President and Chief Executive Officer at Constellation Brands
Thank you, Patty. Good morning, and welcome to our second quarter call. Let's dive right into a discussion about the quarter. There were a number of puts and takes impacting our results in Q2, and Garth and I will spend time walking through them. However, the fundamentals of our business remain solid and consumer demand for our brands, particularly our core beer portfolio, remains strong. This gives us confidence to increase our EPS guidance for the year, which we outlined in our press release earlier today and Garth will review in more detail shortly.
In addition, we repurchased a significant number of shares in Q2 at prices that are favorable as we believe Constellation's stock is undervalued at current levels. We've received some feedback from investors on this topic in recent weeks, and we'll address key themes that emerge from these discussions in our remarks. As we walk through our Q2 performance and outlook for the remainder of the year, there are several key takeaways we'd ask you to keep in mind. Number one, the momentum of our core imported beer brands provides a point of competitive strength versus industry peers as we're the leading share gainer in the high end of the U.S. Beer market.
The majority of our growth continues to be driven by Modelo Especial, supported by strong consumer demand for Corona Extra and Pacifico, and we expect this to continue for the foreseeable future. We continue to believe that Modelo Especial in particular has a long runway for growth given the steadily increasing household penetration for this brand among non-Hispanic consumers and continued strong velocity. Now, we've admittedly had some supply challenges this fiscal year driven by several external factors, the most relevant being the ongoing robust demand for our Beer brands. We expect to return to more normal inventory levels by the end of Q4.
Despite these challenges, we continue to be on track to deliver a better-than-expected year for our Beer business. In fact, our strong performance to-date gives us the confidence to increase guidance for our Beer business as we now expect to achieve 9% to 11% net sales growth and 4% to 6% operating income growth for fiscal 2022. Our view is reinforced by recent 12-week IRI trends showing that Constellation's Beer business is significantly outpacing the high end and total U.S. Beer industry. Point two. As it relates to our Hard Seltzer business and building off our last point, we're unique in our position versus our competitors in this space as our primary growth is coming from our core Beer portfolio and we're not reliant on the growth of Hard Seltzers and ABAs to achieve the medium-term growth goals for our Beer business.
The Hard Seltzer landscape has shifted considerably in recent months. Therefore, we've lowered our growth expectations for Corona Hard Seltzer resulting in a sizable obsolescence charge taken for Q2, which includes our view of the total impact for the fiscal year. But let's be clear. We continue to see the Hard Seltzer and broader ABA space as a meaningful sector in the Beer market, and we continue to believe it's important to participate in and gain our fair share in this segment to complement the growth of our core imported Beer portfolio and to maintain our position as a leader in the high end of the U.S. Beer market.
Going forward, we plan to focus on competing in this space in ways where we offer meaningful points of differentiation and unique value to consumers. I'll have more to say on this topic in a moment. Number three. While our Wine and Spirits business was challenged in the quarter by underperformance of several mainstream brands due to tough COVID comparisons, our recent route to market transition, and supply chain challenges for our imported wine brands, we continue to see the benefits of our premiumization strategy take hold. We're performing well in the high end of the Wine segment, which represents the vast majority of expected industry growth over the next several years.
And we continue to strengthen our capabilities in emerging growth channels key to long-term success such as e-commerce and DTC. Number four. We continue to enhance our approach to innovation with a more consistent, strategic, disciplined and consumer-led approach with a focus on high growth segments aligned with consumer trends. Our innovation agenda is designed to complement our organic growth, and we're developing sustainable products that are incremental to our business while further premiumizing our portfolio into margin-accretive price points.
Over the years, we've been able to extend some of our brands into new spaces, recruiting new drinkers and expanding occasions, and we've achieved a healthy balance between both from the core and from innovation. Number five. Our capital allocation strategy remains unchanged since I assumed the role of CEO almost three years ago. Since then, we've made significant progress in reducing debt and achieving our goal of returning $5 billion in value to shareholders by the end of fiscal year '23 through a combination of dividends and share repurchases. In fact, to-date this fiscal year, we have repurchased $1.4 billion of our shares, and when combined with our dividend, we have achieved nearly 60% of our $5 billion goal.
