Constellation Brands, Inc.

Good morning and welcome to the Constellation Brands first quarter fiscal year 2025 earnings call. At this time, all participants are in a listen-only mode. 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 Joseph Suarez, SVP of Investor Relations. Thank you. You may begin.

Thank you, Daryl. Good morning, all, and welcome to Constellation Brands' Q1 Fiscal 25 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 gap measure and any non-gap 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 SEC 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 and as Darrell mentioned, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance, and now here's Bill.

Thanks, Joe, and welcome all to our Q1 fiscal 25 earnings call. I'm pleased to say that we got off to a solid start in Q1, and as usual, I'd like to start with a few key highlights for the quarter. First, we continued to extend our position as a growth leader within consumer packaged goods, achieving an enterprise dollar sales increase 4.5 percentage points above that of the entire CPG sector. Let me repeat that. We achieved an enterprise dollar sales increase 4.5 percentage points above that of the entire CPG sector, per the Sercana Track channel data for the 12 weeks ended on their May 19th quad week. This significant outperformance was largely driven by the continued growth of our beer business, which attained the second largest share gain in the total beverage industry, as well as, once again, the top share gain in all beverage alcohol. This for the Cercana 12 weeks and the June 2nd, which most closely aligns with our quarter. Second, continuing with our beer business, we delivered another strong quarter with high single-digit net sales increase driven by our beer portfolio's 57th consecutive quarter of depletion growth as well as significant operating margin improvement supported by our cost savings and operational efficiency initiatives. And of course, all of this was aligned with our full-year guidance and our medium-term outlook for the business. Third, in line with our disciplined and balanced capital allocation priorities, which we have consistently delivered against for more than five years now, in the first quarter of this fiscal year, we did several things. First, We maintained our strong investment grade balance sheet and still expect to achieve our target three times net leverage ratio in fiscal 25. Second, we returned $185 million to shareholders in dividends and executed $200 million in share repurchases. Plus we completed over 40 million more dollars of buybacks in June. Third, We continued to advance our latest brewing capacity addition at Obregon and new brewery development at Veracruz. And we are pleased to have executed the divestiture of our Mexicali site, which as a reminder was mainly the land building as we had already repurposed most of the equipment. Fourth, we executed the tuck-in acquisition of Sea Smoke to address white space and enhance asset utilization in our wine portfolio. and in parallel initiated a potential sales process of a few Wine & Spirits non-core assets, including certain vineyards and facilities, to better align our network and partially offset the acquisition cost. Staying with Wine & Spirits for a moment, while the performance of the business continues to face near-term challenges largely driven by broader category headwinds, we expect next sales and operating income improvements, and our outlook for the fiscal year is unchanged. Lastly, all in, we drove comparable earnings per share growth of more than 17% and remained focused on achieving our stated full-year guidance and medium-term target of low double-digit comparable EPS growth. With that, let's turn more fully to our beer business's performance. We maintained the momentum in our beer business during the first quarter of fiscal 25, with net sales and operating income growth of more than 8%, and nearly 16% respectively. As noted earlier, these increases were primarily supported by strong volume growth, as well as cost and operational efficiencies. Our beer business grew shipments by 7.6% in Q1 on a reported basis, while depletions were up 6.4%, excluding the impact of the Kraft brand divestitures in June of last year. It is important to reiterate that this mid- to high single-digit level of volume growth was fully aligned with the expectations we shared for our fiscal year as well as our medium-term algorithm. So, despite the volatility of short-term scanner data, be it due to weather, timing of holidays, or other non-structural factors, or the performance of the broader beer category, be that due to dynamics affecting other brands or segments, our beer team, once again, consistently delivered on our targets and objectives. Now honing in on the performance of our largest brands, Modelo Especial grew depletions by nearly 11% and upheld its position as the top share gainer, extending its lead as the number one beer brand in U.S. tract channels. Importantly, Modelo Especial also continues to grow household penetration rising to become the number three brand on this metric at the end of May, with a 2.4 percentage point increase on a 52-week basis. While Corona Extra depletions declined just over 1% in Q1, we continue to expect we can deliver low single-digit growth from this brand. Importantly, Corona Extra remains a top five beer brand in the US, and it continues to gain share in the category. Pacifico delivered remarkable depletion growth of over 20% and was the number four dollar share gainer across the total beer category. Our Modelo Chilada brands delivered an increase of more than 5% in depletions, and we are excited to continue to build on that momentum in fiscal 25 with two new flavors, fresher picante and negra con chile. More broadly, from an innovation pipeline perspective, The rollout of our two new Modelo oral pack sizes is underway as we continue to thoughtfully build out the brand using our disciplined approach after a successful national launch last year. In addition, the expansion of our Aguas Frescas variety pack to an additional 20 markets and the launch of Corona Sun Brew in select Eastern test markets are also advancing per our plans, and we look forward to sharing more on these additions to our portfolio over the coming year. The strong execution of our beer business in Q1 was also reflected in our ability to deliver significant operating leverage, driving 2.6 percentage points of operating margin expansion year over year. Looking ahead, we continue to expect our beer business to deliver net sales growth of 7 to 9%, operating income growth of 10 to 12%, and an operating margin of approximately 39% in fiscal 25. Moving on to wine and spirits. As noted earlier, we continue to face challenging dynamics in these categories, particularly across most of the wine price segments. These headwinds were the main drivers of the 7% net sales decline for that business in Q1. That said, our craft spirits portfolio achieved shipment volume growth of 14% as well as double digit dollar sales growth in Cercana U.S. tract channels, significantly outperforming the low single-digit growth rate of the higher-end spirit segment. In addition, we continue to make good progress against the operational and commercial execution initiatives identified last quarter to support our efforts to improve the performance of this business in fiscal 25. The tactical investments in the 11 brands that represent 75% of net sales and over 80% of volumes for our wine and spirits business in fiscal 24 are now underway. And we expect to see improvements in this select group of our most scaled offerings over the remainder of the year, ultimately underpinning the relatively stable net sales outlook for that business in fiscal 25. However, these incremental investments did have a near-term impact on the operating income, which declined 25% in the first quarter. That said, we also expect year-over-year operating income performance of our wine and spirits business to improve throughout the remainder of the year. And we continue to target wine and spirits operating income to be down 9% to 11% in fiscal 25. As we have noted previously, we remain committed to continuing to advance this business over the coming years towards the medium-term target shared in our investor day. Lastly, we continue to make good progress against our ESG ambitions, having recently received true certification for zero waste at our Nava and Obergon breweries, marking a significant milestone in meeting our waste reduction commitment. And as a reminder, last year, we also achieved our initial water restoration commitment one year ahead of schedule. And we then set an ambitious target nearly five times the size of the original goal to be completed within the same timeframe of fiscal 23 to 25. So in closing, we once again delivered another quarter of solid performance driven by the continued strength of our beer business. And we expect to maintain this momentum throughout the rest of fiscal 25 and beyond as committed at investor day. Our beer business continues to achieve strong volume growth well above that of its category and total beverage alcohol. This outstanding performance supported the second largest dollar share gain within the broader beverage industry and reinforced our significant growth outperformance relative to the entire CPG sector. Our wine and spirits business is making progress against the operation and commercial execution initiatives identified last quarter to support its trajectory for this year's guidance. All in, we continue to advance toward our enterprise-wide financial targets, including the delivery of double-digit comparable EPS growth, while upholding our disciplined and balanced capital allocation priorities from the last five years, which so far this fiscal year has also included the return of over $240 million to shareholders in share repurchases through June. And with that, I turn the call over to Garth.