Greetings. Welcome to the Constellation Brands Fiscal Year 2024 Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Joe Suarez, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Darryl. Good morning all, and welcome to Constellation Brands Q2 fiscal '24 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 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. Following the call, we'll also be making available in the Investors section of our company's website, a series of slides, which highlight the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line 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's Bill.

Thank you, Joe, and good morning, everyone. Welcome to our Q2 fiscal '24 call. In terms of key headlines for the second quarter, I'm pleased to report that our team once again delivered solid overall performance. First of all, our beer business led to charge as the number one share gainer with accelerating shares across the key summer holiday. We continue to invest in growth for this business as our team looks to seize opportunities to gain incremental awareness, shelf space, in household penetration for our brands in the back half and beyond. Secondly, our Wine and Spirits Business continues to progress along its journey to realize the full benefits of its transformation. Prioritized investments in our largest Wine and Spirits higher-end brands are yielding outperformance in their respective categories, while partially offsetting and helping to reduce headwinds from our mainstream brands as they continue to shift the mix profile of our portfolio. And third, our continued discipline around capital allocation priorities contributed to a strong overall performance in the quarter and sets the stage for fiscal '24, being another solid year of profitable growth and shareholder returns. That said, let me provide a little more color around our key performance drivers in the quarter. As noted, our beer team once again delivered remarkable results. Not only did we remain the top share gainer over the entire critical summer season, we also extended our leading position from Cinco de Mayo to become the number one share gainer in tracked channels during the 4th of July holiday, and although, it falls slightly after our second quarter-end. I'm also pleased to report that we further accelerated our share gains during Labor Day. Modelo Especial remained the key driver of our strong performance, achieving double-digit volume growth in tracked channels and an 8.6%…

Thank you, Bill, and good morning, everyone. Our second quarter results reflect the ongoing disciplined execution of our strategic initiatives and our relentless focus on continuing to deliver growth while enhancing our performance. As Bill noted, we achieved yet another strong quarter with double-digit net sales and operating income growth in our beer business while our Wine and Spirits business delivered solid performance across its largest premium, fine wine and craft spirits brands, which partially offset the category headwinds affecting our mainstream brands. We also continue to generate strong cash flow results and execute against our consistent and balanced capital allocation priorities. Now let's review our Q2 fiscal '24 results in more detail where I will mainly focus on comparable basis financial results. To begin, our beer business increased net sales by 12%, representing an uplift of $253 million. This was driven primarily by volume growth of 8.7% as demand for our Beer brands accelerated through the first half of the fiscal year. This growth also benefited from favorable pricing, which contributed $59 million of the overall net sales increase. As a reminder, we continue to expect pricing to account for 1% to 2% of our net sales increase this fiscal year from the combination of the wraparound impact from the significant pricing actions taken in Q3 of fiscal '23 and targeted pricing actions we are taking in fiscal 2024. For the second quarter of fiscal '24, beer shipment volume and depletions were generally in line with one another, and I'm pleased to report that our inventories are at healthy levels to support the ongoing growth of our brands. Beer depletion growth for the quarter came in at 7.9%, reflecting a successful summer selling season, driven by ongoing consumer demand across our industry-leading beer portfolio as evidenced by our share…

[Operator Instructions] Our first question comes from the line of Vivien Azer with Cowen & Company. Please proceed with your question.

Hi, thank you. Good morning.

You bet.

So, obviously, very strong one half results in the year. I've been getting a lot of questions on why the positive revision to guidance wasn't a little bit more robust. And, obviously, Bill, you laid out some of the factors to contemplate from a shipment perspective as well as from the lapping of pricing that Garth called out as well. But is there anything incremental that you can offer in terms of your outlook for the category in the back half that might have informed a little bit more caution as well? Thanks.

No. We remain very positive about the back half of the year. The critical things that are important relative to our back half is normal seasonality. We only do 45% in the back half, we do our maintenance in Q3, which always limits Q3 somewhat. And we're going against pricing from last year that won't largely be repeated combined with the normal sales buildup ahead of price increases that occurred again in Q3 last year. But let's just keep in mind, when you look at the takeout data you see in tracked channels, our four-week numbers are very consistent with the 52-week numbers. This is an ongoing growth story that we have a lot of confidence in, which is why we raised our expectations for the year in beer. We expect to have a very strong second half.

