Greetings, and welcome to Constellation Brands' Fiscal Year 2026 Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Blair Veenema, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Donna. Good morning all, and welcome to Constellation Brands' Q4 and Full Year Fiscal '26 Conference Call. I'm joined this morning by Bill Newlands, our CEO; and Garth Hankinson, our CFO. I'm also pleased to welcome our incoming CEO, Nicholas Fink, who is joining us at the start of today's call to share a few remarks. Following Nick, Bill will briefly review the fiscal year, after which we will turn it over to your questions for Bill and Garth. Before we proceed, we trust you had the opportunity to review the news release and CEO, CFO commentary made available in the Investors section of our company's website, www.cbrands.com. On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. And we encourage you to also refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call. Before turning it over to Bill to kick things off, -- please keep in mind that as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourselves to 1 question per person, which will help us to end our call on time. Thanks in advance, and for the final time, over to you, Bill.

Thanks, Blair, and good morning, everyone. I'm going to make a few opening comments before we get into Q&A. But first, I'd like to pass it over to Nick Fink our President and CEO elect for a few brief comments. Nick, warm welcome. Nick will assume the role on April 13, and we are pleased to have him with us today to say a few words before we get started. Nick?

Thank you, Bill, and good morning, everyone. I'd like to start by recognizing Bill's leadership over the past 7 years as CEO and in total, his 11 years of contributions to Constellation Brands. He strengthened the foundation of the company in meaningful and lasting ways, and I've valued our partnership during my time on the board. I look forward to continuing to work closely with him over the coming months to ensure a seamless transition as he moves into his role as a strategic adviser. I'm honored to step into the CEO role next week at such an important time for our business. Constellation enters this chapter from a position of strength with a leading portfolio in high-end beer, a reshaped wine and spirits business, best-in-cost marketing and sales capabilities and a proven playbook that continues to deliver consistent share gains year after year. While the consumer landscape remains dynamic, I firmly believe that we are well positioned to continue delivering for our consumers, employees, distributors and shareholders over the long term. Having served on the Board for the past 5 years, I've been closely involved in our key strategic and operational priorities. That perspective gives me strong conviction in our strategy and in our ability to execute going forward. We will continue to be insights-driven and consumer obsessed, lean into our strengths in beer, allocate capital with discipline and generate strong cash flow while thoughtfully navigating an evolving consumer landscape. As I formally assumed the role on April 13, I look forward to spending time with our operators, distributors and many of you in the investment community to gain an even deeper understanding as we begin to shape the next phase of our growth journey ahead. I'll close by reiterating my confidence in this business, in our iconic brand portfolio, our route to market and consumer-led marketing, our best-in-class operations and most importantly, our talented people. These strengths underpin our differentiated capabilities as we seek to continue delivering sustainable long-term growth and attractive shareholder returns. With that, I'll turn it back to Bill. .

Thanks, Nick. Just a few additional comments from me before we start Q&A. As we stated in our published remarks, we ended the year with some solid momentum in our beer business, despite operating in a challenging environment during our fiscal '26. It was a year that required agility and focus as consumers continue to navigate a tough economic backdrop with more selective shopping behavior, which weighed on overall category performance for much of the year. Our teams stayed tightly aligned on what we can control, drawing points of distribution, supporting our core brands and executing with discipline. That approach allowed us to take share and strengthen our competitive position. Our beer portfolio continued to lead the high-end segment with Modelo Especial maintaining its leadership as the #1 beer brand by dollars in the United States and momentum improved as the year progressed. In Wine and Spirits, our efforts to reshape the portfolio are gaining traction with strong contributions from brands like Kim Crawford and Mecampo. Lastly, from a financial standpoint, the business delivered solid cash generation, giving us the flexibility to reinvest while also returning capital to shareholders. As we look ahead, we're encouraged by the improvement we saw exiting the year, but we remain realistic about the current operating environment, which remains fluid with limited visibility. That said, we feel good about where we're positioned. -- with strong portfolio, clear priorities and a disciplined approach to operating, we believe we're well equipped to continue building momentum and delivering long-term value. Now back over to you, Donna, for the questions.

[Operator Instructions] Our first question today is coming from Nik Modi of RBC Capital Markets. .

