Constellation Brands, Inc.

Good day, and welcome to the Constellation Brands Fiscal Year 2024 Fourth Quarter Full Year Earnings Call. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session. Instructions will follow at that time. If anyone should require operator assistance during today's call, please press star zero from your telephone keypad. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Snehal Shah, Director of Investor Relations. Mr. Shah, you may now begin.

Thank you, Rob. Good morning, all, and welcome to Constellation Brands' year-end fiscal 2024 earnings 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 today's news release or otherwise available on the company's website at www.cbrands.com. Please note, when we discuss comparable earnings per share figures for fiscal 2024 and prior fiscal years, we are referring to earnings per share on a comparable basis excluding canopy equity and earnings unless otherwise noted. Please refer to the news release and constellations as we see filings for risk factors which may impact forward-looking statements made on this call. Following the call, we will also be making available in the investors 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 would like to ask that we limit everyone to one question per person, which will help us to end our call on time today. Thanks in advance, and now here's Bill.

Thanks, Nehal, and good morning, everyone. Welcome to our fiscal 24 year-end earnings call. As usual, I'd like to start with a few headlines from this past fiscal year. First, I'm pleased to report that we delivered another year of strong performance in fiscal 24. We drove comparable earnings per share growth of nearly 9% and remain focused on achieving our stated medium-term target of low double-digit comparable EPS growth moving forward. This growth was supported by a net sales increase of 5% at an enterprise level and solid operating leverage that resulted in an increase of 7% in comparable operating income, representing an enterprise comparable operating margin of nearly 33%. This performance, once again, yielded recognition for Constellation Brands, as the number one growth leader among large CPG companies by Cercana in calendar year 23, as we have been five of the last seven years. We are the only CPG company of scale to make their top 10 ranking for 11 consecutive years. Our continued strong performance and momentum heading into fiscal 25 reinforces our confidence in our ability to deliver against the following targets outlined at our Investor Day this past November. Maintaining 6% to 8% enterprise net sales growth, delivering 33% to 35% enterprise comparable operating income margin, and generating low double-digit comparable earnings per share growth, all of which we intend to achieve in fiscal 25. Second, from a segment perspective, our fiscal 24 results were largely driven by our beer business, which delivered net sales and operating income growth above 9% and 8% respectively, both exceeding our expectations from the beginning of the year. This strong performance drove our largest dollar share gain ever for a full fiscal year, adding an impressive two points of dollar share within the U.S. beer category. and we achieved a significant milestone this year as Modelo Especial became the number one beer in U.S. dollar sales. Furthermore, across all beverage alcohol, our beer business was the number one dollar share gainer, capturing 1.1 points of share and driving nearly 70% of the total dollar growth in the sector. This was truly a remarkable achievement by our entire beer team, working in concert with our distributor and retail partners as they delivered volume growth for the 14th consecutive year, which is certainly another incredible differentiator amongst CPG companies. In our wine and spirits business, we faced a series of near-term category headwinds throughout fiscal 24, but remain confident that our strategy is sound. We recently promoted Sam Glaser to serve as our new president of wine and spirits. He is a well-rounded and accomplished industry veteran with nearly 30 years of experience in the wine and spirits category and a successful track record of driving commercial and operational efficiency and effectiveness. Sam also played an integral role in the implementation of the business transformation over the last few years, leading our global end-to-end supply chain optimization initiatives and building a world-class farming, winemaking, and distilling network. aligned to consumer preferences while developing a focused international route to market to deliver incremental growth for the business in the medium term. Now that the strategic transformation of our Wine and Spirits portfolio is largely complete, SAM is well positioned to lead our team in driving enhanced focus on execution and the delivery of growth and improved profitability. To that end, our Wine and Spirits team has identified several immediate actions to help drive improvement in our year-over-year top-line performance, which I'll discuss in more detail shortly. Third, we continued to achieve superior cash flow generation and