Constellation Brands Stock

Ladies and gentlemen, thank you for standing by. Greetings and welcome to the Constellation Brands Fiscal Year '27 Second Quarter Earnings Call. [Operator Instructions] Please note that today's conference is being recorded. At this time, I'll now turn the conference over to Blair Veenema, Vice President, Investor Relations. Thank you. You may now begin.

Thank you, Rob, and good morning all. Welcome to Constellation Brands Q2 Fiscal '27 Conference Call. I'm joined this morning by Nick Fink, our CEO; and Garth Hankinson, our CFO.

Before we proceed, we trust you had the opportunity to review the news release and CEO, CFO commentary made available on the Investors section of our company's website, www.cbrands.com.

On that note, as a reminder, Reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. We also encourage you to refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call.

Before turning it over to Nick to kick things off, please keep in mind that as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourself to 1 question per person, which will help us to end our call on time. Thanks in advance, and now over to you, Nick.

Thanks, Blair. Good morning, everyone. Before we get into the Q&A, I want to take a minute for those of you who may not be out of [indiscernible] to read our posted commentary to summarize a few key takeaways from this quarter's results, which beat our expectations. First, we are reiterating our fiscal 2027 guidance, including comparable EPS of $11.20 to $11.90 per share. And if the positive September trends that we saw continue, we would expect to land at the high end of that range. Second, our increased investments and focus on marketing are working. We were the #1 dollar share gainer in beverage alcohol this quarter. Our beer business outperformed and accelerated meaningfully quarter-on-quarter. Pacifico became a top 10 beer brand with a very long distribution runway ahead of us.

We're significantly outperforming the industry, and we are seeing marketing-driven green shoots across the board.

Finally, our inventory levels are healthy. We have set much of the first half rebuilding distributor inventory levels. And while there's always going to be month-to-month variability, September depletions are trending in the right direction. Days on hand remain lower than our long-term average, and we entered the third quarter in a much better position.

We feel good about where we are for the first half, and this entire team is incredibly focused on executing from here.

With that, operator, let's please open the line for questions.

[Operator Instructions] And the first question comes from the line of Nik Modi with RBC.

So Nick, maybe we could just kind of dig into the guidance and some of the comments you just made in the opening. I know there's been a lot of noise, a lot of moving pieces, a lot of timing differences. Maybe you could just give us a little bit more clarity on the back half kind of what you're seeing in September in terms of what's driving the improvement? Is it just timing of Labor Day? Or is there something else going on? And how we should be thinking about kind of what needs to happen to get to the high end versus I think where most people are kind of configured which is the mid to the lower point of the guide?

Sure, happy to try to unpack that. And I'll just start by saying we feel really good about the trajectory given the results in the first half and the trends in September, which is why we expect now to come in at the high end of the guide should those trends continue.

Now you're absolutely right. There was timing -- Labor Day timing between August and September this year, we saw that shift. But a lot of that timing was offset by an extra sell day in Q2. So think of Q2 as neutral, and we actually saw non-timing-related acceleration in the month of September as our college football and other programming took place, and we're seeing a very healthy response to that.

So at this point, we feel there'll be a real reversal in trends for us to contemplate the low end of the guide. And there's nothing we're seeing today on either the top line or the bottom line to indicate that things are going in that direction. That said, we do want to continue to be prudent in our assumptions and forecasts, and we are just unbelievably focused on delivering for our shareholders. And that's just going to come back to our [indiscernible] focus on marketing, out execution, discipline and pushing the organization to continue to deliver. So Garth, I don't know if you have any color to add?

No, Nick. I mean, I think as you said, we feel good about how we've delivered the first half and Q2, and we are confident on where we sit for the rest of the year. As we look at Q2 and we think about had we not ship to the levels we did to rebuild inventories, if we hadn't done that, we still would have come in above our expectations for the quarter. And that's what gives us confidence that we're in a good position to deliver on the rest of the year. And as you said, if September trends continue to be at the high end of the guidance range.

The next question is from the line of Peter Galbo with Bank of America.

You noted that a key focus in the first half was rebuilding the beer distributor inventories, and I think improving days on hand heading into 3Q. I think by our math, in the first half, you shipped around 8 million cases ahead of what you actually depleted. So maybe you can just help us think about the expected unwind, if any, of that inventory build in the second half. Specifically, should we expect shipments to lag depletions kind of as you normalize that inventory? Or do you still expect to ship ahead of depletes for the full year? Any framework around just the inventory movement and shipment to complete dynamics would be helpful.

Sure, Pete. Happy to do that. And Garth, add in some color. Here is the headline that start, which is distributed inventories are now in a great position and they're actually still lower than historical averages. So we saw an overcorrection inventories in FY '26. And we entered FY '27, frankly, too light, and that resulted in us testing the lower limits of how low days on hand can go, and it actually created a number of inefficiencies in our channel, and we were doing a lot of work to make sure that we were covering off and keeping shelves full and consumers satisfied everywhere. But I'll be up with some inefficiencies as we were working hard to move stuff around. And so we needed to ship during the quarter to close out distributor order backlogs and avoid out of stocks. And so I'd say your math, if you take the undershipment in '26 and you look at when we had to ship this year-to-date, we're about normal for where we would be first half of the year to meet our expectations for building inventory into the summer and then into the fall sports season, et cetera. So I would expect the back half of the year to look pretty normal compared to any other year. And for the full year, we would expect ships and depletes to track within 99% of each other.

Our next question is from the line of Lauren Lieberman with Barclays.

Great. So Nick, you're 6 months in now, and I think we started to talk about this a little bit at the conference and you laid it out in the prepared remarks last night. How you're thinking [indiscernible] brand in the portfolio? And you've also started to talk a little bit about cost discipline, finding efficiencies in the business so you can reinvest. So would just love to hear you kind of 6 months in a big picture thought about the organization, where there's opportunities for efficiencies and cost discipline to allow you to keep investing for growth?

Sure. I think that's 2 parts. Why don't I'll start with the growth opportunity and the brands. And look, as we discussed, I mean, I came in very enthusiastic knowing that we had an exceptional portfolio of brands and talent. And I'll tell you that spending time out in the field, and spending time with our customers and in themselves folks as well as our marketing team centers only reinforce that and actually getting into some of the data behind our brands has only left me more enthused. This is an incredibly healthy portfolio, there's no question. We're a gross business and we need to get that engine humming again. And that's going to take sustained work across marketing, brand positioning, commercialization, products, packs, et cetera. And I think -- we talked about the conference as well. There are opportunities for us to get more organized and tighter in our execution discipline behind that brand work, right? And so if I start and look at our scale brands, there are jobs to be done there that are different to the work that we're doing, scaling a new wave brands. And we've started that work, and we're starting to see some of the green shoots come across from that.

I take -- and I talked about this often, because I think it will be a very case study. Take Corona, for example. We put more behind Corona. We got more focused on call granular execution of that brand. It's not a brand that requires awareness driving. It's a brand that requires saliency. And we're seeing green shoots already. [indiscernible] has stabilized. If I look at Circana data, our 12 week is better than our 52-week and a 4 week is better than a 1 week, right? So I'm not satisfied with where it is, but it's trending in the right direction, a lot better than it was a year ago. I'm looking at Modelo, right? You're seeing a nice stabilization of that business, and we know that there are pockets of growth that we can go after [indiscernible] with our Hispanic consumer, but when you think about the fall, get the football to use it. That's the middle of the country, right? That's a general population where wares on the spread is actually incredibly low. A lot of opportunity to go there.

And so it's different to what might have gotten us here and how we go about now building those brands. You then move over to the Pacifico, which is scaling our next wave of grains. And this is where the company's playbook is second to none just world plus, and you can see were Pacifico compounding it at something like a 20% growth rate year-to-date as the #10 brand already. It's not a small brand, and yet it's powered at that kind of growth rate and you have Victoria performing similarly behind that.

And then we've said we're going to have to access some areas where the consumer is and where the growth is. And whether we're doing that organically through things like our NA portfolio, which is gaining more and more traction, you got Corona NA, now #3, by the way, not satisfied with there's a whole lot more we can put behind that, and you'll see us do that. And then something like [indiscernible], which is the hottest subcategory, the subcategory right now, and we've been able to get into a leading position in a very disciplined way with a huge runway ahead of us to take the Constellation machine and muscle and go build that business.

So I'm feeling, as you can tell, quite enthusiastic about the growth opportunities ahead of us. And then the second part of your question about the state of the organization in terms of its ability isn't lean can it fuel this. We've done a great job over the last several years driving cost efficiencies, I think about $600 million since Investor Day. But I believe we can be more systematic and programmatic about how we go after that. And the best consumer companies have a multiyear continuous improvement program. And that is built up where we would have visibility to the activities that are going to drive margin and fuel for growth 4 years from that. And with the team in place, we're now putting that, and I think that is going to turbocharge our ability to sustain margins as well as reinvest for future growth. So, Garth, I don't know if you have anything to add?

Well, as we've said previously, and I think as you've all seen in our results, getting our capacity build behind us is frees up to focus on driving those sustainable efficiencies in our business as well as stepping up our free cash flow generation. As we've evolved from a builder to an operator, we've already generated significant savings in our results. And as Nick just mentioned, the $600 million since Investor Day. And we're not done there. There's still a lot of opportunity for us as we continue to take the company on a more focused journey and increasing our level of operating excellence. So certainly more to come.

The next question is from the line of Chris Carey with Wells Fargo.

I wanted to go back to recent expectations and guidance kind of this topic. I think there was a view coming out of the conference earlier last month at there was incremental pressure on inflation in the back half of the year and that was going to impact your gross margin specifically. I think today, based on the guidance, and correct me if I'm wrong, gross margins are implied to be up in the back half of the year, which I think is surprising to some people today. Can you just give us a sense of did people interpret the back half gross margin expectation wrong? What is delivering that expansion into the back half of the year? And I think maybe what's underlying the question is whether you have kind of good cost exposure this year and whether that's going to inflation will kick up going into fiscal '28 when perhaps you have a bit more depreciation coming on on Veracruz? So I know that's a lot, but I think that's a key theme this morning, and I would just love for you to dig a bit deeper into that and help contextualize this dynamic for us.

Yes, Chris, as you said, there was a lot there on tax, so let's try, and Nick, you can wait in here too if you like. So first, I think that there probably was a little bit of confusion coming out of the conference last month. As we noted those headwinds, we also noted that we expected to deliver the business in line with guidance, which we said at the conference, and obviously, we're sitting here again today. As you look at the second half of the year and our expectations for beer margins, we expect to come in, in the second half at 34.5% to 35.5% of operating margins. This is pretty normal for us from a seasonality perspective. As you know, the second half of the year is our lowest volume period of the year. So we have less fixed cost absorption in the second half. This is also the point of the year where we go through maintenance CapEx, which has an impact on margins.

We do expect to have a higher percent of SG&A in the second half of the year as it was in our commentary, that should be around 7% in the second half of the year. That's driven largely by short-term incentive compensation, where last year, we were -- had a lower level of accrual, and so it's an overlap issue for this year.

We also intend in the second half continue to support the brands, as Nick laid out. We're seeing real green shoots from the marketing initiatives that we have underway. And we're confident in the results that they are providing, and that's evidenced by our leading share gains as we've gone through the first half of the year.

And so from a marketing perspective, in the second half of the year, we expect marketing to be about 10% of net sales. But in the third quarter, this will be above 11% as we continue to lean into our investments in Major League Baseball and NCAA football.

You brought up next year and the impact of Veracruz. I'd like to just say we are progressing nicely on Veracruz. We had expected to bring Veracruz online this fiscal year. Progress continues. We're about 85% done with the site. There's still some work to be done on utilities, site works on roads and things of that nature. So our expectation now is to bring that on the line in the first part of our fiscal year. When we do bring that online, the depreciation impact on an annualized basis will be about $75 million, and on an annualized basis, that's about 90 basis points of margin headwind.

Our next question comes from the line of Bonnie -- do you have anything to add? The next question will be coming from the line of Bonnie Herzog with Goldman Sachs.

So you continue to demonstrate disciplined capital allocation. And then as the heavy beer investment cycle winds down and free cash flow and flex, how are you thinking about the balance between debt paydown, organic investment, M&A and share repurchases? I guess I'm ultimately wondering what should we expect for the pace of buybacks?

Yes, Bonnie, thanks for the question. I mean I think as you can see in the results, we remain very active in repurchasing shares in the second quarter. And year-to-date, we've now bought back $530 million worth of shares. I think over the last few years, we've developed a strong track record of buying shares back in a programmatic way, but also through accelerating repurchases when we see a dislocation in our stock price versus intrinsic value. And that approach is going to continue. You can expect that to remain the case.

