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spk14: 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.
spk03: 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.
spk06: 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.
spk05: Thank you, Bill, and good morning, everyone. Fiscal 23 was another successful deliver on our operating plans and strategic initiatives. Despite the inflationary pressures that both our industry and consumers have been facing, we demonstrate, yet again, the strength of our adaptable businesses, higher-end brands, and resilient teams. We expect the same focus and dedication to further support our momentum in Fiscal 24. So let's review in more detail our full-year Fiscal 23 performance and Fiscal 24 output. As always, I will focus on comparable basis financial results. Starting with the fiscal 23 performance of our beer business, net sales increased $713 million for 11%, exceeding the upper end of our guidance range. This was primarily driven by solid shipment growth of approximately 7% as strong demand continued across our portfolio, supporting a $464 million uplift in net sales from incremental bias. Net sales also benefited from favorable pricing in excess of our usual 1% to 2% average annual pricing algorithm. As we previously noted, the incremental pricing actions taken in fiscal 23 were in response to cost pressures across the value chain due to inflationary headwinds. We introduced larger pricing increases and made pricing adjustments in certain markets ahead of our regular case. Depletion growth for the year was over 7%, which, as Bill noted, was driven by continued strong growth in our largest brands, Modelo Especial, Grown Extra, Pacifico, and the Modelo Gelato brands. On-premise depletions grew 15% year over year, and on-premise volume accounted for approximately 12% of total depletions in fiscal 23, nearing the mid-teen volume share from prior to the start of the pandemic. As previously guided, our shipments and deflations were closely aligned on an absolute basis. Moving on to the bottom line for our beer business, operating income increased 6%, also exceeding the upper end of our guidance range. This increase was largely driven by a $492 million benefit from net sales growth and yielded an operating margin of 38.3% which was in line with our implied guidance range. As expected and noted over fiscal 23, operating margins were negatively affected by inflationary headwinds. For the import portion of our beer business, which represents nearly the entirety of COGS, we faced an increase of approximately 16% in our raw materials and packaging costs, which was largely driven by inflationary pressures that resulted in an 8% increase on a per-case basis. This reflected some benefits from the lapping of the seltzer obsolescence charge in fiscal 22, as excluding any obsolescence impact, the increases in our raw materials and packaging costs would have been 20% on an absolute basis and 12% on a per-case basis. Note that these two cost categories, including the obsolescence impact, represented just over 55% fiscal 23. We also saw a 12% year-over-year increase in freight costs, mainly driven by incremental shipment expenses that were offset by efficiency initiatives. Freight costs were 5% up on a per-case basis and account for just under 25% of import costs. And we faced a 14% rise in labor and overhead costs that was mainly driven by our brewery capacity investments. Labor and overhead were up 7% on a per case basis and accounted for just under 15% of import costs. In addition, operating margins for the beer business were also affected by a $41 million or nearly 22% increase in depreciation almost entirely associated with our brewery capacity investments. a $55 million or nearly 9% increase in marketing spend related to incremental investments in sport sponsorships, and a $48 million or nearly 14% increase in other SG&A driven by incremental sales support to align with the momentum of our beer brands. Note, however, that while our marketing investments increased when compared to the prior year, they were still within our 9% to 10% range as a percentage of net sales. All of that said, it is important to note that we still delivered best-in-class margins for our beer business in fiscal 23. Now shifting to our wine and spirits business. First, please recall that we divested a collection of primarily mainstream wine brands from our wine portfolio in fiscal 23. So during today's remarks, I will also be discussing top line on an organic basis which excludes the contributions from the divested brands. As Bill noted, despite the strong performance of our higher-end wine and spirits brands, on an organic basis, net sales declined 2%, ultimately landing in our guidance range. The decline in net sales, excluding the impact of the divestiture, was primarily driven by our mainstream brands as they faced challenging market conditions and lapping a prior fiscal year inventory bill. Again, this decline was partially offset by strong growth in our higher end brands, which outperformed in the US in the higher end category for both wine and spirits and total US wine market. Our higher end brands also had strong growth in our emergent and rapidly expanding direct to consumer channels and international markets. Over time, we expect our portfolio to continue to migrate toward the higher end and for these higher end brands, channels, and markets to