Good day and welcome to the Constellation Brands' Fiscal Year 2024 Fourth Quarter Full Year Earnings Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Snehal Shah, Director of Investor Relations. Mr. Shah, you may now begin.

Thank you, Rob. Good morning, all, and welcome to Constellation Brands' Year End Fiscal 2024 Earnings 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 today's news release or otherwise available on the Company's website at www.cbrands.com. Please note, when we discuss comparable earnings per share figures for fiscal 2024 and prior fiscal years, we are referring to earnings per share on a comparable basis excluding Canopy equity and earnings, unless otherwise noted. 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 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. 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 today. Thanks in advance, and now here's Bill.

Thanks, Snehal, and good morning, everyone. Welcome to our fiscal '24 year-end earnings call. As usual, I'd like to start with a few headlines from this past fiscal year. First, I'm pleased to report that we delivered another year of strong performance in fiscal '24. We drove comparable earnings per share growth of nearly 9% and remain focused on achieving our stated medium-term target of low-double-digit comparable EPS growth moving forward. This growth was supported by a net sales increase of 5% at an enterprise level and solid operating leverage that resulted in an increase of 7% in comparable operating income, representing an enterprise comparable operating margin of nearly 33%. This performance once again yielded recognition for Constellation Brands as the number one growth leader among large CPG companies by Circana in calendar year '23, as we have been five of the last seven years. We are the only CPG company of scale to make their top 10 ranking for 11 consecutive years. Our continued strong performance and momentum heading into fiscal '25 reinforces our confidence and our ability to deliver against the following targets outlined at our Investor Day this past November, maintaining 6% to 8% enterprise net sales growth, delivering 33% to 35% enterprise comparable operating income margin and generating low-double-digit comparable earnings per share growth, all of which we intend to achieve in fiscal '25. Second, from a segment perspective, our fiscal '24 results were largely driven by our Beer Business, which delivered net sales and operating income growth above 9% and 8%, respectively, both exceeding our expectations from the beginning of the year. This strong performance drove our largest dollar share gain ever for a full fiscal year, adding an impressive two points of dollar share within the US beer category. And we achieved a significant…

Thank you, Bill, and good morning, everyone. As usual, my discussion will focus mainly on our comparable P&L results, starting at an enterprise level followed by business segment detail for fiscal '24. I will then discuss our fiscal '25 outlook and expectations in the same manner. Starting with net sales. As an enterprise, we delivered growth of over 5%, slightly exceeding our fiscal '24 guidance range of 4% to 5%. This was driven by the strong performance of our Beer Business, which grew net sales over 9%, exceeding our guidance of 8% to 9%. As Bill mentioned, our Beer Business had another strong year of depletion growth, a 7.5% increase as the strength of our portfolio carried throughout the entire year. Off-premise depletions grew by over 8%, which represent nearly 89% of our total depletion volume. The on-premise accounts for the balance of our depletions and grew by over 1%. We expect to build on our momentum in off-premise channels supported by the low-double-digit incremental shelf space that we captured this spring, which we foreshadow at our Investor Day last November. And we continue to see opportunity to drive growth in the on-premise with new draft handles, particularly for Modelo Especial and Pacifico in the coming fiscal year. I will elaborate on fiscal '25 shortly. Shipment volumes for our Beer Business in fiscal '24 grew 7.4% and we achieved favorable pricing of 2%. These volume and pricing increases were partially offset by the divestiture of our craft beer business and an unfavorable shift in product mix. In aggregate, the volume, price and mix changes amounted to a nearly $700 million increase in beer net sales for fiscal '24. In regards to selling days, we had one extra sell day in the year, which occurred in Q4. This had a minimal…

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question today comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question. Hi, questioner. So we lost that questioner. Moving on to our next questioner is coming from Nik Modi with RBC Capital Markets. Please proceed with your question.

Thanks. Good morning, everyone. Just two quick ones for me. Just been getting a lot of questions about gross margin and wanted to get any perspective on if there's any one-time issues that might have affected the gross margin this quarter for beer. And then the second part of that is just when you think about the shipments this quarter, can you give us any context on how much might have been attributable to some, whether it be the Aguas Frescas launch into wholesale or preparing for some of the shelf resets that would be helpful. Thank you.

