Constellation Brands Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 30, 2023

There are 13 speakers on the call.

Operator

As a reminder, this conference call is being recorded. It's now my pleasure to turn the call over to Joe Suarez, Vice President, Investor Relations. Please go ahead, Joe.

Speaker 1

Thank you, Kevin. Good morning, all, and welcome again to Constellation Brands Q1 fiscal 'twenty four 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 measure And any non GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website atwww.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.

Speaker 1

Following the call, we'll once again 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'd like to ask that we limit everyone to one question per person as noted, which will help us end our call on time. Thanks in advance. And now here is Bill. Thanks, Joe, and good

Speaker 2

morning, everyone. We are off to a strong start in fiscal 2024 with a solid our Q1. Our beer business delivered net sales growth of 11%, mainly driven by continued strong volume growth in line As anticipated, depletion performance accelerated throughout the quarter, Resulting in a 5.5% increase for the period, an acceleration that has continued into June, supported by our Beard team's an unrelenting push to increase distribution for our high growth, high velocity brands continued incremental investments in marketing Focused on the highest return opportunities and ongoing strong demand for our high end Mexican beer brands aligned with consumer led optimization trends, particularly in large markets with significant runway for Modelo Especial like Texas, Florida, Illinois and North Carolina, where the brand posted double digit dollar sales growth in Turkana tracked channels. And yes, also in California, where our share gains actually accelerated and as expected, Demand for our portfolio did ramp up after the unseasonably cold weather in early March. All in, our beer business delivered strong growth for the quarter, while consistently advancing all four areas of our strategic initiatives.

Speaker 2

First, the business continued to propel its powerful core brands that people love. Modelo Especial And as most of you likely already are aware, became the number one beer in America in dollar sales during the Q1. Both Corona Extra and Pacifico also achieved share gains and delivered dollar sales growth which are still centered around the flavor and betterment consumer led trends are off to a great start. Our Modelo Chilada brands optionality, the number 4 new product in Sercana channels and from the launch of new Sandia Picante flavor, the number 5 new brand. Modelo Oral was also a top 10 share gainer and incrementally has actually been slightly above what we saw in initial test markets.

Speaker 2

And Corona NA was the number one share gainer in the non alcoholic beer category in tracked channels. 3rd, the expansions of our beer brewing capacity continue to advance as planned. Our latest modular addition to Overgone successfully ramped up in Q1 and we are on track with the new ABA facility at Nava offer Q4 of this fiscal year. At Veracruz, site development and construction work are underway, and we expect that to build up options

Speaker 3

to improve this year and next.

Speaker 2

And 4th, the ESG efforts of our beer business further drove progress on our company wide goals, restoring 1,100,000,000 gallons of withdrawals from local watersheds. The initiatives in our beer business drove most of this achievement and we plan to announce a new water target later this fiscal year. Building on our existing water and emissions targets, We also recently announced 2 new commitments focused on reducing waste and enhancing our use of circular packaging. In support of that commitment within our beer business, we plan to attain a true 0 waste to landfill certification for our breweries in Mexico And replace high cone plastic rings with recyclable paperboard for all applicable 4 and 6 pack SKUs. Similarly, within our wine and spirits business, we also plan to attain the same certification for our key U.

Speaker 2

S. Operations as well as reducing our packaging to product weight ratio by 10% and ensure that 80% of the business packaging is returnable, With that, let's turn more fully to our Wine and Spirits business. As noted previously, Over the last few years, the wine and spirits business has strategically shifted its portfolio to a bold, innovative and higher end product mix That continues to be driven by consumer led premiumization. In Q1, the higher end wine portion of the business option to gain share in the U. S.

Speaker 2

Wine category and outpace the dollar sales growth of the corresponding segment and tracked channels. Meiomi and Kim Crawford, the portfolio's largest premium wine brands and the Prisoner Wine Company, the largest fine wine brand group The innovation efforts across these brands also continued to deliver excellent results With Meiomi Bright, the brand's lower alcohol, lower calorie offering aligned with consumer led betterment trend, Capturing the number one new brand spot in the category. In the mainstream line portion of the business, the reinvention of Woodbridge is underway While there is certainly more work to be done here, the brand's year over year dollar sales decline in U. S. Tracked channels improved throughout the quarter.