Given our strong cash flow generation and the $2.5 billion that we have left on our repurchase authorization that runs through FY '28, we have the flexibility and the capability to repurchase more shares. And I think we've got -- we've demonstrated that we're very shareholder friendly, and we continue to expect to do so. Anything you want to add, Nick?

Yes. Bonnie, just to add with respect to the M&A part of your question, we feel we're going to have the flexibility to do frankly both in to drive the highest value creation for our shareholders as long as we do it in a very disciplined manner. And I think, look, we've got an announcement of a small acquisition here, but I think it's a good example of a framework that the company will use for doing things in a highly disciplined way. We're very excited about adding the spec at to the portfolio. We think that brand is going to approach 2 million cases for calendar '26. So it will be accretive to growth next year. And yet, we've gotten this done for probably somewhere in the same ZIP code as it would take to develop and launch a new organic innovation with -- without a track record of success already.

And so I wouldn't say that here's an example of we'll be happy to pay for it if it's hyper successful. And if not, we've already gotten something that's got some real momentum behind it that will be accretive next year, and we've done it in a highly disciplined way. And I think I'd look to that as an indication of how we're thinking about M&A going forward.

Next question is from the line ofKaumil Gajrawala Gaja with Jefferies.

As you think about marketing spend, there was a lot of reasons for a big step-up in the first half of the year. Obviously, world Cup was part of it. I hear lots of indications from you, at least on this call and in your comments on continuing the pace. Does that mean the right level is that same new higher level that you had earlier in the year? Maybe that's calling sports, maybe that's something else. But what should be the correct run rate when we try to sort of adjust for a once and every 4 years event that happened recently?

I'll share some perspectives and Garth will give some more color around the reinvestment rate. But as sort of the headline, we believe we're reinvesting at a healthy rate. Now we're a branded company. I talked a little bit earlier about this company needs to be a growth engine, and that growth is going to be driven by our brands and the relevance and saliency of our brands to our consumers. And there are specific things we can do, right, drive distribution, drive awareness, drive relevancy that we know how to do. And marketing is critical for that.

You light the World Cup as an interesting [indiscernible] a major event, but wound up being disappointing from industry expectations. So what was the learning from that event from us, I mean, a couple of things. Firstly, I think we did it in a -- again, a very thoughtful and disciplined way and the way we went about executing that. We came away as I'm going to say it, the Winter World Cup because we have 3x more market share gains in beer than the next best competitor, which was 400 basis points of outperformance versus the category, and we did that with significantly less spend on other people [indiscernible] execution machine. Now we won't have a big lag World Cup next year because most of the benefit we got from World Cup was share gains on premise. We saw the off-premise be fairly flat. But what we did learn from it is it's an opportunity to reengage consumers and younger consumers around the beer occasion around sports. And so it doesn't have to be very years. It can be the operating model through which we engage consumers in the category. So you'll see us continue. College football is coming up, right? We talked about you saw a really healthy September as that programming started to roll out and the team think for on that.

I expect more from us over the next coming weeks and months as we talk about how we're going to use this type of programming to drive awareness all the way through to shelf and the kind of activation that you might see above the line, all the way through the line into retail at store. And a big takeaway from it is this is an opportunity for us to continue to win [indiscernible] space in that we now have to do that. So it doesn't imply higher spending, that implies that we think we're at good levels, and you're going to see us continue to drive the portfolio outperformance with our brands and our knowhow.

Yes. I mean, I think the only thing that I would add to that is, as Nick has said, we tested the limits on a number of things. And I would say that we feel comfortable with the amount of marketing spend that we're going to have this year on a full year basis. In the last couple of years, we probably underspent a bit from where we should have been. And so we're getting that marketing spend back to what we think are the most healthy levels in order to drive the top line in the manner which we want to drive the top line. That being said, we hold ourselves very accountable and have a very disciplined approach to how we measure the effectiveness and the returns generated by our marketing spend, and we'll continue to do that. But again, at this point, we feel good with the levels that we'll have on a full year basis.

Our next question is from the line of Filippo Falorni with Citi.

I wanted to go back to your comment, Nick, about the September improvement. I was hoping you can give us a little bit more color on where you're seeing the improvement from a channel standpoint? And I'm asking because we don't really see a material acceleration in the track channel. So is it coming mainly from the on-track piece, maybe the off-premise on track or on-premise continuing to do well. So any color you can give there and especially given the off-premise on-track is very tied to the Hispanic consumer base? Are you seeing any signs of improvement there? That would be very helpful.

And then a quick follow-up on pricing in beer. Price/mix was flattish for the quarter. You called out being a little bit more cautious on the price increases. How should we think about that evolving in the back half of the year?

I'll give color and might get a bit more color on the pricing equation. I'd say that the September recovery we saw was pretty broad-based. And as I said earlier, well beyond -- tested this at work well beyond just the timing of Labor Day. I mean if you discount that on a gross basis, it was a very strong recovery. I think we kind of filled out and go there was some very healthy growth in September, but it's broad based that we saw consumers across the board engaging in the category. I think as you look at channels right now, we are continuing to see some strength in club in particular. I think particularly with fuel prices, it's been a place that we've seen consumers go and that means really well into our relationships there. And so that's a place where we'll continue to lean in. Of course, international accounts. But even in C-store like getting that mix right and getting their consumer proposition with the right product, right pack at the right place for that consumer is key to winning in those channels where consumers are looking for different things at different moments.

And so short answer is, it's pretty broad-based, but our ability to dial in the right mix and right portfolio and right offering within the channels, I think, is also helping the case here.

And then just with price, I'll take a quick few words, give a bit more color. But I'd say philosophically, we believe in this portfolio. It's a strong portfolio of brands, and we believe in our long-term ability to drive our pricing algorithm. We also have the financial flexibility to move up and down. We talk about our pricing level somewhere between 1% to 2%, generally [indiscernible] the long run, I think you'll assess in there. If we think we can sharpen competitiveness by being at the lower end, we have the financial flexibility to do that. And so we're spending a lot of time looking deeply at our elasticity, consumer, opportunity, the price pack architecture, are there price gaps, places we can go, value we can offer. And I think you'll see us get much sharper at that over time, which in turn will also help us drive the growth of our larger brands.

Yes, just to pick up from where you left off, Nick, I mean, there really is no change to our pricing discipline. I mean we continue to think that we've got the right approach on a very disciplined and methodical basis, looking at markets, looking at brands, looking at SKUs. As we entered into this year, we did say that we intended to be at the lower end of that range as we've been selective with our pricing actions, given the macroeconomic backdrop and the impact that, that's having on our consumer. And as we've always said, it's much more cost effective to retain your consumers than it is to try to regain your consumers.

Now specific to Q2, in Q2, pricing net of mix was roughly flat. That is reflective of an impact of mix headwinds, commercial investments to support demand through distributor incentives and couponings and then the carryover from our high-end light beer portfolio repositioning which was a 25-basis-point headwind in the quarter.

The next question is from the line of Dara Mohsenian with Morgan Stanley.

So Nick, I just wanted to spend some time discussing what attracted you to spiked age strategically, but also really wanted to use the specific deal in the context of if we should expect a broader push into RTDs from an M&A standpoint? Obviously, it's a high-growth segment within alcohol, but also one where barriers to entry or sustainability of brands have been lower. So I just want to understand broad thoughts around the RTD space and the opportunity you see there, and how STZ capabilities may or may not apply to that space? And again, how aggressive STZ might be in expanding further into RTDs?

Sure. And why don't I start on the second part of your question first. And I'll talk about [indiscernible] in particular. On the category itself, look, I mean I've said from the outset we have to remain relevant to our consumers and to our customers. There is no question in my mind that the vast majority of the value creation in our portfolio is going to come from beer, and we are steadfastly focused on beer. And we have a family of brands that are incredible and powerful. And if I can get some growth out of the big ones and continue the journey on the Pacifico and Victoria, that alone will create enormous value. But that doesn't mean that there isn't capacity in our system to dial in other areas of growth.

And just -- because I know you know this, but just as a reminder, our portfolio is so simple today. We have 1/5 the complexity of the next least complex competitor. And so what our distributors are telling us is there are spaces that are growing and we want you to get into those spaces. By the way, they're going to distribute these products whether they're owned by us or not. So there's some opportunity to dial up. And so I think as we look at that, we see the opportunity, but very conscious of the point that you just raised, which is what is the sustainability of these brands, where do we think things are going to loss of long term worth putting in the investment. And this is a discussion that's happening, not just on M&A, but on the organic things that you will see us put into market and launch as we access points of growth. Allstate, [indiscernible] aren't new. [indiscernible] has been around forever. What's new is the amount of iteration around it, the amount of shelf that's given to it, the consumers desire to experiment. And so as we look at that, we go, look, the long-term trend is there. It's always been an access point. What we can do is leverage that access point to find new occasions, might be our consumer in a different occasion who might look for a product like this.

And so we will look at this space. We'll be very disciplined about where we choose to participate because, to your point, something is unsustainable, and we don't want to chase things in rabbit holes. And [indiscernible] a great example of that. People looked at quite of things. I mean there -- there's a very long list of things that we would not do. But we looked at this one, we saw something that was the first mover in the category, a category that is actually differentiated brings something new and different to the consumer. Mimics of existing consumer behavior, right, [indiscernible] and [indiscernible] is being mixed on certain occasions. And so now this is just a more convenient format. A brand positioning that's incredibly telegraphic tells the consumer exactly what it is. And from a value creation standpoint, [indiscernible] wide open runway for Constellation to go to flex its muscle and demonstrate what it can do for both a brand-building perspective where we think we can bring some value and also a distribution runway perspective, where this is still wide open, and our distributors are primed and ready to go after this and make us the winning brand in the category.

And so those capabilities are there. But we'll also have to be able to demonstrate is that we can also come with the type of iteration, pack price architecture, extensions if necessary to keep the brand fresh and relevant. So we're well aware of that. And finally, we'll also be demonstrating our integration capabilities, which we have honed in other parts of the business. And actually, at this point, we have a pretty good track record of taking smaller businesses, integrating them and scaling them really well, and we're going to take that capability and deploy it on this. And so I think this will be a good case study for what we can do.

Yes. And the other thing I want to add to that, Nick, is that given our strong cash flow generation, we have the ability to be able to do this very disciplined M&A, finding the right target, striking the right deal, structuring them in the right nature to enhance our portfolio, and we have the ability to continue to return cash to shareholders through cash -- through share repurchases and our dividend policy.

Our next question is from the line of Rob Ottenstein with Evercore ISI.

Great. I'm wondering if you could give us your updated views on Victoria, maybe give us a sense of in its strongest ZIP codes or towns or however you measure it, what kind of market share it has? How incremental is it? And dream the dream next 5, 10 years, how big do you think it can be?

Yes. Well, I'll give you some thematic thoughts around it just for a starter, and Garth, if you want to add some color. But before I even actually the question, Victoria itself. I think what I'd want to highlight about Victoria as well as the other brands in the beer portfolio is the work that we're doing to develop very distinct lanes for each of our brands, right? Because if we have to stick lanes to each of our brands, they will play as a portfolio with significantly more incrementality than that they sit on top of each other. So that's how they're developing them. So you'll see specific work from Corona. You'll see specific work from Modelo. Pacifico has just been through the marketing and activation plans for next year, highly differentiated from the other brands, will play in a really exciting space. And then Victoria, to answer your question, is really going to live in the space of very authentic Mexican brand, we only advertise today in Spanish, it is our consumer who might travel across the portfolio that in that particular occasion of either sitting with family, discovering the culture, returning to the risk of authenticity, that is the brand that will play there.

And so we've built that very, very specifically. And we've seen the brand respond well. I mean at the top of my head, big growth for the first half of the year is mid-teens compounding on not a small base, but we think that there is a lot of runway to go and take a bet like that, which is growing right alongside Pacifico. Pacifico is now a #10 brand on beer, which was compounding or closer to 20%, and they're living in very different spaces. And what gets me excited about it is that the fact that we can codevelop those things and access different occasions in different spaces. So dreaming the dream, I mean, the dream that you build these things outside each other, really for different occasions, and they can live and play together with the rest of the portfolio, Corona, Modelo, and continue to develop. It's still -- it took us so very strong out less than that like a Pacific up and in fact, like a Modelo also gives us a lot of runway to build distribution and awareness very deliberately kind of around the coast and then into the center of the country. Want to add anything?

