Hello, and welcome to the Constellation Brands' Q2 Fiscal Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Senior Vice President, Investor Relations, Joe Suarez. Please go ahead, Joe.

Thank you, Kevin. Good morning all, and welcome to Constellation Brands's Q2 fiscal 2025 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 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. Thanks in advance. And now, here's Bill.

Thanks, Joe, and welcome to our Q2 fiscal 2025 earnings call. As usual, I'd like to start with a few key highlights for the quarter. First, while the current macroeconomic backdrop weighed on demand for beverage alcohol and, more broadly, across consumer packaged goods, we continue to deliver strong performance in the marketplace driven by our consumer-centric strategy and thoughtful approach to brand building. At a total company level, in Circana tracked channels over the 12 weeks ending September 1, we held the number one spot for both dollar sales growth and share gains within all beverage alcohol. And more notably, we once again achieved dollar sales growth outpacing the total CPG sector as we continued to build on our track record of over a decade as a CPG growth leader. Second, our Beer business remained the clear winner across the total beverage industry, having significantly outperformed in dollar sales growth and, of course, maintained its leading share-gaining position in the U.S. beer category. Third, and continuing with our Beer business, we delivered another quarter of significant margin expansion, supported by disciplined operational and financial management. Importantly, our cost savings and operational efficiency initiatives are delivering significant incremental benefits for our Beer business beyond what we had anticipated at the start of fiscal 2025, which are now enabling incremental marketing investments in our largest beer brands as of Q3. Fourth, our relentless focus on winning in the marketplace, delivering top-tier growth and driving efficiencies supported another quarter of double-digit increase in comparable EPS in line with our full year outlook. Our strong earnings performance and, in turn, significant cash generation enabled us to achieve a pivotal milestone of our capital allocation priorities, having reached a 2.9 net leverage ratio on a comparable basis in Q2, slightly below our approximate three…

Thank you, Bill, and good morning, everyone. As usual, my discussion of our Q2 fiscal 2025 performance will focus mainly on our comparable enterprise results accompanied by business segmented analysis. Let's get started with our enterprise results. For the quarter, enterprise net sales grew 3%, while enterprise operating income decreased 226% on a reported basis and increased 13% on a comparable basis. The increases in enterprise net sales and enterprise comparable operating income were driven by strong results from our beer business, which were partially offset by ongoing category headwinds affecting the performance of our wine and spirits business, both of which I will address in more detail shortly. The decline in reported enterprise operating income reflects a non-cash goodwill impairment loss for the Wine and Spirits business of $2.25 billion. As noted in our updated guidance last month, we now expect enterprise net sales to grow between 4% to 6% for fiscal 2025 and for enterprise comparable operating income to grow 8% to 9% for the full year. At an enterprise level, we remain confident in our ability to deliver against our initial double-digit comparable EPS growth expectations, as demonstrated by our decision to raise at the lower end of our full-year comparable EPS outlook during our recent guidance update, with that range now set at $13.60 to $13.80. Now I'll turn to a more detailed review of our Q2 fiscal 2025 results. To start, our Beer business net sales grew by 6%, representing an uplift of $137.5 million. This was driven by Beer shipment volume growth of 4.6% and favorable pricing, which added $50.2 million to the overall net Beer net sales increase. For the full fiscal year, we continue to expect pricing to account for 1% to 2% of our net sales growth, reflecting both the muted…

[Operator Instructions] Our first question is coming from Kaumil Gajrawala from Jefferies. Your line is now live.

Hi guys. Good morning. Congrats you hit your leverage target. Can you maybe talk about moving forward, now that you're there, what the appetite is for more aggressively repurchasing shares, especially as, using your words, you hit sort of the high-water mark on CapEx? And then just maybe procedurally, how often does the Board meet to have those discussions? Is it ongoing or just kind of once a year? Thanks.

Thanks Kaumil and as you suggested and as were in Bill's and my remarks, we did continue to deliver against our disciplined allocation priorities as we've done for the last year -- or last five years in Q2. As you noted, in Q2, we hit an important milestone, which is we got at our target or slightly below our target. And throughout the first half of the year, we've been fairly opportunistic as we've repurchased shares. In fact, we accelerated our repurchase activity in Q2, delivering $249 million in Q2 after delivering -- or $200 million in Q1, for a total of nearly $450 million through the first half of the year. We have $2.2 billion of authorization left under the current authorization provided by the Board, which will allow us to continue to be opportunistic as we move into the second half of the year. And per your sort of procedural or administrative question, we typically get additional authorizations and/or announce any incremental programs or commitments in the back half of our fiscal year.