Speaker 2

The overall spirits portfolio maintained its share in U. S. Tracked channels with notably strong dollar sales performance across its higher end tequila and RTD products, in particular, Micampo Tequila and High West ready to drink cocktails Both delivered significant double digit dollar sales growth. Beyond the evolution of the portfolio over the last few years, The Wine and Spirits business has also been investing in capabilities to accelerate its performance in key growth channels. This omnichannel focus has provided additional pillars of consumer led growth, such as international and direct to consumer, the latter of which Grew the channel's net sales 13% in Q1.

Speaker 2

And in fact, the e commerce and customer loyalty portions of our DT business DTC business, pardon me, were up over 40% in Q1. From a volume perspective, the wine and spirits business continued to face Lower demand primarily for our mainstream brands, reflecting continued consumer led premiumization trends noted earlier, which in turn affected top line performance. In the higher end wine portion of our portfolio, our larger premium and luxury brands operator to face softer segment demand in April, but we did see solid acceleration in May and that has continued into June. Meanwhile, in our spirits portfolio, our higher end craft brands posted very strong depletion growth of 40%. The wine and spirits business also delivered significant operating margin expansion in Q1, adjusted for the contribution after marketing of the our Investor Brands.

Speaker 2

This further demonstrates the benefits of the strategic refocusing of the portfolio to higher end, higher growth, higher margin brands and channels. To sum up the shift of the Wine and Spirits business toward driving growth and margin improvement opportunities to expand our business through its pivot to the higher end brands and broader channels and markets remains well on track. All in, we are confident in our outlook for the wine Spirit's business in fiscal 2024 as performance is expected to continue to accelerate throughout the course of the year In line with seasonality and the business' annual plan, particularly as the share of net sales from our Aspira, Fine Wine and our Craft Spirits portfolio increases over the coming quarter. In closing, I once more want to highlight that our solid performance optionality for the Q1 of fiscal 'twenty four was anchored by the consistent execution of the annual plans and strategic initiatives across both businesses. And with that, I would like to turn the call over to Garth, who will review in more detail our financial results for the quarter.

Speaker 4

Thank you, Bill, and good morning, everyone. As Bill noted, fiscal 2024 is off to a solid start. We steadily executed against our annual plans, Remaining both focused and adaptable as the economic and consumer backdrop continue to evolve, and we remain on track to deliver against our stated financial performance goals for this fiscal year. As Bill noted, our beer business Double digit net sales growth and the higher end segment of our wine and spirits business outperformed the higher end of the wine category. We also continue to execute and deliver against our capital allocation priorities, and we are reiterating our guidance for the year.

Speaker 4

Now let's review our Q1 fiscal 2024 results in more detail, where I will mainly focus on comparable basis financial results. Starting with the beer business. Net sales increased by $200,000,000 representing an uplift of 11%. This was driven primarily by our volume growth of 7.5% as strong demand continued across our industry leading portfolio. We also benefited from favorable pricing, which contributed $60,000,000 of the overall net sales increase.

Speaker 4

Staying on the topic of price for just a moment, the incremental pricing we realized this quarter primarily reflects update on the ramp around impact from the elevated pricing taken in fiscal 2023 that was above our typical 1% to 2% algorithm. As a reminder, we expect pricing to account for 1% to 2% of our net sales increase this fiscal year, optionality to be taken in fiscal 2024 on a market by market, channel by channel and SKU by SKU basis. Steer depletion growth for the quarter came in at 5.5%, which reflects a slower start but strong finish The disciplined execution of our distribution and marketing plans, including during the key Cinco de Mayo and Memorial Day holidays ongoing consumer led premiumization trends, including solid buy rates for high end beer. And as Bill noted, Significant growth in several of our top 5 markets and beyond as well as improving conditions in California. These results give us confidence as we head into the peak summer selling season.

