Q1 2025 Constellation Brands Inc Earnings Call

Sure Jason.

Is that better.

Yeah.

Good morning, and welcome to the constellation brands first quarter fiscal year 2025 earnings call. At this time, all participants are in a listen only mode.

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.

Now I'd like to turn the call over to Josh as far as SVP of Investor Relations. Thank you you may begin.

Thank you Daniel Good morning, all and welcome to constellation Brands' Q1 fiscal 'twenty five conference call I'm here. This morning, with still 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 our news release or otherwise available on the company's website at Www Dot C brand 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 also 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 guards in today's call.

Before turning the call over to Bill in line with prior quarters and as Darrel mentioned.

We ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks.

In advance and now here's bill.

Thanks, Joe and welcome all to our Q1 fiscal 'twenty five earnings call I'm pleased to say, we got off to a solid start in Q1 and as usual I'd like to start with a few key highlights for the quarter first we continued to extend our position as a growth leader within consumer packaged goods.

Achieving an enterprise dollar sales increased 4.5 percentage points above that of the entire CPG sector. Let me repeat that we achieved an enterprise dollar sales increased 4.5 percentage points above that of the entire CPG.

Sector further second a track channel data for the 12 weeks ended on there may 19th Quad week.

The significant outperformance was largely driven by the continued growth of our beer business, which obtained the second largest share gain and the total beverage industry as well as once again the top share gain in all beverage alcohol. That's for the 12 weeks ended June 2nd which most closely aligns.

With our quarter.

Second continuing with our beer business, we delivered another strong quarter with high single digit net sales increase driven by our peer portfolios 57th consecutive quarter of depletion growth as well a significant operating margin improvement supported by our cost savings and operational.

<unk> see initiatives and of course all of this was aligned with our full year guidance and our medium term outlook for the business.

Third in line with our disciplined and balanced capital allocation priorities, which we have consistently delivered accounts for more than five years now in the first quarter of this fiscal year, we did several things.

We maintained our strong investment grade balance sheet and still expect to achieve our target three times net leverage ratio in fiscal 'twenty five.

We returned $185 million to shareholders in dividends and executed $200 million in share repurchases plus we completed over $40 million more dollars of buybacks in June.

Third we continue to advance our latest growing capacity addition, at overdone and new brewery development at Veracruz.

And we are pleased to have executed the divestiture of our Mexicali site, which as a reminder was mainly the land building as we had already repurposed most of the equipment.

Fourth we executed the tuck in acquisition of see smoke to address white space and enhanced asset utilization and our wind portfolio and in parallel initiated a potential sales process of a few wine and spirits noncore assets, including certain vineyards and facilities to better align our network and partially off.

At the acquisition cost.

Staying with wine and spirits for a moment, while the performance of the business continues to face near term challenges largely driven by broader category headwinds, we expect net sales and operating income improvements and our outlook for the fiscal year is unchanged.

Lastly, all in we drove comparable earnings per share growth of more than 17% and remained focused on achieving our stated full year guidance and medium term target of low double digit comparable EPS growth.

With that let's turn more fully to our beer business is performance.

We maintained the momentum in our beer business during the first quarter of fiscal 'twenty five with net sales and operating income growth of more than 8% and nearly 16% respectively.

As noted earlier these increases were primarily supported by strong volume growth as well as cost and operational efficiencies.

Our beer business grew shipments by seven 6% in Q1 on a reported basis, while depletions were up six 4%, excluding the impact of the Kraft brand divestitures in June of last year.

It is important to reiterate that this mid to high single digit level of volume growth was fully aligned with the expectations, we shared our fiscal year as well as our medium term algorithm.

So despite the volatility of short term scanner data be it due to weather timing of holidays or other non structural factors or the performance of the broader beer category b that due to dynamics affecting other brands or segments or beer team once again consistently.

<unk> on our targets and objectives.

Now honing in on the performance of our largest brands Modelo, especially our road depletions by nearly 11% and upheld its position as the top share gainer extending its lead as the number one beer brand in U S track channels Importantly, modelo, especially I'll also continues to grow household penetration.

Tracing rising to become the number three brand on this metric at the end of May with a two four percentage point increase on a 52 week basis.

While Corona extra Depletions declined just over 1% in Q1, we continued to expect we can deliver low single digit growth from this brand importantly, Corona extra remains a top five beer brand in the U S and it continues to gain share in the category.

Specific though delivered remarkable depletion growth of over 20% and was the number for dollar share gainer across the total beer category.

Our modelo, which a lot of brands delivered an increase of more than 5% in depletions and we're excited to continue to build on that momentum in fiscal 'twenty five with two new flavors fresh up a country and negra ton Shelly.

More broadly from an innovation pipeline perspective, the rollout of our two new Modelo oral pack sizes is underway as we continue to thoughtfully build out the brand using our disciplined approach after a successful national launch last year.

