Q2 2025 Constellation Brands Inc Earnings Call
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Speaker Change: Hello, and welcome to the constellation brands Q2 fiscal year 'twenty 25 earnings call. At this time, all participants are in a listen only mode.
Speaker Change: If anyone should require operator assistance. Please press star zero on your telephone keypad.
Speaker Change: Question and answer session will follow the formal presentation you may be placed in the question queue at any time by pressing star one on your telephone keypad and we ask you. Please limit yourselves to one question as a reminder, this conference is being recorded its now my.
Speaker Change: Pleasure to turn the call over to senior Vice President of Investor Relations Joe Suarez. Please go ahead Joe.
Joe Suarez: Thank you Kevin Good morning, golf and welcome to constellation Brands' Q2 fiscal 'twenty five conference call I'm here. This morning, with Bill new ones, our CEO and Garth Hankinson our CFO.
Speaker Change: As a reminder, reconciliations between the most directly comparable GAAP measures 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 <unk> Dot com.
He used to 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 Garth in today's call.
Speaker Change: Before turning the call over to Bill inline with prior quarters I would like to 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 is bill.
Bill: Thanks, Joe and welcome to our Q2 fiscal 'twenty five earnings call as usual I'd like to start with a few key highlights for the quarter first while.
Bill: The current macro economic backdrop weighed on demand for beverage alcohol and more broadly across consumer packaged goods. We continue to deliver strong performance in the marketplace driven by our consumer centric strategy and thoughtful approach to brand building.
The total company level and sort of kind of tracked channels over the 12 weeks ending September 1st we held the number one spot for both dollar sales growth and share gains within all beverage alcohol and more notably we once again achieved dollar sales growth outpacing the total CPG sector as we can.
Bill: Continued to build on our track record of over a decade as a CPG growth leader.
Second our beer business remained declare winter across the total beverage industry, having significantly outperformed in dollar sales growth and of course maintained its leading share gaining position in the U S beer category.
Bill: Third and continuing with our beer business, we delivered another quarter of significant margin expansion supported by disciplined operational and financial management.
Bill: Accordingly, our cost savings and operational efficiency initiatives are delivering significant incremental benefits for our beer business beyond what we had anticipated at the start of fiscal 'twenty, five which are now enabling incremental marketing investments and our largest beer brands as of Q3.
Fourth our relentless focus on winning in the marketplace delivering top tier growth and driving efficiencies supported another quarter of double digit increase in comparable EPS in line with our full year outlook.
Bill: Our strong earnings performance and in turn significant cash generation enabled us to achieve a pivotal milestone of our capital allocation priorities, having reached a 2.9.
Bill: <unk> leverage ratio on a comparable basis in Q2 slightly below our approximate three times target.
Bill: And equally important consisting with those consistent with those same priorities. We also returned nearly $250 million of cash to shareholders through share repurchases in Q2, bringing our total year to date cash returns through repurchases to approximately $450 million while.
Bill: <unk> to pay our dividend and advance our brewery investments in our beer business.
Bill: All in as we noted a few weeks ago, while ongoing macro economic headwinds, particularly rising employment have led to a recent deceleration in the rate of growth of consumer demand for our products. We remain on track to deliver another solid fiscal year and continue to create value for our shareholders.
Speaker Change: With that let's turn more fully to our beer business performance.
Speaker Change: During the second quarter of fiscal 'twenty five our beer business continued to deliver strong financial performance with net sales and operating income growth of nearly six and 13% respectively. As noted earlier. These increases were primarily supported by solid volume growth and carryover pricing from last fall.
Speaker Change: As well as disciplined cost management and operational efficiencies.
Speaker Change: Our beer business grew shipments by four 6% in Q2, while Depletions were up 2.4, which includes the impact of one less selling day.
Speaker Change: It is important to reinforce that the Q2 performance of our beer business was accounted for in the updated expectations. We shared for fiscal 'twenty five four weeks ago.
Now honing in on the performance of our largest brands modelo, especially outgrew depletions by nearly 5% and upheld its position as the top share gainer further extending its lead as the number one beer brand in the U S track channels.
Speaker Change: A lot of extra Depletions declined approximately 3%. However, it remains a top five beer brand of dollar sales in the U S and continued to gain share in the category.
Speaker Change: Pacific <unk> delivered another quarter of remarkable depletion growth of nearly 23% and remains the number four dollar share gainer across the total beer category.
Speaker Change: Our modelo, which a lot of brands delivered an increase of approximately 2% in depletions and our remaining sell flavor remains a top 15 overall dollar share gainer in the category.