No, I think that's pretty complete.

The next question is from the line of Steve Powers with Deutsche Bank.

Nick, as you think about, I guess, Constellation's medium-term growth in the context of the 3 pillars that you've outlined and that you're just speaking to. Is there a way to dimension maybe how you expect contributions to divide among them? Because I think to me, the pillars individually each make good intuitive sense, but I'm still left with a question of to what degree in your mind, the focus is still on sustaining growth in scale brands like Modelo and Corona versus how strongly focus maybe shifting towards those next wave brands or to newer demand spaces such as what we talked about with Spike Dave? I think maybe some further context there would be helpful.

And then Garth, if I could, just to clean up on Chris' gross margin question from earlier in the call. It sounds like the Veracruz shift is a modest benefit to the second half that we should consider on beer margins going to '28. I guess is there anything notable on how your contracted or hedged on other operating costs that could be an advantage in '27 that could trigger a catch-up in '28 should current conditions hold?

All right. So I'll start and give you some conceptual things. I don't want to -- we don't probably have mid-term guidance out there, so I don't want to get ahead of it too much, but I'll give you some thoughts, which is, if you look at scaling our next wave brands, you can see the growth there, right, I talked about what Pacifico cost going, talk about what Victoria is doing. By the way, we have -- we comp up which homegrown innovation launched from scratch compounding at 50% right now. Expect that to be a multimillion case full string the spirits brand. So a lot of time is first on that is to do. Our distributors are fully behind it.

And so there's not just a couple -- I mean there's a track record here of our ability to take things that have momentum and scale. Next wave you can see what the category is doing. You can see what NA is doing, I would put in there and the speed at which that is growing and our ability to get that to scale. By the way, if that scales to anything close to, say, where you see some of the mix in places like Europe, we expect that to be a massive opportunity for the company and we expect to grow [indiscernible] in that space. You see something that like data. I said you're approaching too many cases, just already in calendar '26 and just getting started. So you can start to dimensionalize, right, at those growth rates, what might happen there.

And then to come back to the quarter of your question, okay. So you got some stuff that scale. What do you do with that? I've spent the better part of the last 6 months appealing every piece of data back on our big brands and looking at where is the check in the our brands? And I've got to tell you that these are some of the healthiest brands I've ever seen in my career. And so then the question comes, well, what else should we be doing? And I think that comes down to a more mature set of capabilities around running things that are large and at scale. And for things like pack price architecture, [indiscernible] relevancy, showing up every day in people's lives, not just from awareness perspective, but activating at their point of consumption, right? It's dialing in that tool kit.

And when I look at that and when I look at the brand shares, when I look at historically, how some beer brands have been able to grow, when you've had leadership in the industry engaging consumers, which we may not have had for a long time, not understanding the fact that I think Constellation's brought that, but now is getting to a scale of it can really lead the industry. There's a lot of runway on the growth of our bigger brakes. I mean you take our biggest market, California, [indiscernible] make sure that by no means the ceiling for a beer brand. You then go to markets like New York and Miami, where it's big, but plenty of room to go. And then you open in the idle of the country and awareness it doesn't even register, which is why you see us say things like college football and accessing people. [indiscernible] with Corona, I mean, as we started to turn the dial on Corona, we're seeing a really great response in markets like New York and Miami, which are culturally important markets, where the brand is now starting to gain share again and consumers are reengaging with it.

And I'll tell you, that was a pretty blunt instrument of coming in and saying, we're going to focus on these things after our marketing claims are set for the year and [indiscernible] I have worked to kind of develop the investment and challenge the team to come up with new ideas. The plans that they set for '28 now with the benefit, some time to work on it are much more granular. So longer term, to the headline, I expect that part of the business to grow. It's not going to grow at the same rate as Pacifico, but we expect that part of the portfolio to grow.

Yes. And I point around Veracruz. So I appreciate the opportunity to clarify that the -- we expect to put Veracruz in service in the beginning of our fiscal '28 and the depreciation and impact on margins that I articulated will start to occur when we put that in service. And again, that is in fiscal year '28.

As it relates to some of the other costs that we're managing across the P&L, we've been very active in terms of managing our commodities and currencies. As we've seen opportunities throughout the fiscal year at moments of weakness and there have been periods of time where there have been weakness, we've layered in incremental hedges for this year. And in this fiscal year, we are highly hedged across all commodities and currencies. Over 90%, they're at 90% for most with the exception of diesel, where we're kind of fully hedged for the year. And we've used the opportunities of weakness to layer on incremental hedges to protect the P&L for FY '28 and beyond as is typical with our normal hedging process.

I'll just add on that point because it's come up a couple of times. As we think about inflation, look, I'd say I'm not sure there's been a year in my career can now manage a business. It's something flat all of our back to member and health care inflation is off the charts. Like what great companies do is go ahead of that and run a cost agenda to offset the inflation to sustain their margins and drive filter. And I just want to make that point very simply because we've had a great program to date, but I think you're going to see it get more programmatic, more systematic, and that's part of our jobs.

Our last and final question comes from the line of Carlos Laboy with HSBC.

Can you expand on your diagnosis of insufficient sales for Corona Extra a little bit more. But beyond saliency, how do you think about Corona's utility and relevance. In other words, is Corona competing less effectively for a role within people's lives? And are there adjustments that are maybe still necessary, particularly with younger beer consumers since the way they live their lives has certainly changed over the last several years?

Yes. I think that's a great question, right? And so you go through the [indiscernible], okay, well, kind of what's the ticket? Is it's got higher redness, but it's not relevant to people and I talk we're happy to share some of the stuff we got through it. You find an aware is most loved beer bid, most loved beer brand by Gen Z. You have most [indiscernible] in the world, and I could go on and on or not. And so you step back from that and go, and I think it should be a challenge to us, right? If you have that kind of an asset, why aren't we seeing greater performance on it, and that's a challenge to put to the team. And in my mind, it is part of what is the playbook that you used to go after this. And so it can be everything from when you talk about [indiscernible] utility relevance, I mean I agree that the consumer is more occasion-based, right? I don't depend on them to report, what's the moment, how are they coming together? And then I'll be present there, right? So we do a lot of big awareness building. But do we still own the bucket at the beach part? Have we given some of that up? And so do we need to redirect some of our all into doing things or [indiscernible]. And you're going to see us be more active in music, sports, at the beaches actually showing up in those moments and being part of that cultural fabric.

But it also goes beyond that. We have to look at our Pabst architecture. Are -- do we have the right product at the right price point in the right channel for the right consumer. We're the leader in small sizes, the maximum sure small sizes. We're the leader in large sizes with the [indiscernible] large sizes. How we pull those levers to be much more granular about how we use those sizes and packs to shop exactly where our consumer is. And so those are the types of challenges put to the team and the game, I think sort of we saw a rapid response this year, and I'm not satisfied with the results, bit I'm encouraged that we're bending the trend. You're not seeing it in the sure last column, and we're gaining share in 2 of those culturally relevant markets that we're in as well as whatever period you look at, the data is getting better.

What I really want to see as we get into next year [indiscernible] plan is get more granular in how we deploy the dollars to do the kinds of things I just described. And I'm pretty encouraged that we will see that brand respond well.

Why I am passionate about it is, as we can prove that we can do this on the Corona, we'll be able to prove we can do this on any other large-scale brand, and we intend to build large-scale brands in this company.

At this time, we've reached the end of our question-and-answer session, and I'll turn the floor back to Nick for closing comments.

All right. Well, thank you, everyone. I really appreciate you joining the call today and the thoughtful questions. I'd also like to thank the Constellation team who has shown exceptional focus as we've executed across these strategies. And I'm really excited about what we're seeing in the business. We're confident in [indiscernible] and I think there is plenty of good news to come. So with that, thank you, everyone, and have a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. You may now disconnect your lines at this time, and have a wonderful day.

Okay. We're going to get started. It's a pleasure to have Constellation Brands' CEO, Nick Fink; and Executive Vice President and CFO, Garth Hankinson, with us this morning. Nick, a special welcome to you. It's your first time at our conference in Boston. So thanks, guys, for being here. So Nick, you joined the company as CEO in April. So I think it's still fair to describe your eyes as very fresh when it comes to the business. And the earnings call in July was a great opportunity for those of us on the outside to get some sense of your early perspectives on the business.

One thing that struck us as particularly interesting is when you mentioned needing distinct strategies for scaling brands and for sustaining growth for brands that have hit a certain size. So how would you say that applies at Constellation?

The company has evolved a great deal in the 5-plus years I've been on the Board. And when I joined, I mean, we had a strategy, I think we executed very well of taking the brands that we had with enormous distribution and awareness runway and just executing very single-mindedly against that. That opportunity still exists in parts of our portfolio and the parts of our portfolio that have matured into brands that take Corona, for example, we have pretty much full distribution. We have great awareness. There's a different playbook for growing a brand like that. And so as I've gotten into the business a little bit and applied a bit more thought to like, okay, what's the nuance behind managing this portfolio that has some more mature brands, has some very high-growth brands, has some incredible assets like in our route to market and our marketing ability, and it really is to develop distinct capability.

So we'll continue to be a brand scaler. And I think we're one of the best in the world at that, and we have the track record to prove it. And you can see Modelo has still got a lot of room to go. You can see Pacifico coming up right behind that, you can see Victoria. But we have to be excellent at taking the things that we've scaled and continuing to drive saliency and relevance, continuing to find in the granular pockets of growth, activating in those areas that really speak to consumers. And then I think there is a third pillar, which is there is some stuff that's new to the world, and you've seen us put some of late, some newer products out there, some innovation. And that, again, is a different skill set and a different playbook. And I think we need to hone in on that as well.

Okay. So another thing that you had mentioned on the call was the idea of becoming more occasion-led in how you think about competition and also about consumer behavior. Historically, I think it's been much more of a conversation specifically about beer consumers and beer occasions and this is a more holistic look. Can we talk a little bit about how that shift in mindset may manifest externally? Any early learnings or opportunities that you're kind of seeing uncovered in these first few months of trying to bring this way of thinking to the organization?

Yes, Sure. I mean it really starts with the consumer and understanding everything about the consumer, how they're thinking, what are they looking for in those need state occasions and then choosing those need state occasions where we want to participate. Today's consumer is moving across category, I think, more than they ever have.

They've always moved across category. I mean I'm not sure people ever just single only one thing, but they're moving across category more than they have. And our customer, distributor is moving across category more than they ever have. And it's going to be critical. We remain relevant with both of those. And so really understanding in that need state, what is the competitive set? What are the choices that they're making? And then how do we best play against that across our portfolio? We have a portfolio of products, right?

And so pick an occasion, and we don't have to participate in every single occasion. We can be choiceful. But you pick an occasion and with my portfolio, how do I best want to win that occasion. And I think a great example of that is Pacifico, which is really leaning into an active adventure sports lifestyle type occasion. I was just out with our distributors in California looking at some of our activation around the World Surfing Championship. And you could see just how seamlessly it fit into that occasion. That becomes more of an occasion thing where that consumer may choose beer, they may choose something else.

And how do we win more of those occasions is the thinking? And I think as we get into next financial year and already, we're seeing some of the early work around our brand activation, it's going to have more of that consumer focus lens around occasion, which in turn creates different lanes for our brands and allows us maybe to go harder to foster some of the opportunities we have.

Okay. Do you think there have been, though, a lot of blurring across those lanes? Because I feel like when I think about your brand portfolio, the brands have lived in their lanes. But maybe I'm wrong, and maybe there's been more intersection in the marketing historically.

They definitely have distinct personalities. I think given our success, it's sometimes easy for us to default to, here's the way we build a Mexican brew beer in market X right? And if you do that too much, it can start to look similar. So what can you take from that skill set and apply consistently over and over again, and then where do you need to create distinction. And I think just putting -- this is not a revolution, it's evolution. It's really just tweaking that a little bit to make sure that there is a distinction that we can access more occasions than we might have if we just had sort of the very strict blinders on.

Okay. So speaking of occasions, the summer started out with a lot of beer drinking occasions anchored by all the excitement around the World Cup. And I love the idea that all this gathering could prove lasting but people remember it's fun to kind of get together and hang out and drink beer. But what have you seen since? I mean, how the category trends improved? What have you seen today or the last month or so, call it, post World Cup versus pre-World Cup?

Yes. So very interesting, and I have a number of thoughts about it. I agree with you, it was great. World Cup was great. The Mexico run was great. I mean just the photos you saw people are coming together. And I think actually, I'm hopeful that, that has some long-term impact. And you can see it in some of the Gen Z numbers where we're seeing people now come up the adoption curve, albeit later than the generation prior to them, but coming up the same curve. And I think having moments like that help bring people together in a post-COVID world and start to unlock that. And so I think that was a big positive.

