Hello, and welcome to the Constellation Brands Fiscal Year 2022 Q4 Full Year Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Patty Yahn-Urlaub, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Kevin. Good morning, and welcome to Constellation's Year-end Fiscal '22 Conference Call. I'm here this morning with Bill Newlands, 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 cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to prior quarters, I would like to ask that we limit everyone to 1 question per person, which will help us to end our call on time. Thanks in advance, and now here's Bill.

Thank you, Patty. Good morning, and welcome to our fiscal '22 year-end call. Before I get started this morning, I'd like to comment on the announcement made earlier this week relating to the proposal from the Sands family to declassify Constellation's dual share class structure. According to the family's filing, the proposal brings significant benefits that will accrue to the company and its shareholders, including increasing market demand from investors who prefer single-class structures. The proposal is under consideration and will be negotiated explicitly by the Special Committee of our Board of Directors, and any agreement reached with the Sands family will require the approval of that Special Committee as well as our full Board of Directors. In addition, pursuant to the terms of the proposal, it would require the approval of holders of a majority of our Class A common stock that do not also hold shares of our Class B common stock. I'd like to remind everyone that the Sands family proposal was not made in connection with a corporate transaction. Constellation does not intend to comment further on the proposal unless and until a definitive agreement is reached, the proposal is abandoned or otherwise deemed advisable in connection with any further public disclosure by the Sands family. With that, let's proceed with the discussion of our excellent results and our guidance for fiscal '23. As I reflect on our performance for fiscal '22, I'm extremely proud of how our team pulled together to deliver a year of double-digit organic net sales growth and strong cash flow generation. Our team accomplished this while battling through year 2 of the pandemic, including various supply chain challenges, adverse weather events, rising inflation, rapidly shifting consumer preferences and a host of other issues in the surrounding environment. Through it all, we…

Thank you, Bill, and good morning, everyone. Fiscal 2022 marked another year of solid financial performance and shareholder value creation despite a myriad of headwinds forming our fortitude and resiliency. Our strong operating results and powerful cash flow generation allowed us to return almost $2 billion in capital to shareholders for the year. Additionally, as Bill mentioned, this morning, we announced that we are entering into an accelerated share repurchase, or ASR agreement to repurchase $500 million of shares during Q1 of fiscal 2023. Please note that the ASR agreement constitutes the $500 million share repurchase referenced in this morning's earnings release. Once we complete the ASR in Q1, we will be approximately 75% of the way toward achieving our goal of returning $5 billion to shareholders by the end of fiscal 2023. More on fiscal 2023 in a minute, but first I want to review full year fiscal 2022 performance in more detail, where I'll generally focus on comparable basis financial results. Starting with beer. Net sales increased 11%, landing in the upper end of our previous guided range driven by shipment growth of approximately 9% and favorable price, which, as expected, landed slightly above our typical 1% to 2% range. These tailwinds were partially offset by unfavorable sales mix primarily driven by a shift in package types and the return of on-premise draft SKUs. Depletion growth for the year came in at nearly 9% driven by the continued strength of Modelo Especial and Corona Extra as well as the strong return to growth in the on-premise channel. On-premise volume accounted for approximately 11% of the total beer depletions during the fiscal year and grew strong double digits versus last year. As a reminder, the on-premise accounted for approximately 15% of our beer depletion volume pre COVID and was…

[Operator Instructions] Our first question today is coming from Lauren Lieberman from Barclays.

Great. I wanted to talk just a little bit about Corona. I was actually surprised that in your prepared remarks, you talked about expecting more modest growth in Corona Extra in '23. But the momentum on that brand has been so strong this year, my understanding of anecdotes around performance during the Super Bowl period has been tremendous. So just curious why expecting things to slow down a bit in '23.

Well, Lauren, we're actually very optimistic that we'll continue to see strong Corona Extra performance. Obviously, as you point out, it was a very pleasant situation for us this past fiscal year, and it significantly outperformed than we expected. But we also have a lot of other priorities in the Corona brand family, as you know. As I stated in my remarks, we expect Premier to be a heavy focus both in the on-premise as well as building out our distribution capabilities in the off-premise. So we're just trying to be sort of aware that we're going to have a lot of overall work across the family, but we expect to continue to see Corona Extra be a continuing growth driver in our overall business.

Our next question is coming from Dan Mohsenian from Morgan Stanley.