Bill, best of luck going forward. Maybe you could just unpack the beer top line guidance for the upcoming fiscal year, the negative 1 is a positive one. And I ask that in the context of what seemingly is a pretty good start to March or to the year. if you could just give us some context on kind of what you're thinking? Is there anything that we should be thinking about in terms of like why it would decelerate for the full year relative to what we're seeing in March right now? Any context would be helpful. .

Sure, Nick. Obviously, the single biggest challenge that exists now is our limited visibility. Things have been very volatile in terms of what the consumer reaction has been and our continuing research suggest that the consumer is still cautious. With that said, as we noted in our overview, -- we exited last year in a very strong position. We saw sequential gains in the quarter, and we saw depletions up in the quarter, which had not been the case over the prior 3 quarters. March is off to a solid start, better than planned with continued increasing momentum. So certainly, we remain optimistic about the year that we have just begun. -- but we need to continue to recognize volatility has been high and visibility has been low.

The next question is coming from Bonnie Herzog of Goldman Sachs. .

All right. And best of luck Bill from me, too. It was great working with you. I have a question on beer operating margins. Your guiding margins of 37% to 38% for this year, which is a step down from your prior guidance of 39% to 40%. So can you help us understand the key drivers of the new margin delivery I guess, especially around fixed cost absorption from the new Veracruz brewery coming online. Also, how should we think about the phasing of margins across 1H versus 2H? And then finally, I guess, I'm curious to know if you believe you could get back to the 40% margin range? And if so, is that a possibility next fiscal year? Or is this going to take longer .

Thanks for the question, Bonnie. So you're right. We've got to 37% to 38% margins. I'll tell you what the headwinds are and then what we're doing to offset those headwinds. You rightfully pointed out that -- the primary headwind as it relates to operating -- our gross profit margins are expense-related, costs associated with our new brewery in Veracruz, which is expected to begin production around the middle of our fiscal year. With that, we were going to have some fixed cost absorption headwinds as we go through the year. And then further down the P&L, we have an increase in our SG&A expense related to lower incentive comp in FY '26 and incremental investments in marketing that we will make in this year to drive continued growth within the business, both in the short and in the long term. Offsetting those headwinds will be 1% to 2% price delivery, which, as we've noted in the materials we uploaded overnight, we'll be at the lower end of the range this year. We will continue to deliver against our cost savings agenda, where we've been very successful in our migration from a builder to an operator. And then we -- additionally, as you saw in materials, we'll have relief from aluminum tariffs this year. As it relates to beyond FY '27, we're not prepared to talk around any guidance beyond this year. So we'll cover that as we go through this year and into next.

The next question is coming from Dara Mohsenian of Morgan Stanley. .

Best wishes for me also, Bill, I enjoyed working with you. And Garth, maybe if I can just follow up on the beer margin side, -- can you just break out what you're expecting from a key input cost standpoint in fiscal '27 aluminum freight and some of the other key buckets, just how hedged you are on the input cost side as well as FX side -- and then as you think about beer margins, maybe volatility there, what might be some of the upside drivers versus downside drivers -- and then also just focus on wine and spirits as much, but the margin guidance is clearly a lot lower than maybe the ongoing business should support longer term. So just help us understand the wine and spirits margin guidance for '27, how much of that is depressed by factors specific to '27 versus extends longer term?

Yes, Dara, there was a lot there. So I hope I got it off. So from a hedging perspective, we're fairly well hedged as we enter the year in both the [indiscernible] and on currencies. For fuel, we're nearly 100% hedged; on aluminum were approximately 90% hedged; natural gas, about 80% hedged; in corn about 75% hedged. Across all of our currencies, we're right around 80% hedged as we enter the year. So we're in a good spot. In terms of beer margins and what could lead to upside I think volume, as Bill noted, we're cautiously optimistic around the start of the year. And if volumes were to increase from where we are, that would certainly benefit the margin profile. As it relates to wine and spirits margins, there are a number of factors that are going into our -- the guided margin profile, including ongoing category pressures, channel headwinds, the timing of our cost deleveraging and distributor inventory rebalancing. Starting with the category headwinds. We've seen a material downgrade in the outlook from where we were a year ago U.S. high-end wine has shifted from expected low single-digit growth to low single-digit declines. U.S. high-end spirits are decelerating from plus mid-single-digit growth to flat to slightly down. And so while we're significantly outpacing the market, it's sort of on what I would call a little bit of a lower base. Relating to channel headwinds. We've seen some tasting room softness in our Napa-based wineries. And then internationally, we've seen some weakness as it relates to U.S. made or U.S. sourced wines and spirits, particularly in Canada, which is our largest market, where ban on U.S. wine and spirits remains in place. And then as we outlined in our materials, we've agreed to some inventory rebalancing with our key distributors, reflecting the softness we're seeing in the wine and spirits category. And then in terms of the timing of cost leverage because the top line is softer, as you know, in wine, the length of time it takes for things to move from the balance sheet into the P&L just it will take a bit longer than expected. That being said, structurally, we still believe that our target margins are achievable over the medium term as distributor inventories normalize as the category declines moderate and as our cost savings agenda moves from the balance sheet and into the P&L.

