The Vice President of Investor Relations, Joe Suarez, welcomed everyone to Constellation Brands' Q1 fiscal 2024 conference call. He was joined by the CEO, Bill Newlands, and the CFO, Garth Hankinson. Joe asked that everyone limit their questions to one per person in order to end the call on time. Bill Newlands then spoke, stating that they had a strong start to the fiscal year with 11% net sales growth in their Beer Business, mainly driven by strong volume growth.

In the first quarter, Modelo Especial became the number one beer in America in dollar sales, while Corona Extra and Pacifico achieved share gains and double-digit dollar sales growth. Modelo Chelada brands also remained a top 10 dollar share gainer with support from a variety pack, a new flavor, and the launch of Sandía Picante. The beer team's efforts to increase distribution and invest in marketing have been successful, resulting in a 5.5% increase in depletion performance for the period.

Modelo Oro was a top 10 share gainer, Corona NA was the number one share gainer in the non-alcoholic beer category, and expansions of beer brewing capacity are advancing as planned. ESG efforts have led to surpassing the target of restoring 1.1 billion gallons of withdrawals from local water sheds and new commitments to reduce waste and enhance use of circular packaging. The Wine and Spirits Business has been shifting its portfolio to a bold, innovative and higher-end product mix.

In Q1, the Wine and Spirits Business gained share in the U.S. wine category and saw strong dollar sales growth across its higher-end brands, such as Meiomi and Kim Crawford. The brand's lower alcohol, lower calorie offering, Meiomi Bright, was the number one new brand in the category. The reinvention of Woodbridge is underway to address growth headwinds in the mainstream portion of the business, while Mi Campo tequila and High West ready-to-drink cocktails saw significant double-digit dollar sales growth. The Business has also been investing in capabilities to accelerate its performance in key growth channels, such as international and direct-to-consumer, which saw a 13% net sales increase in Q1.

The Wine and Spirits Business saw lower demand for their mainstream brands, but higher end and luxury brands saw softer segment demand in April, but an acceleration in May and June. The business has been refocusing its portfolio to higher end, higher growth, and higher margin brands and channels, and this pivot has been successful in driving growth and margin improvement. The performance for the first quarter of fiscal 2024 was strong due to the execution of strategic initiatives.

In Q1 fiscal 2024, the Beer Business saw an 11% net sales increase, driven by a 7.5% volume growth and favorable pricing. This was thanks to the wraparound impact from pricing taken in the previous year, as well as additional pricing actions taken in fiscal 2024. Depletion growth for the quarter was 5.5%, with a slow start but strong finish due to successful execution of distribution and marketing plans.

In the first quarter of fiscal 2024, shipment volume ran slightly ahead of depletion volume due to inventory preparations for the peak summer season. Depletions grew 3.2% and accounted for 12.4% of total volume, while Modelo Especial and Corona Extra delivered mid-single-digit and low single-digit depletion growth respectively. The operating margin decreased by 220 basis points to 38%, and there will be one more selling day in Q4.

In Q1, COGS experienced low double-digit percent increases due to inflationary pressures, higher overhead costs related to brewery expansion and increased logistics costs. Marketing expenses also increased by $29 million or 17%, mostly due to media spend and investments in a new product launch. 70% of COGS are subject to annual pricing adjustments and half of the remaining 30% is managed through a hedging program.

The Beer Business is targeting 7-9% net sales growth and 5-7% operating income growth for fiscal 2024, while the Wine and Spirits Business is focusing on higher-end brands and broadening sales channels to increase growth. The higher-end brands of the wine portfolio have outperformed the corresponding segment of the category in the U.S. tracked channels in Q1. Productivity initiatives have yielded $30 million in savings for the first quarter of fiscal 2024.

Constellation Brands' three largest premium and fine wine brand families, Meiomi, Kim Crawford, and the Prisoner Wine Company, have seen dollar sales growth and acceleration in tracked channels. The spirits portfolio also delivered strong dollar sales growth, led by Mi CAMPO and High West ready-to-drink cocktails. However, Wine and Spirits organic net sales were down 6%. Direct-to-consumer efforts delivered 13% net sales growth, and craft brands posted nearly 40% depletion growth, driven by Mi CAMPO's over 80% growth. SVEDKA declines have stabilized, and Constellation Brands is looking at ways to reinvigorate the brand.

The Wine and Spirits Business saw an increase in operating margin of 90 basis points, driven by pricing actions, lower material and packaging costs, blend optimization, and lower marketing expenses. Looking ahead, the performance of the business is expected to accelerate throughout the year due to increased growth from higher-end brands, growth in DTC channels, and a return to growth in international markets. Corporate expenses decreased by 19% due to reduced spending from a digital business acceleration program.