Speaker 4

Our largest brands, Modelo Especial And Corona Extra delivered mid single digit and low single digit depletion growth, respectively, while our emerging brands, the Modelo and Chillatta brands and Pacifico, Each delivered double digit depletion growth. On premise depletions grew 3.2% And accounted for approximately 12.4 percent of total volume, reflecting more normalized year over year performance following The distortions caused by the pandemic closures and post pandemic reopenings. For the Q1 of fiscal 2024, Shipment volume ran slightly ahead of depletion volume on an absolute basis. Shipments were in line with our plan throughout the quarter And depletions ultimately ramped up over the course of the 3 months as previously noted. This difference in timing was the primary driver of the variance between shipment and depletion volumes.

Speaker 4

Additionally, as it has been the case historically, strong shipment volume in the first quarter That said, distributor inventories remain at normal seasonal levels, so we do not expect this variance to generate any further distortion optionality in Q2 and expect both shipment and depletion volume to be aligned for the full fiscal year. Importantly, We are also well equipped with capacity flexibility to meet any incremental demand as we move through the year. In regards to selling days, they were flat year over year for the quarter. Please note that for fiscal 2024, there will be one more selling day in Q4. Moving on to beer margins.

Speaker 4

Operating margin decreased by 2 20 basis points to 38%. This decrease was primarily driven by continued inflationary headwinds in our COGS as we faced an overall cost increase of approximately As anticipated in our guidance for the year, we continue to face higher packaging and raw materials, In Q1, we experienced low double digit percent increases in packaging and raw materials As inflationary pressures continued throughout the period, albeit at a declining rate over the 3 months. We also continue to face higher overhead costs related to our brewery expansion as well as increased logistics costs largely related to higher shipment volumes. As we have previously stated, it is important to note that for fiscal 2024 and consistent with recent years, Roughly 70% of our COGS are subject to annual pricing adjustments. These are based on trailing indicators such as producer price indices While our full year COGS expectations currently remain unchanged, we are monitoring closely any potential favorability in direct commodity And pass through raw material prices for the approximately 15% non hedged portion options, we will provide any relevant updates in future quarters.

Speaker 4

Additional operating margin headwinds for the beer business were comprised of a $29,000,000 or 17% increase in marketing expense, primarily driven by ongoing media spend to build awareness of our core products as well as recent investments to support the new Medela Oral product launch. And as a result, please note that marketing as a percent of net sales came in at 9.5% for the quarter. A $15,000,000 or 18 percent increase in SG and A expense, which was primarily the result of increased legal costs And an $11,000,000 or 16% increase in depreciation, almost entirely associated with our brewery capacity investments. To help offset the increase in cost to our beer business, we are executing on various levers to partially offset the full year high single digit inflationary headwinds in our overall packaging, raw materials and logistics costs through productivity initiatives. These initiatives have yielded savings of over $30,000,000 for the Q1 of fiscal 2024 and are focused For fiscal 2024, our guidance for the Fear business remains unchanged as we continue to target 7% to 9% of net sales growth And operating income growth of 5% to 7%, implying an operating margin of approximately 38%.

Speaker 4

Now moving on to the Wine and Spirits business. As Bill noted, over the last few years, our Wine and Spirits business has been effectively shifting its portfolio options to be more focused on higher end brands that are better aligned with consumer led premiumization trends, while broadening sales channels optionality to also expand into higher growth avenues. To that effect, please recall that we divested a collection a portion of our portfolio during our Q3 in fiscal 2023. Accordingly, during today's discussion, I will be referring to the top line of the Wine and Spirits business on an organic basis, which excludes the contribution from the divested brands. Consistent with the strategic transformation, The Wine and Spirits business has undertaken the higher end brands of the wine portfolio continue to resonate with the consumer and outperformed the corresponding segment of the category in the U.

Speaker 4

S. Track channels in Q1. More recently, we've seen even greater strength in our 3 largest premium and fine wine brand families with Meiomi, Kim Crawford and the Prisoner and Wine Company showing dollar sales growth and acceleration in tracked channels. Similarly, we were also pleased to see the overall spirits portfolio deliver strong dollar sales growth in tracked channels, Led by Micampo and High West ready to drink cocktails. However, Wined and Spirits organic net sales were down 6%, Largely as a result of the continued impact of ongoing consumer led premiumization affecting the entire category And the lapping of a particularly strong prior year Q1 for our higher end brands due to distributor inventory balancing actions.