The next question is coming from Filippo Falorni of Citi.

Just adding my best wishes to Bill and congrats to Nick on the new position. So maybe staying on beer margins, but on the marketing spend side. You mentioned in the prepared remarks that you're thinking about 9.5% of sales on marketing. How should we think about the cadence throughout the year? Obviously, you have a World Cup -- for World Cup coming in the summer, should we think maybe there's a little bit of actual spending in the summer months. And longer term, how do you guys think about the marketing levels is this 9.5% still a good place to think about longer term beyond fiscal '27? .

You bet. We're going to very aggressively invest against our brands in the first half of this year for a number of reasons. One is the momentum that we saw coming out of the end of the year and the momentum that we've seen in March. Secondly, the World Cup is an outstanding event that provides an opportunity for many of our loyalist consumers to engage with our brands. And we're going to invest heavily against that. We always invest in the first half of the year. You will see additional investment this year. Part of that will be done against our high-end light beer strategy. You've probably noticed, we are seeing momentum in our oral and premier brands, particularly coming out of our repositioning of our price points for those 2 sub-brands and we're going to invest behind it. We think that remains a tremendous opportunity for our business, and we're going to invest behind that. We're going to continue to invest against Modelo. Modelo, we believe, still has a lot of runway and will be very appropriate in the time frame of the World Cup. And lastly, I got to make a call out to both Pacifico and Victoria, which have both on a tear, you're going to see more investment against Pacifico than we have done historically as we see that momentum is 1 that we can continue to leverage going forward. And last but not least, Victoria. Victoria has done very well and brings in a younger consumer than our overall portfolio mix, which we find is very beneficial for the long run as well. So a lot to be excited about within our brands that doesn't even begin to touch on things like Sunbrew, which obviously is another one. That showed great momentum in its first full year. So a lot of things for us to invest in, as Garth noted a moment ago. We are increasing our investment this year as we feel it's the perfect time to begin to take advantage of some of this momentum that we're seeing.

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

I wanted to follow up I think it was Dara's question just around some of the key drivers of margin and I have another question. But are you expecting a step-up in depreciation this year with the capacity? And are you well hedged on FX, I think you've been talking about layering in some hedges over the past several years. So if you could just confirm those for me, please? And then just from a medium-term perspective, I think we saw that you had given some concrete targets for cases on Pacifico over the medium term. Can you just expand on that? And and how you see the portfolio evolving and some of the key drivers of your business kind of through fiscal '30, is Pacifico going to be the new growth driver as Modelo normalizes. So I appreciate just some confirmation on the margins in the medium term. .

Yes, Chris. So I'll take the first part of that. And as it relates to depreciation, we are expecting a step into up in depreciation as Veracruz comes online in the middle or expected to be in the middle of our fiscal year. And then as it relates to currency hedging across all of the currencies that we hedge, we're roughly hedged at about 80%, and that's inclusive of the Mexican peso. And obviously, we don't get too far down the track on what we expect volumetrically for our brands. But I think your statement, do you expect Pacifico to be a continuing growth driver for our business. The answer is yes. I think you can see by the takeaway that's existing in Circana channels, Pacifico continues to explode. And it's done a very similar thing to what you saw initially with Modelo which was the initial strength was on the West Coast, and you're starting to see that strength broadening across the country. You probably have noted, we have a new campaign that focuses on the tremendously exciting yellow color of our cans, which stand out both on the shelf and in the [ cold box. ] The consumer continues to be excited about the product in the bottle or the can -- and we think that Pacifico is going to be a critically important part of our growth profile going forward. Not to diminish by the way, the potential that still exists on Modelo as well. So lots of areas for growth drivers, but certainly, Pacifico is going to be a critically important 1 for us going forward.