support our top line growth acceleration. Shipments on an organic basis decreased by under 8% and depletions decreased by 3%. As just noted, this volume decline, which reduced organic net sales by $148 million, was driven primarily by our mainstream brands, as mix and price, largely driven by our higher end brands, provided a $111 million uplift to organic men's sales. Wine & Spirits operating income, excluding the gross profit, less marketing of the brands that are no longer part of the business, following their divestiture in fiscal 23, increased 2%. And operating margin increased 80 basis points to nearly 23%, also reflecting the same exclusion. This margin increase was driven by a $12 million uplift from net sales flow-through as favorable product mix was supported by lower grade costs as well as a strong New Zealand harvest. Benefits from other cost savings actions primarily resulting in lower grade costs that helped to partially offset higher logistics and material costs. and more efficient marketing expense from enhanced investment strategies, which increased focus in the highest return opportunities, which supported a $20 million tailwind to operating income. These benefits were partially offset by $17 million in higher SG&A from increased headcount as we continue to strategically invest in our growing DTC channels. We remain well-positioned continued to expand margins in our wine and spirits business over time with mixed improvements and productivity initiatives in the future. Now moving on to the rest of the P&L. In fiscal 23, our corporate expense included approximately $270 million from SG&A and $20 million from unconsolidated investments related to our ventures portfolio, all in landing at the low end of our guidance at $290 million. Within the SG&A portion of corporate expense, the implementation of our DBA program, which stands for Digital Business Acceleration, accounted for $47 million. As a reminder, we introduced our multi-year DBA initiative in fiscal 23 and expect similar investments to carry into fiscal 24. Interest expense for the year increased 12% to approximately $400 million, coming in at the upper end of our guidance range. This increase was driven primarily by the financing of the stock reclassification, which took place in Q3 of fiscal 23, as well as the impact of rising interest rates on approximately 15% of our debt with adjustable rates. Our full-year comparable basis effective tax rate, excluding canopy equity earnings, came in at 19.2% versus 17.5% last year as we lapped favorability in fiscal 22, primarily driven by higher stock-based compensation activity. Free cash flow for fiscal 23, which we find is net cash provided by operating activities, less CapEx, was above the upper end of our guidance range at $1.7 billion. CapEx totaled $1 billion, including over $800 million of investment in our beer business CapEx came in below our guidance primarily due to timing shifts in the spend for certain materials and equipment of our Mexico brewery investments at our Nava and Obregon facilities. As of the end of fiscal 23, our Mexico brewery operations had a total nominal capacity of approximately 42 million hectoliters. This includes 32.5 million hectoliters at our Nava facility and 9.5 million hectoliters at our Obregon facility. This represents a 1 million hectoliter uplift at our novel facility relative to the capacity we communicated a few months ago. This uplift is once again the result of our continued productivity initiatives that have unlocked additional production flexibility from the existing footprint of our breweries. As a reminder, earlier this year, we shared that these initiatives initiatives had unlocked additional capacity of 1.5 million hectoliters at Nava and half a million hectoliters at Oregon. In light of the 2.5 million hectoliters of productivity capacity unlocked at Nava in fiscal 23, we have slightly adjusted the ramp-up plans for our new ABA production line at that facility, which I will discuss shortly. With that, let's move now to our outlook for fiscal 24. We expect a comparable basis diluted EPS to be in the range of $11.70 to $12, excluding canopy equity and earnings. For fiscal 24, our beer business is targeting net sales growth of 7% to 9%. As Bill discussed earlier, we expect continued strong volume growth momentum to be largely driven by our icon brands, Modelo Special and Corona Extra, and next wave brands, Pacifico, and the Vadello Gelato brands. We anticipate our full-year fiscal 24 shipments and depletions to track each other closely, both on an absolute basis and in terms of the year-over-year comparison. As a reminder, despite some fluctuations in the last few years in our quarterly shipment cadence and year-over-year growth rates due to severe weather and pandemic-related impacts, we expect the cadence of our shipments in fiscal 24 to follow a more traditional seasonal pattern. We anticipate approximately 55% of our fiscal 24 buy-ins to ship in the first half as we meet peak summer demand for our products. In addition, from a quarterly perspective, particularly when looking at year-over-year growth rates, we also expect shipping and depletion comparisons to still show some variability, as they always have, as we manage inventory levels around seasonality throughout the year and our regular brewery maintenance activities in Q3. All of that said, we do not expect to have any incremental lapping variability