Yeah, Nick, I'll try to address both of those. First on the gross margins, as we laid out in our press release, we did have a bit of a write-off of a bad accrual as it relates to bad receivables in Q4. That impacted our Q4 operating margin by about 100 basis points. Obviously, that would have hit gross margin as well, and that impacted the full year by about 30 basis points, again, at the operating profit margin. As it relates to Q4 impact of Aguas Frescas' launch, very, very minimal impact, really just the strength of the portfolio more broadly is what drove Q4.

Thank you. The next question is coming from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Hey, guys. Second attempt. Can you hear me?

Second time is the charm, Dara.

Okay, great. So I wanted to touch on beer depletions, the nearest 7% result in the quarter, ex the extra day. It's a pretty solid result considering the weather. Can you just give us any sense for momentum so far in March and April when the weather normalized or maybe how big a drag January was in Q4? Just give us sort of a sense of underlying trends. And just on market share, you mentioned the shelf space gains being disproportionate this year, post-Bud Light struggles. How much of a positive impact are you expecting from that, and can you juxtapose that versus the risk that Bud Light trends get better, and you see some direct impact on your brands from that? Thanks.

Sure. We obviously take into account our March results with our overall expectations for the year. But I'd say, March was very consistent with what our expectations were. Everyone should keep in mind that March has two less selling days, April has two more. So we internally look at it as sort of the combo plan of those two months. With that said, we had a very comfortably strong March as we expected that we would, and think it's setting us off on a really solid year, as we said, consistent with what we said at the Investor Day in New York. As we also noted in my script, we had low-double-digit growth in our shelf sets here in the spring, greater than our growth algorithm, which is what we expected. And certainly, that's going to be one of the added values in our delivery of the total year. But as we've said, and as all of you know, incremental space, by and large, is not at the same velocity as what you have from existing velocity, because it's marginal returns. With that said, we're very pleased with the increase in our shelf position. We've said for many years, our brands really deserve it. They've averaged over $50 million per SKU in dollar return, and it certainly is reflective of what I'm sure all retailers are seeing and that our brands are driving the growth in the category.

Our next question is coming from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Thanks, operator. Good morning, Garth. Good morning, Bill. So I guess, just stepping back, we had this question a couple of times this morning, and maybe the underlying question is just at an enterprise level we get back to being basically on algorithm for the year, but in a year where wine and spirits underdelivers beer, at least in terms of growth rate on operating profit, maybe a little faster than normal, a little help from below-the-line on interest expense. So just is it a coincidence, right, that basically there can be a hole with wine and spirits underdelivering, but there were other offsets? Or was this more a function of you all maybe making some adjustments to get to that place, whether it's pulling some savings forward or using some tax credits? I think people are just trying to understand how much manipulation or how much work you had to do to sort of make up the difference or whether this was just a coincidence.

No, Bryan, we don't play with the numbers. The numbers reflected very strong results in our Beer Business. As we've said, we've had some challenges in our Wine & Spirits business. As you know, we just installed a new President of our Wine & Spirits business whose focus will be on execution. We have a number of things in this coming year that will cause it to be a bit of a reset year at the bottom line because we're lapping a number of one-time issues, but that isn't going to stop us from delivering on the enterprise-wide results that we committed to in New York and that we are reiterating today. We expect to continue to show best-of-class results. As you heard in my remarks, last year, we again were the number one growth company in Circana large companies as we have been five of the last seven years, and that is what's really driving the success of our business, not anything else.

Our next question is from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Great. Thanks. Sorry. Good morning. I was just curious, you gave a lot of help and color on the Wine & Spirits, but I was just curious and we've heard in the industry more about, you spoke last quarter about promotional pressures, other manufacturers have talked about retailer destocking, seeing more inventory management at the distributor level. Just curious to hear your take on kind of the promotional environment and kind of state of the union on inventory levels within the system, knowing it's tough to have visibility within three-tier, but just curious your view on inventory in the system online?