Thank you. Our next question is coming from Dara Mohsenian from Morgan Stanley. Your line is now live.

Hi good morning. So, just on beer depletions in the quarter, a bit softer result than we've been used to from you guys looking back over the past few years. Just can you give us a bit of postmortem there? Obviously, you talked about the macro factors. Is that really the key factor in your mind? Or are there other pressure points? And maybe parse out trends in different key consumer segments for you to give us some insight there. And then the pickup so far in September, that's obviously scanner data, just put that in context and how that sort of informs your forward view from here around depletions in this macro environment? Thanks.

Sure. Let me tackle that one. First of all, there were two or three factors that were critically important in Q2. One is there was somewhat higher unemployment rate, particularly in the Hispanic market. And that affects most of our top five states, which represent roughly 50% of our volume. I think, secondly, and if you look historically, this often happens, whenever there is a scenario where you have a federal election that is close, you often have people pull back. You see it across the whole consumer sector, and that is consistent as well. I think a couple of things are important to recognize. One is demand. Our buy rate continues to be very strong. On a 52-week basis, we are up mid-single digits, with the Hispanic consumer is slightly ahead of that. You point out, I think it's obvious, in IRI Circana data, the four-week trend is better than both the 12-week trend and the 26-week trend. I think this is consistent with what we've said all along, which is we don't see this as any radical change in the long-term perspective on the business. It is purely a near-term issue. I think the fact that the Fed has reduced rates is going to help to manage the unemployment issue and stimulate consumption. So we remain as optimistic as we have been about our expectations for the back half of the year.

Thank you. Next question is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.

Hi. Thank you. Hi, everyone. I had a question on your increased space and distribution gains. I know you've captured a lot of space in the spring reset. So I guess curious to hear if the lift from that has met your expectations. And then also, any color on potential shelf space gains you got or maybe getting this fall? And if so, could you maybe quantify this and really share with us how that factors into your full year Beer top line growth guidance, which essentially implies top line growth should accelerate a little bit in the second half versus the first half? Thank you.

Well, obviously, any time you pick up shelf -- and just to remind everyone on the call, we had double-digit share gains here in the spring resets, that always is beneficial. And it's particularly beneficial in areas where we are still radically improving our share and increasing our awareness levels. I think this is going to be doubled-down, Bonnie, on the fact that we are spending a significant amount of increased marketing investment against our Beer brands because of the strong cost and efficiency initiatives that we've been able to achieve above and beyond what we expected at the beginning of the year. So we expect that, therefore, those shelf initiatives that have occurred in the early part of the year, combined with our marketing efforts to double down at a time when many in the consumer sector having to pull back will be highly beneficial to our results as you continue through the rest of this year.

Thank you. Next question is coming from Nik Modi from RBC Capital Markets. Your line is now live.

Hello Nik.

Nik, probably your phone is on mute.

Can you hear me?

We can now.

Yes. So if you could just talk about Corona. It was a little weaker in the quarter. Is this a function of just Modelo really doing better and maybe cannibalizing maybe Pacifico? Just any thoughts around that would be helpful.

Yes. Corona was slightly softer than we expected it might be in Q2. But as we noted, there were some, again, macro factors. Corona is a little overweighted to the East Coast. There were some challenging times during that window -- during the second quarter for many of the Eastern markets. With that said, there's a lot of excitement around Corona as well. We are already seeing a pickup, as you've seen in the IRI takeout data, Corona has, much like our overall business, has looked much better on a 4-week basis than it did in the prior window of time. We're very excited about the impending launch of Corona Sun brew, which has done very well in consumer testing in the Northeast here during this window of time. So we continue to say that Corona is going to be slightly up for the year. We still think that's probably where that will land. And Corona is going to be one of the big benefitees in the increase in the marketing spend that we have in the back half of the year because of our strong cost efficiency initiatives. So I think Corona is going to be just fine as we continue through the remainder of the year.

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

Thank you, operator and Hi Bill and Garth. It seems like, obviously, beer volumes picked up in the last few weeks, as you mentioned. I was hoping to see if you can comment a little bit on how to expect the beer depletions against consumption as we unfold. Of course, you have an extra day in the fourth quarter, if I believe that's correct. But you also have -- you have easier comps now in the third quarter, but tougher comps in the fourth quarter. So how we should be thinking about cadence of beer shipments and depletions as we move forward? Thank you.

