Constellation Brands, Inc.

Greetings and welcome to the Constellation Brands fourth quarter and full year 2023 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Joe Suarez, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Daryl. Good morning, all, and welcome to Constellations Brands' year-end fiscal 2023 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 SET 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 investor 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'd like to ask that we limit everyone to one question per person, which will help us end our call on time. Thank you, Joe, and good morning, everyone.

I'm pleased to report that our team delivered another solid year of performance in fiscal 23, driving a 7% increase in net sales and a 3% increase in comparable operating income, despite elevated inflationary headwinds faced throughout the year. We delivered record net sales and comparable operating income of $9.5 billion this year, and 3 billion respectively. We were recognized as the number one growth leader among large CPG companies by IRI and Boston Consulting Group in calendar year 22. And we're the only CPG company of scale in recent times to make their top 10 ranking for 10 consecutive years. Our performance was driven by strong execution of our strategy, which centers on continuing to build powerful brands that people love to introduce consumer-led innovations that address emerging trends and consistently shape our portfolio for profitable growth, to deploy capital with discipline while balancing priorities, and to operate in a way that is both good for business and good for the world. Here's how each of our segments delivered against each of these objectives in fiscal 2013. Our beer business delivered another year of double-digit net sales growth, and its 13th consecutive year of shipment, buy, and growth while maintaining best-in-class margins. We extended our lead as the number one high-end beer supplier in the U.S. and as the leading share gainer in IRI channels with a 12% increase in dollar sales. We increased depletions by nearly 27 billion cases and delivered net sales and operating income growth well above the initial we continued to build momentum for our anchor brands. Modelo Especial maintained its position as the top share gainer and the number one high-end beer brand in the category, increasing depletions by 9%. Corona Extra was the third largest share gainer and the number three high-end beer brand in the category, increasing depletions by nearly 4%. And Pacifico gained significant momentum as a top 10 share gainer in track channels delivering depletion growth of over 30%. Several consumer-led innovations within our Modelo gelato franchise served as growth catalysts in fiscal 23. Our Neuron Apicosa flavor and new variety pack added over 1.6 million new cases of depletions to our gelato brands. Our new Limani Sal 12-ounce 12-pack And in track channels, the Limani Sal 12-pack was a top 15 new package SKU and the Variety Pack a top 10 new brand. We continued to invest in our beer business, deploying over $800 million in capital investments in fiscal 23, which supported the ongoing expansions of our brewing capacity at Obregon, the continued development of our new ABA alcohol production line at Nava, and the early stage work at our new site in Veracruz. As part of our commitment to water stewardship, we recently worked with local officials and water authorities to complete a project that updated water infrastructure in the city of Zaragoza near our Nava facility, which improved water accessibility As we look to fiscal 24, we will continue to prioritize investments against our core brands, Modelo Especial, Corona Extra, and Pacifico. We believe that the fundamental growth drivers to these brands, including awareness, distribution, and demographic upside opportunities, remain as strong as ever. We're excited about several consumer-led innovations that are currently hitting the market. Modelo Oro, which exceeded both external and internal benchmarks in three test markets where we trialed it last fiscal year, and Corona Non-Alcoholic, which addresses the rapidly growing betterment trend. We'll also continue to build momentum for our Cholata franchise with the introduction of a second 12-ounce 12-pack for our best-selling traditional Cholata flavor and with the new spicy watermelon flavor Sandia Picante. And we'll continue deploying cattle to enhance our brewing capacity to meet the anticipated continuing robust demand for our products, both near and long term. Shifting gears, our wine and spirits business has transformed from a U.S. wholesale business, mainly serving the mainstream segment, to a global, omni-channel competitor, performance against the broader market. While lower demand for our mainstream brands drove a 2.1% volume decline for our wine and spirits portfolio and IRI channels, we outperformed the 2.6% volume decline for the combined U.S. wine and spirits categories in fiscal 23. We continued to focus on the growth of our consumer preferred higher end brands within our portfolio. Our Espiro portfolio, which includes our Fine Wine and Craft Spirits brands, delivered double-digit shipment growth. In addition, it significantly outpaced the Fine Wine and Craft Spirits segment, led by the Prisoner Wine Company, which delivered depletion growth approaching 10%, and our Craft Spirits portfolio, which achieved depletion growth approaching 29% in U.S. wholesale. In addition, these brands delivered exciting consumer-led innovations, such as the Prismers Winefold Blanc de Noir, Casanova's Ultra Premium Marques Tequila, and our Mi Campo Ready-to-Drink Cocktails, which are still in early stages of their life cycles, but are contributing to our expanded presence in the higher end of the