In addition, the expansion of our Agua Fresca as variety pack to an additional 20 markets and the launch of Corona <unk> and select Eastern test markets are also advancing per our plans and we look forward to sharing more on these additions to our portfolio over the coming year.

The strong execution of our beer business. In Q1 was also reflected in our ability to deliver significant operating leverage driving two six percentage points of operating margin expansion year over year.

Looking ahead, we continue to expect our beer business to deliver net sales growth of 7% to 9% operate operating income growth of 10% to 12% and an operating margin of approximately 39% in fiscal 'twenty five.

Moving on to wine and spirits as noted earlier, we continue to face challenging dynamics in these categories, particularly across most of the line price segments.

These headwinds were the main drivers of the 7% net sales decline for that business in Q1.

That said, our craft spirits portfolio achieved shipment volume growth of 14% as well as double digit dollar sales growth and second a U S track channels significantly outperforming the low single digit growth rate of the higher end spirit segment.

In addition, we continue to make good progress against the operational and commercial execution initiatives identified last quarter to support our efforts to improve the performance of this business in fiscal 'twenty five.

<unk> investments and the 11 brands that represent 75% of net sales and over 80% of volumes for our wine and spirits business in fiscal 'twenty. Four are now underway and we expect to see improvements in this select group of our most scaled offerings over the remainder of the year ultimately underpinning the relatively.

Stable net sales outlook for that business in fiscal 'twenty five.

However, these incremental investments did have a near term impact on the operating income which declined 25% in the first quarter.

That said, we also expect year over year operating income performance of our wine and spirits business to improve throughout the remainder of the year and we continue to target wine and spirits operating income to be down 9% to 11% in fiscal 'twenty five.

As we have noted previously we remain committed to continuing to advance this business over the coming years towards the medium term target shared at our Investor day.

Lastly, we continue to make good progress against our ESG ambitions, having recently received <unk> certification for zero waste at our Nava and obregon breweries, marking a significant milestone and meeting our waste reduction commitment and as a reminder, last year. We also achieved our initial water restoration commitment.

One year ahead of schedule and we then set an ambitious target nearly five times the size of the original goal to be completed within the same timeframe our fiscal 'twenty three 'twenty five.

So in closing we once again delivered another quarter of solid performance driven by the continued strength of our beer business and we expect to maintain this dramatic throughout the rest of fiscal 'twenty five and beyond as committed at Investor day.

Our beer business continues to achieve strong volume growth well above that of its category and total beverage alcohol.

This outstanding performance supported the second largest dollar share gain within the broader beverage industry and reinforce our significant growth outperformance relative to the entire CPG sector.

Our wine and spirits business is making progress against the operational and commercial execution initiatives identified last quarter to support its trajectory for this year's guidance. All in we continue to advance toward our enterprise wide financial targets, including the delivery of double digit comparable EPS.

<unk> growth, while upholding our disciplined and balanced capital allocation priorities from the last five years, which so far. This fiscal year is also included the return of over $240 million to shareholders in share repurchases through June and with that I turn the call over to Garth.

Thank you Bill and good morning, everyone as usual my discussion of our Q1 fiscal 'twenty five performance will focus mainly on our comparable enterprise results accompanied by business segment details.

Starting with our enterprise net sales, we delivered topline growth of 6% for the quarter in line with our full year expectations and our medium term outlook for our Investor day targets as.

As anticipated this strong growth was driven by our beer business, which I will elaborate on shortly.

For fiscal 'twenty five we continue to expect enterprises net sales to grow between 6% to 7%.

Enterprise operating income increased 23% and 12% on a reported and comparable basis respectively.

This resulted in a 35, 4% operating margin reported operating margin and a 180 basis points year over year increase in comparable operating margin to 34, 7%.

While we delivered very strong operating income growth in the first quarter again, driven by our beer business. We continue to expect enterprise comparable operating income growth of 8% to 10% for the full year.

At an enterprise level. We also remain on track to achieve our full year comparable EPS guidance of $13 50.

The $13 80.

Having delivered comparable EPS of $3 57 for the first quarter.

As a reminder, our full year comparable EPS guidance represents a 10% increase year over year using the midpoint of our range.

Importantly, these comparable EPS results and expectations are also consistent with our medium term annual low double digit comparable EPS growth target, we outlined at our Investor Day last November.

Now turning to the more detailed discussion of the underlying drivers of our Q1 performance.

Starting with our peer business. This segment is off to a great start in fiscal 'twenty five.

Our beer business grew depletion volumes by six 4%, excluding the impact of last year's craft brand divestitures, which will be the basis of our depletion figures. This year to eliminate any sequential distortions from lapping periods without the craft brands.

This reflected the solid consumer demand during the quarter as well as the strong execution and performance during the key 5 de Mayo and Memorial day holidays.

As usual, we led 5 de Mayo and we are pleased to have once again, one the memorial day holiday as the top share gaining supplier in sarcoma dollar sales growing six 3% and gaining one six share points of total beer and one eight share points of high end beer.