Speaker Change: As noted earlier, our beer business also maintained the momentum of its significant operating leverage gains driving two seven percentage points of operating margin expansion year over year.
Speaker Change: As mentioned earlier, we are pleased to be deploying incremental marketing investments across our largest beer brands in the second half of fiscal 'twenty five as our cost savings and efficiency initiatives have delivered results above our initial expectations.
Speaker Change: Looking ahead more broadly consistent with our recent outlook update we continue to expect our beer business to deliver net sales growth of 6% to 8% operating income growth of 11% to 12% and an operating margin of approximately 39% in fiscal 'twenty five.
Speaker Change: Moving on to wine and spirits as noted a few weeks ago and our full year guidance update we continue to face incremental category headwinds and our wine and spirits business, particularly in the lower priced segments. This affected both the performance of wine and spirits in this latest quarter and our fiscal 'twenty five outlook for that business.
Speaker Change: Yes.
Speaker Change: In Q2, the impact of these category headwinds largely drove wine and spirits shipments down nine 8% year on year, while in turn was the primary driver of the respective 12 and 13% declines in net sales and operating income for that business.
Speaker Change: Against that backdrop, the business remains focused on continuing to advance the operational and commercial execution initiatives identified at the end of our last fiscal year to improve the performance of our largest wine and spirits brands Inc.
Speaker Change: <unk>, we saw some green shoots in Q2 across our largest higher end wine brands Kim Crawford may Omi, the prisoner as tactical pricing and marketing support actions. We are taking in select markets began to drive better consumer takeaway trends.
Speaker Change: So we plan to continue these actions through the remainder of the year to drive further improvements in the select group of our most scaled higher end offerings, which ultimately underpins the sequential improvement we expect in our wine and spirits business over the second half of fiscal 'twenty five for our updated outlook.
Also notably our craft spirits portfolio.
Speaker Change: It's smaller in scale continues to be a positive driver for the business delivering strong depletion volume growth as well as high single digit dollar sales growth in <unk> U S track channels significantly outperforming the low single digit growth rate of the higher end spirits segment.
Speaker Change: Looking ahead for our recent updated fiscal 'twenty five outlook, we expect the wine and spirits business to ultimately deliver for the full year net sales and operating income declines of 4% to 6% and 16% to 18% respectively.
Speaker Change: Lastly, we usually take this opportunity and our Q2 call to bring your attention to the upcoming release of our annual ESG impact report every October that said going forward, we will be publishing this report under the same timeline as our other fiscal yearend materials the shift in time.
Speaker Change: <unk> will help ensure better alignment between our most recent and relevant financial year updates and and these related to our efforts to address pressing environmental and societal needs that are important to our business and our stakeholders ahead of our annual meeting we look forward to sharing our progress and updated targets.
In a few quarters.
Speaker Change: In closing, while our sector is facing less favorable consumer demand due to macro economic headwinds, we delivered another quarter of strong financial results underpinned by the continued solid net sales growth and significant margin expansion of our beer business ultimately achieving our second quarter double D.
Speaker Change: Comparable EPS growth in line with our full fiscal year expectations.
Speaker Change: In addition, we continued to build on our leadership position within consumer packaged goods and the total beverage industry outperforming and dollar sales growth across certain kind of tracked channels and we remain steadfast in delivering against our disciplined and balanced capital allocation priorities.
Speaker Change: <unk>, a two times net leverage ratio on a comparable basis slightly below our stated approximately three times target. While also returning nearly $250 million to shareholders through share repurchases in Q2, as well as continuing to pay our dividend and advance our brewery capacity.
Speaker Change: <unk> investments and with that I will turn the call over to Garth who will provide more details on our financial results and now Garth.
Garth: Thank you Bill and good morning, everyone.
Garth: As usual my discussion of our Q2 fiscal 'twenty five performance will focus mainly on our comparable enterprise results accompanied by business segment details.
Garth: Let's get started with our enterprise results for.
Garth: For the quarter Enterprise net sales grew 3% while enterprise operating income decreased 226% on a reported basis and increased 13% on a comparable basis.
Garth: The increases in enterprise net sales and enterprise comparable operating income were driven by strong results from our beer business, which were partially offset by ongoing category headwinds affecting the performance of our wine and spirits business.
Garth: Both of which I will address in more detail shortly.
Garth: The decline in reported enterprise operating income reflects a noncash goodwill impairment loss for the audit spirits business of $2 $25 billion.
As noted in our updated guidance last month, we now expect enterprise net sales to grow between 4% to 6% for fiscal 'twenty five and for enterprise comparable operating income to grow 8% to 9% for the full year.