in our shipment growth rate for Q4 as we did in fiscal 23. From a pricing perspective, at this stage we are planning for average annual pricing within our 1% to 2% algorithm. We are mindful that consumers will likely continue to face challenging macroeconomic conditions for the foreseeable future and that our pricing increases in the last two fiscal years were above this algorithm. As we advance throughout the year, we will continue to monitor inflationary dynamics and potential recessionary risks to ensure our pricing is appropriately balanced to support the momentum of our brand. We will provide any further updates in that regard as part of our future quarterly calls. In terms of operating income growth, our beer business is targeting 5% to 7%, which implies a fiscal 24 operating margin of approximately 38%. As we have discussed, we continue to expect our beer operating margin to be negatively impacted by inflationary COGS headwinds. The majority of these relate to year over year adjustments in our packaging and raw material costs, which on average represent a high single digit increase in absolute terms for these inputs in the import portion of our beer business. While prices for some of these inputs are off their peaks, most are subject to contractual terms that reflect annual adjustments based on trailing pricing data and some still remain significantly elevated relative to pre-pandemic prices. In fiscal 24, we expect packaging and raw material for our imports to account for approximately 55% to 60% of costs. In addition, we expect freight to be approximately 20% to 25% of costs and reflect a high single-digit year-over-year absolute increase as we continue to face annual volume and contractual increase. and labor and overhead to be approximately 15% of costs and reflect a high team's increase in absolute terms, largely driven by increased headcount and training tied to our brewery capacity investments. For our beer business, we expect incremental depreciation of approximately $35 to $40 million as we continue to bring into production incremental brewing capacity from our investments, particularly at Obregons, fiscal 24. As noted earlier, the incremental capacity unlocked from our existing Nava facility footprint through productivity initiatives has given us additional flexibility on the ramp-up of our new ABA line. We now intend to spend a bit more time optimizing that new additional ABA production to better support the strong growth of our Modelo Chilada brands. Accordingly, we anticipate the ABA line will be ramping up in Q4 of FY24. Conversely, we have been able to accelerate the ramp-up of our next 5 million hectolitre investment at Obregon to Q1 of FY24. This is being enabled by the move of brewery and packaging equipment that we had previously intended for use at Mexicali. Now, going back to operating margins. we plan to execute a number of productivity initiatives to help offset inflationary pressures. The expectations shared for our beer business COGS in fiscal 24 have operational efficiencies and cost-saving actions embedded into them. These initiatives include benefits from our ongoing hedging program and contractual negotiation efforts, as well as from our fiscal 23 DBA program. To that end, it is relevant to note that only around 25% of our beer business COGS are subject to contractual pricing adjustments within fiscal 24. And then we expect our hedging program to reduce our exposure to those adjustments for about 10 to 15% of COGS. In addition, we expect to deliver marketing and other SG&A efficiencies, including an even greater focus on optimizing these types of investments for our Icon and Next Wave brands. So despite remaining slightly below our medium term operating margin target, we expect our fiscal 24 efforts to still yield best in class results for our beer business. And we expect all quarters within fiscal 24 to deliver operating margins above this latest quarter's result. Moving to the outlook for our wine and spirits business. For fiscal 24, we are targeting organic net sales to be relatively flat, within half a percentage point from fiscal 23 net sales, excluding $38.5 million of net sales from the brands divested in fiscal 23. We expect to continue the strong growth of our premium wine, fine wine, and craft spirits brands, and in our DTC channels and international markets. These segments of our business will help to offset the headwinds we expect to face with our mainstream U.S. wholesale brands, which are facing challenging market conditions due to ongoing consumer-led premiumization. Conversely to our beer business, we expect our wine and spirits business to ship approximately 55% of our fiscal 24 volume in the second half, again, in line with seasonal demand for our wine and spirits products. More notably, Despite continued inflationary pressures, we are targeting operating income growth between 2% to 4%, exclusive of $19.5 million of gross profit, less marketing, relating to brands divested in fiscal 23. This implies an operating margin improvement of at least 40 basis points. The primary margin improvement drivers for fiscal 24 include additional mixed improvement particularly with our further optimized portfolio, driven by ongoing growth in our higher-end brands from continued consumer-led premiumization trends, enduring growth momentum in our higher-margin direct-to-consumer channels and targeted international metro