Greetings. And welcome to the Constellation Brands Fiscal Year 2023 Q2 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Joseph Suarez, Vice President, Investor Relations. Please go ahead.

Thank you, Kevin. Good morning all. And welcome to Constellation Brands second quarter fiscal 2023 conference call. I am here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. 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.cbrands.com. Please refer to the news release and Constellation’s SEC filings for risk factors, which may impact forward-looking statements made on this call. Before turning the call over to Bill in line with prior quarters, I’d like to ask that we limit everyone to one question per person, which will help us end our call on time. Thanks in advance, and now, here is Bill.

Thank you, Joe, and good morning all. Welcome to our second quarter call. I hope everyone had a good summer and enjoyed some of it with our great products. Before we get started today, I want to take this opportunity to say that our thoughts are with all those affected by Hurricane Ian. Thankfully, all Constellation employees living in Hurricane Ian’s path are safe and accounted for. We are also fortunate to avoid any adverse impact to our operations in the area to this point and we continue to stay in contact with our local distributors, retailers and other partners to best support their needs in this difficult time. Additionally, thousands of people in Florida, South Carolina, North Carolina and Virginia have been impacted by this natural disaster. So we are also supporting the American Red Cross with a significant contribution to help provide food, shelter and much needed assistance. We will also match employee contributions to the American Red Cross two-for-one as part of this effort and we hope it will provide at least some comfort to local residents as they work to recover and rebuild. I also want to remind everyone that we filed our proxy statement in connection with the Class B common stock reclassification a couple of weeks ago. We have called a special meeting of shareholders to vote on the reclassification next month on November 9th. At this point, we are unable to comment further or provide additional information on this topic during today’s call beyond what is available in the proxy statement and our other filings with the SEC. All of these filings are available through our Investor Relations website and I urge anyone interested in the special meeting or the reclassification to review these documents. Now, as usual, I would like to start…

Thank you, Bill, and good morning, everyone. As Bill mentioned, our business continue to perform well in the second quarter, delivering another strong set of operating results. We are making good progress against our operating plan and strategic initiatives, and we are now expected to exceed our previously stated fiscal 2023 net sales goals for the beer and Wine & Spirits businesses and our operating income goal for the beer business. Our strong Q2 results were led by 12% increase in net sales driven by growth in both our beer and Wine & Spirits businesses. Additionally, we achieved a 10% uplift in operating income underpinned by significant double-digit increase in the operating income of our beer business. Our strong cash flow results supported dividends and incremental share repurchases in Q2 that put us on track to exceed our $5 billion goal in cash returns to our shareholders by the end of this fiscal year. With that, let’s review Q2 performance and our full year outlook in more detail, where I will generally focus on comparable basis financial results. Starting with beer. Net sales increased 15% primarily driven by shipment volume growth of over 12% from strong demand for our core beer portfolio and higher average annual price increases. Q2 shipment volumes were generally aligned with depletion volumes and inventories across the supply chain remain at historical norms. From a growth perspective, depletions for the quarter were up nearly 9%, which was propelled by the continued strength of Modelo Especial, Corona Extra, Pacifico and the Modelo Chelada brands. Selling days in the quarter were flat year-over-year and will continue to be flat in Q3. Moving on to beer margins, we continue to experience headwinds driven by the inflationary economic environment, particularly in packaging material cost and shifts in mix. However, beer…

Thank you. [Operator Instructions] Our first question today is coming from Dara Mohsenian from Morgan Stanley. Your line is now live.

Hey, guys. So on the beer…

Good morning, Dara.

…business, there has been a pretty nice halo the last few quarters between scanner data and the reported depletions just as on-premise recovers post-COVID. It wasn’t as much the case this quarter. So can you just give us some detail on on-premise and untracked channels in general in Q2 and what you are seeing there? And then on the beer margin side, obviously a big beat in the quarter versus consensus, that’s great news, but the implied H2 margins of 36% are well below what you saw in the first half, obviously there is some seasonality there? But just help us understand as we think about margins for fiscal 2024. Should we think about it more relative to a 38% full year basis and more relative to 36% the back half, again there’s some seasonality there, but just conceptually how you think about that would be helpful?