So I wanted to focus on beer margins First, just how much visibility do you think you have on the fiscal 2023 beer margin guidance given there's a number of moving pieces? There's also tremendous external volatility including how hedged or locked in on contracts you are on some of your key commodities and might. And what might be some of the bigger risk points in terms of margins? And then second, just on the pricing front, playing devil's advocate, why not be more aggressive than the long-term 1% to 2% algorithm? I'm just having a hard time believing that $1 incremental per case cost on beer is going to be that much of a factor in a trade down decision relative to consumers seeing much, much higher dollar pressure from other areas, whether it's grocery, gas or electricity costs. So just your thoughts around why not being more aggressive on pricing, particularly given the market share volatility and if you're seeing any signs of trade down so far?

Thanks, Dara. I'll take the first part of that question on margin and then Bill will comment on pricing. So as we started selling in the second half of last year, the inflationary environment, obviously, have gotten a little bit deeper and more protracted than anyone expected. And so that's why we were focused in January as to the facts we're going to be facing some additional headwinds this coming year. Typically, we're seeing inflationary increases on a year-over-year basis in that kind of low to mid-single-digit range. And this year, we're expecting them in the high single digit to low to mid-double-digit range. You're seeing that across things like glass, which is our biggest component in beer, which is up 6%. Cartons are up 17%. Crowns were up 26%. Wood pallets are up 35%. So costs are definitely under pressure for sure. That being said, we think that we're fairly well positioned as we enter into the year. To be very proactive around this, we've gotten more aggressive with our hedging policy or our hedging practices, I should say. We typically enter a year somewhere hedged in the neighborhood of sort of 50% to 60% on any given line. But this year, we've taken a more defensive posture to make sure that we're really protecting the P&L. As we enter the year this year, we're hedged at about 75% on aluminum, 70% on natural gas, 60% on the core and 90% of diesel. So we're in a pretty good spot. That being said, as you articulated, there's a lot of volatility around commodities, and that's where we're watching as we go through the year, and we're being opportunistic to layer and even been further hedges as we see weaknesses on a day-to-day basis. So we think we're in pretty good shape. But certainly, there's still some exposure just given the depth and the duration of the inflationary environment we're currently in.

So relative to your question on price, we certainly understand the question, a lot behind it. So let me remind you how we price. We price on a SKU-by-SKU basis, market-by-market basis, and we're going to continue to do it that way. We also are probably a bit more judicious on price, and perhaps we could be. The reality is we need to be sensitive to our consumers. It's a challenging time for consumers across many, many industries. And it's our view that this is not the time to try to put extra burden out on one of the critical things that many people have in their basket, which happens to be our beers. So we're a bit probably more judicious than we might be able to be, but we think this is in the long-term interest. We always say it's a whole lot easier to keep your consumer than to lose them and have to reacquire them. And that's part of what drives our thinking.

Your next question is coming from Bonnie Herzog from Goldman Sachs.

Maybe just a little bit of a follow-on question to Bill, what you were just mentioning. I was just hoping to get some color from you on the consumer and sort of the spending behavior so far this year. I certainly know your products are premium, but curious, are you seeing any signs of down-trading pressure? And then could you talk about how well you think your portfolio will hold up if or when we enter a recession? I know Bill, in the past, you kind of mentioned your portfolio is pretty defensive. So I'd just be curious to kind of hear you revisit that for us.

You bet, Bonnie. Fortunately, so far, things are holding up very well. One of the things that I've seen over the course of my career in the alcoholic beverage business, is many, many times, when there is recessionary environments, consumers are still interested in our category and almost view it as a small luxury that they can still experience where they might pass on buying a new refrigerator or something that's a bigger purchase. If they're having personal challenges, they still want to engage in some things that they enjoy in their life. And fortunately, our category is one of those. So so far, this continues to hold. And I think it speaks directly to my answer to Dara a minute ago, which is trying to be sensitive to our consumer and to make sure that that we continue to provide our great products to them at pricing that's reasonable given a tough environment.

Our next question is coming from Chris Carey from Wells Fargo.

Just one follow-up on the pricing and then related question. Are you planning on pricing on Corona? Or is that all going in Modelo and the other SKUs? Can you just maybe comment on where the pricing is going to be going in? And then just specifically on Modelo, I think you said mid-single digit to high single-digit in the off-premise. Can you maybe review expectations for on-premise penetration for this fiscal year? And just in general, where you see that as far as kind of innings of developing the on-premise for that specific offering?