Thank you. Our next question comes from the line of Andrea Teixeira with JPMorgan. Please proceed with your question.

Thank you. Good morning. I was hoping to see if you can comment a bit on the shelf resets in the category are large, how you're seeing consumers, I understand the CAG situation and the on-premise consumption. Just hearing, obviously, the shift in market share and you were a beneficiary and you have been doing a lot of work for a long, long time in the shelf resets. And so if you can comment on that, how you're looking at as you go into the spring resets in the large boxes as well as what's happening in the on-premise? Thank you.

Certainly. We certainly expect to see a strong reset period. You know, there's some limited resets that occur here in the fall. Most of those occur in the spring. Our confidence around that drives primarily from the sheer velocities that we have within our key brands. No, our portfolio is second to none in terms of delivering against velocities. And those have been consistent year-on-year, which gives us a lot of confidence in our ability to continue to see shelf set gains. Retailers are very smart about this, and they recognize where the growth and velocity is coming from and that will work strongly to our advantage as those resets occur.

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

Yes, thank you. Good morning, everyone.

Hi, Nik.

Bill, I was hoping you can -- hey, how are you? I was hoping you can just comment on systems and supply chain volume. And I ask this question because a lot of your growth is coming in areas that were not really driving your growth, let's call it, 5 to 10 years ago. So getting the right volume in the right place at the right time requires some adjustment and probably some systems overhaul. So I just -- I was wondering if A, if that is a valid point to be making; and B, if it is, what you're doing internally to make sure that you can actually have the most optimized supply chain?

Certainly. A couple of things stand out, Nik, around this. As you know, a few years ago, we literally had no redundancy in the system. We now do, and that certainly provides much greater flexibility in terms of our operations footprint to do a number of things. One is to make sure we're able to keep up with our increasing demand that we consistently see on our business and in a scenario where something is accelerating at a greater pace than what we had anticipated. We can react to that. I think, A, that's very strong. Secondly, as you know, we made some significant investments in our digital business efforts and those are really paying dividends in terms of our supply chain capability as well. That has significantly refined our ability to make sure we have the right supply chain capabilities all the way through the supply chain. So, I'd say both of those things have been critically important. In fact, and I know you'll be there -- you'll get a chance to hear about this in some depth during our Investor Meeting on November 2nd. We think this is a critical factor that's been important to our continuing ability to maintain and meet the significant increase in demand that we've seen and we'll go into that in a fair amount of detail on November 2nd.

Thank you. Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Hi, good morning, guys.

Hi, Dara.

So just two quick clarity questions. The mid-single-digit gap versus Circana data that you saw in this quarter in terms of depletions, do you think that lingers? Might that close back towards the low single-digit gap going forward? Just conceptually, how do you think about that? And in your answer to Andrea's question around shelf space, is there more opportunity this year than a typical year, just given ABI's business is obviously falling off unexpectedly after the spring reset. So, do you think about the shelf space opportunity as greater than typical, just given those dynamics? And there may be greater shifts, even if your business doesn't compete as much directly head-to-head versus them?

Yes. Sure, Dara. On the first point, the question of whether or not the sort of mid-single-digit continues, I think, remains to be seen. Certainly, as Garth noted at Barclays, and we said during our prepared remarks, it's more than it has usually been so whether or not it refers to the norm of what we usually see, which is sort of lower single-digit remains to be seen, and obviously, one that we watch carefully. Relative to the shelf sets, yes, we think this is going to be a great opportunity for us for all the reasons I answered earlier, which is our velocities are second to none. And we fully expect that we're going to be able to expand our presence. That also impacts some of our new product development. If you think about Oro, I mean, Oro is off to an excellent start much in line with what our expectations were. And that also gives us a chance to expand our shelf presence because we expect that, that particular brand using that example is going to get more shelf space. The last thing I would say, and I got to call out Chelada’s, because Chelada's has just been absolutely on fire. And our additional sizes and variety pack in those -- in that particular category, again, gives us chance outside of the core beer set to also gain more shelf space. So we need to think about this very broadly because we expect to gain both in what I would call the core beer shelf as well as the ancillary beer shelf as well with things like Chelada.