areas, primarily through our Aspira portfolio brands, additional innovation with new consumer-led products that help extend our higher-end offerings and stabilize our mainstream brands. reduced marketing spend relative to net sales with optimized investments increasingly focused on high growth, high return areas, and additional SG&A reductions in cost management initiatives. Similar to our beer business, we expect approximately 25% of our wine and spirits business COCs to be subject to adjustments within fiscal 24. Now moving to expectations for the rest of the P&L in fiscal 24. Corporate expense, including just the SG&A portion, is expected to be approximately $270 million. We expect to see favorability from the termination of certain compensation and benefits that will not be payable in fiscal 24 following the retirement of Rob and Richard Sands from their executive roles for the reclassification agreement approved by shareholders in fiscal 23. offset by the impact of inflationary pressures and merit-driven salary increases. Interest expense is expected to be approximately $500 million for the year. This is a 25% increase from fiscal 23 and is primarily due to the incremental interest expense associated with the financing of the reclassification. The comparable tax rate excluding canopy equity and earnings is expected to be around 19%. Rounding out the P&O, we anticipate approximately $40 million in non-controlling interest benefits and weighted average diluted shares outstanding are targeted at approximately $184 million. Turning to cash flow, we expect fiscal 24 free cash flow to be in the range of $1.2 to $1.3 billion. for $1.3 billion. CAPEX includes approximately $1 billion to support our Mexico brewery investment and most of the remainder will support our wine and spirits hospitality updates. To wrap up, I would like to reiterate that our refreshed capital allocation priorities that we have introduced and discussed throughout fiscal 23 and earlier by bill remain unchanged. We remain committed to to a disciplined financial foundation by maintaining an investment grade rating as we move towards our net leverage ratio target. Delivering returns to shareholders via both dividends in line with our payout ratio goal and through incremental share repurchases to at least cover dilution while remaining opportunistic for any additional repurchases. Continuing to support the growth of our businesses through deployed capital and our beer brewing in our wine spirits hospitality investments and lastly through smaller acquisitions that would fill gaps or enhance our existing portfolio we believe that this strong disciplined capital allocation strategy combined with exceptional execution will empower us to be premier shareholder return generator for the foreseeable future with that bill and i are happy to take your questions
spk14: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question comes from the line of Andrea Teixeira with JP Morgan. Please proceed with your question.
spk01: Thank you. Good morning. Can you comment on what you're seeing most recently that makes you feel confident about the 7% to 9% beer sales growth outlook, particularly in light of the broad deceleration in consumption called out by retailers in March? And related to that, are there any dynamics between shipments ahead of the Cinco de Mayo start of the summer and the depletions as we move into the first quarter and throughout the year. And if I can squeeze on the pricing front, you mentioned the 1% to 2%, but I understand some of the competitors decided to just push back. And given the dynamics that you had towards the fall last year, if you're going to be mostly looking to do pricing for the fall. Thank you.
spk06: So thanks for the question and good morning to you. A couple of things that give us confidence in the 7% to 9% range. First of all, we saw a very strong start to the year in markets like Texas and Florida, which have both seen double-digit increases in the first month of the year. Now, acknowledging the state of California has been challenging, but I'll tell you what I'm very excited about about California. In Q4, we saw our distribution growth, our effective distribution grow by 3.6% Q4 versus the Q4 prior. Our simple distribution, despite a very broad market capability there, saw simple distribution go up 2%. And our draft panels went up over 9%. What this says to me is that we are well prepared when California gets back into their normal weather patterns. versus what we saw this year. So we're very comfortable. Obviously, we wouldn't be giving you this guidance if we thought otherwise, but we feel very comfortable that we'll be in that 7% to 9% range that we noted today. Arthur, want to touch on the pricing point?
spk05: Yeah, so as we stated in our prepared marks, we're comfortable with the pricing at our 1% to 2% algorithm. Obviously, we will continue our approach to pricing to monitor what the macroeconomic and inflationary recession impacts, potential recession impacts are on our consumer. It allows us to monitor our competitor behavior and give us the flexibility to act agilely when we see a reason to move on price. So that'll be something, as I said in my prepared remarks, that to the extent we make any changes throughout the year, we will provide updates on our
spk14: Thank you. Our next question comes from the line of Kevin Grundy with Jefferies. Please proceed with your question.