Garth: At an enterprise level, we remain confident in our ability to deliver against our initial double digit comparable EPS growth expectations.
As demonstrated by our decision to raise the lower end of our full year comparable EPS outlook during our recent guidance update.
Garth: That range now set at $13 60 to $13 80.
Speaker Change: Now I will turn to a more detailed review of our Q2 fiscal 'twenty five results.
Speaker Change: To start our beer business net sales grew by 6% representing an uplift of $137 5 million.
Speaker Change: This was driven by beer shipment volume growth of four 6% and favorable pricing, which added $52 million to the overall net beer net sales increase.
Speaker Change: For the full fiscal year, we continue to expect pricing to account for 1% to 2% of our net sales growth.
Speaker Change: Reflecting both the muted pricing from the first half of this year, which was driven by lapping outsized pricing from last year as well as targeted price actions. We are taking in the second half of fiscal 'twenty five.
Speaker Change: Beer Depletions grew two 4%, marking our 58th consecutive quarter of growth.
Speaker Change: As a reminder, in the second quarter, we had one less selling day and the impact of a selling day variance to our volume growth performance has historically been between half to one five percentage points, depending on the day of week lost or gained.
Speaker Change: Also as Bill noted beer Depletions for the quarter were impacted by the recent challenging macroeconomic backdrop, where rising unemployment rates have impacted consumer behavior.
Speaker Change: That said we are pleased to have had our beer business once again outperformed the category and sector and dollar sales in the second quarter and in particular to have once more one the fourth of July holiday as the top share gaining supplier in sarcoma dollar sales growing five 1% in <unk>.
Speaker Change: Getting a one two share points of total beer and one three share points of high end beer.
Our on premise Depletions grew 5% and accounted for approximately 11% of our total volumes.
Speaker Change: Corona extra remains the number one packaged beer by dollar sales in the on premise.
Speaker Change: Modelo Especial continues to hold its number for beer position on draft in the U S up from the number five spot last fiscal year.
Speaker Change: For the second quarter beer shipment growth outpaced depletion growth as distributors proactively managed inventory levels to supply the higher volume summer season.
Speaker Change: For the full fiscal year, we expect absolute shipment and depletion volumes to be closely aligned with each other and for the quarterly share of full year volumes across both of those metrics to be in line with those of fiscal 'twenty four.
Speaker Change: As we look ahead to the balance of the fiscal year for the beer business I'd like to take a moment to reiterate our updated outlook announced last month.
Beer net sales are now expected to grow between 6% to 8% for fiscal 'twenty five reflecting the incremental macroeconomic headwinds we have seen this year affecting the consumer as noted earlier.
Speaker Change: We believe these headwinds are transitory in nature and while our consumers are cautious. They also remained very loyal to our brands as they seek more value oriented packs and channels to manage their spend in this environment.
We are focused on managing the levers that we can control and continue to advance our cost savings and efficiency initiatives that allow us to accelerate incremental marketing investments toward our beer business to drive top line growth.
Speaker Change: We remain confident in our overall growth profile, which again continues to outperform our sector and industry as we pursue further incremental points of distribution in the U S and push forward with our focused and disciplined innovation agenda, while building on the broader demographic tailwind from our loyal Hispanic consumers.
Speaker Change: I'll now turn to beer operating income and margins.
Speaker Change: The beer segment grew operating income by 13% and had a 270 basis point increase in operating margin to 42, 6%.
Speaker Change: The strong performance in our beer operating income is largely the result of an over $65 million benefit from our ongoing cost savings and efficiency initiatives.
Speaker Change: Partially offsetting an increase in cogs or 4%, excluding these savings, but inclusive of the impact of volume and foreign currency.
Speaker Change: As a reminder, approximately 25% of our total Cogs are exposed to the Mexican peso and we are approximately 90% hedged against that exposure for the fiscal year.
Speaker Change: For the remainder of fiscal 'twenty, five we anticipate incremental Cogs relative to net sales due to lower fixed cost absorption from normal volume seasonality.
Speaker Change: That said it is important to recall that in Q4, we will lap the vap.
Write off from the same period last year, which will provide some favorability year over year, but will not offset the sequential impact of lesser fixed cost absorption due to seasonally lower volumes.
Speaker Change: Marketing expense as a percentage of net sales was seven 6% for the quarter.
Speaker Change: For fiscal 'twenty five we are still on track to be in line with our full year expectation of approximately eight 5% as we continued to ramp up investments to support our core brands and during the NFL and college football season, particularly in Q3.