World Cup itself from a competitive perspective, we were delighted with the performance. We walked away as the #1 share gainer for World Cup, almost a full point of share. There, which we were very pleased with all the work and I was out in the field a lot and got to see what the team did. It was really incredible. So a lot of activation, I think, really prove the power of our system where we really go and apply it. The actual underlying performance itself, you saw nice performance in the on-premise, where we're actually underrepresented. So that's a distribution opportunity for us. And the off-premise was frankly pretty lackluster. And then you got into August, and you can see the Circana data was also pretty lackluster.

And I think as we saw gas prices start to spike back up again, diesel prices start to spike back up, some other factors, frankly, it was a pretty lackluster August relative to the start of the summer. And I think some of these macroeconomic and geopolitical things have to play out a little bit for us to say, how much of the -- how much of this kind of bringing people together can be sustaining versus was a blip in the pan, I think it will sustain because I think there are a lot of cyclical headwinds right now that will dissipate at some point, but time will tell.

Okay. Let's just stay on the consumer for a moment. So just wanted to get your latest read on the Hispanic consumer and also general market cohorts. You touched a little bit on the macroeconomics. I was curious more specifically.

Yes. Look, I mean I'm sure a lot of companies here today would say consumer is stretched, and we feel the consumer is stretched. And we still see very much at the very highest end of our portfolio, and it's interesting to -- even though it's small for us to participate there, you see continued strength. But then across the board, otherwise, we see a stretched consumer by and large. And then when you -- we double-click down into the Hispanic consumer and our ZIP code data and look at that, it's a little bit of a tale of 2 cities.

There are markets that are performing very nicely, like California and New York, where the lines have actually come together, right? We see less pressure on that Hispanic consumer than we do or about the same as you see in general market, right? And so we're seeing less distinction there. But I'd say Florida and Texas, in particular, this year have had more headwinds, and that's where we see more divergence in the data with the Hispanic consumer.

Okay. Let's talk a little bit about the beer portfolio. So you guys have started to build out the pricing ladder, but it's still kind of a newer effort. I was curious how you think about balancing playing offense in this stretched consumer environment but also protecting premium positioning and brand equity across your brands, and particularly, when you think about Modelo Oro or Corona Premier and then you've got low index test like [ Barrilito ].

So it is a premium portfolio. And if you look at price per 12-ounce or I look at that data, we still are at a pretty significant premium to most of the market. And I think that's where the portfolio sits. And remarkably, you look at how much -- how loved the brands are consumers see value in that. As you come back to where we started a little bit about really dialing in about how do we manage brands that have scaled and how do you get much more granular about it. And I think there are 2 things.

One is having a bit more pricing across the portfolio. So an example of you brought up Oro, Corona Premier, we were really sitting at a price point where there wasn't a market for a light beer, right? The entire market was sitting at a different position, which we call a 120 index to domestics. We've now repositioned those, and we've seen a lot of growth. There's still a lot more opportunity to get that price realization. It's not fully through on that reprice positioning, but we expect to see velocity and distribution grow. And the performance has been really pretty good.

And so now you start to have a little bit more of some opportunity across the pricing scale. And then Barrilito, it's really interesting. I mean we were seeing that product, frankly, pop up great gray market in the market anyway. And so it sort of led us to go, well, we should probably test and see how it performs and how cannibalistic it is to the rest of the portfolio. And so we've really been testing it in parts of Texas, Fresno, a couple of other states. And so far, the test is going really well. It's a lot less cannibalistic than we feared. It plays at an interesting price point of play. It's an interesting liquid.

By the way, it's fairly low ABV, it's low cal. And so it's just sort of part of a routine for that consumer where it's a pretty light beer. And I expect we'll scale that test more. We're going to be careful, though, because we do want to protect those premium positions. That's one element of it. The other part about really getting more dialed into managing business with scale brands is really having a really defined price pack architecture and revenue growth management function. And we've been building that for years. I think we can develop that further.

We're the leader in small size. We're the leader in large size. How do we start to play that across our business better to help the consumer access what they're looking for at a particular moment.

Let's talk about Corona Extra. I think that's been -- you hinted at it earlier, you were talking about different strategies for different parts of the portfolio. But a key question is continue to be Corona Extra volumes, right how you kind of shore that up. So I guess what have you learned so far in diagnosing the gap between it's, like, really strong brand equity health metrics, but these weaker -- but then weaker consumption trends? And when do you think you'll be ready to shift from sort of diagnosing to executing in terms of turnaround plan?

Yes. Well, first, we've already made that shift. Now I would say that shift today is a blunt instrument. We're going to get much more specific and tight as we get into next year. But we already made that shift, and you are seeing the brand respond to it. And so the brand trends have been far better. It's gone from us to kind of holding share. We're seeing markets like New York, where it's starting to perform a lot better, Miami, where it's leading, starting to perform a lot better by the way, very important markets, culturally. But what's so interesting about that brand is given the challenges we had particularly last year, I went in looking for the faults in the brand, like I've run tired brands in my career.

I've run leading brands in my career. I've run new brands in my career. And so you sort of look for those data points. And there's nothing in Corona that is broken. It's the most loved beer brand. It's the most famous Hispanic brand in the world. We have great awareness, great [indiscernible] so the more I peel the onion on the data, it's just -- it's an incredibly powerful brand. So to your point, what's missing. And I think it's going from that big awareness driving, which we don't need quite as much of that to really being in the cultural moment, turning it on, being present, showing up and activating around occasions where consumers need to be.

So that's one, it's saliency. Part of that will be a better drive to be active on-premise. We're either the #1 or #2 on-premise packaged brands in most markets. We need to show that leadership and demonstrate being part of those occasions where consumers really discover and rediscover brands, pack price architecture, right? We've seen great growth in our 7-ounce business. That's a great opportunity there, both from a price point, but also they're very fresh, they're very cold. People just love them. So it's to earlier discussion, it's a different playbook than scaling awareness and distribution. It's getting really granular around brand tactics.

This year, we put a good deal of money behind it, and it's responded well. Next year's plan is going to get much more granular around some of these items and try to be part of much more of a cultural conversation to have that relevance that I think will connect with consumers. But we're happy to see it already starting to respond.

Okay. Are there any specific examples because I didn't know we were already in execution mode of things you did in New York or Miami that you can think of that did have a particularly good return?

I'd say at this point, again, blunt instrument, it's really just making sure that we had the spend in place that we were trying to activate, that we were getting some of these other pack sizes into distribution, doing some things on-premise. But again, it's early days.

Okay. So let's turn to Modelo Especial, runway that still remains there. So where are you seeing the most encouraging progress outside of existing stronghold states? And are there markets where structural factors, meaning population mix really might limit the brand's long-term share potential?

Yes. Look, I almost think of it as -- you think of it as like 3 different big markets or 3 different types of markets and businesses. And so there are places where it's extremely strong. Take California, for example, just out there with a distributor. And yet they still -- they still believe there are pockets of growth where we haven't penetrated. And so getting away from the coast a little bit, looking at certain urban markets or certain submarkets where maybe other brands are playing very strong and we can get in there. So big market.

Then there are other markets where New York, Miami, Dallas, Chicago, it's a big brand, but there is plenty of room to go in terms of share distribution. And there are markets where it's still pretty small, right? And you go more towards the center of the country, and we're not playing at all. Look at the awareness numbers are very low on Modelo. I mean it's shocking to have a brand that's the #1 dollar share brand with the awareness that we have. And that's the opportunity there. It's just to continue to drive that awareness. There's some distribution to go, about 20-point gap that we believe is there. But even just kind of moving off the coast a little bit towards the center, we think is going to give more runway to that brand.

Okay. The 20-point gap, sorry, that's overall a national distribution?

Yes. That's overall national distribution to domestics.

Okay. Great. And then Pacifico and Victoria are becoming really meaningful growth contributors. You mentioned Pacifico in particular earlier. So how do you decide when to like accelerate support, really push distribution, the on-premise activity behind these more up-and-coming brands, I don't know if we can call Pacifico up and coming anymore. But the smaller brands in the portfolio, but at the same time, minimizing cannibalization and making sure execution doesn't get too complex.

Yes. Well -- and by the way, Pacifico just entered the top 10. So it's not that small and yet just posting unbelievable double-digit growth. And this is where really when I say that the company is an incredible brand scaler over a very long period, I credit the team. There is a deliberateness, thoughtfulness and discipline to how a brand like Pacifico or a brand like Victoria is scaled that is really multiyear in nature. It's very tempting to get lightning in the bottle and then just go for it and get over your skis. And so I see the team just executing so well is really pacing the distribution and awareness, so we don't really get one ahead of the other that if we're building too much distribution before we get the velocity, we don't want to lose hard-earned distribution. So making sure that those 2 things are working in sync, we're getting velocity while we're building that distribution.

We talked earlier about really building distinct lanes for things, occasion-based. I think as we -- again, it's evolution, not revolution. But I think as we refine that work and gain more confidence that they live in distinct lanes and even less fearful about cannibalization as a company, we'll be able to lean into some of these things a little bit quicker. I don't think we want to go too hard and get over our skis, but I think we'll be able to lean into it a little bit quicker than we are now.

Okay. Let's shift the conversation a little bit to the broader operating model and production footprint. So the company first discussed the notion of moving from builder to operator in the fall of '24, you were on the Board, you were still CMO, obviously. But where do you think you are today in that journey? Kind of what's on the horizon, but the shift from building to operating, where do we stand? And how much further is there to go?

Yes, Lauren. I mean, as you noted, we bought these brands back in 2013. And right from the get-go, we were pretty much in an aggressive expansion mode to support the dynamic demand we had for the product. As you might recall, during those first decade, we had periods of time where we were operating those breweries during peak season in excess of what their rated capacity was. To support the build-out over the last 10 years, we've been spending nearly $1 billion a year, mostly to build-out Nava and Obregon, but then recently to complete the expansion of the new brewery in Veracruz.

As a result of those activities, we now have a production footprint that gives us the agility to react within the fiscal year, should there be any change in consumer demand around a particular segment or a particular product. But it's also derisked our production footprint as it relates to giving us greater ability to deal with any short-term disruptions in production. As we got towards the end of that aggressive build-out phase, as you know, in 2023, we started talking about this shift in orientation towards more of an operator. We could start to see the end of that expansion back in 2023. And we knew that we needed to focus our efforts around how do we make a more cost-effective as efficient of an end-to-end supply chain as we possibly could.

Since that time, we've generated over $600 million worth of savings across items like procurement, logistics and operations. That wasn't a one-and-done program. We believe that over the last few years that we've given the organization the right focus on end-to-end supply chain. We're building real discipline and muscle in that space. And we think that there will be meaningful cost savings agendas in every year going forward. We use that cost saving agenda not only to support the best-in-class profit profile that we have but also to invest back into the growth of the brand, some of the things that you just heard Nick talk about.

So we think that, that's something that's going to continue as we move forward. I do want to touch a little bit about the current fiscal year in regards to our cost savings agenda. This will be another year where we have significant cost savings in line with what our expectations were at the beginning of the year. That being said, as this year has progressed, we have faced a couple of inflationary headwinds that we didn't foresee at the beginning of the year, which we'll start to see in the second half of the year in gross profit margins.

Most notably, you'll see that a little bit in logistics where there's just a supply-demand imbalance in the U.S. specific to trucking. And then even though we entered this year in a highly hedged position, we still have some exposure to commodities that given some of the macroeconomic headwinds we've been facing, will start to impact us in the second half of the year. So you will see a little bit of gross profit margin pressure in the second half of the year. And when you couple that with the incremental marketing dollars that we said we will put in play in Q3 and Q4 as well as just the normal seasonal cyclicality of our business. You'll see operating margins in the second half of the year as normal, be less than they were in the first half of the year. That being said, I mean, we still feel really good about our margin profile for the full year and consistent with what we laid out in terms of our full year guidance back in April.

Okay. So still in line with the full year guidance. And then in that context with multiple years of productivity and opportunity still ahead of you, but what probably we'll see remain still a pretty subdued demand environment and very different than the demand was for your brands and for the category as well in the building phase. Just want to come back again to the confidence level in holding your best-in-class margins over the medium term in a continued subdued volume growth environment.