Yes. I think there's going to be another number of things that work to our advantage as the year progresses. One is, and you already pointed it out, there's been incremental change that you've seen in the recent weeks. We do not see it this is a structural change, as we've said many times, a number of things are going to be working better as we go forward. The fact that the Fed action to reduce rates, I think, is going be a big help. I think the fact that we expect Hispanic unemployment to come back in line, and obviously, the resolution of the election will occur here in the next several weeks. The other thing I'd point out, and we've said this, and I'm sure Joe has said this when you've spoken to him directly, beer depletes and scanner results have tended to be right on top of one another recently, after there having been some fairly broad differentiation amongst those. So I think that begins to be -- begins to be a little more consistent as you go forward through the rest of the year. Based on our assessment, the sell days are the same at both Q3 and Q4, we don't expect any impact of that. Just a reminder for everybody, Q2, there was 1 less selling day, and in our judgment, that probably impacted somewhere toward the upper end of the range that Garth mentioned during his conversation.

Thank you. Next question is coming from Peter Grom from UBS. Your line is now live.

Yes. Thanks. Thank you, operator. Maybe just two quick follow-ups. I just want to follow-up. Just in the context of what we've seen year-to-date with shipments coming in ahead of depletions and the expectation that they're going to be aligned for the year, how should we be thinking about the timing of that reversal? Would that be largely in 3Q or spread evenly in the back half of the year? And then just thinking about the full year, obviously, you're kind of squarely at the midpoint of your sales guidance. But with shipment timing benefits expected to reverse a bit, should we kind of view the high end of Beer top-line range as aspirational? Or are there other key drivers or offsets that could result in stronger growth in the back half? Thanks.

Thanks, Peter. In terms of the sort of quarterly cadence, the shipments and depletions. As we noted during my opening remarks, we expect the quarterly share of annual shipments and depletions to be in line with where they were fiscal 2024. And as noted, and you noted, Q2 shipments surpassed depletions as distributors build inventory for the peak season. In Q3, the shipment share will be lower than the depletion share due to maintenance activities. And this has historically resulted and our shipment growth being below depletion growth. So you will see some of that reversal that you referenced, in Q3. And then in Q4, both the share of the full year for both of those tend to normalize just as we saw last year. So net-net, as you indicated, we expect, on a full year basis, shipments and depletions to be largely in line with one another.

And I would say, I would not necessarily agree with your aspirational comment. What we try to do with our range is provide a range that gives us, if things go positively, we would expect to be to the upper end of the range. And if things are a bit more challenging for any reason, it might be the lower end of the range. That's why we give it a range. So I would not characterize it in the way you asked it. .

Thank you. Next question is coming from Michael Lavery from Piper Sandler. Your line is now live.

Thank you. Good morning. I was hoping you could unpack some of the marketing color a little bit. You talked about some of the incremental spending. But then I think you also reiterated the 8.5% spend for the full year for beer. So maybe can you just help us understand what's new or what's changed and how we should we should -- what expect to see?

Yes. What's new and what's changed is we've decided to put a significant amount of additional investment against our brands. Corona, Modelo, Chelada, Pacifico will all benefit from some of that increased spend. And that's already started. You may have noticed against the football schedule that you kind of can't miss our brands if you happen to watch any football, whether it be college football or National Football League. So we're going to continue to do that because of the tremendous work that's been done around cost and operational efficiencies. And all of our critical brands are going to benefit from the uplift that we will have in the back half of the year. And I think it's important to point out, the reason we can do that is because of the growth of our business and the cost savings initiative. This is at a time when many, many other consumer businesses are challenged and wouldn't be able to do this. I think this is a great opportunity for our business in the back half of the year to double down on our approach to going after the consumer and providing them with outstanding opportunities to consume our products.

Thank you. Your next question is coming from Filippo Falorni from Citi. Your line is now live.

Hi. Good morning, everyone. I wanted to ask on Beer gross margins. That's been an area of upside surprise versus our estimates. Clearly, you talked about the cost savings coming in better and driving the opportunity to invest more behind the brand. How should we think about those savings in the second half of the year, and maybe other drivers, both from a commodity and foreign exchange standpoint, you mentioned the pay so you're 90% hedged this year this year. Should we think maybe some vulnerability on the pays on Q4 and maybe into fiscal 2026? And then on the commodity side, maybe any update on the commodity headwinds that you're expecting? Thank you.