But that will especially out was the top share gaining brand picking up one share point and we had a total of five out of 15 share gaining brands.

Our on premise Depletions grew 2% as we continued to capture tap handles and gained share as demonstrated by the Delaware speciality shifting up one spot to now be the number for beer on draft in the U S.

Beer shipment volume for the quarter increased seven 6% and ran slightly ahead of Depletions on both a growth rate and on an absolute basis. This is aligned with our usual seasonality as distributor and retailers prepare for the peak summer season.

That said from a full year perspective, we continue to expect absolute shipments and depletion volumes are closely aligned with each other.

And in terms of the quarterly cadence of our volumes in fiscal 'twenty five we still anticipate the quarterly share a full full year shipment volumes and depletion volumes to be largely aligned with that of fiscal 'twenty four.

Lastly, regarding selling days for our beer business. They were flat for the first quarter of fiscal 'twenty five for.

For the balance of the year, we will have one less selling day, which will occur in Q2.

In addition to the shipment volume growth, we realized pricing benefits of less than 1% due to lapping the wrap around impacts of the pricing actions. We took in the fall of calendar year, 2022, which were above our normal pricing algorithm.

Altogether volume growth combined with price mix benefits drove net sales growth of more than 8% for our beer business.

As we look towards the balance of fiscal 25 from a topline perspective for our beer business, we anticipate the momentum of our portfolio to continue.

The shelf space gains we captured this past spring and our ongoing pursuit of additional points of distribution across the country are in line with what we outlined during our Investor day.

In addition, the opportunities across our disciplined innovation launches and the demographic tailwind from Hispanic consumers, who have high affinity and strong loyalty for our brands as well as the incredible equity of our brands underpinned by our consistent marketing efforts give us further assurance that our topline perform.

<unk> is sustainable.

Moving on to operating income and operating margin performance for our beer business.

This segment delivered 16% growth in operating income and a 260 basis point increase in operating margin to 46%.

These increases were largely driven by the strong top line growth of our beer business as well as in nearly $50 million benefit from our savings and efficiency initiatives, which partially offset an increase in cogs up 7%, excluding these savings, but inclusive of the impact of volume and foreign currency.

As a reminder, approximately 25% of our total Cogs are exposed to the Mexican peso and we are approximately 85% hedged against that exposure for the fiscal year.

Marketing expense as a percent of net sales was eight 4% for the quarter relatively in line with our full year expectation of approximately eight 5%.

Other SG&A expense was four 4% as a percent of net sales slightly under our full year expectation as we expect an uplift in the second half due to lower fixed cost absorption as well as talent acquisition and integrated supply chain investments.

We continue to expect beer operating margins of approximately 39% for fiscal 'twenty five.

And from a cadence perspective, we anticipate incremental Cogs relative to net sales in <unk> due to lower fixed cost absorption from normal volume seasonality with some favorability in Q4 from lapping the write off in the same period last year.

Shifting to our wine and spirits business the segment realized a 7% net sales decline in the first quarter. This was largely driven by a five 1% decrease in shipment volume as marketplace dynamics in U S wholesale remain challenging, particularly in the wine category.

That said, we continue to expect that the operational and commercial execution initiatives identified in Q4 of last fiscal year and set underway and our recently completed Q1 should help us more effectively navigate the broader category and segment headwinds to ultimately deliver relatively stable year over.

For year net sales performance in fiscal 'twenty five.

Note. However that we expect the top line performance uplift in our wine and spirits business to be more heavily weighted towards the second half of the year aligned with the usual seasonality of the business and as the benefits of our commercial and operational execution initiatives begin to take hold.

From an operating income perspective, our wine and spirits business realized a decline of approximately $20 million, which in turn resulted in a 370 basis point decrease in operating margin to 15, 3%.

These declines were primarily driven by unfavorable cost of goods sold lower volumes and unfavorable product mix due to category headwinds extending into higher price segments, which more than offset the favorable impacts of SG&A expense and favorable pricing.

The unfavorable Cogs relative to net sales was primarily driven by higher grape and low end spirits cost, partially offset by cost savings realized in freight and warehousing.

Our marketing expense as a percent of net sales was 10, 5%.

This was elevated when compared to our medium term target due to ongoing marketing investments around some of our largest brands, particularly through tactical initiatives.

SG&A as a percent of net sales was 17, 5%, which was also elevated when compared to our medium term target as benefits of our SG&A savings initiatives are expected to be realized in future quarters.

As we look towards the rest of the year for our wine and spirits business, while we expect improvement in our performance for both operating income and operating margin. We continue to anticipate a full year, 9% to 11% decline in operating income for our initial fiscal 'twenty five guidance.

Rounding out the rest of the P&L.

Corporate expense for the quarter was approximately $59 million, reflecting a year over year increase of $9 million or 18% largely driven by higher compensation and benefits and professional fees.