Speaker Change: Other SG&A expense was three 8% as a percentage of net sales and we expect this ratio to increase in the second half of the year largely due to lower volumes, yielding less cost absorption. This is in line with our expectation and we continue to anticipate our full year SG&A expense to be approximately.
Speaker Change: 5% of net sales.
Speaker Change: Overall for beer operating margins, we continue to expect to be at approximately 39% for fiscal 'twenty five.
Speaker Change: As noted we expect lower fixed cost absorption and incremental marketing investments to drive sequentially lower operating margins in the second half.
Speaker Change: Moving onto the white spirits business net sales for the segment declined 12% in the second quarter, driven largely by a nine 8% decrease in shipments.
Speaker Change: The decline was largely driven by ongoing challenges in the wine category, particularly in the U S wholesale marketplace due to both weaker consumer demand and retailer inventory destocking.
Speaker Change: Accordingly, we remain focused on the ongoing tactical pricing and marketing actions shared at the beginning of this fiscal year to help drive net sales improvement in the performance of our largest brands.
Speaker Change: As Bill noted we are seeing some encouraging early results from these actions.
Bill: And as a reminder, we continue to see the back half of the fiscal year as the higher volume period for our wine and spirits business due to historical seasonality related to vintage releases from our higher end brands and incremental demand over the holiday season.
Bill: As well as incremental benefits from the initiatives just referenced.
Bill: Operating income for wine and spirits business remained relatively flat with a decline of approximately $10 million, resulting in an 18, 1% operating margin.
Bill: Altogether the decline in operating income and relatively stable margin performance were primarily impacted by unfavorable product mix and overall lower shipment volumes, partially offset by higher contractual distributor payments.
Bill: Our marketing expense as a percent of net sales was nine 3%, which is slightly above our medium term targets as we continue to make near term investments in our largest brands to help support our top line.
Bill: And SG&A as a percentage of net sales was 14, 8% coming in line with our medium term outlook.
Bill: Looking forward to the remainder of the year for the wine and spirits business, we expect operating margins to benefit from mixed benefits due to the previously noted seasonally driven increase in volumes for our higher end brands.
Bill: Incremental volume benefits from the commercial execution initiatives also previously referenced to further support demand for our core brands.
Bill: And operational efficiency and cost savings actions similar to those being executed in our beer business.
Bill: As we face ongoing operating deleverage due to larger topline headwinds, we anticipate a full year, 16% to 18% decline in operating income for our recently revised fiscal 'twenty five guidance.
Bill: Capping off the rest of the P&L.
Speaker Change: <unk> expense for the quarter was approximately $58 million, reflecting a year over year decrease of $8 million or 13% driven by a one off real estate tax benefit in the second quarter.
Speaker Change: In the back half of fiscal 'twenty, five we expect a marginal increase mainly due to the increase in compensation and benefits and digital capabilities investments and.
Speaker Change: And for the full year, we continue to expect $260 million.
Speaker Change: Interest expense for the quarter was $104 million, a 6% decrease from the prior year due to lower average borrowings and an increase in capitalized interest from our investments in our breweries.
Speaker Change: As noted in our previously updated guidance interest expense for the fiscal year is now expected to be approximately $430 million as we see favorability from lower cost of borrowing and adjustments related to capitalized interest.
Speaker Change: Our comparable effective tax rate was 18, 7% compared to 17, 8% for the corresponding quarter last year and we continue to expect our full year tax rate to be 18, 5%.
Speaker Change: And finally free cash flow, which we define as net cash provided by operating activities less capital expenditures for the first half of fiscal 'twenty five we generated free cash flow of $1 2, billion% to 12% increase from the prior period.
Speaker Change: As a reminder, we expect free cash flow to be between one four and $1 $5 billion for the fiscal year as we reached the high watermark year of capital expenditures in our beer business.
Speaker Change: Medium term outlook provided at our Investor day.
Speaker Change: Beyond fiscal 'twenty five we continue to expect an uplift in free cash flow generation, particularly as we complete the initial phase of our new Veracruz brewery by late fiscal 'twenty six or early fiscal 'twenty seven.
Speaker Change: To conclude we continue to make solid progress and delivering growth from our strong portfolio of brands.
Margin expansion from our relentless pursuit of operational efficiency and cost discipline and against our disciplined and balanced capital allocation priorities.
Speaker Change: That said in light of constantly evolving macroeconomic and geopolitical dynamics, we continue to closely monitor for any signs of ongoing pressures on the consumer.
