The operator welcomes listeners to the Constellation Brands Fiscal Year 2024 Second Quarter Earnings Call. The call is being recorded and the Vice President of Investor Relations, Joe Suarez, introduces the CEO, Bill Newlands, and the CFO, Garth Hankinson. Reconciliations between GAAP and non-GAAP financial measures are available on the company's website. Bill Newlands reports that the second quarter saw solid overall performance, with the beer business leading the charge as the number one share gainer. The company continues to invest in growth and plans to gain awareness, shelf space, and household penetration for their brands in the second half of the year and beyond.

The Wine and Spirits Business has made progress in its transformation, with investments in higher-end brands offsetting headwinds from mainstream brands. The company's capital allocation priorities have contributed to a strong overall performance in the quarter. The beer team has delivered remarkable results, with Modelo Especial leading the way and the broader Modelo brand family also performing well. Other core beer brands, such as Corona Extra and Pacifico, also saw strong performance.

The beer business of the company saw solid growth in the second quarter, driven by strong demand for its brands. This has led to an increase in net sales and operating income, and the company is confident in meeting its guidance for the fiscal year. There are also opportunities for future growth, especially in premiumization and the Hispanic population. The Wine and Spirits business is also performing well, with its premium wine brands outperforming their respective categories in the US.

In the second quarter, the Prisoner Wine Company and Mi Campo tequila brand performed well, leading to an increase in overall share for the Fine Wine & Craft Spirits category. The renovation of mainstream brands has helped address challenges in corresponding category segments. However, the Wine and Spirits business continues to face lower demand for mainstream brands due to consumer-led premiumization trends. Despite this, the company is maintaining its guidance for the full year and expects improved performance in the second half due to proactive actions, direct-to-consumer channels, and recent price increases.

The company expects to see increased operating margins due to improved sales and positive operating leverage. They have been executing their capital allocation priorities, reducing their net leverage ratio and anticipating lower interest expenses. They have also maintained their dividend payout ratio and have executed share repurchases to offset dilution. Brewery expansions are on track and the company will soon release their annual ESG Impact Report, which highlights their efforts towards addressing environmental and societal needs.

In the paragraph, the speaker discusses the achievements and future plans of the company, highlighting their success in restoring 1.1 billion gallons of water and their upcoming ESG impact report. They also mention the outperformance of their beer business, the benefits of their Wine and Spirits strategy, and their commitment to capital allocation priorities. The speaker concludes by inviting listeners to their upcoming Investor Day and handing over to Garth to review the financial results for Q2.

The company's second quarter results demonstrate the success of their strategic initiatives and focus on growth and performance. The beer business saw a 12% increase in net sales, driven by volume growth and favorable pricing. The Wine and Spirits business also had solid performance, offsetting challenges in the mainstream brands. The company continues to generate strong cash flow and follow their capital allocation priorities. In the second quarter, beer shipment volume and depletions were balanced, and inventory levels are sufficient to support future growth.

In the second quarter, beer depletion growth was at 7.9%, driven by consumer demand, distribution and marketing strategies, and share gains in core and emerging markets. There has been a noticeable shift in off-premise channel observation, with a larger variance between tracked channel volume growth and depletion growth. This is due to independent retailers not adjusting their pricing after the company's pricing actions. In the on-premise channel, depletions were flat compared to the previous year and accounted for 10.3% of total beer volume. This was mainly due to a seasonal pattern and minor supply disruptions in kegs.

Despite some disruptions, the company is still producing and shipping tags and expects to offset any impact quickly. The second half of the year will see lower volumes and subdued shipment volumes due to routine maintenance. Pricing will start to overlap with previous price increases and the company expects shipments and depletions to be in line with the previous year. Beer margins decreased due to inflationary pressures and increased costs, but the company is working on cost efficiency and productivity programs to mitigate these pressures. They were able to achieve $20 million in additional savings in the second quarter.

The company saw margin benefits in addition to their cost-saving initiatives, with a decrease in marketing and SG&A expenses. They expect to be closer to the lower end of their marketing spend range for the full year due to divestitures and a focus on high-return areas. The Beer Business has seen accelerated growth, leading to an increase in net sales and operating income growth expectations for fiscal '24. The Wine and Spirits Business has also seen solid performance from their premium and craft brands, outperforming their respective categories in tracked channels and delivering strong depletion growth.

The Wine and Spirits division of the company saw a decline in organic net sales due to the underperformance of mainstream brands like Woodbridge and SVEDKA. Plans are in place to renovate these brands and improve their performance. The division's operating income also decreased, but the company expects an acceleration in net sales growth in the second half of the year through premiumization and pricing actions. Cost reductions and marketing efficiency initiatives are also expected to support operating income growth.

The outlook for wine and spirits for the year remains positive and the guidance for that business for fiscal '24 is unchanged. Corporate expenses decreased by 19% due to reduced spending and lower costs. Interest expenses increased by 17% due to higher interest rates and borrowings, but is expected to be lower for the full year. The company is making progress towards their target net leverage ratio and the effective tax rate is expected to be approximately 19% for fiscal '24. Free cash flow decreased by 15% due to increased CapEx investments.