Speaker 4

From a channel perspective, we continue to see success through our direct to consumer efforts, which delivered 13% net sales growth in our overall DTC channel. While still small compared to the rest of our wine and spirits business, this channel accounted for 4% of total net sales, An increase of 100% versus just a few years ago. Shipments on an organic basis decreased by 9% Depletions decreased by approximately 6%. As noted earlier, this volume decline was primarily driven by our mainstream brands, Woodbridge and SVEDKA as their respective segments of the categories face ongoing growth headwinds driven by consumer led premiumization. Again, the Wine and Spirits business continues to diligently work on the reinvention of Woodbridge and SVEDKA to address these headwinds.

Speaker 4

In particular, SVEDKA declines have stabilized and we continue to look at incremental opportunities to revitalize the brand and accelerate improvements. And more broadly in our spirits portfolio, our craft brands posted nearly 40% depletion growth, driven by Mi Capo posting depletion growth of over 80%. Wine and Spirits operating income, excluding the gross profit less marketing of the brands that are no longer part of the business following their divestiture, The margin improvement was primarily driven by the favorable impact of the pricing actions taken last year that primarily focused on our higher end brands, Lower materials and packaging costs, including grape blend optimization, lapping of higher freight and warehousing costs and lower marketing expense, as we have streamlined our approach to marketing, focusing on the highest return areas of our portfolio. Looking ahead, we expect the performance of the Wine and Spirits business to accelerate throughout the remainder of the fiscal year through the combination of operational trends, ongoing growth in DTC channels, as well as a return to growth in international markets. Lower marketing spend as we shift towards higher growth areas focusing on the Aspira portfolio and continued work toward the revitalization options, SVEDKA and Woodbridge in the mainstream category.

Speaker 4

Accordingly, we remain confident in the outlook for wine and spirits for the year And our guidance for that business for fiscal 2024 remains unchanged. Now let's proceed with the rest of the P and L, Starting with corporate expense, which for the quarter was approximately $50,000,000 from SG and A and overall corporate expense reduction of 19% when compared to the prior year and $33,000,000 from unconsolidated investments related to Canopy and our Ventures portfolio investments. The overall corporate expense reduction is primarily driven by reduced spend in the 2nd wave of our digital business acceleration program. I want to take a moment to talk briefly about the next wave of our digital business acceleration program. For fiscal 2024, our DBA program will have 3 main goals.

Speaker 4

1st, scaling our prior year's focus areas of marketing, Which will center around improving end to end visibility and planning as well as enhancing our network capabilities across the business. And third, reducing third party consulting fees as we begin to shift the support of our DBA program opportunities to in house increasing efficiencies and reducing overall cost. Interest expense for the quarter And rising interest rates on approximately 10% of our debt with adjustable rates. We ended the quarter with a net leverage ratio of approximately our 3.5 times excluding Canopy equity and earnings and expect to continue to make progress towards our approximately 3 times ratio target throughout the year. Our comparable effective tax rate, excluding Canopy equity and earnings for the quarter was 20.7% versus 20.6 percent last year.

Speaker 4

For fiscal 2024, we continue to expect the comparable effective tax rate, excluding Canopy equity and earnings, to be approximately 19%. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx. For the Q1 of fiscal 2024, we generated free cash flow of $388,000,000 a 31% decrease versus prior year, Driven by a 41% increase in CapEx investments, driven primarily by the capacity expansions at our Nava and Obregon facilities optionality and the construction of our new brewery located in Veracruz. Our capacity expansions are underway as planned. Update on the planned additions for this year, we fully ramped up 5,000,000 hectoliters at our Obregon facility in Q1 and are planning on another 5,000,000 hectoliters option to support our ABA production to be online at our novel facility towards the end of fiscal 2024.