So why don’t -- Garth why don’t I take the first part. So relative to the on-premise, it’s very typical of us to see a stronger Q1 on-premise, because it includes Cinco, which is the single biggest event and occasion for our beer business in the on-premise. On-premise was roughly 11% of our volume in this particular quarter, which was slightly less than it was in the prior quarter. The other thing, I think, it’s always important to look at is, our depletion volume, it has been very consistent with what we look at in IRI trends. And as an example, in our beer business in the most recent IRI trends, the 26-week data showed in totality 7.5% growth and purely the import business showed 9.4% growth. That’s very consistent with our roughly 9% depletion growth in this particular quarter. The other place we will also see strength within our business is in some of the untracked channels in smaller Hispanic, particularly Hispanic accounts, particularly our West, which are not tracked by IRI or Nielsen channels. So, all in, I think, again our depletion growth profile looks exactly like what the take out trends in tracked channels are. And I think, as we have said many, many times, this year in particular that is really the way to look at our business due to the variance that we saw last year in weather-related activities in our and when we shipped and when we did maintenance and things of that nature, which I am sure Garth will touch on here in a moment.

Yeah. Dara, on the margin piece. So, one, I would say that, you would expect that this year’s margin profile on a first half versus second half would reflect something if it’s more normal, which we really haven’t had the last couple of years due to sort of production issues that we had to contend with, which led to sort of a rebalancing of our shipments. Again, this will be more, because we are in a more typical production environment, you will see a more sort of normal first half versus second half margin profile. We are expecting margins in the second half to be negatively impacted as I said in my remarks as the benefits from pricing and some of the cost saving actions will be more than offset again by ongoing inflationary pressures. From a material’s perspective, we continue to see some pressure from corn, as well as cans and cartons and glass. As you know, we have a relatively robust hedging policy. But the way that we layer in those hedges and then the way that those hedges then roll off, we saw the greatest impact from those in the first half of the year. So while we are nicely hedged, they just won’t be at the favorable rates if you will, as we were in the first half. And then again as is typical -- and then it’s typical as we are laying out incremental capacity, we will be impacted by incremental costs as we bring on people to train in advance of the capacity coming online. And then, finally, we are expecting to see a significant increase in marketing in the second half versus the first half as we support new marketing campaigns around college and NFL football. For FY 2024, our guidance is continues to be clear on that. We continues to view the right way to think about our margins is in that 39% to 40% range and we are not coming off of that.

Great. Thank you.

Our next question is coming from Kevin Grundy from Jefferies. Your line is now live.

Great. Thanks. Good morning, everyone. Bill, I wanted to pivot to the wine sale this morning, given the continued premiumization focus but you are holding onto Woodbridge, a more value-oriented brand, I think, the view there in the past has been that that brand offers scale. Just a little bit on how the deal came about, whether you can comment, whether you are done and generally pleased with the shape of the portfolio at the conclusion of this transaction? And I think, just kind of taking a step back, just given the change here, and I think, it’s sort of been in some state of transition for a period of time, it sort of begs the broader question, whether the wine portfolio albeit a narrowed down one and more focused on premium -- the premium end of the category, whether you think it still makes sense within the broader portfolio relative to a beer business, much higher growth margins and return on capital. So I’d love to get your thoughts there. Thanks so much.

Sure. Look, we are very pleased with the progress that we are seeing in the Wine business and the divestiture that you saw this morning again it helps to reshape the portfolio. What I -- the way I think you should think about our total business is we are increasingly focused our attention on the higher end. We have noted that for many, many years as it relates to beer. We have now specifically related that on our Wine & Spirits business as well. As you probably noted, most of the tuck-in work that we have done in our Wine & Spirits business has been focused on craft spirits, as well as higher end wine brands that fill portfolio gaps, all of which focus on the high end, where we believe the growth and margin profile are significantly improved. So I would think about this today as just a further step in the reshaping of our business. As we have said, we are very focused on seeing a growth profile and an improved margin profile on that business, and we believe we are well on our way to delivering that and today is just again one more step in the process of achieving that goal.