To be clear, our shareholder value equation is based on outsized growth combined with return of dollars to shareholders. One of the most important capital allocation priorities is to continue reinvesting in our Beer business to keep up with robust demand for our products. Despite initial challenges associated with the buildout of a third brewery in Mexico, we have moved on to other capacity alternatives in the country. Our expansions in Nava and Obregon helped ensure we have adequate production capacity for the medium-term and will create much needed redundant capacity that better enables us to manage through unexpected events like we've experienced these past two years.
We continue to work with Mexican government to solidify plans for a new brewery in southeastern Mexico with adequate water supply and an available talented workforce. Now let's move on to a more fulsome discussion about our performance within the quarter. During the quarter, the Modelo Brand family posted depletion growth of 17% in the quarter and single-handedly drove total import share gains in IRI channels on a dollar basis. As the number two Beer brand in dollar sales in the entire U.S. beer category, Modelo Especial is the only major Beer brand growing household penetration and is leading the way as the number one share gainer among high end brands. Modelo Chelada has become the number two brand family in the Chelada space, posting depletion growth of more than 50% for the second quarter.
Corona Extra continues its growth trajectory as the second fastest share gainer and the number one loved brand in the import category driven by a return to growth in the on-premise, which currently represents approximately 11% of our Beer business volume. In addition to the comments I made earlier about our Hard Seltzers, I'd like to discuss industry trends and our refreshed approach to this sector of the Beer market going forward. In the short- to medium-term, we believe that there will be consolidation within the Hard Seltzer/ABA space primarily due to the chaos of SKU and brand proliferation with too many new entrants that don't have the velocity or consumer demand to warrant shelf space.
We also believe this subcategory will evolve beyond low calorie, low carb offerings and open up to more distinctive consumer value propositions that include things like more flavor, different alcohol bases, and functional benefits. We've already started to innovate in this way with distinct products like Refresca and Limonada. We've also discovered that consumers are looking for more robust taste and flavor in their seltzers. As a result, we will be altering the flavor and taste profile of our Seltzer portfolio to better align with the changing consumer preferences while also introducing single serve packages to better serve the growing convenience channel, our largest trade channel.
And we have a solid lineup of innovation that we have yet to introduce. We have several great examples of our innovation strategy at work within our Wine and Spirits portfolio. This business continues to drive growth from recently launched innovations including Meiomi Cabernet Sauvignon, Kim Crawford Illuminate, The Prisoner Cabernet and Chardonnay, all of which are amongst the top 10 innovations across high end wine in IRI channels during the quarter. And our Wine and Spirits innovation pipeline is ready to go with further consumer-led new products as we head into our peak selling period including the expansion of our ready to drink platform and the introduction of Woodbridge wine seltzers and boxed wines.
In addition to driving growth through innovation, we're making progress with our core Wine and Spirits portfolio despite the previously mentioned challenges. We continue to take price to further premiumize our mainstream portfolio as these steps are critical to maintain brand equity and to improve profitability, which will serve our brands well over the long term. We're putting points on the board in a number of areas where we're outperforming the U.S. Wine market. Our high-end super premium plus portfolio grew net sales double digits during the quarter. In on-premise channels, our investments are paying off with enhanced wine offerings at major restaurant chains.
We're thriving in critical emerging channels like three-tier e-commerce and direct-to-consumer, which continue to drive high end growth where we're outpacing category performance at key accounts such as Instacart, Amazon, and Albertson's with the resurgence of online shopping due to the COVID pandemic. For example, Constellation's fine wine share has expanded significantly in the latest 12 weeks due to the robust growth of The Prisoner on Instacart and Robert Mondavi Winery on wine.com. In fact, e-commerce and DTC sales are up nearly three to four times versus 2019 and they comprise roughly 3% to 5% of our business versus 1% pre-pandemic.
Going forward, we will continue to focus on becoming a category leader in e-commerce and DTC as we believe these channels will make up a significant portion of our mix over time and will continue to be an opportunity for high end growth. I'd also like to provide you an update on our U.S. harvest, which is about 70% complete at this point while our production facilities, wineries, and tasting rooms remain untouched by recent wildfire activity. This quarter, our ventures activities included investments in Adaptogen infused HOP WTR and Aaron Paul and Bryan Cranston's artisanal Dos Hombres Mezcal.