Speaker 4

In total, by the end of fiscal 'twenty four, we expect to have about 52,000,000 hectoliters of capacity online, Which as you recall, includes nearly 3,000,000 hectoliters of additional capacity from operational efficiency initiatives executed last fiscal year. Looking ahead, as we continue to consider incremental operational opportunities for our production facilities, we will seek to ensure that we align our additional modular capacity expansions to the timing that best balances Turning to cash flow. We continue to expect fiscal 'twenty four free cash flow option and CapEx of $1,200,000,000 to $1,300,000,000 Comparable EPS for the quarter, excluding Canopy Equity and earnings option was $3.04 with an announced dividend of $0.89 bringing our dividend payout ratio to approximately 30% for the quarter. Our fiscal 2024 EPS comparable guidance of $11.70 to $12 remains unchanged. In closing, we believe that this solid start to fiscal 2024 sets us up for a great year ahead.

Speaker 4

We delivered net sales and volume growth in our beer business, while implementing cost savings and efficiencies to help counteract the continued inflationary headwinds we face. Our wine and spirits business is honing in on becoming a multichannel global competitor, primarily focused on the higher end segment. The growth in our core businesses and execution against our strategies makes us enthusiastic about what the rest of the year will bring and the shareholder value we will be able to create. With that, Bill and I are happy to take your questions.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Dara Mohsenian from Morgan Stanley. Your line is now live. Hey, guys.

Speaker 5

So you sounded pretty bullish about beer depletions towards the end of fiscal Q1 in May June so far, was just hoping for a little more detail there and more specifically If you can sort of juxtapose that versus the slowdown we had seen in the November to April timeframe, it does seem like a fairly sizable inflection the other way. So, more detail there would be helpful and just if these factors driving the better May June look more Extendable and how you think about that? And if I can slip in a second part, that I'll pretend is related to the first part. Just if industry pricing worsens going forward given there's obviously a lot of potential changes on the ABI side, how do you think about Domestic beer pricing as sort of a risk factor to your volume trends as you look going forward, if in fact there's any change from an industry backdrop standpoint? Thanks.

Speaker 2

Sure, Dara. Let me cover that one. As we have told you before, March was a particularly challenging month. But as we've also noted, there was great acceleration. I think the easiest way to look at it is option to look at Turkana data.

Speaker 2

The 12 week is better than the 26 week. The 4 week is better than the 12 week. And as I noted this morning, the acceleration that we saw coming out of the Q1 is continuing into the Q2, which I think is very positive. To give you some other perspective that I think would be important and I think people often ask, if you think about Modelo Especial, We had 24 states in the Q1 growing double digits. In our chilada business, we had 47 states Double or triple digits during the Q1.

Speaker 2

And as we've already noted, those things were accelerating coming out of the quarter. So I think we're quite comfortable that the largely challenging issues that we faced in sort of that Winter time period are now behind us, and we're looking forward to a very strong summer period. Relative to your question about pricing, we haven't seen any particular challenges around pricing. In fact, as we run our normal drivers and drags, the effect of pricing has actually decreased in our business as we've gone through the early part of this year. As we've noted other times, we have not seen much trade down at all away from our business and believe that trend is likely to continue given the strong consumer engagement with all of our brands.

Operator

Thank you. Next question today is coming from Lauren Lieberman from

Speaker 6

Great. Thanks. I was just curious if you could talk a little bit about on premise trends, the depletion call out of 3 I think there's a pretty there's a deceleration versus Q1. Can you just talk specifically to what you've been seeing in terms of on premise trends Later in the quarter, I know you've been talking about this acceleration in Turkana data, if that also applies to the on premise? Thanks.

Speaker 2

Lauren, on premise is still not quite back to where we saw pre pandemic. As we've said before, it was roughly 15% of our business pre pandemic, and it's still in that 12% to 13% range as we have come out of the pandemic. And it's probably been a little more volatile, hit and miss, compared to what you see in tracked channels. We believe it's going to continue to do well and it's going to continue to improve over the course of the summer As we put the final touches hopefully on the pandemic behind us, but it's admittedly not back to quite where it was Ahead of time. The thing that we've often been very pleased about is we've seen many accounts in the on premise get much more focused opportunity to participate on well known recognized brands.

Speaker 2

And obviously, whenever that happens, it's to our advantage, because of the strength of those brands.

Operator

Thank you. Next question is coming from Peter Grom from UBS. Your line is now live.