spk08: Great. Thanks. Good morning, everyone. Just a quick cleanup. Bill, I'm not sure if you can comment on March depletion trends. I mean, presumably given the importance of California, I suspect they're probably running a bit below what we saw in the fourth quarter. Maybe you can just comment on that. But my broader question is on the oral launch. And maybe just follow up there on your expectations, comments on cannibalization risk. And then I think, importantly, sort of context around how we should be thinking about this rollout relative to the premier launch several years ago and the degree of incremental spend. If I'm not mistaken, Garth, you can correct me if I'm wrong, I think that was in the 35 to 40 million range of incremental spend behind that rollout. But just some context around there would be helpful. So thank you both for that. I appreciate it.
spk06: Sure. So that I don't step on myself after I just got done saying at Cagney that I wasn't going to talk about depletions anymore. I won't specifically talk about March depletions, other than to say they're pretty much in line with what we expected. As I did note in my prior answer to Andrea, Texas, Florida were up double digits. Certainly California was challenged this particular start to the year, but I think it's safe to say that as we progress in the year, it's extremely unusual to have rain, snow, or flooding once you get into May, June, July, and August in the state of California. So much like we've seen many other times when there's a dislocation in a particular market, we expect that that would pass over time. Second, related to your oral question, we've said we're going to be very sensible about the rollout of oral. I'm pleased to say that our beer group has done an extremely good job of getting distribution into the marketplace. As you know, we're less than a month in on that particular project. But we were very positive about the cannibalization rates that we saw in the three test markets. We saw incrementality above 60% in those markets, which we were very pleased with. And we really think it fills a gap, particularly with our core Hispanic consumer, who has been looking for an alternative to some of the other light beer scenarios. So we're very positive about that, but we're going to do it in a very sensible and approachable way. For those of you who watch March Madness, you will have noted we started our media campaign during that particular event, and this launch will be supported by significant media over the course of the summer.
spk14: Thank you. Our next question comes from the line of Darren Mosenian with Morgan Stanley. Please proceed with your question.
spk04: Hey, guys. Hey, Darren. Hi, Darren. On the beer depletion side, can you discuss a bit the trends you're seeing on-premise? The gap looked better in terms of on-premise and some of the smaller store-owned track channels relative to track channels. versus Q2 and Q3, so just would love to get an update there. And then also, do you think you're seeing any broader macro impacts in your portfolio? Maybe give us a bit of update on trade down in general in beer and what's occurring there and any impacts to your business. Thanks.
spk06: You bet. So in terms of on-premise, on-premise continues to grow, as we noted in our prepared remarks. We continue to see acceleration in the on-premise, which we think is very good. We're not quite back to where we were from a normal standpoint where we sat before the pandemic, but we continue to make progress against that as we're seeing more and more often that consumers are being out in the marketplace and consuming on-premise. So we remain optimistic. Our growth profile in the on-premise arena continues to accelerate. as I think many on-premise accounts are looking more and more for brands that resonate consistently with consumers, and obviously we have those, and that speaks very well. I use the example of a well-saturated market like California seeing draft panels on our business go up 9% in the fourth quarter last year, and I think that's a great reflection of the potential that still exists for us in the on-premise. Relative to your question about trade-down, we have seen very little trade-down against our portfolio. Certainly, there has been some, it appears, but it tends to occur at lower price points than ours. So there are some consumers that are showing some concern about general inflationary macroeconomic trends, but by and large, that has occurred at lower price points than where our brands compete. And that's fairly consistent with what we've seen relative to the pure loyalty we see against our brands. It's the benefit of having consumer preferred brands in our portfolio.
spk14: Thank you. Our next question comes from the line of Rob Ottenstein with Evercore. Please proceed with your question.
spk11: Great. Thank you very much. Just a follow-up question. on Garth on some of your guidance comments. And I don't know if I just maybe I didn't follow you, but I think you were talking about productivity measures that would help get to the margin target. And then you talked kind of very quickly or, you know, with some points on hedging programs. and the amount hedged or not. And I apologize. I lost you on that. But I was kind of trying to connect what hedging would have to do with productivity and trying to exactly the point you were trying to make.