Thank you. Our next question is coming from Lauren Lieberman from Barclays. Your line is now live.

Great. Thanks so much. Good morning. I was just curious on the second half outlook because some of the things - just in terms of the cost structure because some of the things you have called out in terms of rolling hedges and so on. I would have thought, you might have had some visibility into previously. So I was just more curious on the, what’s changed on the second half cost outlook rather than just why second half is different than first half? And then the second thing was, you made a pretty clear statement on the medium-term algorithm still looking for 39% to 40% margins on beer. So outside of the timing shifts that are impacting the second half margins, I was just curious if you can maybe look forward fiscal 2024 and beyond, like, do we get back to 39% to 40% in 2024 or is it a longer rebuild because of where you think that -- those relative hedge positions kind of roll through when we look into 2024?

Yeah. So, Lauren, on the first half of that around what changed from Q or from the first half of the year to the second half of the year, and I would say that, really nothing changed in our mind. We give guidance on an annual basis, not on a quarterly basis, and we are going to deliver margins in line with where we said at the beginning of the year. Do you want to answer the second half, Bill?

Yeah. Sure. I think the way that -- I think we will obviously give specific guidance on fiscal 2024 when we get to that timeframe. But I think, what we are seeing is, we continue to see a long runway for growth in our beer business and we think that’s in the 7% to 9% range consistently. We think, we are going to see consistent delivery of 39% to 40% on the margin play. As Garth and I have always said, over the last several years, you have opportunities to be ahead or behind that in any one particular year. This year we are a little behind that algorithm because of a number of factors that we have touched on before. But we still believe that is a solid expectation for the medium-term and we will give specific guidance around 2024 when we get there. But we believe that’s a consistent approach that we are going to be able to deliver on with consistency for the next several years.

Thank you. Our next question today is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.

All right. Thank you. Good morning, everyone. I…

Hey, Bonnie.

Hi, Bonnie.

I was hoping for a little more color on your beer shipments versus depletions. I guess, first, it would be helpful to hear, how your quarter-to-date depletions have been tracking. And then second, you mentioned depletion should outpace shipments in the second half, but just really trying to think through how we should think about your shipment in the context of your new topline guidance, it does imply really any shipment growth in the second half. So, I guess, what I am really trying to understand is given you are lapping some of the brewery maintenance you had last year in Q3 and then you have the rollout of some really strong innovation such as Modelo Oro that will need to be shipped in Q4. So I am just kind of thinking through your new topline guidance and it feels pretty conservative. So I just want to make sure I understand that? Thanks.

Sure. Well to answer your -- first part of your question, Bonnie. The start of the quarter, September was very solid and it’s consistently in line with what we expect our annual numbers to be. So we certainly think we are off to a good start in the -- in Q3. Garth said this at the beginning of the year that it was going to be a very lumpy year. The important part that I think everyone should think about is, our depletion, the actual volume of our depletions and our shipments year-to-date are almost on top of one another. However, because you are comparing to last year and because we had shipping disruptions last year, it looks very different on a percentage basis. One an actual volumetric basis, they are very similar and you are going to see the same thing for the rest of the year. But this is why we have consistently said, the best thing to do to look at the success of our business is the depletion rate and our depletion rate year-to-date on our beer business is in just under 9%, and obviously, that’s why we increased our guidance, because we have further confidence that we are going to outpace the growth profile that we set out at the beginning of the fiscal year. So that’s the way, we have consistently urged that people think about it around the depletion rate, because it’s just going to be lumpy this year on the shipment side, doesn’t take away one iota for the outperforming success that our beer business continues to have in the marketplace.

Thank you. Our next question today is coming from Andrea Teixeira from JPMorgan. Your line is now live.