Interest expense for the quarter was $103 million, a 14% decrease from the prior year.

And our comparable effective tax rate was 18, 2% compared to 27% for the corresponding quarter last year.

Our corporate expense interest expense and comparable effective tax rate expectations for fiscal 'twenty five remain unchanged at $260 million $445 million to $455 million and 18, 5% respectively.

We expect a marginal increase over the coming quarters in corporate expense, mainly due to an increase in compensation and benefits and digital capabilities investments.

We also expect a slight uplift in interest expense due to lower capitalized interest from our beer business expansions beyond Q1 any.

Any minor increase in our effective tax rate due to anticipated incremental contributions from our wine and spirits business to our enterprise operating income.

Turning to free cash flow, which we define as net cash provided by operating activities less capital expenditures.

For the first quarter of fiscal 'twenty, five we generated free cash flow of $315 million.

A 19% decrease from the prior year as capital expenditures increased 35%, primarily driven by the construction of our Greenfield brewery in Veracruz.

That construction is progressing as planned and similar to all of our recent expansions, we believe will enhance our production.

Capacity product redundancy and overall efficiency for our beer business.

We expect our new brewery to be operational towards the end of next fiscal year or in the earlier part of fiscal 'twenty seven.

To conclude the excellent enterprise results were achieved in the first quarter of fiscal 'twenty five support our confidence in our ability to deliver on our financial and strategic objectives for the full year as we continued to leverage our strong portfolio of brands.

We're relentlessly pursue operational excellence and remained consistent and adhering to our disciplined and balanced capital allocation priorities.

That said as we always do we will continue to closely monitor the consumer currencies and our input cost and to take appropriate action in response to any potential volatility or macro headwinds.

As always we thank you for your continued support and interest in our company and we will report to sharing our progress with you throughout the year.

With that Bill and I will be happy to take your questions. During our Q&A session. Thank you.

Thank you we will now be conducting a question and answer session. You would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.

You May press star two if he 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 keys. As a reminder, we ask that you. Please limit yourself to one question one moment. Please while we poll for your questions.

Our first question comes from the line of Andrea Teixeira with J P. Morgan. Please proceed with your question.

Yes, hi, good morning, So you got to you elaborated.

You commented on the continued momentum in beer and disciplined marketing efforts, leading to sustainable sustainability of growth I think we're all hoping to hear from you a little bit on how you exit the quarter at June.

Commentary, so far given the state of the consumer.

Even though we are hearing from other companies and are in the economy in general.

Can comment on that and in.

Related to that like I think we all.

Hope that you are benefiting from all of the shacks and expansion in distribution.

You can kind of tell us a little bit of how you benefit from in the depletion side you had just reported at six 4% how much you would say came from our same store same shelf growth or how much was additional distribution. Thank you.

Sure. Let me, let me start with that first of all I think the important thing to always keep in mind is that our buy rates for our beer business remain very strong we saw a high single digit both at a consumer level and within the Hispanic community with the Hispanic community being slightly higher than the total.

Consumer now that doesn't mean, there aren't some shift around and pack sizes channels, but our buy rates remain extremely strong and I think this is a consistent theme that we've said time, frankly time and time again, which is our beer business has tremendous brand loyalty and therefore it continues to excel.

And despite whatever might be going on with other peer companies are with other brands in the sector. As we noted we had an unusually strong performance against all other CPG sectors, and where again the number one share gainer within beverage alcohol.

To your point I think the the.

The gains that we saw in shelf sets.

Certainly an added to factor in this it also gives us plenty of chance to expand things like Oro, which we're very excited about for this fiscal.

Fiscal year, So I think it's very difficult to put an exact number on the dimension of it and I think you've seen we've consistently delivered year after year after year on exactly what we said we would do in this quarter is no different.

Thank you. Our next question comes from the line of Carlos Laboy with HSBC. Please proceed with your question.

Yes, Hello, everyone.

You've been able to sustain pretty good profit margins are pretty stable profit margins here remarkably well despite the.

The Mexican peso, having appreciated very strongly in recent years, but that seems to have turned this quarter. If you were to enter a period of peso weakness can you speak to the sort of flexibility that this might give you were that would enter into your pricing strategy and look just to be transparent. The reason I'm asking is because.

In the eighties and nineties, we went through periods of peso weakness.

You were able to successfully closed price gaps with mainstream beer and the dividends of that are still coming through today. So so if you could just speak to how how youre thinking about this it would be helpful.

Yeah, Yeah across I think the results that you referenced are just an indication of how effective our hedging policies are really are we have a multiyear hedging policy, which allows us to layer in incremental hedges over a multi year period, when we see moments of of weakness if you will.

In Q1, we actually did see a couple of days there were there was some fairly significant movements greater than 10%.

We took advantage of that movement with our with our with our Treasury team again layering in incremental hedges not just for this year, but also for future years as well just as a reminder, when we entered this fiscal year, we were about mid 70% range hedged against the peso and as a result of these incremental.