spk05: Yeah, so sure, Robert. Thanks for the question. And just so you know, as Joe indicated at the beginning of the remarks, we are going to be posting some slides to our website immediately following this call specific to the productivity efficiencies And the hedging, the point on that is just like in any given year, we have certain productivity goals, efficiency goals, savings to help offset the impact of cost increases related to inflation. So that's no different than any other year. And the point of the comment was that those increases that I had stated previously, those are net of those efficiencies. And then... On the point around hedging, it's just that we continue to have a fairly robust hedging policy and program. Typically, we are only able to hedge around 10% to 15% of what's in our cost of goods. And so we are hedging against those things right now. And as we enter this year, we're at where we would normally be in terms of the percent of commodities that are hedged.
spk14: Thank you. Our next question comes from the line of Nick Modi with RBC Capital Markets. Please proceed with your question.
spk10: Yeah, thanks. Good morning, everyone. Just a follow-up. Good morning. Just a few follow-ups. So I'm just curious on, Bill, you mentioned some of the distribution gains you've seen in California. I just was hoping to get some context on your view on resets and kind of what you're seeing more broadly, especially in the markets where you're undershared relative to where you are in California. And then the second question is just, you know, there's been a lot of discussion in the trade about some of the other brewers, you know, perhaps rolling back some pricing or promoting back some of the recent price increases. Just wanted to get some context on kind of philosophically how you think about, you know, if that were to happen, kind of would you need to react or not? And just would love your context and perspective on that.
spk06: Yeah, you bet, Nick. Thanks for the question. One of the things that relative to resets, we are doing extremely well in reset situations. And I think it's just simple good business because with our portfolio representing more than 80% of the growth in the total beer category, it just makes sense for retailers to increase our shelf positions versus the competition. You know, you see, as we said in our prepared remarks, Modelo being the number one growth driver and Corona being the number three growth driver, Pacifico being a top ten growth driver. These brands demand more space on the shelf, and we're very fortunate that our team is specifically focused on that very topic. Relative to pricing, as Garth noted, you know, we carefully analyze the elasticities against our brands, and I've said this on many other occasions. we're very mindful that we want to keep our consumer. And our pricing strategies over time have been to be sensible and approachable to ensure that we keep our consumers. We're going to raise within our normal algorithm this year in the 1% to 2%, as Garth noted. But we should expect no rolling back of any pricing scenarios from us this year because we have been judicious and sensible about keeping the consumer engaged with us as we've moved pricing in the past. We'll continue to monitor to that carefully as the year goes on, as we always do. You know, on a monthly basis, we analyze elasticities and drivers and drags, which you've all heard from Jim Savio over time. But we see absolutely no need to be rolling back pricing in any market because we think we were very appropriate in what we have done historically, which should allow us to be right back in our algorithm going forward.
spk14: Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.
spk09: All right. Thank you. Good morning, everyone. I had a question on your free cash flow guidance of $1.2 to $1.3 billion this year. It's a fair amount below your historical run rate. So maybe you could highlight the key puts and takes that are going to impact your free cash flow this year. And then you completed your share repurchase goals to date and your $5 billion return to shareholder target, but you didn't necessarily announce a new return goal. So curious how you're thinking about your capital allocation priorities going forward, and then maybe what's realistic to consider for cash return to shareholders this year and beyond, you know, thinking about this in the context of the CapEx needs, your leverage targets, et cetera. Thanks.
spk05: Thanks, Bonnie. So to start on free cash flow, I guess to start on free cash flow, we need to start at operating cash flow, right? So operating cash flow is a bit down this year versus last year, and the primary drivers of that are really a couple fold. One is there is the increase in interest that I referenced in my opening remarks, pretty much a 25% increase in a year-over-year basis, and that's really reflective primarily of the debt and the interest associated with the collapse, and then to a lesser extent, the remaining floating rate debt that we have on our books. Additionally, we'll have higher cash paid taxes next year due to the USAMT and some non-recurring tax benefits that we had in FY23, and then to a smaller extent, some changes in working capital. Moving further down the list, we'll continue to have significant investment in CapEx, as you heard. Those are the factors that are driving the operating cash flow and free cash flow ranges that we outlined earlier. As it relates to the returns of capital to shareholders through shareholder purchases, We still have nearly $1 billion left under our existing board authorization for shareware purchases. As we mentioned in our comments, at the very least, we will buy back Volusion throughout the year, but we will continue to be agile and be able to take advantage of market conditions, just like we did in Q4, where, as Bill noted in his remarks, we aggressively bought back almost $300 million worth of shares as we saw some what we consider dislocations in price. So that will be how we continue throughout the year. We actually like the ability to have that flexibility. And so it's something that will obviously continue to be a very critical component of our capital allocation strategy.