Speaker 7

Thanks, operator, and good morning, everyone. So I kind of wanted to ask about beer margins, maybe 2 parts. Maybe first, I think marketing was up almost 17% this quarter. And I think the expectation in the initial guidance was for a single digit increase for marketing for the year. So I guess how should we think about the phasing of marketing spend moving forward?

Speaker 7

And I guess has the outlook options at all given the high teens increase in 1Q? And then just related, you mentioned that you're monitoring some favorability across some of your key inputs, we'll provide an update later. But I guess, conceptually, should there be any favorability in those inputs? Would you anticipate those benefits dropping to the bottom line or would you look to take up marketing further? Thanks.

Speaker 4

Well, thanks for the question. I mean, as we noted in our prepared remarks, the increase in Q1 marketing spend was largely supportive of the momentum behind our existing products as well as support of the launch behind Modelo Oro. So marketing as a percent of net sales for the quarter came in at 9.5%. The outlook for the full year is unchanged. We will continue to spend in our normal algorithm that 9% to 10% of net sales on a full year basis.

Speaker 4

And so again, Nothing changed in that regard. As it relates to some of the improvement that we're seeing, obviously, we're off of some of the highs From a commodity perspective, with the exception of 1 or 2 things that have continued to be a little bit They haven't quite come off their highs just yet. So we do think that there could be some favorability as we move through the year on the commodity side. However, some of that favorability could be offset with the strength of the peso. If we look at the outlook right now, the favorability we're seeing on some commodities is being somewhat or completely offset by the strength of the peso.

Speaker 4

So right now, we're not seeing necessarily when you take into account the peso and the improving commodity market, but we're not obviously seeing a big change for the balance of the year.

Operator

Thank you. Next question today is coming from Brian Blaine from Bank of America, your line is now live.

Speaker 8

Hey, thanks, operator. Good morning, everyone. Just one quick one for me, Garth. I think Back on the 4Q call when you talked about cadence, I think it was 55% of beer volume first half and 55 percent of wine and spirits in the back half. So just wanted to see if that was still directionally kind of where we should be thinking as we're beginning to kind of restack our models for the balance of the year?

Speaker 4

Yes, Brian. Absolutely, no changes in that. And obviously, that's one of the reasons why we think Lime will continue to improve through the year. And again, no change. The beer business is pretty seasonal and tried and true.

Speaker 4

So that's Absolutely what the outlook is for the beer business.

Operator

Thank you. Next question is

Speaker 6

And how it may be impacting your business as well as your distributors and any changes you might be making there? And then also in light of this, wondering if there might be an opportunity for you to possibly secure more cap panels for Modelo, just thinking about the on prem business? And then just finally, any changes that you might be making to your marketing strategy or possibly spend levels in light of all of this? Thanks.

Speaker 2

Well, obviously, the single biggest change that we've seen, Bonnie, has been that Modelo has taken over as the number one beer by dollars in the U. S. We Jim Sabia has often said that, that was going to happen in the next few years, but obviously it happened a little sooner than we had anticipated. I think one of the things that you're likely to see if some of that challenge continues is when we look at shelf sets in the back half of the year. Many retailers look at velocities as they are doing their re shelf setting, which again often happens In the fall and that always works to our advantage.

Speaker 2

I think when you the retailing environment has gotten very, very sophisticated about seeing Where the growth profiles are and the velocities against those. We're particularly excited in our beer business. The fact that the buy rate, both on core as well as our high end beer, including the Hispanic consumer, went up year on year, during the Q1. I think that's going to continue to be positive for us, and I think it's going to help us accelerate expansion of shelf. And again, some of that is coming because of the growth in velocities that you're seeing on our brands, but also the decrease that you've seen, as you note, from some of our competitors.

Operator

Thank you. Next question is coming from Nadine Sarwat from Bernstein. Your line is now live.

Speaker 9

Hi, thank you for taking my question. You mentioned some commentary at the start on Ouro. I'd be keen to get a little bit more color there in terms of either repeat rates, cannibalizations Feedback from consumers now that it's been out in the market for a while. Thank you.