deployed that cash in a disciplined and balanced manner underpinned by our consistent capital allocation priorities. For fiscal 24, we generated $2.8 billion in operating cash flow and were able to reduce our net leverage ratio by nearly half a point, while returning over $900 million back to our shareholders through quarterly dividends and share repurchases. We also continued to prudently invest to support the ongoing growth with total capital expenditures of nearly $1.3 billion in fiscal 24, most of which was focused on capacity additions to our beer brewing operations. And fourth, we continued to deliver against our environmental, social, and governance objectives which I'll discuss in more detail shortly. With that as a backdrop, let's turn to a more detailed discussion of our fiscal 24 performance, starting with our beer business, which, despite some challenging weather in our fourth quarter, grew depletions by 9%, resulting in our 56th consecutive quarter of depletions growth. For the full year, we continued to extend our lead as the number one high-end beer supplier in the U.S., delivering top share gains across the total beer category, underpinned by a nearly 14% increase in dollar sales and nearly 11% volume growth across tract channels. And in line with our expectations, we captured low double-digit percent incremental shelf space this spring, while adding another 21,000 resets through our Shopper First shelf program in fiscal 24. These factors all played a significant role in driving the growth of our beer business paired with the strength of our portfolio's iconic brands, starting with Modelo Especial, which grew depletions by nearly 10% and maintained its leading position as the top share gainer and, as noted earlier, the number one overall beer brand in U.S. track channels. Corona Extra increased depletions nearly 1%, and maintained its position as the number three high-end beer brand in the U.S. And Pacifico delivered depletion growth over 17% as it reached the 20 million case sold milestone and remained a top $10 share gainer across the total beer category and the number $4 share gainer in the high end. While we continue to build on the success of our iconic brands, We are also building good traction with our focused innovations aligned with consumer-led trends of premiumization, flavor, and betterment. Our Modelo gelato brands delivered an increase of 30% in depletions, also surpassing 20 million cases sold, and remain the number one gelato in the category, supported by the launch of our new flavor, Sandia Picante, and new pack-size offerings. We are excited to continue to build on that momentum in fiscal 25 with two new flavors, Pacificante and Negra Conchelle. Modelo Oro's national launch established a strong foundation for the brand as it rose to become a top five share gainer across the total beer category and the number three share gainer in the high end with just two SKUs. Given that strong reception and ongoing consumer demand for Betterment products, we are launching two more Modelo Oro SKUs in fiscal 25, an 18-pack and a 24-pack. Staying within the Modelo brand family, our new Aguas Frescas variety pack secured the number one new FMV spot in its test market of Nevada. So on fiscal 25, we will be expanding its rollout to another 20 markets for this authentic liquid aligned with consumer-led flavor trends and featuring our nitrogyte, Our nitro technology. In our Corona brand family, we introduced Corona non-alcoholic, which is the leading dollar share gainer in the fast-growing non-alcoholic beer cycle. As for fiscal 25, we are testing Corona Sun Brew in select eastern markets. This new refreshing beer is brewed with real citrus peels and a splash of real citrus juice. The strong execution of our beer business in fiscal 24 was also reflected in our ability to maintain best-in-class margins by combating trailing inflation headwinds with cost savings and efficiency initiatives. We also continued to invest in our beer business in fiscal 24, deploying approximately $950 million in capital expenditures, supporting our ability to meet the continued robust demand we see for our brands. through the expansion of our beer brewing capacity at Nava and Obregon, and the ongoing work at our new Veracruz site. Looking ahead to fiscal 25, and in line with the plan we laid out in our investor day in November, we expect our beer business to remain within our net sales growth algorithm of 7% to 9%, and for operating margins to gradually improve, supported by our operating income growth of 10% to 12%. Moving on to wine and spirits, due largely to the challenging market dynamics referenced earlier, our wine and spirits business saw declines of approximately 8% for both organic net sales and operating income, but still landed within our revised guidance range. While we do not expect ongoing challenges in the wine and spirits category to immediately subside, particularly in the mainstream and premium price segments, We have identified several areas to improve the performance of our wine and spirits business in fiscal 25, including, but not limited to, refocusing our efforts