Constellation Brands has fully commissioned a new brewing capacity project at their Obregon facility and plans to bring their ABA facility online at Nava later this fiscal year. They are also developing expansion at Obregon and a third brewery site at Veracruz. They expect to have $1.2 billion to $1.3 billion in free cash flow in fiscal '24, with a reported EPS guidance of $9.60 to $9.80 and comparable EPS guidance of $12 to $12.20. They have also announced a dividend of $0.89 per share. The company's management team is focused on executing their strategic priorities and will be sharing their medium and long-term ambitions and vision at their upcoming Investor Day in November. The first half results of the year have been strong.

In response to a question about the positive revision to guidance, Bill Newlands explains that they remain positive about the back half of the year and that normal seasonality, maintenance in Q3, and lapping of pricing from last year may have influenced their caution. He also mentions that their four-week numbers are consistent with the 52-week numbers and that they expect a strong second half. In regards to shelf resets, they expect a strong period and have been a beneficiary of their work in this area. They also anticipate a strong spring reset in large boxes and are monitoring the impact of the on-premise situation.

The company has seen consistent growth in its key brands and is confident in its ability to continue gaining shelf space during resets. The CEO also mentions the importance of having a redundant system in place to keep up with increasing demand and to react to unexpected accelerations in sales.

The speaker discusses two factors that have contributed to the company's success: investments in digital business and improvements in supply chain capabilities. These have helped the company meet the increase in demand and will be discussed in more detail at an upcoming investor meeting. The speaker also addresses questions about the gap between their data and Circana data, and the potential for increased shelf space opportunities due to changes in the market.

The speaker discusses the potential impact of upcoming student loan repayments on their beer business, noting that it is uncertain at this point. They mention the opportunity for expansion in shelf space and the success of their brand Chelada. They also mention the potential for down trading due to premium price points.

The speaker discusses the importance of brand loyalty for their company, using Modelo and Corona as examples. They express confidence in their brands' ability to continue gaining traction due to this loyalty. In response to a question, they also mention that their new product, Modelo Oro, is off to a good start with lower-than-expected cannibalization rates and strong uptake in the Hispanic community. They do not provide a specific impact of the voluntary ad product recall on the quarter's results.

The company is pleased with the success of their Oro brand in Hispanic markets and plans to introduce new SKUs next year to further accelerate growth. The recent CAG recall did not have a significant impact on the company's finances. In response to questions about consumer behavior and inflation, the company believes their approach to pricing has been effective, with a consistent 1-2% increase annually.

The speaker discusses the company's approach to maintaining consumer loyalty and the impact of inflation on consumer behavior. They mention that the company's pricing strategy and brand loyalty will benefit them in this environment. They also mention that marketing expenses for the year are expected to be at the lower end of the historical range and comment on gross margin delivery for the quarter.

The speaker, Garth Hankinson, is responding to a question about the company's costs and margins. He reminds the audience that they expect a 38% beer operating margin for the fiscal year and that Q2 is traditionally the highest margin quarter. Inflationary pressures and a strong peso have offset any improvements in inflation. The second half of the year will see lower volumes, leading to lower fixed cost absorption and higher COGS and marketing expenses. There will also be incremental depreciation and scheduled maintenance, as well as the overlapping of pricing benefits from last year. These factors will contribute to the 38% margin for the full year.

Bill Newlands, responding to a question from Robert Ottenstein, discussed the company's productivity programs and how they are a multiyear process. He mentioned several areas where they have seen success, such as supply chain optimization and improved purchasing. He also stated that the company will share more details on their cost savings initiatives at their upcoming Investor Day. In response to a question from Filippo Falorni, Newlands stated that the last four weeks have been strong and consistent with the last 52 weeks, but did not provide further details on the performance of the business in September.

During the Investor Day, a competitor mentioned that September has been slow for the industry due to the cycle of shipments and price increases. However, the company's total beer business is up 13.7% in the most recent four weeks, consistent with the past 52 weeks. The company expects some tightness in the beginning of the quarter due to lapping last year's price increases and prebuilds by retailers, but still expects a strong back half of the year. In terms of capital allocation, the company has not made any buybacks during the quarter but is on track to offset dilution year-to-date. The company may consider buybacks in excess of that target given the strong momentum and cash flow generation.

The company will discuss capital allocation in greater detail at the upcoming Investor Day. They plan to buy back dilution and prioritize getting their leverage ratio back to their target of 3.0. They also have the flexibility to be more active if conditions allow. The next question is about wine industry growth and the company's view on it. The lower end of the wine business has been struggling, while the higher end is performing well.

The wine business is facing challenges, with mid to high single-digit declines in the lower end of the market. However, the higher end brands like Naomi, Kim Crawford, High West, and Booker are outperforming expectations and gaining market share. The second half of the year is more important for wine sales, as vintage releases and ASPIRA brands are weighted towards that time. Additionally, the company has chosen to balance shipments and depletes throughout the year, rather than focusing on the fourth quarter like last year, which will improve the business in the back half of the year. Overall, the higher end of the wine market is performing well, similar to the higher end of the beer market.

The speaker thanks the audience for joining the call and discusses the company's strong performance in the first half of the fiscal year. They mention the acceleration of their beer business and the growth of their higher-end brands in the Wine and Spirits portfolio. The speaker also mentions an upcoming Investor Day on November 2nd and encourages the audience to tune in for more details on the company's medium-term outlook. They end by thanking the audience again and inviting them to disconnect from the call.

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