Speaker 2

You bet, Nadine. It is the incrementality on the actual market has been better, a slight bit better than what we had anticipated coming out of our test markets. And we are quite pleased with it in the test markets. So we're getting very good response on that. It is already a top 10 share gainer, as I noted in my prepared remarks.

Speaker 2

And again, we've done this with, I would say, a careful approach. We only have 2 SKUs In that particular product at this point in time, recognizing, as Garth pointed out in his remarks, should that continue to show The positive signs that it has to date, we do have the capacity now to more aggressively go after that as the year continues, which I think again is very, very positive and speaks to the success that we've had in our operations in Mexico of creating some ability to go beyond what our initial plans are when those opportunities present themselves. But It's early days. I don't like to get too far over my skis too soon on any new product introduction. But so far, this is going at least according to plan, if not better.

Speaker 2

And we're very pleased with the incrementality that we're seeing. As I said, it's slightly better than we saw in our test markets. So, all thumbs up for us at this point on that product.

Speaker 9

Thank you.

Operator

Your next question is coming from Andrea Teixeira from JPMorgan. Your line is now live.

Speaker 10

Thank you. Good morning, everyone. So So I wanted to go back to the marketing spend. I think you've mentioned for the year, the 7% to 9% of the top line. You started well with 9%.

Speaker 10

So I was just hoping to reconcile because you also said you expect it to be Up to low single. I'm not questioning. I think it's probably a great thing to start well, especially now with this commentary about Obviously, what's happening with Bud Light. And then related to just a clarification on A bit on the gross margin side. And I think, Arce, you mentioned that, obviously, you've got EUR 30,000,000 We're pleased to see margins the way they came through for beer.

Speaker 10

So can you comment on a little bit what the lag boom? Do you Feel even more confident with your guide being conservative as the way I see it. Thank you.

Speaker 7

So let

Speaker 2

me take the first half and I'll let Garth take the second half of that. Our marketing approach has been assistance for years, that's one of the things that we think has been tremendous for our brands and why they continue to accelerate in the market. We believe in spending against our brands. We have refined it some. We're getting much more capable in the digital arena than what we were just a few years ago.

Speaker 2

And I think that's very positive. But we have the number one share of voice in the market and we expect to continue to be To have that continue going forward and we believe in it. It's shown tremendous success for our brands as we've gotten to this point and we believe it's

Speaker 4

offset for the quarter was roughly in line, maybe slightly better than what our expectations were as we entered the year. We certainly feel confident in our ability to deliver a margin profile that we laid out at the beginning of the year, as I said in my prepared remarks, and as we reminded everyone last quarter, roughly 70% of our total COGS are subject to annual adjustments that are backward looking and only 30% have any fluctuation our exposure to fluctuations throughout the year. And so again, we feel really good about the position that we're in right now and our ability to deliver the margin profile it's consistent with the with our earnings guidance.

Operator

Thank you. Next question is coming from Chris Carey from Wells Fargo Your line is now live.

Speaker 4

Hi, good morning.

Speaker 11

Just one clarification and then a question on wine and spirits. Just the clarification, Garth, you said that You didn't expect any distortion in shipments versus depletion going forward after Q1. And I think you were clear in response to Brian's question about the mix of cases front half versus back half. But should the rate of growth of shipments be below the rate of growth of depletions in Q2 or Any quarter go forward and basically what I'm trying to clarify here is the absolute cases versus the rate of change. So I would just be a clarification then.

Speaker 11

The question on Wine and Spirits would be, can you just perhaps Just to pose the premiumization efforts with the margin delivery in the quarter and perhaps just reaffirm confidence in a way on the margin trajectory of the Wine and Spirits business go forward here? Thank you.

Speaker 4

Yes. So on the shipments and depletions, so look, as we said, we expect the shipments and depletions On a nominal basis to be largely in line with one another on a full year basis. I think if you look and you go back to the years that are unaffected by the pandemic or weather related operational difficulties, you'll see that There is some seasonal differences between, depletions and shipments. Q1, as we noted, we typically do have some outpacing of shipments relative to depletions on a nominal basis as you're building for the summer season. And you're getting distributors and retailers in a position that they're able to Meet the demand of that key summer selling season.