Yeah, you bet. We did see some inventory reduction this past fiscal year, particularly in Canada. There was quite a bit of inventory realignment in Canada, and certainly there has been some that we've seen in the US as well. The thing that I think is important for us to continue to focus on is we've made a number of changes. We're going to focus on those 11 brands that are really the biggest drivers of our success. That's a bit of a change. Frankly, we've probably peanut buttered our efforts a little too broadly in the past, and we're going to focus on those brands that we believe have real growth potential for the long term. We're also going to do a bit more promotional spend than we have in the past, particularly on brands like Woodbridge, where that's an important part of the consumer dynamic. A lot of work and research has been done in the last few months to make sure that we understand all the consumer dynamics around our critical brands and we will execute against those dynamics in this coming year. And I think that's reflective of an improved top line that you see this year, acknowledging there'll be a bit of a reset at the bottom line.

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

Hi. Good morning, everyone. So Garth, thank you for all the perspective on expectations around beer margins for the full year. Can you just perhaps expand a little bit on what specifically is driving the commodity input inflation, number one? And then secondly, if I put all this together, it does feel like maybe there's a little bit of top line leverage you're expecting or you need a little bit more savings on the G&A line to get to the low-double-digit number for the full year in the division. So maybe just help provide any context on that. So thanks on the commodities and maybe just some of the assumptions on how you're getting to the operating profit number for the full year. Thanks so much.

Yeah, so just as it relates to margins for beer I think that, first of all, I think we have to acknowledge that if you look at the past two years, and you look at the disruptions we saw to global supply chains and then the elevated inflation environment that we've been dealing with, that the improved margins, starting in the back half of our fiscal '24, and then moving forward with significant margin expansion in FY'25 to get near the low-end of our target range I think that that's no small feat. As we look forward to FY'25, we're going to face similar tailwinds and headwinds that we have for the last several years. The tailwinds, again, will be volumetric growth given the strength of our brands, as well as our typical pricing algorithm. Some of the issues that we'll face or headwinds that we'll face is that while commodity prices have certainly abated from their highs, they're certainly sort of higher still than their historical norms or near-term historical norms. And there have been a couple of commodities that have been a bit resilient in their strength, if you will, or haven't come down nearly as much as we would have hoped. So we still face those. In addition, we have the strength of the peso, which is something that we're going to continue to manage through. Fortunately, we're hedged as we enter the year against the peso at about 80%, so we're going to manage that effectively. And as you've heard us talk about extensively, both on this call and Investor Day, we have this year, as well as have had last year, an aggressive set of cost savings initiatives that will help benefit the business. So all in, I mean, we think that there's fairly significant margin expansion here, margin growth, in FY'25 as we move towards getting closer to our mid-term growth algorithm or mid-term margin algorithm.

Our next question is from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.

Hi. Just one quick follow-up on the shelf space question. You've gained a lot of shelf space already. Can you maybe just give a sense of how much incremental space do you expect as we think about this spring? And then secondly, it looks like the strategic or I guess the evaluation on Wine & Spirits is complete. To what degree did you consider divestments as part of it, either for pieces of that business or maybe even for the whole thing? Thanks.

Sure. As I stated, Kaumil, on our -- in my primary remarks, well, low-double-digit shelf space is what we expected to get, and that's in fact what we are getting in spring resets. Obviously, it varies all over the map depending, but that's roughly what the total number is in the aggregate. And again, that's at least as much as we expected. We're very pleased with where that landed. Relative to the Wine & Spirits business, we've made this comment a number of times. The person that drinks across all three categories, beer, wine, and spirits, spends six times as much as an individual that drinks only in one of those three categories. Therefore, we continue to feel that that's important, that we are accessing significant additional consumer occasions and consumer spending by being able to play in all three of those categories.

Our next question is from the line of Nadine Sarwat with Bernstein. Please proceed with your question.

Thank you. Two interrelated questions from me. First, you obviously posted very robust beer volume growth this quarter. What are you seeing in terms of the health of the US consumer today? Any signs of the downtrading or shift in behavior? And then a second question also on the consumer. Some of your industry peers have highlighted dry January being more meaningful headwind this year. Other commentators are calling out different drinking patterns amongst younger legal drinking-age consumers. So I'd be really curious to hear what you are observing when it comes to these trends. Any changes in behavior from the consumer? Thank you.