within our premium and above brands to more consistently drive growth in our most scaled and central offerings, notably in Crawford, Miami, The Prisoner, High West, and Me Campo, while accelerating additional tactical investments to revitalize the equity and support demand for our largest mainstream brand, Woodridge, and ensuring that we continue to support the transformation of other significant brands in our portfolio, such as Stedka, bent by Robert Mondavi, Ruffino, and Lumina. Note that these 11 brands represent three-quarters of net sales and over 80% of volumes for our wine and spirits business in fiscal 24, which is why we plan to provide more focus and investment for them. Another key area we are focused on is aligning with our U.S. wholesale distributor partners on clear priorities to help enhance our performance in our largest markets and channels. As noted in our prior call, these priorities include enhanced focus on improving mix, inventory, and sales execution. We will also be making additional investments in media spend and price promotions, as well as adjustments in our own sales capabilities to better support the execution and go-to-market efforts of our distributor partners. And similar to our beer business, we will continue to focus more broadly on efficiency opportunities to drive operational and sales excellence across our wine and spirits segment. This will include the operational and supply chain initiatives highlighted at our Investor Day, as well as enhancements to the business's organizational structures to enable a more effective and competitive operating model. Looking forward to fiscal 25, we expect our wine and spirits business net sales to be relatively stable and operating income to be down 9% to 11%. While we believe the focus on sales execution I just outlined will help stabilize the top line growth for wine and spirits, our operating income guidance reflects incremental investments in additional media spend, price promotions, and sales capabilities as well as continued inflationary pressures on some cost of goods sold and lapping of distributor contractual payments and reduced incentive compensation that occurred in fiscal 24. As we noted, we remain committed to continuing to advance this business over the coming years toward the medium-term targets shared at our investor day. Moving on to capital allocations. we continued to deliver against our stated priorities and targets in fiscal 24. As noted earlier, we further strengthened our balance sheet with a reduction in our net leverage ratio supported by our strong earnings performance and our disciplined debt management. We returned cash to shareholders and deployed most of our capital investments to brewery expansions to support the growth of our beer business and we continued to conduct tuck-in, gap-filling acquisitions that aligned with consumer-led trends and complemented our portfolio. We also made notable progress in regards to our environmental, social, and governance ambitions in fiscal 24. From a governance perspective, our board undertook refreshment actions that resulted in the appointment of two new independent directors, each with strong financial backgrounds. We also recently announced the election of a new independent board chair, Chris Baldwin, who brings a wealth of senior leadership experience from the CPG sector. In addition, in line with our commitment to be good stewards of the environment, since we had surpassed our initial water restoration target in fiscal 23, we established a new goal of restoring more than 5 billion gallons of water to key watersheds near our operations the timeframe covering fiscal 23 and 25. This goal is designed to ensure local residents and businesses have ample supply and access to water, which is the key to building sustainable and thriving communities. Finally, we announced two new environmental commitments in fiscal 24 to reduce waste within our key operating facilities and to enhance circular packaging. So in summary, we once again achieved another strong year of performance and significant progress across our strategic initiatives in fiscal 24, and we fully expect to build on this momentum in fiscal 25. We are confident in our ability to continue to create shareholder value and deliver on our commitments, including achieving low double-digit comparable EPS growth by generating high single-digit net sales growth and delivering best-in-class margins for our beer business, managing category challenges, and improving the growth trajectory of our wine and spirits business with enhanced execution, and maintaining our capital allocation discipline and commitment to operate in a way that is good for business and good for the world. As I wrap up, I want to once again thank all of our colleagues across Constellation, as well as our trade partners, for their hard work and dedication, and helping us deliver another year of industry-leading performance. And I believe we are well-positioned to keep that momentum going in fiscal 25. And with that, I will turn the call over to Garth, who will give more details on our financial results and outlook.