HOP WTR is a nonalcoholic calorie free sparkling water infused with Adaptogens and Nootropics to provide the perfect balance of function and flavor for health-conscious consumers. The nonalcoholic segment of total beverage alcohol grew almost 40% in 2020 in dollar sales through IRI channels, and according to IWSR research, 60% of consumers are switching between nonalcoholic or low alcoholic and full-strength drinks within the same occasion. Dos Hombres is an award-winning hand crafted Mezcal brand created by Breaking Bad co-stars who have developed an exceptional liquid that receives frequent praise from both the industry and consumers.
The overall U.S. Mezcal category grew 14% in 2020 according to IWSR and super premium Mezcal priced above $30 per bottle is projected to be the largest and fastest growing segment within the category. Moving on to Canopy Growth, we're encouraged by the recent introduction of the Cannabis Opportunity and Administration Act draft bill which was introduced by Senators booker, Wyden and Schumer in July. More than 90% of Americans are in favor of cannabis legislation for medical purposes and two-thirds of those are in favor of legalizing for recreational use as well.
In fact, nearly two out of three Americans already have legal cannabis access as 37 states have legalized for medical use and 18 states for adult use. While we're optimistic about federal legislation within this Congress, Canopy is not waiting for this reality to materialize. Canopy's U.S. business grew 91% year-over-year in their most recent quarter driven by robust consumer demand for their CBD and CPG products, including Martha Stewart branded products, Quatreau beverages, stores and baked products, and Biosteel's new RTDs. Over the coming years, revenue for Canopy's U.S. business is expected to grow significantly as it benefits from increasing distribution and new product introductions.
Once THC permissibility becomes a reality in the U.S., Canopy expects their U.S. business to make a substantially greater contribution to their results. Canopy has scaled a multi-state route to market plan ready for legalization and has leveraged Constellation's distributor relationships to fuel their U.S. non-THC business with more opportunities in a world post federal permissibility. Overall, we're comfortable with Canopy's progress and we're looking forward to the growth and legalization prospects for the business. In closing, I'd like to reiterate our main takeaways for this quarter.
First, continued strong demand for our core imported beer brands provides a point of competitive strength versus industry peers led by the number one share gainer in the Beer category, Modelo Especial, which we feel has ample runway for growth well into the future given the steadily increasing household penetration rates among non-Hispanic consumers and continued strong velocity. The short-term supply disruption to our imported Beer business does nothing to dampen our long-term prospects as we expect to return to more normal inventory levels by the end of Q4, and we're on track to deliver a better-than-expected year for our Beer business.
Second, we continue to see the Hard Seltzer and broader ABA space as a meaningful sector within the beer market. Going forward, we plan to focus on competing in this space in ways where we can offer meaningful points of differentiation and unique value to consumers, and we have some upcoming innovation in this space that we're optimistic about. Number three, we continue to see benefits of our Wine and Spirits premiumization strategy take hold. We're performing well in the higher end of the wine segment and we continue to strengthen our capabilities in emerging growth channels key to long-term success such as e-commerce and DTC.
Fourth, we continue to enhance our approach to innovation with a more consistent, disciplined, and consumer-led approach focused on high growth segments aligned with consumer trends to complement our organic growth while developing sustainable products that are incremental to our business at margin accretive price points. And fifth, and certainly not least, our shareholder value equation continues to be based on outsized growth combined with a return of dollars to shareholders.
And let me reiterate, our capital allocation strategy remains unchanged. We remain committed to our goal of returning $5 billion in value to shareholders by the end of fiscal year '23 through a combination of dividends and share repurchases. Our strong operational performance and cash flow generation allowed us to make significant share repurchases in Q2 aligned with our commitment which contributed to the increase in our EPS guidance for the year. At the same time, we remain committed to continuing to reinvest in our business with an emphasis on our Beer business to keep up with the robust demand for our products.
And with that I'd like to turn the call over to Garth who will review our financial results in the quarter. Garth?