Sure, Nadine. We're very pleased with the health of our consumer. We've said many, many times, the brand loyalty that we have within our franchise is superb. And I think that's really important. I think when you put that together with the fact that, and Garth has mentioned this on a number of occasions, we've been judicious in our pricing strategy over the last few years, which is a little bit different from what some other people have done in CPG industries, but we think that's important to maintain that consumer base given the very strong loyalty that we have within our franchises. It's also important to note that the high-end, which is the only place where we compete in beer, continues to see an increase in buy rate. So that, again, speaks to the fact that the consumer continues to premiumize and we're in the perfect position to take advantage of that particular point. Relative to any consumer changes in January and so on, one of the things that we've noted a couple of times is betterment. We've done a number of things in our wine business to bring out light or lighter products like Illuminate and Kim Crawford and Bright in Meiomi. Similarly, our Corona Non-Alcoholic had a great start. It was the number one share gainer in the non-alcoholic segment and I think that does reflect some change in consumer behavior or people that are concerned about being the designated driver, but still want to enjoy an outstanding tasting beer. We're going to continue to emphasize the betterment trends as we go forward with a number of our product offerings and certainly expect Corona Non-Alcoholic to continue to grow here in this coming fiscal year as well.

Our next question is from the line of Andrea Teixeira with JPMorgan. Please proceed with your question.

Hey, good morning. This is Drew Levine on for Andrea. Thank you for taking our questions. So just two for us, if we may. Just going back to one of the earlier questions, Bill, if you can comment maybe on depletion trends outside of California versus inside California during the quarter and how those progressed throughout the quarter. And then one for Garth. I think you mentioned roughly $200 million of cost savings for beer in fiscal '24. I think that implies a pretty meaningful step up in the fourth quarter. So if you could just talk about maybe some of the projects where you saw benefit and how we should be thinking about cost savings for fiscal '25. Thank you.

Andrea, your voice got a lot lower since the last time you asked a question. All joking aside, our trends were very, very strong really across the country. A significant place, let me use Pacifico as an example, the depletions across that brand for the year were up 17%, and obviously, the big stronghold is California. Modelo Especial continues to be the number one brand in the State of California. But we're also seeing really good success across the country. Places like Texas and Florida. And secondary markets. We've always said secondary markets are going to be an important element for us. And many, many, many of those showed double-digit increases over this past year. So we were very pleased to see a broad-based growth profile for our business as we closed out the year, and we think we're in position to continue to do that here in fiscal '25. Garth, I think, the second one was for you.

Yeah, just on the roughly $205 million of cost savings that came out of Beer Business throughout the year. Yeah, that ramped up throughout the year. We started right out of the gate very strong in Q1 and again that ramped up as we went through the year. It ramped up as we went through the year really based on two factors. One is, we identified or put in place new initiatives throughout the year. But then you also benefited from -- almost from a compounding perspective for those things that started earlier in the year as well. The kinds of initiatives that we undertook last year were procurement-related in terms of various RFPs around raw materials where we were able to address some of the outsized increases that we saw over the last two years due to global supply chain disruptions as well as the inflationary environment. There was a number of logistics initiatives in terms of rail cars and double stacking and also a number of operational initiatives that were underway.

Thank you. Our next question is from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Great. Thank you very much. First, could you please just remind us what your gross dollar amount of expenses that are peso-denominated are? So that would be great. And then second, looking at the scanner data and this is Circana, your price/mix has been well below the beer category over the last four, 12 weeks or so. So I'm trying to understand why that's the case. And the most of the other players took pricing kind of before or after the Super Bowl. Kind of what is the timing on your price increases this year? And again, why is your apparent realization in the scanner data less than the market and most of the other big brands? Thank you.

Yeah, so on the first one, in terms of the amount of costs that are peso-denominated for our Beer Business is about 20% to 25% of our costs are peso-denominated. As I said, as we entered this year, we're hedged at about 80%.

And relative to price realization, as you know, a lot of what you see in these types of things depends on when pricing increases or pricing actions were taken. We consistently have said 1% to 2% is our pricing algorithm, and over the course of the whole year, we're still expecting to see 1% to 2% pricing actions. As you also know, Robert, we do that on a SKU-by-SKU, market-by-market basis, and therefore, you have reflections of different time frames across the year as to when that actually shows up. I don't think that's anything that we are concerned about nor any kind of an ongoing trend. And as we said, over the course of the year, we'll expect to get 1% to 2% as we've communicated we would.

Our next question is from the line of Filippo Falorni with Citi. Please proceed with your question.