market. Meanwhile, our Ignite portfolio continued to drive the momentum of our premium brands, such as Mayomi and Kim Crocker. which delivered depletion growth of 5% and 7% respectively, both gaining share in their respective segments. We continued to complement the growth of our core premium products with innovations that broaden the offerings of these consumer-preferred brands. As an example, Naomi's New Red blend remains the number two wine skew since its launch, and Kim Crawford's Prosecco was the number two new wine brand. Within our Ignite portfolio, the performance of our higher-end premium brands was offset by our remaining mainstream wine and spirits brands, namely Woodbridge and Speta, which experienced declines versus the market in the U.S. We continue to focus on stabilizing and revitalizing these brands. To further support our strategy to reshape our wine and spirits portfolio to the higher end, we divested several residual mainstream brands and acquired a smaller, higher-end wine brand and a ready-to-drink cocktail brand. Of note, our relatively recent acquisition, the My Favorite Neighbor portfolio, is delivering substantial growth and performing above our initial expectations. So overall, on fiscal 23, while net sales for our wine and spirits business declined just under 4%, a large part of that was due to the recent divestiture of primarily mainstream brands that I just referenced. And despite the strong performance of our higher-end brands, on an organic basis, net sales declined by 2%, mainly driven by lower demand for our mainstream brands, reflecting continued consumer-led premiumization trends, which I also noted earlier. We continued to build momentum for our higher-end brands and continued to accelerate our performance in key channels, such as direct-to-consumer and international markets, which grew net sales by 29% and organic net sales by 4% respectively. Looking forward, we see an opportunity to continue to grow the DTC and international markets by investing in our premium wine, fine wine, and craft spirits brands that tilt their growth toward DTC and international routes to market. Importantly, our wine and spirits business delivered operating margin expansion in fiscal 23, further demonstrating the benefits of its strategy and making additional progress toward its medium-term targets. Overall, we are exiting the year in wine and spirits on solid footing, and I remain confident in the pathway of that business. The solid performance driven by our beer and wine and spirits teams enable us to return nearly $2.3 billion to shareholders and share repurchases and dividends in fiscal 23, and we further demonstrated our capacity to conduct opportunistic share buybacks with an additional nearly 300 million of repurchases in the fourth quarter. This means our dividend payments and buybacks since fiscal 20 totaled more than 5.4 billion, well above our 5 billion goal. Moving forward, we plan to continue to deliver against our capital allocation priorities approach. Our fiscal 24 earnings and cash flow outlook should enable us to move closer to our net leverage ratio target, to support dividend payments in line with our payout ratio target, to continue to deploy capital to beer brewing capacity additions and hospitality investments in wine and spirits business, and to opportunistically pursue additional share repurchases and small gap billing acquisitions. Lastly, We remain committed to making meaningful progress against our enterprise ESG goals, which include reducing scope 1 and 2 greenhouse gas emissions by 15% by fiscal 25 from a fiscal 20 baseline, and restoring more than 1 billion gallons of water withdrawals from local watersheds, while also improving accessibility and quality of water for communities where we operate between fiscal 23 and 25. Water stewardship in particular has been a top priority for our team, and I'm pleased to announce that we have already surpassed our fiscal 25 goal related to water restoration. We'll look to announce later this year new targets for our water stewardship efforts, as well as other important areas that are part of our ongoing commitment to ensuring the long-term viability of our local communities and this environment. We have also significantly enhanced our ESG reporting, adding references aligned to the Sustainability Accounting Standards Board framework and considering recommendations from the Task Force on Climate-Related Financial Disclosures. As we look ahead, we intend to continue to take steps to more fully integrate ESG into our core business planning process, establishing thoughtful, specific, measurable, and time-bound targets supported by robust strategies and operating plans that we can map progress against. We believe this approach best serves the interests of our business, shareholders, other stakeholders, and our surrounding communities as it seeks to integrate ESG into our business operations and helps ensure that we can clearly deliver on our stated commitments. So in summary, we delivered another solid year of performance. resulting in record net sales and comparable operating income, despite elevated inflationary headwinds based throughout the year. Our performance was driven by strong execution of our strategy, and we continue to make good progress against all dimensions, building brands that people love, complementing growth of our core products with consumer-led innovation, deploying capital with discipline while balancing priorities against our organization, and continuing to operate in a way that is both good for business and good for the world. With another strong year of execution against our strategy behind us, we're quite confident in our ability to continue building momentum in fiscal 24. And with that, I will turn the call over to Garth.