As we now sit at about 85% for the full fiscal year. So again, it's a it's a very robust.

Our practice very methodical disciplined and flexible approach and it's certainly been paying dividends for us.

Thank you. Our next question comes from the line of Darren most setting it with Morgan Stanley. Please proceed with your question.

Hey, good morning.

So just to follow up on Andrea's question in terms of macros and potential impact on the beer business can you unpack a little more maybe what youre seeing from low versus middle versus high end consumers in terms of demand for your beer business and then also just any update on on premise.

Channel trends.

And what Youre seeing throughout the course of fiscal Q1, and so far this summer just in terms of if we're seeing any big channel shifts or any types of impact on that front. Thanks.

Sure Derek let's.

Let's start with the second question first the on premise was slightly weaker than what we might have expected although as you saw.

We had some significant gains within our franchises, particularly modelo, which stepped up.

<unk> versus what we had had in prior years I think some of that relates to couple of things. One is as many people have noted the weather scenario that existed over the course of the early part of the spring slash beginning of summer well it wasn't great which impacts <unk>.

Impacts the on premise much like it impacts the overall business so.

I think that was a bit of a play but as we're getting into that.

The summer months, we expect that just to show some resiliency I'd reemphasize to your question about where the consumer is at various price points excuse me income points I think yet again. This goes right back to what I said in answer to her question, which is.

The the brand loyalty that exists with our consumers.

Is second to none I mean, when you when you look at the Hispanic consumer which is one we watch very closely given it's more than 50% of our overall mix.

That consumer buy rate was up compared to the total consumer.

Again, I think that speaks very strongly.

The loyalty that we see within that consumer base irrespective of income.

That that in particular is a long range benefit for our business and we will continue to be a long range benefit to our business given that community.

In many respects views beer is a staple.

No.

Again overall, we continue to be very pleased well with our buy rates and despite gives and takes during the course of the quarter I think it's reflective in our depletion rate of six 4%. So very strong quarterly result.

Thank you. Our next question comes from the line of Filippo for Lorne <unk> with Citi. Please proceed with your question.

Hey, good morning, everyone.

First just a just a quick follow up on <unk> question. If you can just provide any update on just where youre seeing accident. According to June and then a bigger picture question on <unk>.

<unk> last year, obviously, you had Madonna Oro, which was pretty successful and you have some some runway for this year can you talk a bit about this year's innovation, including Corona Some rule and the more dialogue was suppressed because of expansion and anything else. We should think about in terms of innovation contribution of India. Thank you.

You bet as we've said in other quarters, we don't we're not going to give quarterly depletion guidance.

But what I will say is we're really pleased with what the status is the weather going at this particular quarter.

And as we've always said that that's really a big factor in terms of the of.

The delivery of the business and quite frankly, the forecast for tomorrow is terrific. So we're looking forward to the July 4th being yet another.

And a N a and a weekend and weekday in this case that we will win much like we did on memorial day.

For it so.

Relative to the innovation agenda, we have expanded modelo Agua fresca as to 20 additional markets as you may recall. It was test marketed last year in Las Vegas and was the number one F N b in that particular market had a very strong start in.

And that variety pack is now in 20 additional markets, which covers roughly 70% 75% of the total.

<unk> expected for that product. So we're very excited to watch that one developed as the AR as the year goes on similarly, we are testing Corona Sun brew.

In the northeast.

Just again, just getting started and it's very early days, but we're very pleased with their response to it and certainly much of the consumer sampling that's been done around that product suggest that that product is going to be a homerun for us with the consumer. So again both of those are too early days to really have any what I would.

Called concrete results.

But as we always do those were only introduced after significant testing at a consumer level to make sure that we had the right product the right package and the right pricing mix.

Two to.

To give them a very high probability of success.

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Great. Thanks, good morning.

So.

This strong start to the year on profitability routinely create more flexibility to hit that 10% to 12% operating profit guide for beer for the year, particularly as there is nothing too material from a timing perspective in the quarter. So kind of what do you see as the key variables that influenced the high versus the low end of that operating profit guidance range from here. Thanks.

Well look Lorne you know, we feel really good about the about the guidance we gave for the full year and obviously, we feel really good about the results that we reported today as.

As we gave guidance.

And in April of this year, you know, obviously, we laid out that from from a beer perspective, we very much expected that our operating income growth would be in that 10% to 12% range and we certainly reiterated that today that that implying that our operating margins would be at about 38% I think it's important to note that our 39%.

So I think it's important to note that we gave that guidance.

As it relates to the margin on an annual basis not on a quarterly basis. So that means that we won't necessarily hit 39% or approximately 39% every quarter certainly we expect that theres going to be the normal seasonality that we see every year, which means we have higher volumes in the first half of the year.

And then lower volumes in the second half of the year just due to regular seasonality.

And which results in a bit of a fixed overhead absorption drag as well as the second half of the year is when we do most of our.