Thank you. Our next question comes from the line of Gerald Pascarelli with Wedbush Securities. Please proceed with your question.

Great. Thanks very much. It's a macro-related question. Bill, one of the questions we get a lot is on student loan repayments. They're going to resume this month after a three-year pause. So just how are you thinking about the impact from that, maybe the potential for down trading, just obviously given some of the premium price points on your beer products? Any color there would be great. Thank you.

Yes. That, again, is one of those things that I think remains to be seen. One of the important things that we see with our brands is the consumer loyalty that is attached to those brands. Taking Modelo as an example, we over-index with the Hispanic community and the Hispanic community has tremendous brand loyalty to Modelo. Also with Corona. Corona is a much broader-based demographic, but that we continue to say it's the most loved beer because it is. I think that's critically important. People make choices all the time about where they're going to spend their discretionary income. And brand strength is critically important about how people make those judgments. So specifically to your question, it remains to be seen, but we feel very confident in our ability to see our brands continue to gain traction simply because there's so much brand loyalty attached to them.

Thank you. Our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question.

Hi. Two questions for me, please. Coming back to Modelo Oro. Could you share some -- any updated data points that you have, especially, when it comes to cannibalization? And how would you characterize that incremental consumer? And then just one final question on that voluntary ad product recall. Can you quantify the impact that this has had in the quarter, both on top-line and on the margins? Thank you.

Sure. As I noted earlier, we only had a couple of SKUs in Oro, but it's off to a really good start. And the cannibalization rates were less than we had anticipated and, frankly, less than they were in the three test markets that we had originally run. So we're very positive about that. One place where we're seeing disproportionate pickup on that particular sub-brand of Oro is in the Hispanic community. We've been very pleased by the takeaway in critical, large Hispanic markets, how Oro has done and as we continue to build that out, you'll see additional SKUs coming next year, which we believe will help to continue to accelerate that brand's growth. And if the cannibalization rates stay where they have been, it's going to be better than we had initially anticipated. Garth, do you want to handle the second one?

Yes. And just on the CAG recall, the impact was entirely in the cost of goods as related to shipping and destruction of products as well as the initial cost to produce the product. It's -- it wasn't a material movement for us for the quarter. There'll be a little bit more detail in the 10-Q on that, and you can find it there.

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Thanks, operator. Good morning, everyone.

Good morning.

So I guess a little bit of perspective maybe on -- and this may be a little bit of a follow-up from one of the earlier questions, but just we're getting a lot of questions about demand elasticity, consumer tolerance of inflation. So can you just give us a little bit of perspective for both your beer business and also in wine and spirits, just what kind of economizing behavior might you be seeing? Again, is it like buying more in chain convenience versus independents or choices people are making on packaging. Just as you're kind of looking forward, just kind of where we are on economizing behavior and how you might have to adapt or adjust to that?

Yes. So I think this points out to where our judicious approach to pricing has been spot on. We've said consistently -- in fact, we got questions about that on prior calls at times about why we weren't taking more price. Our view has consistently been 1% to 2% annually. We were a little more than that the last couple of years, but 1% to 2% is the consistent way that we look at it, and we look at it market-by-market, SKU-by-SKU. The rationale for that is quite simple. It's much easier to keep your consumer than to have to go get them again, if you have lost them. I think in this particular instance, as you point out, people are careful. We're seeing less -- more trips, but somewhat less purchasing per trip than we used to see, which simply means people are being a little more careful about what they do, given the inflationary environment that exists. I think the important part for us is the fact that even though there are more trips, they are making more trips to purchase more of our brands, even if they might spend a little less on any particular trip, again, that speaks to what I just replied to on the prior question, which is about our brand loyalty and about the consistent consumer dynamics that really works to our advantage over the long run. So again, I think the critical element to that is our judicious pricing approach over time is one that's going to do us very well when you're in a consumer environment that people are a little bit more concerned or a little bit more nervous about the inflationary environment. And I think that's going to work to our advantage as we go forward.