Yes, you bet. So I'll just remind you what I said earlier, which is we look at pricing on a SKU-by-SKU basis and a market-by-market basis. So it's not any individual brand, let's say, where we focus on pricing. It's really on a SKU by SKU, brand by brand. And so there's not in generality, as to your question, on a particular brand. Relative to Modelo, as I also stated earlier, one of our biggest arteritis is really on-premise draft. We're the #5 player in on-premise draft. We're only 11% penetration nationally in that particular format. That's a great opportunity for us to expand our reach, particularly on Modelo Especial. And interestingly enough, it was only beaten out of its growth last year by Pacifico, which I guess is not the worst thing. But certainly, Modelo, we think, has a great opportunity to continue to expand its reach, particularly as we continue to see much greater penetration in non-Hispanic households that's going to be both the on-premise and the off-premise numbers that both you and I quoted earlier.

Thank your next question today is coming from Kaumil Gajrawala from Credit Suisse.

Garth, can you maybe talk about the logic behind doing an ASR versus just buying in the open market over the course of the first quarter?

Sure. Thanks, Kaumil. Look, we're going to use the same approach this year that we used last year, which is we're going to use all sort of the tools that are available to us to buy back the shares that we need to buy back in order to meet our obligations. So last year, we used an ASR in the second quarter. We also took advantage of a 10b5 and 10b18 program. So we're going to do that for the -- we can optimize the timing of the -- of our repurchases as well as appropriately dollar cost averaging, dollar cost average out here to make sure we get the best value for this. And we opted to use the ASR in the first quarter because we're going to get the benefits earlier in the year. And also, I think that it's a good time for us to buy it.

Thank your next question today is coming from Vivien Azer from Cowen and Company.

I just wanted to offer, I think it's really reassuring to investors how consistent you guys have been in terms of the commentary on capital allocation today. So thank you for that. In terms of my question, I also wanted to focus on pricing in the health of the consumer but perhaps pivoting to the Wine & Spirits business. Clearly, you guys have done a ton of work to premiumize your portfolio. So given the portfolio evolution in Wine & Spirits, how does that change your thinking around your ability to take price there?

I think it largely depends on the sector of the wine business in which we're discussing. As you know, mainstream is actually down, although we're gaining share in a down market. And that's the way we think about it. Let's gain share in the mainstream of the business. On the other hand, as you move up the price ladder, you're seeing significant acceleration, and many of our brands are performing extremely well, and it does give us some opportunity to increase our pricing and doing probably even a better job of covering some of the inflationary increases that we see in the beer business. So I think you should expect them to see a bifurcated answer where we need to be sensitive to what the marketplace is giving us in the mainstream but there's probably some opportunity as you look at the premium and up sections to be a little bit more aggressive in the pricing arena.

Our next question today is coming from Nik Modi from RBC Capital Markets.

So just a quick housekeeping item, and then I have just a real question. Just, Bill, if you can just comment, given the rules around ASRs and material nonpublic information, can I presume that Constellation is not sitting on some news regarding a large M&A transaction? So that was just a clarification. And the real question is any update on how March depletions look. Some of the channel work that we did suggested some very strong results that look to be an acceleration sequentially from what you guys showed this February quarter. So any thoughts on that would be helpful.

Nik, this is Garth. I'll take the first part, and then I'll turn it over to Bill. I think it speaks for itself that Constellation is fully aware of and comprise all of our obligations under state and federal securities laws. And relative to your question of how March was, Nik, we're pleased that it's at least consistent with our annual algorithm despite huge comps that we faced in March of last year. So we're pretty pleased that we got off to a good start.

Your next question is coming from Bryan Spillane from Bank of America.

So Garth, I had a question about just the Wine & Spirits margin outlook medium term. And one thing just in terms of, I think you gave kind of 2 sets of numbers. One was 28% to 29% operating margin and then the other was approximating a 30% EBIT margin over time. And just are those different? Or are we just saying that we still think we can get back to the 30% margin? I was a little just confused about the language there.

Yes, sure. So on the operating profit margin question, yes, so we are coming in at 28% to 29%. The difference between operating margin and EBIT is the addition of our -- what we take in from equity earnings and Opus One.

Your next question is coming from Nadine Sarwat from Bernstein.

I want to touch on Corona Hard Seltzer for a little bit. So that brand continues to underperform the broader seltzer market. So what's your strategy going forward with the brand? And then maybe taking a step back, a broader question related to this. What lessons have you learned from launching Corona Hard Seltzer? And how is this going to influence your approach to rolling out innovation in the future? I think you called out a number of those in your prepared remarks.