Hey, good morning, everyone. I had a question on the overall beer industry and your thoughts as we are about to cycle the big market share shift with the controversy around Bud Light in April of last year. Clearly, your business was growing at these rates well above before this controversy, but there are some concerns that you might have benefited from the market share shift, so maybe you can address some of the impact that you see on your business and how you're thinking about it as we start to cycle those impacts. Thank you.

Well, as we've said right along, we probably were not the single biggest gainer as it related to the controversy that you know, but I'd also, again, continue to point out something I said earlier, which is, we've got extraordinarily strong brand loyalty, and we only play in the high-end. The high-end is where the growth in the category is at the moment, and we're fortunate that that's exactly where we play. When you add in the fact that we've seen a significant increase in our shelf presence here during this spring reset program, we think we're in a great position, recognizing we are coming off the single biggest share gain in the history of Constellation Brands Beer Business. Two points in all total beer and 2.6 points in the high-end. It's an unprecedented gain and I think it reflects the sheer strength of our brands.

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

Great. Thanks very much. Just going back to wine, Bill, the drivers you laid out in your prepared remarks were very helpful, but based on current trends, I think the outlook for the year came in above expectations, definitely above our expectations. So, I guess, in the context of two guide downs last year, if you could maybe provide some more commentary just on your level of confidence this early in the fiscal year in achieving flat revenue performance, that would be great. And then does your outlook embed the assumption that the wine category will ultimately start to improve from current levels this year? Thank you.

I think, obviously, Garth and I spent a lot of time with our wine colleagues over the last few months looking carefully at what we thought was critically important. The reflection of an improved performance has several variables involved. One, we're going to work much more closely and enhance our sales capabilities to support our distributor network. I think we've gotten much more aligned as to what our intentions and expectations are, both from distributor to us and us to distributor than where we had been as we came out of last year. Second, we've refocused our priorities. There are 11 or so critical brands that did not probably have the right amount of prioritization within our overall portfolio, and we have radically addressed that. Third, we're going after efficiencies within the business, and we think there are those to be had. As you know, that was a tremendous success last year in our Beer Business, and we're putting some of the same resources against our Wine & Spirits business that helped generate that very strong result last year. So there's a number of elements that we are putting in place recognizing this is going to be a bit of a reset year, particularly at the bottom line for the wine business. However, again, we've said, we think the strategy is sound, it's right, it's going to get us to our medium-term algorithms as we go forward, and at this point, it's all about execution. And I think Sam Glaetzer and the rest of the team are going to be crystal focused on execution against our strategy.

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

Yes, good morning, everyone. Can you please expand further on the state of on-premise activity that you saw towards your end, and more important, currently?

You bet, Carlos. I think you saw some interesting volatility, depends on the particular time frame, and we saw some of that. We had an issue for a brief period during this year where we had some issues with kegs, which is now fully behind us. We're continuing to see strong development in the on-premise, and we're particularly excited about it heading into Cinco, which is obviously the next big time frame for us, and a time frame when we historically have done very well and made significant share gains, both in the retail and in the on-premise environment. So we're very optimistic that the on-premise is going to be an important part of what our results are this year. Both Modelo, Corona, Extra and Pacifico are all growing share in that channel and we expect that that continued share of growth is going to continue in this fiscal year.

Thank you. At this time, we've reached the end of the question-and-answer session, and I'll hand the floor back to Bill Newlands for closing remarks.

Thank you, Rob, and thank you to all who joined today's call. As we wrap up, I want to, once again, thank our colleagues across Constellation, as well as our trade partners, for delivering another strong year of performance in fiscal '24. Your continued focus and discipline has made Constellation a top-performing growth leader among CPG companies for 11 consecutive years. No other company in recent times can say that, and we're extremely proud of this achievement. As we head into fiscal '25, we're confident in our ability to further build on our momentum and to create additional shareholder value by delivering low-double-digit EPS growth, fueled primarily by our Beer Business, which we expect to generate high-single-digit net sales growth and best-in-class operating margins. Heightened focus on our commercial and operational execution in our Wine & Spirits business, while maintaining our disciplined approach to capital allocation and continuing to serve as good stewards of our environment and the communities where we operate. As we approach the key summer selling season, we invite you to enjoy some of our great-tasting products as part of your festivities, and we look forward to speaking with you again on our next quarterly call. Thank you very much, and have a good day, everybody.

This will conclude today's conference. Thank you for your participation. Have a wonderful day.