Yes, we still feel good about the puts and takes that we have as it relates to the cost profile of the business. In any given year, we're going to have inflationary pressures that we have to deal with. That being said, we do expect that we will get back to growth at some point in addition to the benefit that growth provides. We'll continue to lean into our pricing power. That might be at the lower end of our range going forward, at least in the near term than where it had been historically, but that will still be a tailwind for us as well as this cost savings agenda that we're building into the fabric of the company. So we still believe that we'll be providing best-in-class margins in the beer space.

Okay. Great. Let me ask -- stick with marketing because you mentioned the step-up that's planned for Q3 and Q4. So marketing support, fiscal '27 includes big events, right, World Cup, America 250. But how should we think about the right long-term level of marketing support for the beer business? Because '27 feels like a sort of outsized year.

No. I mean I think that in any given year, we build our marketing plan based on what we think is best for the brands. We do it on a brand-by-brand basis to a certain extent, we do it on a market-by-market basis. We want to make sure that we're investing appropriately behind the brands so we maximize our top line growth. So I think that this is something that we'll continue to assess on a year-to-year basis, but we are absolutely going to make sure that we're investing at the appropriate levels to drive top line growth and to ensure that we maintain the momentum we have in the brands.

And I'd just add, the brands are well supported this year. And I think our intention is to continue to support the brands. And we've seen our share gains accelerate and so it says to us that, that is working, and we'll continue to lean in to continue to take share. And then as some of these headwinds abate that should have a pretty significant payoff.

Okay. I'm going to switch and talk about Wine and Spirits because we do have another business. So one thing that stood out among many of the retained brands in the portfolio is that they're in segments that have generally held up better than broader category trends across Wine and Spirits. So what characteristics make Wine and Spirits brand more durable do you think in today's environment? And how do you decide where to lean in with incremental brand investment versus to stay more disciplined in this sort of uneven category environment?

Yes. I think feel like, firstly, over the last several years, the team has done a fantastic job cleaning the portfolio out and really dialing it into the parts of the market that we believe there'd be growth in. And we constantly -- there's one sheet, we constantly come back to all the segments across Wine and Spirits and where we think the growth will be and are we exposed to those segments. And I think it's been paying off really nicely. I mean last quarter it was 8% growth in the 18 months in a row now, we've significantly beat the market and it's at this point, almost like 1,000 basis points of outperformance. And so it feels like even if it doesn't say 1,000, we're now dialed into the parts of the market that are growing really nicely.

As you look across the portfolio, there's I'd say 2 parts. There's the fine wine piece that is exposed to a very high-end consumer with some great brands and it's become very, very focused, and that's continued to perform well. And then there are the parts that are more around consumer brands, whether it's Mi CAMPO, which is just on fire right now. The Prisoner, Kim Crawford, Ruffino, those brands. And as the team has just gotten really good at investing behind the basics and executing really well, we've seen those grow really nicely.

I think as we move forward, where do you choose to invest and where not. A lot of it is what is the growth potential and how do we invest? And so in some of those brands, we're investing really in the experience that people have when they visit the winery, how that's translated into the digital world, online, et cetera. Maybe one type of experience Mi CAMPO, where we think there's an opportunity to build a multimillion case full strength Spirits brand, and it's demonstrating -- we're going to have to lean into more of that type of marketing. And fortunately, we've got Garth. I mean, he's really encouraged the team to continue to invest behind the growth where we're seeing the returns.

Okay. And I guess, what are the most important milestones you need to see on this business in terms of margins? Is it distributor inventory normalization, category stabilization, cost? Like what is it that gives you confidence that the business is ready to move forward toward those structurally higher margins?

Yes. Well, as Nick just outlined, I mean, we feel good about the direction of that division overall. In Q1, as you noted, we grew 8%, and we outperformed the market by nearly 10 percentage points. So we have the right portfolio to generate the top line growth, which will certainly help with the margin profile. The margin profile this year, expectations are in that 5% to 6% range. We expected that to get better over the coming fiscal years. As you know, the long aging inventory cycle that you have in the wine business takes time to move its way through the P&L.

That being said, the actions that we've taken over the last 18 months in terms of cleaning up our production footprint and making sure that we had a support structure that was fit for purpose for the portfolio that we have. We feel you'll see that progress over the next several years. The items that have to be true, so to speak, are: one, is to get the distributor inventory levels back to where they need to be, as we outlined earlier this fiscal year. We've mutually agreed with some of our larger distributors to take that on, and that will take us about 12 to 24 months. So as we come out of that, that will certainly be a benefit to margins.

Additionally, we then have to see that inventory that sits on our balance sheet sort of start to flow through into the P&L. And that, as I said, will take a couple of years. Fiscal '27, the fiscal year that we're in right now will be our first normalized harvest year post all of the operational and organizational actions that we've taken, right? And so if you think about the aging cycle, it will be a couple of years before those fully flow through the P&L. And then continued outperformance on the top line. Even in a category that has slowed since we've taken some of the actions, we feel that we've got opportunities for incremental growth that will help with fixed overhead absorption and will help drive margins higher.

One more question about portfolio. So Nick, you used the word choiceful in talking about the company's approach to emerging trends. What does that mean more concretely in terms of M&A?

Look, to me, it means being disciplined at the end of the day. So understanding -- look, I'll back up for a second. I don't think you could just sit things out when you've seen the world change pretty drastically before you, including for your customers and go, I'm not going to even look. So I think you have to look, but you have to look and go, where do we think growth is not just there, but sustainably there. Where do we think we have a right to win, leveraging the assets that we have, whether it be our route to market, our marketing power, our ability to scale brands, et cetera. And then how do you participate in a disciplined way. And that should apply organically as well as inorganically.

I mean anything we do organically push into new space should be done with great discipline about are we going to generate the returns that justify the investment? And are we going to make sure we don't distract ourselves from the core, which is the thing that's going to generate probably the most value for us. But there's a way to do that. And I think if we -- as long as we partner together and work well at just knowing what the framework is and having strict criteria by which we evaluate things, including returns, then that keeps us on the path to be disciplined and choiceful.

Okay. And Garth, how should we think about broader balance of kind of capital allocation priorities?

Yes. I mean I think we're in a real enviable position as it relates to capital allocation and a little bit of a consistent and boring story, if you will. We touched upon earlier around this investment that we've been making in our beer business. And we're kind of coming to the end of that heavy investment cycle. So we've already started to see that cash flow inflection, and that's only going to accelerate from here. That puts us in a position where we can continue to operate and hit our capital allocation priorities consistent with how we've operated in the last 6 or 7 years. We're going to continue to focus on being -- having a strong balance sheet and being an investment-grade company.

We're going to continue to invest in the business for growth, whether that's through organic or inorganic initiatives. And then we're going to continue to return capital to shareholders through our dividend, which has a 30% payout or through utilizing our share repurchase program, which still has a significant amount left on the $4 billion of authorization we have under the current Board authorization. So a little bit of consistency with how we've operated the business over the last several years.

Okay. We just have a few minutes left. So I just wanted to close by hearing maybe respectively, what you're most excited about over the next 12 months, both of you. So -- and what do you hope to deliver on so we can sit here 12 months from now, and what should we be talking about that you've had a good 12-month track record?

Yes. I mean, just personally, I'm most excited, I think the strength of our brands and the power of the portfolio, just -- I feel extremely gratified to be sitting in the seat. A lot of work done before I came along and to just see the power and strength of these brands. And it's being demonstrated in the share growth that we have, which has only accelerated. And I -- what gets me excited is I think this year, again, fairly blunt instrument -- I mean, great plans, but fairly blunt instrument and sort of just dialing it up.

I think if we can take that to the next level and get really focused on sort of these 3 different pillars of playbooks and getting a little bit more specific and granular about where we activate what and how we do it, I think we're going to see that help us accelerate even further. And I think coupled with what Garth described as the opportunity of driving from being a builder to an operator on the operations side and the fuel for growth that can come out of that, it becomes a flywheel and a machine that could be very powerful.

Look, I'm excited about the momentum we have in the business across all of our business units. In beer, we continue to take share in what is really a challenging consumer environment, which I think is proof positive that we have the best portfolio of brands in the beer category. In Wine and Spirits, the actions that we've taken over the last 18 or 24 months are really bearing fruit, and we see that on the top line. And as we just discussed, we'll start to see that in terms of the margin profile in the fiscal years to come.

And then the actions that we've taken across the enterprise to make sure that we've got an effective and efficient cost structure to support organizational goals. I think, is really exciting. And then that all culminates in what we just touched upon, which is really strong free cash flow generation, which is going to let us continue to progress against all of our capital allocation priorities.

Okay. Great. All right. We're going to wrap there and go to breakout. So please join me in thanking Constellation for being at the conference again this year.

Thank you.

Greetings. Welcome to the Constellation Brands' Fiscal Year '27 First Quarter Earnings Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'll turn the conference over to Blair Veenema, Vice President, Investor Relations. Thank you. You may now begin, Blair.

Thank you, Ralph. Good morning, all, and welcome to Constellation Brands Q1 Fiscal '27 Conference Call. I'm joined this morning by Nick Fink, our CEO; and Garth Hankinson, our CFO.

Before we proceed, we trust you had the opportunity to review the news release and CEO, CFO commentary made available in the Investors section of our company's website, www.cbrands.com.

On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. We also encourage you to refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call.

Before turning it over to Nick to kick things off, please keep in mind that as usual, answers provided today will be referencing comparable results unless otherwise specified.

Lastly, in line with prior quarters, I would ask that you limit yourselves to 1 question per person, which will help us to end our call on time. Thanks in advance. And now over to you, Nick.

Thanks, Blair. Good morning, everyone, and thank you for joining us. Before we get into the Q&A, I'd like to share a few observations from my first 2.5 months as CEO of Constellation Brands. Having spent significant time in the market over the last several months, I am increasingly confident in the enduring strength of our brands and the role they continue to play in consumers' lives, even in periods when discretionary spending is more challenged. Over time, we have repeatedly shown an ability to create demand and scale brands through a combination of consumer insights, commercial execution and disciplined investment. That capability is reflected in the strength of our portfolio today, whether it's Modelo, Corona, Pacifico, Kim Crawford or Mi CAMPO, these are brands with strong identities, deep consumer connections and enduring relevance.

I also believe some of our greatest opportunities remain directly in front of us. As brands become larger and more established, it is important to find new ways to remain relevant in consumers' lives. That requires a deeper understanding of behavior, motivation and the moments that matter most to consumers. That's an area where I believe we have significant strengths and meaningful opportunity. Leveraging strong commercial capabilities, rich consumer insights and increasingly powerful data and technology tools that can help us move faster and make effective decisions.

My focus is on ensuring that we continue to build on those advantages. And lastly, I believe the most successful companies are willing to challenge their own assumptions about where future incremental growth will come from while still executing with excellence in the core. We have a strong portfolio in attractive positions today, but we also need to maintain a forward-looking perspective about where consumer demand is heading, and how we can leverage our capabilities to continue to create value through disciplined investment and execution. Across all 3 areas, one common theme is the importance of developing world-class insights. The better we understand consumers and emerging trends, the better position will be to allocate resources, execute effectively and create sustainable growth.

So while the quarter reflected a continuation of the dynamic consumer backdrop that we have been operating in of late, my confidence in the long-term opportunity for this business remains strong. We have exceptional brands, outstanding people and a set of capabilities that position us well for the future.

Now back over to you, operator, for any questions.

[Operator Instructions] And our first question is from the line of Nadine Sarwat with Bernstein.

Nick, your prepared remarks touched a lot on your refined strategy for Constellation. So perhaps a 2-part question from me on strategy. First, you intend to deploy a different playbook to sustain growth at scale versus scaling emerging brands. How could that different playbook look like in practice? And then second, you called out exploring white spaces where you have a right to win. Is this organically, through acquisitions? And what white spaces are you seeing as most attractive today?

Sure. And thank you for the question. I'd be happy to give some perspective, Nadine. So I think there's little doubt about our capability to scale brands. We've got this incredible track record. And as I've spent time much deeper into it with the teams as well as just getting out into the market with our distributors talking about it, there is an execution playbook, it's disciplined, and frankly, it's the best I've seen. It's thoughtful, it's considered and there is a way in which we build distribution, we build awareness. We do it in a sustainable fashion that we know is going to hold over the very long run. And you've seen us do that over many decades, brands like Corona now continuing the job of Modelo and some great rising stars in the portfolio, we'll continue to do that. So a little doubt, and I'd say best-in-class ability there.