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

Hi, everyone. Garth, can you just comment on how inflation is coming in relative to your expectations entering the year, puts and takes. I asked this in the context of your comments around marketing coming in at the low end of the historical range for the full year. And I would just be curious on how you view gross margin delivery in the quarter relative to expectations with any context on the back half of the year? But -- so anyway, high level, just trying to get some context around how costs are running relative to what you were thinking going and maybe you can frame how this delivery is coming in, again, relative to your going expectations? Thanks.

Yes. Thanks, Chris. Look, as a reminder, we expect our beer operating margin for this fiscal year to be around 38%. That remains unchanged. And as it relates specifically to Q2, Q2 is historically traditionally our higher -- our highest margin quarter given the volume associated with Q2. And so in the second half of the year, obviously, we're going to continue to face inflationary pressures that we've had all year long. We are seeing some easing in inflation as expected as we've gone through the year. Unfortunately, while we've seen some improvement in inflation, we've also seen a strengthening peso kind of hold up. And so any improvement that we had due to inflation has been really offset by the strength of the peso. And then again, in the second half of the year, because of the historically lower volume that we have in that half, there will be an impact, obviously, to fixed cost absorption as well as COGS and marketing and additionally, incremental depreciation as we brought on over gone partway through the year. And then as Bill noted in his remarks, it scheduled maintenance that we traditionally do in the second half of the year as well as the overlapping and the pricing benefits last year. So all in, I mean, those are sort of the factors that will contribute to the 38% margin for the full year.

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question. Lauren, are you self-muted?

Hello, Lauren.

Lauren, unfortunately, we can't hear you. Are you muted? I will move on and Lauren…

I think come back again.

You got it. Our next question comes from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Great. Thank you very much. I was wondering if you could give us a little bit more detail on your productivity programs, the specific buckets that you've addressed that you're targeting? And is this something that is potentially a multiyear process of system optimization? Thank you.

Thanks, Robert. Yes, I would say that our cost savings and efficiency initiatives certainly are multiyear in nature. Obviously, we communicated earlier this year in Q1, we had taken $30 million out and then this year, an incremental $20 million for this quarter, I should say, an incremental $20 million. We're always looking at ways to sort of prove productivity create efficiencies in the business, whether that's through supply chain and procurement or operations. Examples of that over time have been things like double stacking rail cars and the use of plastic pallets optimizing the location of inventory, as Bill referenced in response to a question earlier, improved purchasing in terms of raw materials, through better contract management and negotiations, as well as more effective and efficient use of our marketing spend. So it's absolutely something that the organization is focused on a year-on-year basis. And certainly, we will share a lot more detail on our cost savings initiatives for both our beer and our Wine and Spirits businesses at our upcoming Investor Day.

Thank you. Our next question comes from the line of Filippo Falorni with Citi. Please proceed with your question.

Hi, good morning, everyone. Bill, you mentioned that the last four-week trends has been very strong and consistent with the last 52 weeks. Can you give a little bit maybe more color on the performance of your business in September. And then at the industry level, one of your competitors, the Investor Day mentioned that September for the industry is particularly sluggish, particularly last couple of weeks as you cycle the shipments ahead of the price increases in the last year. So maybe some color on the timing of shipments into September into Q3 would be helpful. Thank you.

Sure. When I look at the most recent Circana data for four weeks, our total beer business is up 13.7%, which is very consistent with what the 52 weeks. That's what I was alluding to in my prior comments around that. Certainly, as we also noted, we expected that we would see some element of tightness during the course of the beginning of this quarter that we are in purely because we are lapping the October price increases that occurred last year and some of the prebuild that people do the retailers do ahead of any price increases that existed. All of that's consistent with what we've expected. And we expect, as we've said, the reason we raised the -- our guidance expectation around beer is because we expect to have a very strong back half of the year despite a couple of these headwinds that certainly exist.