Maintenance.

On our breweries. So therefore, the second half of the year opiate will be lower from a margin perspective in the first half of the year.

That being said as we've noted previously we do expect that in Q4 that we will see some favorability on a year over year basis due to a lapping of the VAT write off of last year.

Thank you. Our next question comes from the line of Nik Modi with RBC capital markets. Please proceed with your question.

Yes, Thank you and good morning, everyone.

Just more of a philosophical question I mean the sentiment.

The beer category has been pretty poor for a while now.

Obviously investors see it.

But the trade talks about it as well.

Your business has been very disconnected from that so I'm just I'm just curious like as you engage with your your supply chain partners distributors retailers and what's the conversation look like I mean.

Are they come.

Coming down around the fact that maybe the camp.

Index your business relative to the beer category anymore, because there's a lot of moving pieces on cross consumption, it's really about occasions versus.

Some holistic category I mean, I'm just I'm just curious like what.

What that discussion looks like right now, especially as you're in the middle of.

Southeast that probably discussions for what's going on in the fall and into next year.

Yes.

So I have to start by giving a little tip of the cap to you because you pointed out what we think is a critical point, which is this is all about brands.

The reason our brands have gotten double digit increase in their shelf position. During this period of time is because of the strength of those brands and to take away as we've said on prior calls.

Our average SKU take a takeaway in dollars is five times the rate of our chief competitors. So if you're a distributor or you're a retailer you're going to put the emphasis on where you get growth in profitability and growth in takeout and strong velocities and our brands represent that that's why you see Pacific.

Go with with 20% growth and being the number four a share gainer. That's why you see modelo, especially al now being the number one play.

And and off premise dollar volume.

Our brands are very strong and they stand out distinctively from other brands in the category and I think.

Made that note many times and we happen to agree fully with that.

Lastly, I would say we continue to invest in our brands.

Part of what we're doing is we believe there is still significant upside on the longer term in terms of our brands and the investment that we put behind them. Despite modelo.

Modelo being number one there's still a lot of awareness opportunity.

And we're planning to go get it.

We feel the same way about things like oral and Agua Fresca as and Sun Brew, we're bringing new scenarios and new occasions to more consumers I think that all speaks to the strength of our brands and I think whether you speak to retail or whether you speak the distributors. They are all very.

And about our prospects not only today, but for the long term.

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question Hey, Thanks, operator, good morning, guys.

I have just just two questions I guess the first one is just a guard or the only if you can just comment on.

Veracruz I know you made a comment in the prepared remarks, but just how far along you are in the construction you know do we have a foundation yet.

Piped in water just some sense of kind of where you are and where that is relative to plan and then I have a follow up.

Brian: Well, well well well, Brian I mean, as I said in my remarks, we are well on our plan, we expect to open their brewery at the end of the next fiscal year early in the fiscal year after that.

Brian: So we're well on our on our way it is why our Capex. This year is at its peak as a reminder, we shared with everybody at Investor day that our FY 'twenty five would be our peak in terms of Capex.

Brian: As as that construction is kind of.

Brian: At full throttle importantly are.

Brian: This is our peak year of Capex, we do expect that by the by the AR.

Brian: So our end of our medium term outlook meeting FY 'twenty five we'll go from will go from Capex kind of in the low double digit range of net sales to a mid single digit range of net sales.

Brian: So just important for all of you to know and appreciate that but as it relates specifically to Veracruz, where we are on track.

Okay. Thanks, and then just to follow up on some of the earlier conversations build the stock is down today, because I think there is a concern about the tough comparisons in beer.

Maybe a little bit of a lesson concerned because of how the stock reacted when Trump was elected in 2016. So could you just give us a first.

Our perspective on how you think about the comps the comps were the comps when you set your plans so it's not like they're a surprise.

Speaker Change: So if you could give us a perspective on that and whether or not people should actually even be worried about the election, and who wins or loses relative to FTC and to different yes sure.

I think it's always risky and we've talked to many many times Garth than I have about this topic.

Without getting too excited about what happened tomorrow morning, rather than looking at the longer range picture.

Year after year after year now we've delivered against the goals that we set out and were not varying from our expectation from this year in part because of very strong performance that we delivered in Q1.

Garth noted in his remarks that doesn't mean, there aren't times, when it's a little better or a little worse or you have a little variability because you have less sell days or you have various things that go on I think it's important to look at the bigger picture our brands continue to perform year after year and the runway for those brands remains extraordinarily strong.

I think that's going to be a true statement no matter who's elected in November.

Our brands are really focused on delivering against the consumer and that consumer is incredibly loyal as I said, just a few minutes ago.

Speaker Change: That makes a big difference irrespective of who happens to be the president of the U S. So.

We're certainly I might add and we've said this before as well.

Our government affairs team works very closely both in the United States and in Mexico.

Speaker Change: On both a federal and a local level and I think that that capability is one that is also advantageous to us again irrespective of any particular party that might happen to be an opposite at any particular time.

Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Peter K. Grom: Thanks, operator, good morning, everyone hope you're doing well so I was hoping to get some updated perspective on just kind of the puts and takes as it relates to the beer profit outlook back in April you touched on volume leverage price next cost savings being tailwind versus commodities and FX headwinds.

I'd be curious have your expectations for those buckets changed at all over the last few months totally understand you Randy.

The outlook this morning, but just yes.

Peter K. Grom: The building blocks changed at all versus your prior expectations. Thanks.

Thanks, Peter I mean, I guess the short answer that question is no.

As I've just laid out previously.

We will see quarterly variability as we do every year, mostly driven.

Due to seasonality volume seasonality certainly the building blocks that we laid out in detail at our April conference call. We were provided for full year guidance those remain where they are.

Peter K. Grom: Or what they are as we noted a couple of times now we are taking actions, where we see that there is opportunity to take actions like making sure that we further hedge against the peso when we see weakness, but other than that I mean, the business continues to be the business and the building blocks of the building blocks.

Thank you. Our next question comes from the line of Chris Carey with Wells Fargo Securities. Please proceed with your question.

Hey, Thank you very much.

I've got a follow up on.

Peter's question there.

Gross margins in beer, specifically Garth.

Can you maybe frame how the Q1 gross margin came in relative to your expectations on paper. It certainly looks like strong deliveries specifically in the context of the rest of the year and then just regarding the commentary around taking.

Taking advantage of the weaker peso does that give you more confidence on this fiscal year end and how much can you actually take advantage of for fiscal 'twenty six at this point.

Speaker Change: Yeah, So I would say that the gross margins kind of came in within our expectations just to give you a little bit of color around what drove that we essentially saw about 100 basis points of improvement.

In gross profit margin on a year over year basis about 3% of that or 30 basis points about I should say.

Speaker Change: Yes.

As volume price and mix.

Speaker Change: Driven about 80 basis points are what I would just call cost of goods.

Logistics materials labor offset by depreciation and things of that nature, We got about 20 basis points bump due to the craft divestiture and then we had a about a 30 basis points hit just due to the exposure against the FX.

Speaker Change: Hedged.

So that's really what the building blocks or not.

The makeup of the other changes we feel really good about where we are for the balance of the year.

Certainly we continue to progress against our aggressive cost savings initiatives that we outlined at our Investor day as I mentioned in my comments, we've already got $50 million of about $50 million in Q.

In Q1 that we think are sustainable and we will certainly continue to execute against our cost savings initiatives as we go through the balance of the year.

Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

Bonnie Lee Herzog: Alright, Thank you good morning.

I had a question on just marketing.

Outlook for marketing and advertising spend this year, it's below historical levels and I guess, there's some concern that maybe starving your brand. So could you touch on this end and provide a little more color on the efficiencies you've gained and may continue to go home.

Speaker Change: We're approaching investments this year and I guess why do you feel good about these investment levels. Thanks.

Bonnie: Yes, you bet, Bonnie we're actually going to be spending more dollars. This year than we have in prior years.

Would expect because our brands demanded in our growth profile allows us to continue to do it with that said you did point out an important point is we have created some efficiencies within our spend and therefore the percentage is slightly less than we've done in prior years purely driven by efficiency that doesn't change.

The fact that we are spending more against our brands than we've ever spent and that process will continue we strongly believe engaging our consumer.

With with critical.

National Media and digital advertising platforms are critically important to continue to create awareness and to bring consumers into our into our franchises that youre seeing spend against many of our new initiatives youre seeing that against Sun Bro Youre seeing that against Agua Fresca as.

We just kicked off our oro spend for the year.

We are very strongly supportive as we have been for many many years.

Bonnie: Against against our brands and that process will continue.

If you don't mind me Bill.

More I mean, we've said this publicly multiple times now.

We will continue to invest in the growth of our business. Both in marketing just like we did just like we do with the investments, we're making in our brewery capacity.

We will not we will not starve our brands for marketing.

In order to hit our margin profile instead, we will continue to invest for growth.

Since we're piling on Garth do you mind, if I pile on too.

One of the reasons why we saw the improvement in her adult penetration and the double digit growth.

Modelo is business in the quarter is exactly what we're just talking about which is we spend against our business. That's why modelo in 10 years has gone from a tiny little brand to the number one brand by dollars in the United States.

Thank you. Our next question comes from the line of Nathan <unk> with Bernstein. Please proceed with your questions.

Speaker Change: Hi, Thank you.

The November election, so former President Trump has mentioned the potential 10% Universal baseline tariff 61, given your Mexican imports Pier basin, how do you think.

Haynesville scenario would play out for constellation.

How would you add color on the risks.

Thank you.

I think it's too early to speculate on what may or may not happen in November our quite frankly, our business performed just great. During the last Trump administration and I would expect that we would perform extraordinarily well in a new administration irrespective of who might be at the helm of that administration.