Yes. Well, thank you for the question. And as you noted, we've made very good progress against our cost savings and efficiency initiatives. And we've -- at this point we've really hit that $300 million target that we laid out at our Investor Day last year. Obviously, that doesn't mean we'll stop there. As we go forward, we'll continue to identify areas of opportunity to take costs out of the business, become more efficient, as we always have done. But those -- the acceleration of the achievement against those has helped lead to the margin profile that we announced today. As we look towards the second half of the year, we will continue to benefit from the cost savings that we generated through the first half of the year. That being said, in the second half of the year, in the Beer business, we typically see about 45% of our volume, so the normal cadence. So we will have less fixed cost absorption in the second half of the year. Again, typical in what we'd see in the back half of every sort of normal year. And then, as we said in the opening remarks today, we are spending more on as a percent of net sales and marketing in the second half, we're going to support the growth of the business, inclusive of the incremental marketing expenditure that Bill just spoke to here a moment ago. And that's why you'll see some -- you'll see the margin be a little bit lower in the second half of the year. Importantly, on that marketing, you'll see the biggest impact of that in Q3.

Thank you. Next question is coming from Robert Moskow from TD Cowen. Your line is now live.

Hi. I want to ask about Wine and Spirits. The marketing plans that you had this year it looks like it's been slow to materialize, although you did mention some green shoots. And I wanted so if the plan going forward also includes more acquisitions. You had Sea Smoke acquisition earlier this year. Do you think that you need to make more acquisitions of up and coming brands like this in order to truly turn around the business?

Yes. Thanks for the question. So, let me remind you what Garth and I said at the beginning of the fiscal year, that a lot of the work that was put in place was going to take us 9 to 12 months to fully play out. And as we said on today's call, we expect sequential improvement in the Wine and Spirits business in the back half of the year. The answer to your question, no, I don't perceive us to be acquiring additional properties at this point in time in our -- particularly on the wine side of our business. Frankly, our focus right now is on improving the operational performance of that business. And all the time, energy and efforts are being put against seeing that operational improvement play out in the back half of the year, including engaging more directly and more often with our distributor partners as part of that. As we've said, and I'll just reiterate one more time, we do expect to see sequential improvement in the back half of the half of the year based on all the work that's been put in on the first the year to see that coming along. Noting the point about green shoots, we are starting to see some of that result. We look forward to seeing more of it in the back half.

Thank you.

Thank you. Our final question today is coming from Bill Kirk from ROTH Capital Partners. Your line is now live.

Hi. I have another one on Wine and Spirits. At fiscal year-end, the fair value was still estimated, I think, in the 10-K at about $3 billion. The impairment takes it down to like $500 million. So I guess why the dramatic change in such a short time? Why is $500 million the right number when it's generating $400 million in EBITDA and there's some green shoots out there? And then finally, like does the impairment give you any flexibility to do something strategically with those assets?

Well, thanks for the question, Bill. I would say that the amount that remains on the balance sheet is -- it's fairly formulaic as you go through what you think the future business will look like, there's a number of assumptions that will go into that. And so it's -- I think it's important to note that it's non-cash as well. I wouldn't read anything too much into it other than that. And I don't know that it really has any impact other than it was an accounting requirement for us to take -- it doesn't really change the strategic outlook for the business.

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

Great. Thank you, operator, and thank you all again for joining today's call. We're very pleased with our solid performance in Q2 of fiscal 2025. At a total company level, we once again outpaced the total CPG sector in dollar sales growth across Circana tracked channels and delivered another quarter of double-digit comparable EPS growth in line with our full year outlook, and achieved our approximate three times net leverage ratio, while returning another $250 million of cash to shareholders via share repurchases, now totaling nearly $450 million fiscal year-to-date. In our Beer business, we continued to outperform the total beverage industry in dollar sales growth, maintaining our leading share gainer position in the U.S. beer market, delivering our 58th consecutive quarter of depletion growth, and sustained the momentum of margin expansion in the Beer business through our cost savings and operational efficiency initiatives. And in our Wine and Spirits business, while we continued to face challenging market dynamics in Q2, we expect sequential improvements in Q3 and Q4 as we make further progress on our commercial and operational execution initiatives launched at the beginning of this fiscal year. In closing, as our next earnings call is not until January, I'd like to wish everyone a happy holiday season and hope you will enjoy your celebrations with some of our fantastic products. Thanks again for joining today's call.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.