Thank you. Our next question comes from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question.

Hi, good morning. Thanks for taking the question. My question is on capital allocation and in particular, around buybacks. And I think you noted no buybacks during the quarter but being on track for your target to offset dilution year-to-date. I guess, my question though is what's the appetite for buybacks in excess of that, particularly given the momentum in the business, the strong cash flow generation. How are you thinking about that now versus where you were at the beginning part of the year and moving forward? Thanks.

Yes. So capital allocation is obviously something that we're going to discuss in greater detail at our upcoming Investor Day. But just broadly speaking, I would say, for this fiscal year, as we noted when we entered this year, we were going to at least buy back the dilution that occurred throughout the year. But this year, we are also prioritizing getting our leverage ratio back to our target of 3.0 versus where it was at an elevated state as a result of the reclassification. That said, we're always looking to be flexible and agile as conditions allow for. So something we continually look at. And just as a reminder, we do have $800 million remaining under our current board authorization. So in the event that we decide we want to be a bit more active, we have the ability to do so.

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

Hi. Can you hear me?

We do.

We can.

Part two.

Okay, hooray. Okay, cool. Sorry about that, I don't know what happened, but just quickly, I was going to ask about wine industry growth. And just against the backdrop of your comments on Woodbridge/SVEDKA, obviously not wine, and then the higher end brands performance. But just as you think about the path forward, not just second half, but into next year and so on, how do you think about wine industry growth, wine versus beer versus spirits? I'm guessing we'll get into this a bit more the Investor Day, but I was just curious if you could preview a bit your view on kind of that long-term growth in wine? Thanks.

Yes, certainly, Lauren. It's really the tale of two cities. The lower end piece of the business, what we refer to as mainstream, has been very challenged. It's down mid to high single-digits, which obviously is somewhat challenging for us because we do have significant involvement with that category still even though we have divested a number of brands that played in that category. So that certainly is a very different answer than what I would say to you about the higher end portion of the business, where brands like Naomi and Kim Crawford and High West and Booker and things of that nature are all significantly outperforming our plans and expectations and gaining share. You're right. We'll talk about that at Investor Day. The other thing I keep in mind, unlike beer, which is about 45% in the second half, it's directly the flip when it comes to wine. That's 55% in the second half. And as we do, and a disproportionate amount of our business comes from ASPIRA and which much more relates to vintage releases those all tend to occur in the second half which again weights our business toward the back half the year versus the first half the year. And the other one I would just point out which I think is important to recognize. We made the choice as we said early this year that we were going to balance our ships and depletes all year long, as opposed to doing it once in the fourth quarter which is what we did last year That creates a bit of a challenge in the early part of our fiscal year, but gives us a significant improvement proposition in the back half of the year, as that won't occur as it did last year, creating a disproportionate shipment number in the fourth quarter last year, which won't be the case and we will be going against a much better proposition this year. So all in I think the wine business certainly has seen some challenges, but much like we see in the higher end of the beer business. The higher end portion of the category is much stronger and certainly our business in that sector is performing very nicely against category norms. And you're right we will go into all of that in much more depth during our investor discussion on November 2.

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

Thank you, and thank you all again for joining our call today. We're very pleased with our performance in the first half of fiscal 2024. As anticipated, our beer business further accelerated during its seasonally strongest period of the year to deliver excellent results. In our Wine and Spirits portfolio, our higher-end brands continued to outperform and track channels, and we're looking forward to an acceleration in the growth of that business over the second half. All told, we remain confident in our outlook for the full year and have tightened the expectations for growth in our beer business at the higher-end of the initial range, while increasing our overall EPS outlook as we drove interest expense lower due to our proactive debt management. In closing, I would like to encourage you to tune in for our upcoming Investor Day on November 2nd, where we will be sharing our latest perspective on the medium-term outlook for our business. You will find further details on how to access this event through our Investor Relations website at ir.cbrands.com. Thank you again for joining us today, and we look forward to seeing most of you, if not all of you, November 2.

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