Thank you. So I just want to go back to this question, because it does imply though that, of course, you shipped more than you had in depletions in the 9%. So what you are seeing now, we should be seeing shipment volume negative in the third quarter and the fourth quarter, which is that’s what’s implying because we see it at flat revenues. If I understood it correctly, minus 2 to plus 2 giving your guidance and you have pricing. So you are just telling us to assume volumes will decline in the second half. I just want to clarify that. And then another question related to that, given the pressures that you had in commodities rolling over and all the hedges, isn’t it make sense to take another pricing usually in the fall to kind of like offset those pressures? Thank you.

Yeah. Andrea, thanks for the question. So, first of all, just to reiterate with what you said, our shipments and our depletions for the first half of the year have been in line with one another, so we have not over shipped beyond the depletions. The issue between the first half and the second half is strictly due to the timing of shipments related to some production outages or we had to deal with last year. So that’s the differential. As it relates to your point on pricing, as we said in our scripts, we are taking more pricing this year, we update for this year from our normal 1% to 2% algorithm to 2% to 3%.

The other thing, I think, it’s important to consider is, we have seen significant mixed benefits in our business as well. There’s been a -- because in part from the growth of Cheladas, which are almost entirely single serve or we have added some innovation in different size and pack configurations, but the single-serve pieces of our business, have been very strong. It’s a great example of that’s mix accretive. So in addition to purely the fact that we are going to be taking a bit more price than we had originally anticipated, we also are seeing mixed benefits within the portfolio as well, which will be advantageous.

Thank you. Next question is coming from Rob Ottenstein from Evercore. Your line is now live.

Great. Thank you very much. So wondering if you could talk to us a little bit about what’s going on with Modelo and Corona. Corona being somewhat stronger than we would have expected, Modelo still very strong, but slightly slower than it has been in prior years. Is there anything going on there in terms of the interaction between those two brands or the brand families that we should be aware of?

No, Robert. I don’t think so. I mean, again, when we look at the kind of growth profile that Modelo Especial using that as the example. In any of the volumetric trend timing, we are growing in double digits all the way along and that becomes, obviously, that the bigger it gets the more double digits is a very enjoyable proposition. We are very excited admittedly about Corona Extra. Corona Extra has grown a bit ahead of what we had expected. But I think that speaks to the just the long-term belief amongst both Hispanic and non-Hispanic consumers in that brand. It’s the most loved brand. We continue to benefit from that. And we continue to advertise against that business very heavily. So I wouldn’t read a lot into the fact that Modelo was continues to grow double-digit, but it’s slightly less than the last double-digit. I would view it as we have a comprehensive brand portfolio whether you talk about Modelo Especial, Corona Extra, the Chelada business, Pacifico, that just continues to radically outperform and that in combination allowed us to raise our expectations for the beer business for the year.

Great. Thank you.

You are welcome.

Our next question today is coming from Bryan Spillane from Bank of America. Your line is now live.

Thanks, Operator. Good morning, guys.

Good morning.

I just wanted to ask a question about, I guess, beer inventories and given that you have had more supply this year and it seems like you’re in-stock levels are better in assortment. Has it just being more in-stock with your -- with a full array of assortment is that, how much of a benefit has that been to depletions?

Well, obviously, any time you have all the packages and you have all the availability that you expect, it certainly is beneficial. What I must say is our team has did an outstanding job of making sure throughout the challenging time, when we had some product outages to make sure that we had availability of the brand. Brand size switching, meaning package size switching within the beer business is very strong, because most consumers come into the store planning to buy a Corona or a Modelo, and therefore, will adjust their package size selection based on what’s available. We have seen that through in-depth consumer research. So, yes, it certainly helps some because it provides the wide array of selection that we own to consumers. But it doesn’t change the algorithm radically, because as you have seen, we continue to show high single-digit volumetric and double-digit topline growth within the business, almost throughout the entire thing. The other thing that I would say though, where you do see some real change by availability is Pacifico. We have said a couple of quarters ago, we had some challenges around brown glass, which significantly impacted Pacifico, but didn’t really change, in fact some of you on the call asked questions about that, are we concerned the Pacifico’s growth profile is what it once was and it comes roaring back with 37% and the IRI data shows over 50% take out increases. So I think it shows and confirms what we had said to you on prior quarters is that Pacifico is a tremendous potential brand for us going forward and it is a great example to your question of in instances where you -- we have had some challenges on inventory, what can really happen in the strength of our inherent brands.