Speaker Change: And we plan to continue to take proactive actions to mitigate these possible headwinds and maintain the momentum of our brands with the consumers such as reinvesting incremental cost savings into high return marketing opportunities and advancing our price pack architecture efforts.
Speaker Change: And as we've always done we will continue to provide timely updates to our stakeholders as we develop any additional relevant insights on our consumers or should there be any material changes to our expectations, both favorable or unfavorable.
Speaker Change: As I wrap up I want to thank all of you for your support as we continue to execute against our stated initiatives and with that Bill and I are happy to take your questions.
Speaker Change: Thank you well now be conducting a question and answer session.
Speaker Change: That can be placed in the question queue. Please press star one on your telephone keypad and as a reminder, we ask you. Please limit yourselves to one question. Our first question is coming from Milton <unk> from Jefferies. Your line is now live.
Speaker Change: Yes.
Milton <unk>: Hey, guys good morning.
Milton <unk>: Congrats you hit your leverage target can you maybe talk about moving forward now that you're there. If you know what the appetite is for more aggressively repurchasing shares, especially as using your words, you had sort of a high watermark on on Capex and then just on.
Speaker Change: Maybe procedurally, how often does the board.
Speaker Change: Need to have those discussions is it ongoing or just kind of once a year.
Speaker Change: Thanks, Komal and as you suggested and as where it builds in my remarks, we did continue to deliver against our disciplined allocation priorities as we've done for the last year or last five years in Q2.
Speaker Change: As you noted in Q2, we had an important milestone which is we got at our target or slightly below our target.
Speaker Change: And throughout the first half of the year, we've been fairly.
Speaker Change: Fairly opportunistic as we've.
Speaker Change: Repurchase shares in fact, we accelerated our repurchase activity in Q2, delivering $249 million in Q2, after delivering 200 or $200 million in Q1 for a total of nearly $450 million through.
Through the first half of the year.
Speaker Change: We have $2 $2 billion of authorization left.
Speaker Change: Under the current authorization provided by the board.
Speaker Change: Which will allow us to continue to be opportunistic as we move into the second half of the year and per year sort of procedural or administrative question.
Speaker Change: We typically get additional authorizations and or announce any incremental programs our commitments in the back half of our fiscal year.
Dara <unk>: Thank you. Your next question is coming from Dara <unk> from Morgan Stanley. Your line is now live.
Hey, good morning.
Dara <unk>: So just a beer depletions in the quarter a bit softer results than we've been used to from you guys looking back over the past few years, just can you give us a bit of postmortem. There. Obviously you talked about the macro factors is that really the key factor in your mind or are there other pressure points.
Speaker Change: And maybe parse out trends in different key consumer segments for you to give us some insight there.
Speaker Change: And then the pick up so far in September that's obvious in the scanner data just put that in context.
Speaker Change: How that sort of informs your forward view from here around Depletions in this macro environment.
Speaker Change: Sure.
Speaker Change: Let me tackle that one first of all there were two or three factors that were critically important.
Speaker Change: In Q2, one is there was somewhat higher unemployment rate, particularly in the Hispanic market.
Speaker Change: And that affects most of our top five states, which represent roughly 50% of our volume.
Speaker Change: I think secondly, and if you look historically this often happens whenever there's a scenario where you have a federal election that is close you often have people pull back you see it across the whole consumer sector and that is consistent as well I think couple of things are important to recognize.
Speaker Change: One is.
Speaker Change: Demand our buy rate continues to be very strong on a 52 week basis, we were up mid single digits and I with the Hispanic consumer is slightly ahead of that.
You pointed out I think it's obvious.
Speaker Change: IRI data for four week trend is better than both the 12 week trend and the 'twenty twos. The 26 week trend I think this is consistent with what we've said all along which is we don't see this as any.
Speaker Change: Radical change in the long term perspective on the business.
Speaker Change: It is purely a near term issue I think the fact that the fed has reduced rates is going to help to manage the unemployment issue and stimulate consumption. So we remain as optimistic as we have been about our expectations for the back half of the year.
Speaker Change: Thank you next question is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.
Bonnie Herzog: Thank you hi, everyone I had a call.
Bonnie Herzog: Question on your inquiry.
Speaker Change: And distribution gains.
Bonnie Herzog: I know you've captured a lot of faith in the spring reset so I guess I'm curious to hear a lift from that has met your expectations and then also any color on potential shelf space gains you got there may be getting this fall and if so could you maybe quantify this thing really.
Speaker Change: With US you know how that factors into our full year beer top line growth guidance, which essentially implies top line growth should accelerate a little bit in the second half versus the first half. Thank you.