You then go to some of the places where we've scaled a brand. And I look at a brand like Corona where the brand metrics are phenomenal, most loved beer brand. We've got the right distribution. We've got great awareness. Really, the brand health sort of green across the board. The way to continue to maintain and grow a brand like that will be different to the playbook in which we're driving awareness and driving distribution and there's still opportunities there. It becomes much more about saliency and relevance connecting with the consumer where they are, understanding RGM and price pack architecture, connecting into the right cultural moments, being visible in the places where they are in the way that they want to interact, connecting into the right types of occasions.

It is a different playbook, but it is one that many great consumer products companies do at scale and do very well. And I think it's a place where we'll continue to sharpen the capability and get after that. And if we can do both of those things, there is a ton of value creation to be had there. There's no question in my mind. And then you go to the third place you referenced, which is white spaces. And we have a consumer that's evolving quickly. We have a customer that's evolving quickly. We have shelves, right, that are evolving and look pretty different to the way they looked 5 years ago, 10 years ago, and there's a lot happening.

And so being open-minded to what is happening in those spaces, what are fads and what are trends, being able to know the difference between those things, knowing what's sustainable, what's not sustainable, seeing where momentum exists and then in a thoughtful and disciplined way being able to get after that. And so an example for -- already in our portfolio, you take Corona nonalcohol. Here's a brand that we have strong double-digit growth behind. We're now #4 in the category. That's a space we weren't playing in. Should we be putting more fuel on that fire because the fire is burning. And that's a great example of a white space didn't really exist for this company. Now we've got a toe in the water. Do we want to go double down on something that we've already got some real momentum behind and be willing to invest, again, in a disciplined way.

I'm not talking about going out and making huge bets and hoping it comes. But we and I think have done a much better job over the last couple of years of developing test and learn capabilities, ways to go, try one market versus a different market, see what works, see where we're going to accelerate, see where we want to be agile and change. And that would be an example of a place where we might go do something like that.

Our next question is from the line of Filippo Falorni with Citi.

You called out in the prepared remarks, it's been pretty volatile start of the year, strong March and then softer April and May. So I was hoping you can give us a little more color on what you're seeing in June given -- especially given the gas prices have moderated a bit more recently? Are you seeing improvement in consumption trends as gas prices come down? And then also, obviously, in June, we've had 3 weeks of World Cup. So maybe you can give us some perspective there on the consumption on your brands around World Cup, and whether we should see a further potential improvement in the on-premise business where a lot of those occasions potentially reside?

Sure. I'll be happy to jump in with some perspective and Garth can perhaps share some color as well. There is no question it was a volatile quarter. I mean you saw -- you see it in all the Circana and other data, right, a very strong March out of the gates. And I would say in a more normalized consumer environment a lot of great interaction with both us and the category but particularly our brands resonating very strongly. And then a massive spike in gas prices, and we did see the consumer respond by slowing down. And I think not to be unexpected and that's not just us. I mean, as we've talked to even other companies in the consumer field, traffic is down, a lot of choices being made.

And as we ended the quarter and got into the early part of this quarter and some of those headwinds have moderated, we've started to see a modest reacceleration, I wouldn't say back to where we were in March, but a healthy return to some growth rates and the Circana data just even for the last week was very encouraging, not just a category, but really around our brands, which are somewhat more premium positioned and very attractive to the consumer.

We saw some very strong numbers as consumers get to make the choices that they want to make and would like to make. And so encouraging in a somewhat more normalized environment that the portfolio is more than holding its own and responding really well.

And then certainly, it's been great to see both World Cup and some of the energy that we saw in one of our key markets like New York around the Knicks, which was, to me, I think, yes, some lift from that. But even just more importantly, consumers engaging in that beer occasion coming together in the on-premise, in the off-premise, the pictures from New York, I thought were remarkable, just to see young people being together, watching the game projected on the sides of buildings and those are beer occasions, right? It's just a great reminder to that consumer of the role that this category can play in their lives, and I think having these great events rolling through the summer could be quite meaningful in that regard. So I don't know if anything to add?

I think you hit it all, Nick.

Thank you.

The next question is from the line of Lauren Lieberman with Barclays.

Great. Just getting to the quarter itself, I was struck by the fixed cost leverage that looks like you enjoyed this quarter with the gross margins, the margins for beer at 39%. So I just wanted to talk a little bit about the drivers of that, the 1.8% shipment growth is certainly better than what was anticipated. But it's a high bar for the margin with volumes still sub 2%. So just kind of curious, as we think about that going forward, you're absorbing incremental depreciation, but again, the strength of the margin in the quarter was particularly strong. I just want to understand the building blocks better so we can think about the path forward.

Lauren, thanks for the question. And really, you hit on it. We had about 30 basis points of benefits this quarter versus last year really due to fixed overabsorption -- largely due to fixed overabsorption, as you say, related to the higher shipment. In addition to that, we also continue to make great progress on our cost savings agenda, and that was certainly a benefit. We also had 20 basis points of favorability due to pricing net of mix. And that was offset by about 30 basis points of currency headwinds and other small things that will flow through cost of goods. So that really is what drove the favorability on gross profit margins.

On operating margins, we declined 10 basis points. We had the 20 basis points of favorability on gross margin expansion, but we had a 20 basis point headwind on increased SG&A, similar to last year, as we've added employees to support Veracruz going live later this year. We've brought those folks online. And until those -- until Veracruz commissions, they will sit in SG&A rather than COGS. And then we had 10 basis points of headwinds related to incremental marketing, mostly to support the World Cup that is happening now, as we indicated at our April earnings call.

As we look forward into Q2 and Q3, we would still expect gross margins to be strong, but we will see some incremental headwinds as it relates to operating margins. Keeping in mind, we've increased our marketing spend expectations for the full year to drive incremental marketing investment, particularly around the World Cup and College Football and the NFL. So you'll see in Q2 and in Q3, a spike in marketing as a percent of net sales. As we said in our prepared remarks, that will be over 10% in those 2 quarters.

And then in Q2 and Q3, we will see SG&A increases. They're a bit more material in Q1. A big part of that is lapping last year's lower compensation benefits related to incentive income or incentive compensation.

Our next question is from the line of Dara Mohsenian with Morgan Stanley.

You mentioned in the prepared remarks you're looking to extend participation across more occasions. Just high level, can you give us a bit more detail there on how you execute that? Is it more marketing on base brands and refining that? Is it more through innovation? Is it more through moving into new areas or the white spaces through M&A? And just wanted to get a bit more detail on how specifically you do that. And then obviously, moving into white spaces potentially is a piece of that. So how significant a focus do you expect the white space expansion to be just relative to driving base business brand trends?

Yes, I'll start with that. Look, I think the headline is there will be no greater way we can create value than nailing this with our core brands and core portfolio, period, right? And so when I talk about an understanding consumer occasions, it's really sort of taking the blinders off of not just thinking about our brands as they compete versus another beer or to be even more narrow Mexican beer, but actually, how do you look more broadly at what is the choice that your consumer is making in that moment, right? We -- and the team does some fantastic work. We have a whole wheel of identified different consumer occasions.

And so -- and then we make focused choices like here's where we want to compete and here's some moments where maybe we're happy if you take our product, but we're not spending to go win that moment in the same degree. But then understanding against other -- not just other beers for the beer brands that can apply to the wine and spirits brands as well, not just within your category, but what choices as consumers increasingly cross over, what choices are they making? And then how do you remain salient, and you win even with the core portfolio in that moment?

And if you can do that, then you can actually, even within the beer portfolio, start to create some differentiation amongst our brands, right? They have different brand personas. They appeal to -- they have a lot of similarities, but appeal to slightly different consumer groups, different age cohorts, maybe different moments, you see some of the work that we're doing behind Pacifico, which is more lifestyle-oriented, more around adventure, doesn't necessarily play in some of the same moments. And if we're able to do that, then you expand the aperture of what these brands can do and how they can play. And frankly, I think you can get after a larger addressable moment and compete in a greater way as a portfolio as opposed to duplicating some of the activities. And so that's first and foremost.

To the extent that within that as well, we identify other opportunities where the consumer is looking for something. And we think that is a space in which we can participate in a meaningful, but disciplined way. I think we should consider that as well and I gave the example earlier of Corona non-alc, right? That business is growing strong double digits. Our consumers are telling us they love the product. We haven't put a ton behind it yet, should we start to participate at that not just think of it as a product, but what is the occasion in which they're consuming that product. Is it an occasion where they don't want alcohol at all. There's an occasion where they're actually combining use of it with some of our alcoholic products and extending the occasion. And I think having that very strong consumer insight then definitely leads to an ability to execute in a much more targeted way and grow the addressable moment as well as our share at that moment.

Next question is from the line of Chris Carey with Wells Fargo.

I wanted to ask about, I guess, the complexity of -- or the complexion rather, of the portfolio. Modelo Especial remains sluggish, Corona Extra has obviously been a bit of a challenge, and you're seeing kind of tremendous growth in other parts of the portfolio that are lifting up the portfolio just a bit. I think the sustainability of some of those faster growth offerings feels quite durable, but there remains question marks around, most importantly, Corona Extra and then Modelo Especial just getting back to a bit of growth. Can you just give us a bit more context on how you see these 2 brands specifically and a bit more detail on what you're doing to reaccelerate? And maybe most specifically with Corona Extra, given the duration of the headwinds that the brand has seen?

Yes. Sure. Happy to do so. And I'll start off by vehemently agreeing with you on the sustainability of the things in the portfolio that are growing as strongly as they're growing. And I say that because the very disciplined way in which the team is going about achieving that growth, driving awareness, driving distribution, but doing those 2 things in concert with each other and making sure that we don't get ahead of ourselves so that we're building it in a very disciplined way. And I've been incredibly impressed as I've spent time with our team and our distributors how they do that. And I've seen it done differently with less discipline and less sustainability. And I think the way that we're doing it is best-in-class. So I really agree with you on that.

You're right to point out some of the challenges and the headwinds on Especial and Extra. And I think that's fair. And that goes to my earlier point of once things are scaled, the toolkit for continuing to both maintain and then grow those brands becomes different. Now in the case of Modelo Especial, there is still room to grow. We haven't finished the job scaling that, right. There is still a significant gap to distribution. Unaided awareness is remarkably low given that this is the #1 value -- brand by value in the marketplace, which is actually quite an incredible opportunity as we continue to drive awareness and that becomes more and more of a general population brand. So the job is yet to be finished on Modelo Especial. We will finish the job, but we need to develop the very sharp toolkit of what do you do as that becomes fully scaled, and how do you continue to drive saliency and relevance, which gets us to Corona and developing that playbook on Extra that, that would be a playbook that will then deploy for anything that is scaled and that becomes a bit of a different playbook.

You're not driving awareness and distribution anymore, you're driving saliency, relevance, connecting with consumers in the moment and really being both available to them, which is top of mind awareness and distribution. But activating in that moment being the thing that they choose. And that is a somewhat different skill, one that there are plenty of companies out there that have developed really, really well, and we need to demonstrate that we can bring.

Now I will tell you, and over the course of my career, I've worked on some tired brands. I've rebuilt some tired brands and rejuvenated tired brands. Our brands are not tired. They have some of the most, and I'm just saying this sincerely remarkable brand health of any brands I've ever seen. And you start with Corona Extra, you start with most loved beer, most loved beer, right? Still #1 in New York City, the cultural icons of this country, still #1 in Miami. So you're starting with this really powerful foundation. We need to dial up the everyday activation switch and I have absolute confidence that with the right focus there, that is something that we can do that will not just help Corona Extra, but then will allow us to continue to deploy those capabilities against anything else we scale over time.

The next question is from the line of Rob Ottenstein with Evercore ISI.

Great. And in a way, this is kind of a follow-on to the last question. As you said, and I think we'd all agree, you have some amazing brands. The performance has been tough. Obviously, there's a lot of macro factors that are out of your control. So let's just focus on things that are in your control, and I do know it's early days for you, but for over a year, you didn't have a Head of Sales, right? Bill Renspie, very well regarded, left, I think, in March of '25. And then now you've hired Jack Edwards from Diageo Beer who has a fantastic reputation, I think it started about a month or 2 ago. So you got the great brands. You're in a great category in many ways.

Have you had a chance to sit down with Jack yet and talk about what is under your control in terms of driving execution with distributors, with retailers to make sure that you're best leveraging the remarkable brands that you actually do have. And again, I know it's early days on this, but are there a couple of things that maybe you can point out that are areas in which you're going to be working with Jack and look like reasonable wins and objectives over the next 6 months that can improve the trajectory in terms of what you can control?