spk14: Thank you. Our next question comes from the line of Peter Grum with UBS. Please proceed with your question.
spk13: Hey, good morning, everyone, and hope you're doing well. So I wanted to ask about the pricing cadence and the commentary that you're going to be monitoring the health of the consumer. And you provided a lot of color in the response to both Andrea and Nick's question. But I guess if you don't plan to roll back prices, can you maybe just talk about what actions you would be willing to take if the environment were to deteriorate? Would that just be pricing at the lower end? And I guess what I'm really trying to understand is if the pricing outlook were to really change at all, how would that impact your ability to achieve your beer margin targets? Could you lean in more elsewhere, or would it be more difficult to achieve? Thanks.
spk06: Well, there's a lot of negative what-ifs in the question, which, frankly, we don't see coming to pass. If you look historically at what our beer business has been able to accomplish, we have maintained a very consistent approach to pricing over time, 1% to 2%, year after year after year. The last couple of years, as you know, we've significantly gone beyond that in an effort to hedge against some of the strong inflationary pressures that all consumer companies have faced. Our belief is we are in a very good position to do our historical 1% to 2% pricing increase. That's based on a lot of analytics and a lot of elasticity assessments that we do on an ongoing basis. We are very comfortable with that, and we feel like that's going to be an appropriate play for the course of this fiscal year, which should allow us to do everything we said. I would also note, just as an adjunct to that, you know, one of the things that I said at Cagney was how strong the Modelo share was in its two strongest markets, which was California and Nevada, where we were double-digit. You know, I'm pleased to report that at this point that actually is now four states, which includes both New Jersey and Texas. which, again, just continues to show that our growth profile outside of the state of California remains a tremendous growth opportunity for our business over the long term and also helps to support what we just talked about relative to our ability to price within our 1% to 2% algorithm.
spk14: Thank you. Our next question comes from the line of Chris Carey with Wells Fargo. Please proceed with your questions.
spk12: Hi, everyone. So just two quick ones for me. You know, Garth, on the beer margin outlook, you gave a lot of great detail. I guess, you know, you're looking for flat operating margins for the year. Is there any way or flattish, you know, is there any way to frame expectations for a gross margin relative to operating margin. And I say that in the context of productivity initiatives, which I suppose can play out in both line items. So I just am curious if you have any comment there. The second observation is, you know, WineSphere has just delivered what I think is the best operating margin in a few years, and yet the outlook would imply that you're giving a lot of that back. So is that just conservatism, or is there something, you know, just – missing in the bridge about some of this nice premiumization, which has really helped the margin structure there. And I sort of asked that in the context of prior margin targets for the wine and spirits business in general. So thanks for those two on beer margins and wine and spirits margins.
spk05: Yeah, so on the wine and spirits margins, and so again, I'll reference you to the deck that will be posted to our website after this fall, but we're actually forecasting wine margins to increase And so you'll be able to see that detail on the website. As it relates to operating margins, gross profit margin with beer, I mean, all of the headwinds that we're facing really in beer this coming year will be in gross margin and not below the line. As we said, we'll continue to effectively manage our marketing and SG&A spend and focus on the highest return, highest priority initiatives. And we'll manage that effectively. So, you know, the largest drag for us, as we've said for the last several months now, is going to just be the inflationary impact. And then, again, we'll hit through COGS as well as some incremental depreciation throughout the year.
spk14: Thank you. Our next question comes from the line of Nadine Soarte with Bernstein. Please proceed with your question.
spk00: I thank you. Good morning, everybody. So just coming back to the beer margin point, if I take the midpoint of your beer guidance for top line and operating income, it comes a touch below your initial 38 that I think you had discussed. Was there anything in particular that changed to the downside versus your previous commentary? Or, I mean, is this just a situation of rounding here? And then just to follow up on the margin point, given the margins of last year and what we'll be seeing on the back of your guidance for this fiscal year, should we still be thinking about 39 to 40 as your medium term margin for the business? And would it be fair to 25? Thank you.