Speaker Change: Well, obviously any time, you pick up shelf and just to remind everyone on the call we had double digit share gains here.
Speaker Change: In the spring resets.
Speaker Change: It always has been official launch, particularly beneficial.
Speaker Change: In areas, where we are still a radically improving our share and increasing our our awareness levels. I think this is going to be double down Bonnie on the fact that we are spending a significant amount of increased marketing investment against our beer brands because of the strong cost and efficiency.
Speaker Change: The initiatives that we've been able to achieve above and beyond what we expected at the beginning of the year. So.
Speaker Change: We expect that therefore, those shelf initiatives that have occurred in the early part of the year combined with our marketing efforts to double down at a time when many in the consumer sector, having to pull back will be highly beneficial to our results as you continue through the rest of this year.
Speaker Change: Okay.
Speaker Change: Thank you. Your next question is coming from Nik Modi from RBC capital markets. Your line is now what.
Speaker Change: Hello, Nick go ahead, Nick perhaps your phone is on mute.
Nik Modi: Can you hear me.
Speaker Change: Please begin now.
Nik Modi: Great.
Nik Modi: Yes, so if you could just talk about Corona.
Speaker Change: Little weak in the quarter.
Speaker Change: Now is this a function of just modelo really doing better and maybe cannibalizing, maybe specifically just any thoughts around that would be helpful.
Speaker Change: Yes, Corona was slightly softer than we expected it might be in Q2, but as we noted there were some again macro factors Corona is a little overweighted to the east coast there were some challenging.
Speaker Change: Times during that window during the second quarter for many of the eastern markets.
Speaker Change: With that said you know, there's a lot of excitement around corona as well.
Speaker Change: We are already seeing a pick up as you've seen in the IRI takeout data Corona has much like our overall business is look much better on a four week basis than it did in the prior window of time.
Speaker Change: Excited about the impending launch of Corona Sun Brew, which has done very well in consumer testing in the northeast here. During this window of time. So we continue to say that Corona is going to be slightly up for the year. We still think that's probably where that will land and corona.
Speaker Change: Going to be one of the big benefit benefit Ts and the increase in the marketing spend that we have in the back half of the year because of our strong cost efficiency initiatives. So I think corona is going to be just fine as we continue through the remainder of the year.
Speaker Change: Thank you next question is coming from Andrea to share from JP Morgan. Your line is now live.
Andrea: Thank you, operator, and hi, Bill.
Andrea: Hope all is well.
Andrea: It seems like obviously beer volumes picked up in the last few weeks as you mentioned.
Speaker Change: Was hoping to see if you can comment a little bit on how to expect that the beer Depletions I guess.
Gas consumption as we all food of course, you have a <unk> an extra day in the fourth quarter I believe that's correct. But you also have you have easier comps now in the third quarter, but tougher comps.
Speaker Change: In the fourth quarter, so how we should be thinking about the cadence of beer shipments in <unk>.
Speaker Change: And Felicia Nice may move forward. Thank you.
Speaker Change: Yes, I think theres going to be another number of things that worked to our advantage as the year progresses one.
Speaker Change: And you already pointed it out.
Speaker Change: There's been incremental change that you've seen in the recent weeks we.
We do not see this as a structural change as we've said many times a number of things are going to be working better as we go forward. The fact that the fed action to reduce rates I think is going to be.
Speaker Change: A big help I think the fact that we expect Hispanic unemployment to come back in line and obviously the resolution of the of the election will occur here in the next several weeks so.
The other thing I'd point out and we've said this I'm sure. Joe has said this when you've spoken to him directly.
Beer depletes in scanner results have tended to be right on top of one another recently after theyre, having been some some fairly broad differentiation amongst those so I think that begins to be begins to be a little more.
Speaker Change: Consistent as you go forward through the rest of the year based on our assessment of sell days are the same in both Q3 and Q4, we don't expect any impact of that just a reminder, for everybody Q2, there was one less selling day.
Speaker Change: And in our in our judgment that probably impacted somewhere towards the upper end of the range that Garth mentioned during his.
Garth: His conversation.
Speaker Change: Okay.
Speaker Change: Thank you. Your next question is coming from Peter Grom from UBS. Your line is now live.
Peter Grom: Yes. Thanks, Thank you operator, maybe just.
Two quick follow ups, just I just wanted to follow up just in the context of what we've seen year to date with shipments coming in ahead of Depletions and the expectation that they're going to be a line for the year, how should we be thinking about the timing of that reversal would that be largely an <unk> or spread evenly in the back half of the year and then just thinking about the full year obviously.
Speaker Change: Youre kind of squarely at the midpoint of our beer sales guidance.