I'm happy to share a few thoughts. I don't want to -- be overly graphic about some of the competitive ideas that we have, but rest assured that they're there. But firstly, I'll start by acknowledging your point. I think, yes, indeed, macro headwinds, we talked about both generally in the economy and some of the things we saw both in the quarter. And by the way, our consumer even more adversely impacted by that. And while that gap has improved, there is still a gap that we're seeing within the Hispanic ZIP codes relative to Genpop. So we're cycling through those headwinds. That said, you're right. We don't sit and make excuses. We think about what it is that we have that's under our control that we can go execute.

And so I talked about there are things like still distribution gaps in Modelo so awareness gaps. We can continue to drive those that is within our control. There is more, I think we can do on a brand like Corona Extra. We just talked about that, right? And that might be getting more tactical in the field, in the on-premise, in the places where our consumers live and breathe. I think that is within our control.

And then as Jack is coming on board and we're spending more time together, it's really some of that in-field execution, which has been really good, but we can always push ourselves to improve more. Thinking about our pack price architecture, thinking about revenue management, how do we meet the consumer where the consumer is in an increasingly K-shaped economy, right? We're seeing some really interesting activity across our pack sizes where we have, by far, the largest share of both the small pack size and the larger sharing pack size. I think that's a really interesting place to play, but you got to make it really available to your consumer and make sure they can find it and discover it.

And does that start to get our portfolio to a place where notwithstanding some of the headwinds, it is more accessible. So those are some of the ideas that we're working on. Again, I think it's early days. Jack has been out on the road nonstop since he started. And I think as he absorbs and digests everything he's seeing, we'll continue to generate new ideas, but we're very excited to have him on board. He's a real talent.

The next question is from the line of Bonnie Herzog with Goldman Sachs.

I had a question on your FY '27 guidance. You maintain your beer net sales guidance despite strong shipments in the quarter. And then comparisons do become pretty favorable in Q2 and Q3. So I guess I wanted to understand if the decision to maintain guidance reflects, I don't know, an abundance of caution regarding the dynamic consumer environment. And I guess maybe touch on that, especially with the Hispanic consumer. Or are there specific distribution or maybe shipment headwinds in the next few quarters that we should be thinking about?

Sure, Bonnie. Thanks for the question. I'll start and then Nick, you can weigh in too. I mean, look, we're off to a solid start to the year. There's no denying that. But as we look to the balance of the year and as we laid out in April, this continues to be a rather dynamic operating environment, right, with, in some instances, low visibility. Nick referenced earlier around how we started the quarter and then how we ended the quarter, and again, how things kind of moved around. Nick referenced the impact on gas prices in Q1, right? If you look at the end of our fiscal year and then at the peak of Q1, gas prices were up well over 50% across the U.S. on average. That was more than $1.60 a gallon if you look at it on that rate. In a market like California, gas prices at its peak were up 40%, Illinois 70%, New York, Florida, Texas, up over 50%. Inflation was up largely due to fuel prices, but there are other things that kept inflation a bit higher than anyone would like.

So that's a little bit long-winded to say there are a lot of things that are going around in the market that just give us uncertainty. And while we're off to a good start, we don't think that after one good quarter that we want to change what the outlook is for the full year just given some of the limited visibility we have on those macroeconomic metrics. Anything you want to add?

No, completely agree.

Your next question is from the line of Peter Grom with UBS.

I wanted to follow up on the response to Filippo's question earlier. And Nick, I think you mentioned thus far in June, you've kind of seen a return to healthy growth rates but not at March levels. And look, this may be a hard question to answer. But when you think about the improvement, is there a way to parse out how much of that is related to kind of World Cup or maybe some of these unique events that are ending here in a few weeks versus maybe signs that the consumer pressure is abating. And I guess what I am -- the premise of the question is really just trying to understand whether you think this improvement we've seen kind of quarter-to-date is durable as we look ahead?

Yes, look, it's a great question, and it's one that we're asking ourselves, and we're going to continue to do the work and analysis to really get our heads around as we see how the rest of the year develops and then how we can continue to drive the momentum where the momentum is sustainable. But I will tell you from the early reads and yet -- by the way, early, right? We're just like still a few weeks. I know we're a few weeks in, but we're just a few weeks in. It does seem to us to be pretty broad-based, right? I mean if we can get to some account data or some on-premise data where you do see big spikes around a game or in that particular geography, but it's not like you look to the rest of the country and you're seeing a vastly different result as an average, right? You could see a big spike here, but it's not moving the needle for everything. So it's fairly broad-based.

Texas and California continue to be -- sorry, Texas and Florida, I should say, continue to be challenged. California has been pretty good. And that hasn't necessarily changed as a result of the World Cup. We think that is more of a macroeconomically led headwind for our consumer, in particular, in those geographies. And we've seen that sort of continue notwithstanding the improved performance.

And so it does look like the return of health to us might be more to do with some of the headwinds abating than any kind of onetime tailwinds. But as I said earlier, it still doesn't hurt that you certainly have the World Cup event that you had the [ Knicks ] of major markets and that people are just getting together and enjoying that beer occasion, which we think is also just a key future unlock of people remembering how important it is to come together to socialize and the role that our products can play in that.

Our next question is from the line of Peter Galbo with Bank of America.

Maybe just to put a finer point on those last few questions around Q2. Garth, I was hoping just for maybe a little bit more clarity on the shipment side for Q2. There's a lot of, I think, moving pieces in the quarter. You kind of overshipped, I think, in Q1 ahead of where you normally seasonally would be. You have the lap versus last year where I think there was some destocking. So maybe you can just help us think through the relationship for Q2 between absolute shipments and depletions because I know that the growth rates between the 2 can be a bit wonky.

Yes. Just to start on that, let me just say that, on a full year basis, we would expect, as we always do, that shipments and depletions would align with one another -- very closely align with one another. In Q1, which is typical for us in every fiscal year, we ship ahead of depletions to support the key summer selling season so that's fairly typical. Then as we move through the year, we will see some of that become more in line with one another, again, supporting the fact that when we get to the end of the fiscal year, shipments and depletions will essentially equal one another.

Our final question is from the line of Michael Lavery with Piper Sandler.

Just as you think about the consumer and occasions, one of the things we've seen just as kind of a stepped-up level of innovation focus is higher ABV mostly in RTDs, but certainly in the consumer's mind, some of the lines get blurry and it's in the same consideration set very often. But in most situations, wouldn't seem like it has a different consumption effect on the consumer. It's more -- it looks like a volume headwind if they get more bang for the buck, but with maybe only a modest mix lift, it would seem at a high level to be category value dilutive. How do you think about just competing against that, participating in it? Kind of how do you weigh some of maybe the trade-offs and maybe risks or opportunities in terms of just how that innovation thread evolves?

It's an interesting question. And look, we talk a lot about K-shaped economy and you also see sort of K-shaped consumer behavior, right? So you've seen that behavior, which I think is a value-driven behavior. You're seeing other parts of the K where it's sort of, I want a great premium product, like think about what's happening in Corona non-alc where we've got very strong double-digit growth, no alcohol, right? It's about, I'm willing to pay more to have a very premium experience with a great tasting liquid. And so you've seen -- we continue to see that both ends of that K. And I think for us, we just need to be thoughtful about where we want to play and participate. So I'd say we have a toe in the water on the higher ABV stuff with a small RTD brand as well as some of the stuff that we're doing with our Chelada business, which now would be the third largest RTD business if we measured it that way. So a good example of this company's ability to innovate into something like RTDs, but do it in a way that is thoughtful and sustainable and true to our brands.

And as product plays there, we need to be thoughtful about what is that impact on the whole portfolio, are we meeting the consumer where they are with what they drink and what they would like. And then to the earlier question about controlling the controllables, then how do we go execute that in field because you've got to make sure if you want to play in something like that, that the consumer knows that you are there and can find you, which I think is probably some of the work to do.

So I think we need to be thoughtful about these emerging trends and be choiceful about which are the ones that we want to participate in or not, Garth, I'm going on a perspective whether it's more or less dilutive. I'm not sure, I think it's probably just a consumer occasion.

No, I agree with that.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. We'll also conclude today's conference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.

Greetings, and welcome to Constellation Brands' Fiscal Year 2026 Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Blair Veenema, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Donna. Good morning, all, and welcome to Constellation Brands' Q4 and Full Year Fiscal '26 Conference Call. I'm joined this morning by Bill Newlands, our CEO; and Garth Hankinson, our CFO. I'm also pleased to welcome our incoming CEO, Nicholas Fink, who is joining us at the start of today's call to share a few remarks. Following Nick, Bill will briefly review the fiscal year, after which we will turn it over to your questions for Bill and Garth.

Before we proceed, we trust you had the opportunity to review the news release and CEO, CFO commentary made available in the Investors section of our company's website, www.cbrands.com. On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. And we encourage you to also refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call.

Before turning it over to Bill to kick things off, please keep in mind that, as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourself to one question per person, which will help us to end our call on time.

Thanks in advance. And for the final time, over to you, Bill.

Thanks, Blair, and good morning, everyone. I'm going to make a few opening comments before we get into Q&A. But first, I'd like to pass it over to Nick Fink, our President and CEO-elect, for a few brief comments. Nick, warm welcome. Nick will assume the role on April 13, and we are pleased to have him with us today to say a few words before we get started. Nick?

Thank you, Bill, and good morning, everyone. I'd like to start by recognizing Bill's leadership over the past 7 years as CEO and in total, his 11 years of contributions to Constellation Brands. He strengthened the foundation of the company in meaningful and lasting ways, and I valued our partnership during my time on the Board. I look forward to continuing to work closely with him over the coming months to ensure a seamless transition as he moves into his role as a strategic adviser. I'm honored to step into the CEO role next week at such an important time for our business. Constellation enters this chapter from a position of strength with a leading portfolio in high-end beer, a reshaped Wine and Spirits business, best-in-class marketing and sales capabilities and a proven playbook that continues to deliver consistent share gains year after year.

While the consumer landscape remains dynamic, I firmly believe that we are well positioned to continue delivering for our consumers, employees, distributors and shareholders over the long term. Having served on the Board for the past 5 years, I've been closely involved in our key strategic and operational priorities. That perspective gives me strong conviction in our strategy and in our ability to execute going forward. We will continue to be insights-driven and consumer obsessed, lean into our strengths in beer, allocate capital with discipline and generate strong cash flow while thoughtfully navigating an evolving consumer landscape.

As I formally assume the role on April 13, I look forward to spending time with our operators, distributors and many of you in the investment community to gain an even deeper understanding as we begin to shape the next phase of our growth journey ahead. I'll close by reiterating my confidence in this business, in our iconic brand portfolio, our route to market and consumer-led marketing, our best-in-class operations and most importantly, our talented people. These strengths underpin our differentiated capabilities as we seek to continue delivering sustainable long-term growth and attractive shareholder returns.

With that, I'll turn it back to Bill.

Thanks, Nick. Just a few additional comments from me before we start Q&A. As we stated in our published remarks, we ended the year with some solid momentum in our beer business despite operating in a challenging environment during our fiscal '26. It was a year that required agility and focus as consumers continue to navigate a tough economic backdrop with more selective shopping behavior, which weighed on overall category performance for much of the year. Our teams stayed tightly aligned on what we can control, growing points of distribution, supporting our core brands and executing with discipline. That approach allowed us to take share and strengthen our competitive position.

Our beer portfolio continued to lead the high-end segment with Modelo Especial maintaining its leadership as the #1 beer brand by dollars in the United States and momentum improved as the year progressed. In Wine & Spirits, our efforts to reshape the portfolio are gaining traction with strong contributions from brands like Kim Crawford and Mi CAMPO. Lastly, from a financial standpoint, the business delivered solid cash generation, giving us the flexibility to reinvest while also returning capital to shareholders. As we look ahead, we're encouraged by the improvement we saw exiting the year, but we remain realistic about the current operating environment, which remains fluid with limited visibility. That said, we feel good about where we're positioned with a strong portfolio, clear priorities and a disciplined approach to operating, we believe we're well equipped to continue building momentum and delivering long-term value.

Now back over to you, Donna, for the questions.

[Operator Instructions]

Our first question today is coming from Nick Modi of RBC Capital Markets.

Bill, best of luck going forward. Maybe you could just unpack the beer top line guidance for the upcoming fiscal year, the negative one to positive one. And I ask that in the context of what seemingly is a pretty good start to March or to the year. If you could just give us some context on kind of what you're thinking? Are there anything that we should be thinking about in terms of like why it would decelerate for the full year relative to what we're seeing in March right now? Any context would be helpful.