Thank you. Our next question today is coming from Kaumil Gajrawala from Credit Suisse. Your line is now live. Kaumil, perhaps, your phone is on mute?

Talk to us, Kaumil.

I am sorry about that, guys.

There you are.

Carry on.

Can we talk a little bit about the price increases, you are looking for a little more pricing perhaps than you had expected for, are they in place, what’s the magnitude? And then on price gaps, you gave pretty compelling reasons in previous quarters on why you are going up perhaps less than the market, given kind of our outlook for inflation, most of which has come through. So can you maybe talk about kind of this new outlook and what has changed?

I think there’s two or three things that fall into that equation. You are correct, we have raised our expectation from 1 to 2, 2 to 3. I think there’s several things that are in play there. We have been very excited by the buy rates that we have seen across our business one. We obviously are doing our best to cover as best we can some of the inflationary pressures that Garth noted in his remarks. But we really haven’t changed how we do pricing. We do our pricing, SKU-by-SKU, market-by-market, all the way across the Board. But it will probably come into that 2 to 3 range, which again is up from what we expected. I think, an important part and I touched on a couple of questions ago is, we are also seeing mixed benefits, which does flow through in terms of how it presents itself when you have things like single serves doing better, which is a better mix item for us, you see Chelada which are all almost all single serve being a better mix item for us. So you have got a combination of, yes, we are going to take a bit more pricing. Yes, you are seeing better mix in the overall equation and yet we are still doing it the way we are doing it, which is SKU-by-SKU, market-by-market. And I believe it’s remains judicious, we always keep the consumer in mind as we think about what we are doing relative to pricing and that certainly isn’t going to change.

Thank you. Our next question is coming from Vivien Azer from Cowen and Company. Your line is now live.

Hi. Good morning. I want to touch on…

Hi, Vivien.

…cannabis, Bill. Hi. I wanted to touch on your comment on safe banking. I mean, I fully agree rate like so hard to know, but in the base case assumption is that Republicans flip the house. It seems like there’s maybe better than a 50% chance that they could pass. Historically cannabis indicated that the Constellation Board sensitivity in your lender sensitivity is the key determinant in terms of their ability to close their purchase obligation on acreage that would certainly be meaningfully accretive to their bottomline and in turn, how you guys are reporting that business. So could you just offer any updated insights on how the Board and your lenders are thinking about safe in the current kind of health version very narrow? Thanks.

Sure. We feel miserably of predicting how that was all going to play out. So I would take my answer with a slight grain of salt admittedly. But we are cautiously optimistic that that there will be progress. What I am particularly happy about relative to Canopy, as I think they are positioned to be a winner in the U.S. There want jetty and acreage layouts which are all ready to go. I think are an important part of being a winner. We still believe that in the longer run brands are going to matter and I think they are positioning themselves to have the right brands that will matter over the long run here in the U.S. But look, we are optimistic, I think, everybody’s optimistic that we are going to start to see the legislation loosen up, although again being able to predict that, I would have feel miserably on that score, but we are hopeful.

Thank you. Our next question is coming from Nadine Sarwat from Bernstein. Your line is now live.

Hi, guys. I’d like to kick off with the two long-term questions here. So sticking on the Canopy’s points in the past you have alluded to U.S. federal legalization has been one of the key factors behind your continued confidence in the Canopy investment, but it’s now one of the stated reasons for the meaningful impairment you took today. So how long are you willing to wait to see U.S. legalization happen and do you see the size of your stake changing in Canopy anytime soon? And then, similarly, a bigger picture question, you are super premium beer brands continue to perform strongly in the last quarter, but the consumer is seeing increasing pressure on their wallets from macro pressures. So are you seeing anything if any changes in consumer behavior quarter-to-date from that macro pressure? Thanks.