Speaker Change: Yes, but with shipment timing benefit is expected to reverse a bit should we kind of view the high end of the beer top line range of aspirational or are there other key drivers or offsets that could result in a stronger growth in the back half. Thanks.
Speaker Change: Hey, Thanks, Peter in terms of the sort of quarterly cadence the shipments and Depletions.
Speaker Change: As we noted during my my opening remarks, we expect the quarterly share of annual shipments and depletions to be in line with where they were in fiscal 'twenty four.
Speaker Change: And as noted and as you noted Q2 shipment surpassed depletions as distributors build inventory for the peak season in Q3, the shipment share will be lower than the depletion share due to maintenance activities and this has historically resulted in our shipment growth being below depletion growth. So you will see some of that reversal that you referenced in Q3.
Speaker Change: And then in Q4, both the share.
Speaker Change: Of the full year for both of those would tend to to that tend to normalize just as we saw last year. So net net as you indicate we expect on a full year basis shipments and depletions to be largely in line with one another.
Speaker Change: And I would say I would not necessarily agree with your aspirational comment what we tried to do with our range is <unk>.
Speaker Change: Provider range that gives us if things go positively we would expect to be the upper end of the range and if things are a bit more challenging for any reason it might be the lower end of the range. That's why we give it a range. So I would not characterize it in the way you asked it.
Speaker Change: Thank you. Your next question is coming from Michael Lavery from Piper Sandler Your line is now live.
Michael Lavery: Thank you good morning.
Michael Lavery: Hoping you could unpack some of the marketing color a little bit you talked about some of the incremental spending but then I think you also reiterated the eight 5%.
Speaker Change: Spend for the full year for beer so.
Speaker Change: Maybe can you just help us understand what's new or what's changed and how we should what we should expect to see.
Speaker Change: What's new and what's changed is we've decided to put a significant amount of additional investment against our brands Corona Modelo <unk> Ladha specific goal will all benefit from some of that increased spend and that's already started you may have noticed against the football schedule that you kind of can't Miss our brands, if you happen to watch any.
Speaker Change: Football, whether it would be a college football or.
Speaker Change: National Football League. So we're going to continue to do that because of the tremendous work that's been done around <unk>.
Speaker Change: Cost and operational efficiencies.
Speaker Change: And all of our critical brands are going to benefit from the uplift.
Speaker Change: That we will have in the back half of the year and I think it's important to point out. The reason we can do that is because of the growth of our business and the cost savings initiative. This is at a time when many many other consumer businesses are challenged it wouldn't be able to do this I think this is a great opportunity for our business in the back half of the year too.
Speaker Change: Double down.
Speaker Change: Our approach to.
Speaker Change: Going after the consumer and providing them with outstanding opportunities to consume our products.
Felipe <unk>: Thank you. Your next question is coming from Felipe <unk> from Citi. Your line is now live.
Felipe <unk>: Hi, good morning, everyone.
Felipe <unk>: Wanted to ask on beer gross margins, that's been an area of upside surprise versus they're asked to Matt clearly you talked about the cost savings coming in better and driving the opportunity to invest more behind the brands how should we think about those savings in the second half of the year.
Speaker Change: And maybe other drivers both from a commodity.
Speaker Change: Foreign exchange standpoint, you mentioned the peso youre, 90% hedged this year should we think maybe sounds a liability on the peso in Q4 and maybe into fiscal 'twenty six and then on the commodity side, maybe any update on the commodity headwind that youre expecting thank you.
Speaker Change: Yeah, well. Thank you for the question and as you noted we've had we've made very good process progress against our cost savings and efficiency initiatives.
Speaker Change: And we at this point, we've really hit that $300 million target that we laid out at.
At our Investor Day last year, obviously that doesn't mean, we'll stop there as we go forward. We will continue to identify areas of opportunity to take cost out of the business become more efficient as we always have done.
Speaker Change: But those are the.
Speaker Change: The acceleration of that.
Speaker Change: The achievement against those has helped me to be.
Speaker Change: To the margin profile that we think we are.
Speaker Change: Announced today.
Speaker Change: Yeah.
Speaker Change: As we look towards the second half of the year.
Speaker Change: We will continue to benefit from the cost savings that we generated through the first half of the year that being said.
Speaker Change: In the second half of the year in our beer business, we typically see about 45% of our buying so that normal cadence. So we will have less fixed cost absorption in the second half of the year again typical and what we see in the back half of every.
Every sort of normal year.