spk06: So I'm going to apologize because you broke up there at the end. So I think the back end of that was, do we expect to get there in fiscal 25? You broke up. I apologize.
spk05: But I think that's what she said. So go ahead. Yeah. So I think just as you're working with the numbers that we provided, when we said 38% operating margins, there are approximately 38% operating margins. So then as you kind of look at the various points within our range, you'll come up with various different outputs as it relates to what the margin will be and So we have full conviction that we're going to deliver operating margins for our beer business at approximately 38%. As it relates to the outlook going forward, we've just provided our outlook, our margin outlook for our beer business for FY24. We're not providing... Any guidance for future years? We typically don't do that at this point. That's not part of our process, certainly. The biggest driver, again, this year that we have for FY24 is, again, driven predominantly by inflation and the inflation that we're seeing, which I outlined in my scripts, as well as some incremental depreciation. Offsetting that, we'll continue to As we've said earlier, we'll be pricing at our 1% to 2% range. We continue to drive incremental volume, which helps offset fixed overheads and depreciation as we grow into our expanded footprint. And we'll continue on with the efficiency drivers that I mentioned as well. So that's where we stand. talk about FY25 as we get closer to the end of the year.
spk14: Thank you. Our final question comes from the line of Brian Spillane with Bank of America. Please proceed with your question.
spk02: Hey, thanks, Operator. Good morning. Good morning, everyone. I wanted to touch, just loop back to wine and spirits, and maybe, Garth, could you talk a little bit about how Svedka and Woodbridge are you know affecting margin and maybe margin progression there and i guess i get i asked into the context of it's a they're a much larger contributor to volume than they are to revenue um and i guess my assumption is the margins are lower than the average so just trying to understand um you know is is getting volume uh you know stabilization or volume growth in those two brands an important component that's sort of building margins there Or, you know, is that not really a big factor? So really just trying to understand Woodbridge, Svedka, and kind of the longer-term impact on profitability and wide experience.
spk05: Yeah, well, you're absolutely correct that given the size of those brands that they do have a bit of a drag on our overall margin profile given the price points in which they compete and therefore their margin profile, which is below the average profile for the entire business unit. On a positive note, the Wine Experience team has pretty aggressive revitalization plans in place for both of those brands so that we can stabilize those brands and continue to outperform the price segments that they participate in. And as such, as we continue to make those efficiency improvements, we certainly have our margin targets is laid out.
spk14: Thank you. We have reached the end of our question and answer session. I would now like to turn the call back over to Bill Newlands for closing remarks.
spk06: Thanks very much. Fiscal 23 was a big year for Constellation Brands. We achieved record net sales and comparable operating income and were recognized for a 10th year. as a CPG growth leader, despite some of the most significant inflationary headwinds affecting our company and consumers in recent history. Our beer business outperformed our initial expectations and continued to lead in share gains, growth, and margins, despite some volatility across the year as we lapped distortions in our performance from prior periods and navigating incremental pricing actions beyond our annual algorithm intended to offset cost pressures across the chain. And we've delivered many other transformational milestones, including our transition to a single share class structure and other important corporate governance enhancements, the start of our construction activities at our new brewery site in Veracruz, and some additional refinement of our wine and spirits portfolio, as well as continued progress against the strategy of that business. Lastly, the performance of our business coupled with our disciplined and balanced capital allocation priorities allowed us to maintain our investment grade rating despite the incremental financing associated with the transaction for our transition to a single share class structure, to surpass our share repurchases and dividend cash returns goal by over 400 million, and continue to grow our beer production capacity while executing small growth accretive M&A. As we look forward to fiscal 24, we remain focused on delivering sustainable growth and value creation for our shareholders through the execution of our annual plan and by continuing to advance our strategic initiatives. And we are confident in our ability to continue building momentum across our beer portfolio with strong volume growth and targeted pricing actions. We are bullish on the future performance of our wine and spirits business as it continues to advance its strategy, and we are committed to our capital allocation priorities and our ESG honors. Thanks again, everyone, for joining the call. We hope you will choose to enjoy your Cinco de Mayo and Memorial Day celebrations with some of our great products, and we look forward to speaking with all of you in late June on our next quarterly call. Thank you very much, and have a great day.
spk14: This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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