Thank you. The next question is coming from Lauren Lieberman of Barclays. .

Great. So Bill, as you just went through talking about the brands, 1 that was absent was Corona Extra. And so just I'd love to hear a little bit about like kind of what's next for that brand. But in particular, also extending to think about Modelo. You shared the general market ZIP codes are continuing to outperform the higher Hispanic population areas. But I want to talk about Corona Extra and Modelo Especial, particularly within gen market and what you've been seeing. And then like I said at the outset, just kind of more broadly on Corona -- any thoughts on kind of what's next to the brand given the trends have remained pretty soft. .

Yes. No problem. Obviously, Corona remains 1 of the best loved brands that we have in the entire category. And I think the -- our ability to do things like Corona Sunbrew and the strength of Familiar are really reflective of the strength of Corona Extra. With that said, we're going to continue to invest aggressively against extra. Well, we don't see that necessarily as the growth driver of the business going forward. We believe it's important to maintain that with the kind of strength that exists today for that particular business. Recognizing the overall family is very healthy for the Corona franchise because of some of those sub-brands like Familiar and Sunbrew and Premier. Relative to Modelo, we have seen improvements as most of you know, we assess ZIP code data on a quintile basis. What's the percentage of Hispanic consumers, less than 20%, 20% to 40% and so on as you go up the ladder. We were very pleased to see coming out of the fourth quarter that all of those quintiles showed a sequential improvement in the takeaway. It was probably most notable in the state of California, which is part of the reason you've seen very strong Circana data over the recent past, where we have gained over 1 share point in both dollars and volume over the last 4 weeks, which gets us back to a more traditional share-gaining position. As you probably saw, we came out of the fourth quarter gaining 0.6 share points that has accelerated as we started into the new year. A lot of that has been driven by Modelo as well as you've seen Modelo begin to show continued strength. And we continue to invest not only with our core Hispanic consumer but in the broader marketplace as well. You will expect to see, as you have been, if you've been watching any sports that are focused against sports and that whole platform for Modelo will continue this year, and I think it will speak very well to Modelo's continue ability to grow.

Thank you. Our next question is coming from Rob Ottenstein of Evercore ISI. .

Great. Just would love to understand your process in terms of thinking about capital expenditures, given the uncertain and muted outlook of this year, the declines of last year, the lack of visibility going forward and obviously, you have to invest ahead of actual results and visibility. So -- how have you adjusted your thinking on CapEx? What -- how do you think about what to spend today for growth tomorrow and maybe update us in terms of your medium-term expectations for volume for the business. .

So let me start, and then I'll turn it over to Garth for some more specifics about the operational footprint. I think it's important to recognize we've continued to do what we've said for a number of years now around capital allocation which has involved continuing our spend at the levels that we think are important for the long run. It's continuing to do the dividend. And more importantly, we've continued to return dollars to shareholders. Over $900 million last year despite some extra dark periods we had in preparation for the announcement of Nick joining our business. So that kind of financial discipline is 1 that I think you can expect to see continue as we go forward. Nick has been an important part of supporting our development of that strategy over the last 5 years that he's been on the board. And I think, broadly speaking, you're not going to see any real change in our approach to capital allocation. Now specifically, to the operational side of that. Garth, I'll pass that to you. .

Yes, Robert. So first of all, we're not ready to give any guidance beyond FY '27 at this point in terms of growth. That being said, -- we do expect that we will return to growth and that the headwinds that we're facing today are more cyclical in nature than they are structural. So that being said, we'll continue to operate very modularly as it relates to bringing production capacity online. I think we've been very effective in this over the last several years. This past year, FY '26 -- we spent significantly less in CapEx than where we had started our expectations in the year. And that's going to continue, right? We'll manage that spend. Some of that spend will get delayed as we bring on capacity later than expected and some of it may get avoided altogether. To your point on the timing of when you make those decisions, I mean, as we've spoken about before, a lot of what goes into a brewery are long lead items. And so you have to make those commitments ahead of time, sometimes years in advance. And so that's the process we go through is looking at what we have for expectations for growth and then back backing that into when we think that capacity needs to come online. But again, very successful in managing the modularity of when capacity comes online and managing the cost associated with it.