Obviously, the seltzer market has developed very differently than what we had anticipated. And frankly, it's been more of a challenge than what we had anticipated as well. As you know, this year, we're doing a number of things. We're repackaging, as we said, in prior quarters. We are getting much more focused on where we bring differentiated products rather than me-too products into that particular sector. But we still feel that, that's going to be a growth segment of the overall beer business, and we're going to participate in it. So relative to lessons learned, I think a couple of things are always important. It's important to test. We're obviously doing tests as it relates to our Modelo franchises to make sure that we have consumer propositions that are best of class and that are going to win with consumers. And we're going to continue to operate under that approach going forward.

Our next question is coming from Rob Ottenstein from Evercore.

Terrific. Just kind of swinging back to the question on seltzers and taking it a little bit broader. Clearly, a lot of the excitement on that segment is gone. From your perspective, is there actually a silver lining in that such that retailers and distributors will spend more time, energy on your brands, and that should be something that you should benefit from going forward? And then connected to that, are you starting to get a little bit more of the shelf space that you guys have earned given the tremendous brands and velocity that you've had and the fact that you've been undershelved in the past?

Robert, you definitely put your finger on a benefit of the scenario that the seltzer business has not been quite what we expected, which is -- it's very mix-accretive. So the more beer we sell, the better the mix. So that's the flip side of the seltzer business for us is not developed quite the way we had anticipated, as you point out. I think you make a very good point relative to shelf space. One of the things that occurred during the pandemic is many retailers just didn't redo their shelves to the degree that we would have expected or that you would see on a typical annual basis. And there's no question that the growth profile of our overall portfolio not only demands but really should have more shelf space. So this is going to be a critical part of what our sales organization is driving for this year, is to broaden our reach and package sizes and depth within stores. I mentioned the Shopper-First Shelf initiative, which we actually had a pretty good year on last year. We expect to extend that this year. It's good for the category, it’s good for us. So a lot of work will be done on that very topic this year, as you point out. And we think it will be in everyone's interest, ours plus the retailer, to give our brands more shelf space. They've earned it.

Our next question is coming from Kevin Grundy from Jefferies.

Great. First, a housekeeping question on the Sands proposal, which Bill, I think you can't comment on, when do you expect the Board to vote on that proposal before potentially putting it out to the Class A shareholders? And then the broader question, Bill, just your perspective on the slow start to the year for the U.S. beer industry. So your data looks good. The results were obviously very good today. The Nielsen data continues to look good in the month of March for Constellation and probably even is a bit better, given some of the noise we understand in the Nielsen data in the last week of March. But I just wanted to get your perspective, more broadly, on what you think is driving that. I think there's some year-over-year comps at play, the seltzer slowdown, as you commented. But anything you're seeing that's potentially sort of concerning that you're watchful of, particularly around the consumer that may sort of play out here as it pertains to your portfolio? So your thoughts there would be helpful.

You bet. So just relative to your question about the Sands proposal, we've been advised that transactions of this nature typically takes 60 to 90 days. Beyond that, it's really out of our hands. The management is not involved in the discussion, the discussions between the Sands family and the special committee of the independent directors of the Board. So I don't have the exact answer to that question, believe that by 60 to 90 days is very typical. So we shall see. Relative to the start of the year, I think everybody recognized January was a bit of a tough month. It was for every -- I think everybody in the industry. A little bit of that was where New Year's fell, there were weather events, Super Bowl got pushed out an extra week versus what it was the year before. But I think the exciting part for us is it was a very, very strong February, and as I responded to Nik 2 questions ago, March has been very strong as well in the start of our fiscal year. So I don't think there's anything that's overarching as an issue within the category but certainly not as it relates to our business. We continue to be very pleased with how our brands are performing. And as Garth pointed out in his prepared remarks, we've gotten our inventories back in the right position. So brands like Pacifico, which we were a little challenged for a while on brown glass, we have gotten through that. Some of those kinds of things, which were sort of detrimental to an otherwise very strong performance here, we've now fixed. So we're in a much better position heading into this fiscal year than we were last year where there were just a lot of extraneous things that were not helpful to us.

Our next question today is coming from Andrea Texeira from JPMorgan.