Speaker Change: And then as we said in the opening remarks today, we are spending more on as a percent of net sales and marketing in the second half of the year to support the growth of the business inclusive of the incremental marketing expenditure that bill just spoke to here a moment ago and that's why you'll see some you'll see the margin.
Speaker Change: You will see the margin be a little bit lower in the second half of the year importantly on that marketing, you'll see the biggest impact of that in Q3.
Speaker Change: Thank you. Your next question is coming from Robert Moskow from TD Cowen. Your line is now live.
Speaker Change: Hi.
Robert Moskow: I wanted to ask about wine and spirits.
Robert Moskow: The marketing plans are there.
Robert Moskow: You had this year it looks like.
Robert Moskow: How did materialize, although I did mentioned some green shoots and I wanted to know if it's the <unk>.
Robert Moskow: And going forward also includes.
Speaker Change: Includes more acquisitions, you had see smoke acquisition earlier. This year do you think that you need to make more active.
Speaker Change: Acquisitions are about them coming brands like this in order to truly.
Speaker Change: Turnaround the business.
Speaker Change: Yeah. Thanks for the question. So let me remind you what garden I said at the beginning of the fiscal year that a lot of the work that was put in place was going to take us nine to 12 months to fully play out.
Speaker Change: And as we said on today's call, we expect sequential improvement in the wine and spirits business in the back half of the year.
Speaker Change: To answer your question no I don't perceive us to be.
Speaker Change: Acquiring additional properties at this point in time and our.
Speaker Change: Particularly on the wine side of our business frankly.
Speaker Change: Our focus right now is on improving the operational performance of that business and all the time energy and efforts are being put against.
Speaker Change: Seeing that operational improvement play out in the back half of the year, including <unk>.
Speaker Change: Engaging more directly and more often with our distributor partners as part of that.
Speaker Change: As we as we've said and I'll just reiterate one more time we.
Speaker Change: We do expect to see sequential improvement in the back half of the year based on all the work. That's put in has been put in on the first half of the year to to see that coming along noting the point about green shoots we are starting to see some of that result will look forward to seeing more of it in the back half.
Speaker Change: Thank you.
Speaker Change: Thank you. Our final question today is coming from Bill Quirk from Roth Capital Partners. Your line is that lives.
Hi, I have another one on wine and spirits.
Bill Quirk: At fiscal year end the fair value is still estimated I think in the 10-K in about $3 billion. The impairment takes it down to like $500 million. So I guess why the dramatic change in such short time, why is 500 million the right number when it's generating $400 million in EBITDA and there is some green shoots out there.
Speaker Change: And then finally like does the impairment give you any flexibility to do something strategically with those assets.
Speaker Change: Well. Thanks for the question Bill you know I would say that.
Speaker Change: The amount that remains on the balance sheet.
Speaker Change: Is it.
Speaker Change: It's fairly formulaic as you go through what you think.
The future business will look like there is a number of assumptions that will go into that.
Speaker Change: And so.
Speaker Change: Yeah.
Speaker Change: And it's I think it's important to note that it is.
Speaker Change: Noncash.
Speaker Change: Well.
Speaker Change: I wouldn't read anything too much into it other than that and I don't know that it really has any impact other than it was a.
Speaker Change: An accounting requirement for us to take it doesn't really change the strategic outlook for the business.
Speaker Change: Okay.
Speaker Change: Thank you we've reached end of our question and answer session I'd like to turn the floor back over for any further closing comments.
Speaker Change: Great. Thank you operator, and thank you all again for joining today's call.
Very pleased with our solid performance in Q2 of fiscal 'twenty five at a total company level. We once again outpaced the total CPG sector and dollar sales growth across or kind of tracked channels and delivered another quarter of double digit comparable EPS growth in line with our full year outlook.
And achieved our approximate three times net leverage ratio, while returning another $250 million of cash to shareholders via share repurchases now totaling nearly $450 million fiscal year to date.
Speaker Change: In our beer business, we continued to outperform the total beverage industry and dollar sales growth, maintaining our leading share gainer position in the U S beer market, delivering our 58th consecutive quarter of depletion growth and sustain the momentum of margin expansion in the beer business through our cost savings and operational.
Speaker Change: Efficiency initiatives.
Speaker Change: Initiatives and in our wine and spirits business, while we continued to face challenging market dynamics in Q2, we expect sequential improvements in Q3 and four as we make further progress on our commercial and operational execution initiatives launched at the beginning of this fiscal year in closing as our next earnings call is not until January.
Speaker Change: I'd like to wish everyone, a happy holiday season, and hope you all enjoy your celebrations with some of our fantastic products. Thanks again for joining today's call.
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.