Sure. Well, I will take -- let me take the wallet question, then we can decide who takes the other. No, unfortunately, we have. One of the things that we recognize is beer fortunately is a staple for many of our -- much of our consumer base. So we have seen some variation in terms of the pack sizes that have been taken out. But as I alluded earlier and we view this is a critical component. The buy rates that we have seen have been increasing and that’s one of the first things you look at is the number of times as people go to the store and when they take out when they are in the store. So, we are cautiously optimistic that this is going to continue to go well for us. I think it speaks to the strength of the brands and I think it speaks to the strength of the brand confidence that consumers have with us. Relative to cannabis, I wouldn’t expect you to see the size of our investment in that change.

And as to outlook, I would just say that, in terms of the first part of your question around legalization. First of all, that was one part of a multi-part analysis to determine whether or not we need to take a -- to take the impairment that we announced today. Beyond that we continue, as Bill has said we continue to be pleased with how the cannabis category has unfolded. In the U.S. as Bill noted in his remarks, it’s now a $25 billion retail sales opportunity in those states where it’s legal. So it is starting to convert consumers, consumers are adopting to the category and we are happy with the position that Canopy has in the U.S. and with the improvements that they are making in Canada.

Thank you. Our next question today is coming from Bill Chappell from Truist Securities. Your line is now live.

Thanks. Good morning. Just couple questions on mix, I mean, Modelo Oro, I can’t remember, is that the shipments as you expand nationwide going to have an impact or a meaningful impact on the back half of the year kind of shipments or is that more into next year or is it did not meaningful. And then second and I know that I should probably understand this, but why isn’t just coming out, it’s Modelo Light. I mean it seems like with some of the confusion of Corona Premier that the consumer doesn’t always understand that it’s a light beer or it’s a low-calorie beer. So any clarification would be helpful. Thank you.

Yeah. You bet. Oro is going to be taken nationwide next fiscal year. So it will have no impact per se in the back half of this current fiscal year. It’s in three test markets now, and obviously, it will continue, but it will be taken nationwide next year. Look, we did a lot of study as to what we thought was the best answer. We -- if you actually look at the can that we are really talking about the gold standard of light beer. So I think the consumer will understand what they are going to get. Our understanding from the research is that they do understand what it is. And certainly, we were very pleased with the results of the test market and are anxiously looking forward to seeing how it does on a national basis next year. It was highly incremental and we are very excited about that as well. So we are very optimistic about what Oro can do when it -- when Modelo has a quote light version unquote.

Thank you. We have reached end of our question-and-answer session. I’d like to turn the floor back over to Mr. Newlands for any further closing comments.

Thank you again and appreciate all of you joining our call today. Hopefully, as you could hear, we delivered another quarter of strong growth performance. Consumer demand for our higher end beer, Wine & Spirits brands remain robust, giving us further confidence in their runway for future growth. Our Core beer brands Modelo Especial and Corona Extra continue to out shine the market and our next wave brands like Pacifico and Modelo Chelada are achieving very strong double-digit growth. We continue to see opportunity ahead for our beer portfolio supported by continued consumer led premiumization and our ongoing investments in brewery capacity expansions. The benefits of our Wine & Spirits strategy are also taking hold, as our higher end brands continue to resonate with consumers and our global and omnichannel efforts are yielding benefits. Our largest premium wine, fine wine and craft spirits brands all delivered positive depletion growth and we achieved double-digit net sales growth in both DTC channels and International markets. And we continue to demonstrate again that we are committed to capital allocation priorities to maintain our strong financial foundation, balanced returns and reinvestment and deploy excess cash with discipline. In closing, as our next earnings call is not for January, I’d like to wish everyone a safe and happy holiday season. And as always, we hope your celebrations will include enjoying some of our great products with your family and friends. Thanks again, everybody. I appreciate you are joining the 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.