The DBA program for fiscal 2024 will focus on scaling marketing, procurement, supply chain, and introducing logistics to improve end-to-end visibility and planning. Interest expense and the effective tax rate are expected to increase and decrease, respectively. Free cash flow decreased due to a 41% increase in CapEx investments for capacity expansions and a new brewery.

In Q1 of this year, the company ramped up 5 million hectoliters of capacity at the Obregon facility and is planning on another 5 million hectoliters for ABA production at the Nava facility by the end of fiscal 2024. They expect to have a total of 52 million hectoliters of capacity by the end of the year, including 3 million hectoliters from operational efficiency initiatives. The company expects free cash flow to be between $1.2 and $1.3 billion, with an EPS comparable guidance of $11.70 to $12. The company is confident about the success of the year and the value they will be able to create for shareholders.

Bill Newlands was asked for more detail about the improvement in beer depletions from May and June compared to the slowdown from November to April. He explained that the 12-week data was better than the 26-week data and the 4-week data was better than the 12-week data, indicating that the acceleration in depletions was continuing into the second quarter. He also noted that 24 states had double-digit growth in Modelo Especial and 47 states had double or triple-digit growth in Chelada during the first quarter.

On-premise sales are still not back to pre-pandemic levels, making up 12-13% of total business. This is more volatile than tracked channels, but is expected to improve over the summer as the pandemic is hopefully put to rest. There have been no particular challenges around pricing, and no trade down away from the business.

Garth Hankinson of Constellation Brands discussed the company's marketing spend, which came in at 9.5% of net sales for the quarter and is expected to remain in the 9-10% range for the full year. He also noted that the increase in Q1 marketing spend was largely to support existing products and the launch of Modelo Oro. Additionally, there has been some favorability in key inputs, though the impact of this on the bottom line is yet to be determined.

Garth Hankinson was asked about how the Bud Light issue may be impacting the business and distributors, as well as if there might be an opportunity to secure more tap handles from Modelo. He answered that the outlook for the Beer Business was still the same, with 55% of volume in the first half and 55% of Wine and Spirits in the back half, and that there had been no changes in that.

Bill Newlands discussed the unexpected success of Modelo becoming the number one beer by dollars in the U.S., and how that has impacted the marketing strategy. He also noted that the retailing environment has become very sophisticated in terms of understanding growth profiles and velocities, and that the buy rate for both the core and high-end beer, including the Hispanic consumer, increased year-on-year during the first quarter. Finally, he commented on the success of Oro, such as repeat rates, cannibalizations, and consumer feedback.

The company is pleased with the performance of its new product, which is already a top 10 share gainer. The company has taken a careful approach and only has two SKUs of the product at this time. If the product continues to show positive signs, they have the capacity to go after it more aggressively. The company is pleased with the incrementality they are seeing, which is slightly better than the test markets. The company plans to increase its marketing spend for the year to a low-single digit percentage of the top line.

Bill Newlands and Garth Hankinson discussed the company's marketing approach, which has been consistent for years and has been a key factor in the success of their brands. They have refined their approach to include more digital marketing, and they have the largest share of voice in the market. They also discussed their confidence in their ability to maintain their margin profile, as 70% of their total COGS are subject to annual adjustments and only 30% are exposed to fluctuations throughout the year.

Garth Hankinson clarified that typically, in Q1, there is an outpacing of shipments relative to depletions on a nominal basis as distributors and retailers prepare for the summer season. He suggested looking at pre-pandemic periods to see the seasonal differences between depletions and shipments. Chris Carey then asked for a reaffirmation of the confidence in the margin trajectory of the Wine and Spirits business going forward.

The company is pleased to report that the buy rate, which includes the Hispanic consumer, was up year-on-year in the first quarter. The company has also seen an acceleration of their share in California, an important market, during the first quarter. The company is confident that they can deliver the year and deliver the margin profile they previously guided to.

Bill Newlands explains that the beer leadership team is actively working on price pack architecture as a beer volume growth driver. They are looking at different quantities and sizes of packaging, such as Modelo, in order to make it more accessible to different price points. This has already had a positive effect on the Chelada business, which has seen a massive acceleration due to the availability of multi-pack and 12-ounce options.

Bill Newlands, CEO of Constellation Brands, closed the call by expressing his confidence in the company's outlook for the fiscal year and wishing everyone a happy Fourth of July. He highlighted the strong performance of the Beer Business, with growth accelerating since the beginning of the year, as well as the higher-end brands of the Wine and Spirits portfolio, which have been driving margin improvement. He encouraged everyone to enjoy their Fourth of July celebrations with some of Constellation Brands' products.

This summary was generated with AI and may contain some inaccuracies.