I think it's important to recognize.

Speaker Change: Our business includes inputs from heavy inputs from the upper Midwest in the United States as an integral part of what our overall package of.

The inputs are in our business.

Admittedly, there's a lot of flow our biggest trading partner in this country is Mexico and I think that's likely to continue.

And we're sure we'll be able to navigate anything that might occur just fine and we'll work aggressively to do just that.

Thank you. Our next question comes from the line of Rob Einstein with Evercore ISI. Please proceed with your question.

Great.

Speaker Change: Two questions one.

Terrific quarter.

<unk> reiterated the guidance a lot of confidence stock down.

Love to get your kind of redo your kind of your thoughts on share buybacks here.

With the stock really not much higher than it was in 2018, which just gotta be a huge disappointment to you your management team and the board.

And then myself frankly since we've been recommending it. So that's question number one and then question number two.

Love to get your thoughts on just the the beer industry overall, how it's been developing and there was an earlier question I think on how how you did in June I'm not sure you answered that if you're not comfortable talking about your performance in June maybe the industry overall in June.

Whether it looked better sequentially than than than in May. Thank you.

Thanks, Robert just in just in terms of the share buybacks.

I mean, I think as bill alluded to in his opening remarks.

In Q1.

We continue to make and show the same progress that we have over the last five years in terms of all of our capital allocation priorities that included.

Share buybacks as Bill noted, we bought back $200 million worth of shares in the first quarter and then through the end of June are bought back an additional 40 plus million dollars. So we've continued to.

Do what we said we would do.

As we've as we've.

Oh.

Come out of Q1, we still have about $2.426 billion left on our share reauthorization.

Speaker Change: And we will continue to use the same discipline that we've exercised over the last several years.

And and buy when we see periods of dislocation.

And relative to your question about the overall beer category.

Certainly it appears that there has been some positive momentum.

As we've.

As we've come out of June I think a lot of that relates to the development of the summer we're heading into the peak summer selling season, which we're always excited to see given we tend to win all of the major holidays during those seasons and would expect to do so tomorrow as well.

But certainly it looks like there's been some improvement you know a lot of that we covered Disney you hate to note. This too often but the reality is there were a lot of sort of bad weather moments at key times around weekends and holidays over the first part of this calendar year.

Which certainly hasnt been beneficial for the category overall.

But I Gotta go right back to what I said, a couple of times already today, which is our brands have outperformed this category for a long long time, and we expect that to continue because of the strong brand loyalty.

We have amongst our consumers.

Thank you. Our next question comes from the line of Robert Moskow with TD Cowen. Please proceed with your question.

Hi, Thanks for the question I guess I'll ask about wine.

The guidance for the year implies a pretty substantial pick up in sales growth I guess in the second half.

Speaker Change: What kind of visibility do you have with your distributors on how the commercial turnaround is going are they making bigger commitments about what they are willing to take on.

Because it does it does it does imply a pretty steep ramp thanks.

We already are always said, especially after a prior quarter that we were going to take nine to 12 months to get our wind business back into the position that we expect it to do.

We're pleased with what the work that's been done I think we're ahead of schedule on some of the operational points that we expect recognizing they're likely to be second half loaded.

Because once you put in the work yet wait to get the results out of them second I think we've seen some significant improvement in our engagement, particularly with our wholesale network.

And we believe that's going to create good opportunity in the back half of this year. Some of the re expression of our marketing dollars that we have put in place you saw some of that play out in that in terms of the early spend in this quarter.

We're already showing some positive signs and we'll look forward to reporting on those.

Speaker Change: As we go forward.

But certainly we expect the improvement in this business to be back half loaded as we said now a couple of times.

I think the other thing too to also recognize both of our international business in our DTC business are performing ahead of what we had planned the place where we're still spending a lot of time and energy is on the wholesale portion, but we're working very closely with our key wholesale partners to deliver against those expectations and I.

Fortunately we are all on the same page about what needs to be done and what delivery, we expect against that business as we progress through the year.

Yeah.

Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to Bill Newlands for closing remarks.

Yeah.

Thank you Daryl and thank you all again for joining today's call. We're certainly off to a solid start in fiscal 'twenty five and clearly today brings a great buying opportunity for our stock our beer business continues to deliver excellent top line performance under underpinned by leading volume growth, while achieving solid margin expansion.

Our cost savings and operational efficiency initiatives, while our wine and spirits business continues to face challenging market dynamics. It is making progress on commercial and operational execution initiatives expected to drive improved performance altogether at an enterprise level, we continue to significantly outperform.

The entire CPG sector with our strong volume driven growth and we remain confident in our momentum and our outlook for the full year, including delivery of our double digit comparable EPS growth and with that I wish you all a happy fourth of July holiday and certainly hope that you contribute to our.

Standing performance that we expect to have during this critical holiday period. Thank you all for joining the call and have a good summer.

Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect at this time enjoy the rest of your day.

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