the end of our question and answer session I would like to turn the floor back over to bill for any further or closing comments.
Yeah.
Thank you Kevin and thank you all for joining today's call we're off to an excellent start in fiscal 'twenty for our beer business delivered strong growth for the quarter with performance accelerating since the beginning of the year and into Q2.
The higher end brands of our wine and spirits portfolio continued to outperform in tracked channels and to drive margin improvement we remain confident in our outlook for the full year and are building great momentum as we head into the key summer selling season for our beer business and the seasonally stronger second half for the wine and spirits business.
In closing I want to wish you all a happy fourth of July for those of you celebrating that and hope you choose to enjoy your celebrations with some of our great products. Thanks, again, everyone and have a great summer.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.