The next question is coming from Peter Galbo of Bank of America.

Garth, maybe just a clarification and then a question for Bill. I think off the back of Dara's question around just wine and spirits margins for the year. Maybe you can just help us a little bit with the phasing I think that you talked about inventory distributor reductions. I don't know if that's mostly a Q1 event, so that weighs on the margin. Just any help there. And then, Bill, just a question on on beer, you mentioned Victoria actually being a nice bright spot for the portfolio. That's obviously a very Hispanic-dominant brand. And so -- just I want to kind of reconcile the comments you have about the Hispanic consumer against 1 of the stronger brands in the portfolio, albeit small, growing at the rate that it is, given kind of the cautious view. .

So on the first piece of that, I would say that there's nothing abnormal or unusual around the phasing of line and Spirits margins in FY '27. The inventory destocking with distributors will happen throughout the year and not sort of in 1 event, if you will. .

So relative to Victoria, 1 of the things we've seen, and I alluded to it on 1 of the prior questions, is Victoria has been a much younger demographic, 21 to 25. We're bringing in new consumers. And while you're correct, it is heavily driven by Hispanic consumers it's a Hispanic consumer that is recognizing the heritage of Victoria and the authenticity of Victoria and are adopting that as their brand. We've seen many times over the course of time that generations, new generations will find a brand that they would like to make their own. And it certainly appears at this point in time, recognizing it's early days, that a younger Hispanic consumer is focused on Victoria and is coming to that brand in very strong numbers and quantity. So -- we're very encouraged about that. It's always good within a portfolio of brands to have a somewhat different demographic base. And we think Victoria is going to be a sleeper. It's more than doubled over the last few years, and we think it has a lot of potential going forward as well, partially because of that younger demographic profile.

Thank you. Our final question today is coming from Nadine Sarwat of Bernstein. .

Guys, Bill, it's been a pleasure working with you and best of luck in the next chapter. Maybe 2 for me, just 1 clarifying on an answer earlier than my actual question. Earlier on the call, you said that you feel that your target margins for wine and spirits are still achievable over the medium term. But I know you withdrew your fiscal '28 guidance. Could you help us understand therefore what that target you're referring to is, is that north of 20% -- and then my actual question, mix was a 50 basis point drag to the beer top line in this last quarter, you guys called out packaging type. Can you give a little bit more color -- how much of this is you guys introducing new mix dilutive offerings? How much of that behavioral change from the consumer end? And what are you assuming in your full year guidance for this year when it comes to mix? .

So as it relates to our wine and spirits target margins, we still believe that structurally, we can get those margins in the low 20s. -- again, given all the headwinds that we're facing, that's going to take us a bit longer than expected, but we still expect to achieve that over the medium term.

Thank you. At this time, I'd like to turn the floor back over to Mr. Newlands for closing comments. .

All right. Thank you, Donna. In closing, literally, -- thank you all for joining the call today. As you can see, we are confident we're well positioned to achieve our objectives in fiscal '27 and continue driving long-term shareholder value. We have a strong foundation and a clear strategy, and this is the right moment for a seamless leadership transition. It has truly been an honor and privilege to serve as CEO of Constellation Brands over the last 7 years, Together as an organization, we've accomplished a great deal. We've grown our beer business from roughly 280 million cases to well over 400 million cases. nearly double the size of Modelo Especial and made it the #1 selling beer brand by dollars in America. We reshaped our wine and spirits business to be focused on a portfolio of higher-end brands -- we've established a capital allocation framework that we executed against with consistent discipline and we invested behind our organization to develop best-in-class talent and a company culture and future truly worth reaching for. While the industry landscape remains dynamic, I firmly believe Constellation is best positioned in this space with advantaged brands, best-in-class marketing and sales capabilities, and most importantly, an exceptional team. Having worked closely with Nick on the Board for the past 5 years, I know he understands our business deeply and has the leadership, judgment and strategic perspective to lead this company into its next phase of profitable growth. So to our investors, partners, employees with gratitude, I thank you for your trust and support over the years. It's been a privilege to lead this to lead this remarkable organization. And with that, Donna, back to you.

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.