I just wanted to double-click on the opportunity to improve mix with the shift to on-premise. You had, I think, 3.8% price/mix expansion in the quarter. Can you still have around -- my calculation’s around the 100 basis points tailwind? And do you expect this to be -- price/mix to be embedded in your guide around 400 basis points? I just want to double check that. And on Wine & Spirits, I think Bryan, Vivien asked good questions regarding the outlook. Is there any reason why it was a bit disappointing? I know you're making a lot of investments to premiumize the portfolio. But anything to kind of give us more comfort that besides the Opus One impact, what is impacting there and if there is a better outlook towards the long term?

Sure. Let me touch on the second piece first. We're still very pleased with the development, particularly at the higher end of our Wine business. As Garth pointed out, we had 2 or 3 one-off items that were a bit challenging based around the distributor transition that occurred last year and some sale of smoke tainted wine from prior years. If you would exclude those things, we're in a growth profile for our wine business, and that's being driven by the higher end. The work that Robert Hanson and the rest of the team have done to refocus our attention towards the high end in the growth sector of the wine business I think is exactly what we expected to do. It's the strategy we began and undertook a couple of years ago, and we're continuing to execute against it. So despite the significant headwinds, as I said earlier, in the mainstream sector of the business, we're very pleased with how things are developing at the higher end. And we're comfortable that our longer-term algorithm of 2% to 4% in the wine business will be achieved sooner rather than later.

And relative to your first -- the first part of your question, if I understood it correctly, you're pointing out that, in Q4, we had sort of a 4% points of pricing and whether or not that's going to continue. Our outlook for next year assumes that we're going to get our -- more in line with our typical 1% to 2% pricing. So that's sticking in line with our normal outlook.

Our next question is coming from Steve Powers from Deutsche Bank.

Great. I actually wanted to follow up on both those those 2 questions and your answers there. So on the beer side of things, the 1% to 2% pricing outlook, you're saying that that's inclusive of any mix impacts. I want to clarify that. And then on the wine, Bill, given the decision to reinvest stranded overheads towards additional growth, as you think about that 2% to 4% objective, are you biased, over time, higher within that range because of accelerated reinvestments? Or is the takeaway that the -- just sort of the cost of achieving that top line has just gone up a tick because of -- probably because of mainstream dynamics, but just your perspective there.

I think relative to the second piece of that, there's no question that there's obviously been an inflation, which is making a bit of that more challenging than what it had been prior. But I would like to point out something related to what Garth said in his prepared remarks, which is we've been very judicious, and thank you, Vivien, for your comment about our careful capital allocation. But I think this is a great example of it, we made 3 small purchases in the Wine & Spirits business almost entirely funded by the sale of one of our venture businesses, which was sold at a significant increase versus what we paid. So again, I think this begins to reflect a very judicious view of how we think about capital allocation and it’s very consistent with what we've promised externally. We do believe that we are going to see significant success going forward, particularly at the higher end of the business. I think the only thing that's going to potentially challenge that or be a challenge to it is where the mainstream business goes. As I said earlier, that's in the category that's been declining, and we're gaining share. So we're still winning in that category, but it's a tougher segment of the category. Certainly, we expect high single digits growth profile or even better at the higher end portion of our business. And you're seeing that in brands like Kim Crawford, Meiomi and the Prisoner and High West. So I think, over time, you're going to be pleased with what you see in the profile of our wine business. And this year will be a continued step in that direction.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Newlands for any further or closing comments.

Well, thank you, everyone, for joining our call today. In closing, I want to reiterate that I'm extremely proud of what our team accomplished in fiscal '22. We delivered strong financial results, continued to launch consumer-led innovation and reinforced our efforts to making a positive impact on our communities and the environment. Our beer business extended its leadership position with its 12th consecutive year of volume growth, and we are confident in our ability to maintain this momentum in fiscal '23. Over the medium term, we continue to see a strong runway for growth, supported by favorable industry trends for our portfolio and our ongoing investments in brewery capacity expansions. Our Wine & Spirits business also delivered solid performance in fiscal '22 with organic net sales growth and gross margin improvement. We are enhanced -- focused on consumer-led premiumization continued to yield benefits as our high-end brands outpaced the overall U.S. Wine & Spirits category. Overall, we remain bullish on the future performance of our business, in our ability to deliver value for our shareholders, as reflected in our announcement of a $500 million accelerated share repurchase program. Again, I thank you all for joining today. We look forward to speaking with you in late June during our next quarterly call. And before then, we hope you will certainly choose some of our fine products for your Cinco de Mayo and Memorial Day celebrations. Thank you very much again. Have a great day, everybody.

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.