Speaker 4

So that's fairly typical. So I would just ask you to go back and look at some prior periods again pre pandemic. As it relates to our wine and spirits business, again, as we said on the call, we do expect to see continued improvement through the year On the margin front, as we continue to see increased traction with our premium portfolio, again, we're seeing good growth out of brands like Meiomi and Kim Crawford and the Prisoner Wine Company. We're continuing to get the benefit of pricing on those and there are a number of cost initiatives underway in our wine business as well as seeing improvements there as we said on both logistics And on Grape input costs. So again, that's a business also that as Brian noted, We've guided, Will, the volume there is about 55 back end loaded.

Speaker 4

So for all of those reasons, We're confident that we can deliver the year, deliver the margin profile that we previously guided to.

Operator

Thank you. Next question is coming from Filippo Feloni from Citi. Your line is now live.

Speaker 12

Hey, good morning, everyone. Quick question on the health of the U. S. Consumer, particularly if you look about your core Hispanic Any changes that you're seeing in terms of purchasing behaviors, in terms of package size, trade down or any signs of that? And clearly, your business has improved as the weather improved in California.

Speaker 12

But any signs there also in terms of change in consumer behaviors, particularly again in the Hispanic consumer base in the States? Thank you.

Speaker 2

Yes. As you can imagine, that's something that we track very carefully as well. And we're pleased to report that the buy rate, which again is trips times to spend For high end beer and this includes the Hispanic consumer was up year on year in the Q1. It's one we track very carefully. It's an important element to us.

Speaker 2

And it's one that we are very pleased to see in a positive Vein, as you point out, we have continued to see acceleration of our share in California, which is an important market, It's also very important, for instance, in the state of Texas, which saw a double digit growth profile in the Q1 as well. So We're pretty comfortable that the consumer side of our business remains very strong. And as I noted on The prior call from the prior question, excuse me, that we are continuing to invest heavily against our marketing approach To make sure that we continue to maintain that same consumer demand that we've enjoyed.

Operator

Your next question is coming from Andrew Strelzik from BMO Capital Markets. Your line is now live.

Speaker 3

Great. Thank you. Thanks for taking the question. My question is around opportunities around price pack architecture as a beer volume growth driver. And I guess what I'm hoping is you can help us understand exactly where you are in that process.

Speaker 3

Is that something that over the medium term we should expect to accelerate as a contributor and maybe over the next 12 months versus over the medium term where the focus is within that strategy? Thanks.

Speaker 2

Yes. You're entirely right, Andrew. That's something that our beer leadership team is working on aggressively day in and day out. And frankly, we think we can learn a lot from some other players in the beverage arena, particularly in the soda area, Where pretty much if you tell me what you've got to spend, there's a pack size or a pack appropriate for a particular price point. So a lot of things we are looking at, things like Modelito.

Speaker 2

We're looking at different quantities, Ounce quantities against some of our packaging. So all of these things are critically important. Part of the reason you're seeing the massive acceleration in the high 40 percentile in the enchilada business is what used to be only a 24 ounce can is now available in both multi pack and 12 ounce opportunities. So again, we think and that's been part of the big acceleration In the gelada area. So this is an area that we're spending a lot of time on ourselves to make sure that Whatever the consumer has available to spend against our brand that we have something available to them within our portfolio opportunity to make sure that they can take our products home with them when they leave a store.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Bill for any further or closing comments.

Speaker 2

Thank you, Kevin, and thank you all for joining today's call. We're off to an excellent start in fiscal 2024. Our beer business delivered strong growth for the quarter with performance accelerating since the beginning of the year and into Q2. The higher end brands of our wine and spirits portfolio continue to outperform and track channels and to drive margin improvement. We remain confident in our outlook for the full year and are building great momentum as we head into the key summer selling season for our beer business And the seasonally stronger second half for the Wine and Spirits business.

Speaker 2

In closing, I want to wish you all a happy 4th July for those of you celebrating that And hope you choose to enjoy your celebrations with some of our great products. Thanks again everyone and have a great summer.

Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.

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Earnings Conference Call
Constellation Brands Q1 2024
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