Sure, Nick. Obviously, the single biggest challenge that exists now is our limited visibility. Things have been very volatile in terms of what the consumer reaction has been and our continuing research suggests that the consumer is still cautious. With that said, as we noted in our overview, we exited last year in a very strong position. We saw sequential gains in the quarter, and we saw depletions up in the quarter, which had not been the case over the prior 3 quarters. March is off to a solid start, better than planned with continued increasing momentum. So certainly, we remain optimistic about the year that we have just begun. But we need to continue to recognize volatility has been high and visibility has been low.

The next question is coming from Bonnie Herzog of Goldman Sachs.

All right. Thank you and best of luck, Bill from me, too. It was great working with you. I have a question on beer operating margins. You're guiding margins of 37% to 38% for this year, which is a step down from your prior guidance of 39% to 40%. So can you help us understand the key drivers of the new margin delivery, I guess, especially around fixed cost absorption from the new Veracruz brewery coming online. Also, how should we think about the phasing of margins across 1H versus 2H? And then finally, I guess I'm curious to know if you believe you can get back to the 40% margin range? And if so, is that a possibility next fiscal year? Or is this going to take longer?

Thanks for the question, Bonnie. So you're right. We've guided to 37% to 38% margins. I'll tell you what the headwinds are and then what we're doing to offset those headwinds. You rightfully pointed out that the primary headwind as it relates to operating gross profit margins are expense-related, costs associated with our new brewery in Veracruz, which is expected to begin production around the middle of our fiscal year. With that, we were going to have some fixed cost absorption headwinds as we go through the year. And then further down the P&L, we have an increase in our SG&A expense related to lower incentive comp in FY '26 and incremental investments in marketing that we will make in this year to drive continued growth within the business, both in the short and in the long term.

Offsetting those headwinds will be 1% to 2% price delivery, which, as we've noted in the materials we uploaded overnight, we'll be at the lower end of the range this year. We will continue to deliver against our cost savings agenda, where we've been very successful in our migration from a builder to an operator. And then we -- additionally, as you saw in our materials, we'll have relief from aluminum tariffs this year. As it relates to beyond FY '27, we're not prepared to talk around any guidance beyond this year. So we'll cover that as we go through this year and into next.

The next question is coming from Dara Mohsenian of Morgan Stanley.

Best wishes from me also, Bill. I've enjoyed working with you. And Garth, maybe if I can just follow up on the beer margin side. Can you just break out what you're expecting from a key input cost standpoint in fiscal '27, aluminum freight and some of the other key buckets, just how hedged you are on the input cost side as well as FX side? And then as you think about beer margins, maybe the volatility there, what might be some of the upside drivers versus downside drivers? And then also just focus on wine and spirits as much, but the margin guidance is clearly a lot lower than maybe the ongoing business should support longer term. So just help us understand the Wine and Spirits margin guidance for '27. How much of that is depressed by factors specific to '27 versus extends longer term?

Yes, Dara, there was a lot there, so I hope I got it all. So from a hedging perspective, we're fairly well hedged as we entered the year on both commodities and on currencies. For fuel, we're nearly 100% hedged. On aluminum, we're approximately 90% hedged; natural gas, about 80% hedged; in corn, about 75% hedged. Across all of our currencies, we're right around 80% hedged as we entered the year. So we're in a good spot. In terms of beer margins and what could lead to upside, I think volume. As Bill noted, we're cautiously optimistic around the start of the year. And if volumes were to increase from where we are, that would certainly benefit the margin profile.

As it relates to Wine & Spirits margins, there are a number of factors that are going into our -- the guided margin profile, including ongoing category pressures, channel headwinds, the timing of our cost deleveraging and distributor inventory rebalancing. Starting with category headwinds, we've seen a material downgrade in the outlook from where we were a year ago. U.S. high-end wine has shifted from expected low single-digit growth to low single-digit declines. U.S. high-end spirits are decelerating from plus mid-single-digit growth to flat to slightly down. And so while we're significantly outpacing the market, it's sort of on what I would call a little bit of a lower base.

Relating to channel headwinds, we've seen some tasting room softness in our Napa-based wineries. And then internationally, we've seen some weakness as it relates to U.S.-made or U.S.-sourced wines and spirits, particularly in Canada, which is our largest market, where ban on U.S. wine and spirits remains in place. And then as we outlined in our materials, we've agreed to some inventory rebalancing with our key distributors, reflective of the softness we're seeing in the Wine and Spirits category.

And then in terms of the timing of cost deleverage because the top line is softer, as you know, in wine, the length of time it takes for things to move from the balance sheet into the P&L, just -- it will take a bit longer than expected. That being said, structurally, we still believe that our target margins are achievable over the medium term as distributor inventories normalize, as the category declines moderate and as our cost savings agenda moves from the balance sheet and into the P&L.

The next question is coming from Filippo Falorni of Citi.

Just adding my best wishes to Bill and congrats to Nick on the new position. So maybe staying on beer margins, but on the marketing spend side, you mentioned in the prepared remarks that you're thinking about 9.5% of sales on marketing. How should we think about the cadence throughout the year? Obviously, you have a World Cup -- FIFA World Cup coming in the summer. Should we think maybe there's a little bit extra spending in the summer months? And longer term, how you guys think about the marketing levels? Is this 9.5% still a good place to think about longer term beyond fiscal '27?

You bet. We're going to very aggressively invest against our brands in the first half of this year for a number of reasons. One is the momentum that we saw coming out of the end of the year and the momentum that we've seen in March. Secondly, the World Cup is an outstanding event that provides an opportunity for many of our loyalist consumers to engage with our brands, and we're going to invest heavily against that. We always invest in the first half of the year. You will see additional investment this year. Part of that will be done against our high-end light beer strategy.

You've probably noticed we are seeing momentum in our Oro and premier brands, particularly coming out of our repositioning of our price points for those 2 sub-brands. And we're going to invest behind it. We think that remains a tremendous opportunity for our business, and we're going to invest behind that. We're going to continue to invest against Modelo. Modelo, we believe, still has a lot of runway and will be very appropriate in the time frame of the World Cup.

And lastly, I got to make a call out to both Pacifico and Victoria, which are both on a tear. You're going to see more investment against Pacifico than we have done historically as we see that momentum as one that we can continue to leverage going forward. And last but not least, Victoria. Victoria has done very well and brings in a younger consumer than our overall portfolio mix, which we find is very beneficial for the long run as well. So a lot to be excited about within our brands. That doesn't even begin to touch on things like Sunbrew, which obviously is another one that showed great momentum in its first full year.

So a lot of things for us to invest in, as Garth noted a moment ago, we are increasing our investment this year as we feel it's the perfect time to begin to take advantage of some of this momentum that we're seeing.

Our next question is coming from Chris Carey of Wells Fargo Securities.

I wanted to follow up. I think it was Dara's question just around some of the key drivers of margin and then I have another question. But are you expecting a step-up in depreciation this year with the capacity? And are you well hedged on FX. I think you've been talking about layering in some hedges over the past several years. So if you could just confirm those for me, please? And then just from a medium-term perspective, I think we saw that you had given some concrete targets for cases on Pacifico over the medium term. Can you just expand on that and how you see the portfolio evolving and some of the key drivers of your business kind of through fiscal '30? Is Pacifico going to be the new growth driver as Modelo normalizes? So I'd appreciate just some confirmation on the margins in the medium term.

Yes, Chris. So I'll take the first part of that. And as it relates to depreciation, we are expecting to step up in depreciation as Veracruz comes online in the middle or expected to be the middle of our fiscal year. And then as it relates to currency hedging across all of the currencies that we hedge, we're roughly hedged at about 80%, and that's inclusive of the Mexican peso.

And obviously, we don't get too far down the track on what we expect volumetrically for our brands. But I think your statement, do you expect Pacifico to be a continuing growth driver for our business? The answer is yes. I think you can see by the takeaway that's existing in Circana channels, Pacifico continues to explode. And it's done a very similar thing to what you saw initially with Modelo, which was the initial strength was on the West Coast, and you're starting to see that strength broadening across the country. You probably have noted, we have a new campaign that focuses on the tremendously exciting yellow color of our cans, which stand out both on the shelf and in the cold box.

The consumer continues to be excited about the product in the bottle or the can. And we think that Pacifico is going to be a critically important part of our growth profile going forward, not to diminish, by the way, the potential that still exists on Modelo as well. So lots of areas for growth drivers, but certainly, Pacifico is going to be a critically important one for us going forward.

The next question is coming from Lauren Lieberman of Barclays.

So Bill, as you just went through talking about the brands, one that was absent was Corona Extra. And so just I'd love to hear a little bit about like kind of what's next for that brand. But in particular, also expanding to think about Modelo, you shared that general market ZIP codes are continuing to outperform the higher in Hispanic population areas. But I want to talk about Corona Extra and Modelo Especial, particularly within Gen market and what you've been seeing? And then like I said at the outset, just kind of more broadly on Corona, any thoughts on kind of what's next for the brand given trends have remained pretty soft?

Yes. No problem. Obviously, Corona remains one of the best loved brands that we have in the entire category. And I think the -- our ability to do things like Corona Sunbrew and the strength of Familiar are really reflective of the strength of Corona Extra. With that said, we're going to continue to invest aggressively against Extra. While we don't see that necessarily as the growth driver of the business going forward, we believe it's important to maintain that with the kind of strength that exists today for that particular business, recognizing the overall family is very healthy for the Corona franchise because of some of those sub-brands like Familiar and Sunbrew and Premier.

Relative to Modelo, we have seen improvements, as most of you know, we assess ZIP code data on a quintile basis. What's the percentage of Hispanic consumers, less than 20%, 20% to 40% and so on as you go up the ladder. We were very pleased to see coming out of the fourth quarter that all of those quintiles showed a sequential improvement in the takeaway. It was probably most notable in the state of California, which is part of the reason you've seen very strong Circana data over the recent past, where we have gained over 1 share point in both dollars and volume over the last 4 weeks, which gets us back to a more traditional share gaining position.

As you probably saw, we came out of the fourth quarter gaining 0.6 share points. That has accelerated as we've started into the new year. A lot of that has been driven by Modelo as well. As you've seen Modelo begin to show continued strength, and we continue to invest not only with our core Hispanic consumer, but in the broader marketplace as well. You will expect to see, as you have been, if you've been watching any sports, that our focus against sports and that whole platform for Modelo will continue this year, and I think it will speak very well to Modelo's continued ability to grow.

Our next question is coming from Rob Ottenstein of Evercore ISI.

Just would love to understand your process in terms of thinking about capital expenditures given the uncertain and muted outlook of this year, the declines of last year, the lack of visibility going forward. And obviously, you have to invest ahead of actual results and visibility. So how have you adjusted your thinking on CapEx? What -- how do you think about what to spend today for growth tomorrow? And maybe update us in terms of your medium-term expectations for volume for the business?

So let me start, and then I'll turn it over to Garth for some more specifics about the operational footprint. I think it's important to recognize we've continued to do what we've said for a number of years now around capital allocation. which has involved continuing our spend at the levels that we think are important for the long run. It's continuing to do the dividend. And more importantly, we've continued to return dollars to shareholders, over $900 million last year despite some extra dark periods we had in preparation for the announcement of Nick joining our business. So that kind of financial discipline is one that I think you can expect to see continue as we go forward. Nick has been an important part of supporting our development of that strategy over the last 5 years that he's been on the Board. And I think broadly speaking, you're not going to see any real change in our approach to capital allocation.

Now specifically to the operational side of that, Garth, I'll pass that to you.

Yes, Robert. So first of all, we're not ready to give any guidance beyond FY '27 at this point in terms of growth. That being said, we do expect that we will return to growth and that the headwinds that we're facing today are more cyclical in nature than they are structural. So that being said, we'll continue to operate very modularly as it relates to bringing production capacity online. I think we've been very effective at this over the last several years. This past year, FY '26, we spent significantly less in CapEx than where we had started our expectations in the year. And that's going to continue, right? We'll manage that spend. Some of that spend will get delayed as we bring on capacity later than expected and some of it may get avoided altogether.

To your point on the timing of when you make those decisions, I mean, as we've spoken about before, a lot of what goes into a brewery are long lead items, and so you have to make those commitments ahead of time, sometimes years in advance. And so that's the process we go through is looking at what we have for expectations for growth and then backing that into when we think that capacity needs to come online. But again, very successful in managing the modularity of when capacity comes online and then managing the costs associated with it.

The next question is coming from Peter Galbo of Bank of America.

Garth, maybe just a clarification and then a question for Bill. I think off the back of Dara's question around just Wine and Spirits margins for the year. Maybe you can just help us a little bit with the phasing. I think that you talked about inventory distributor reductions. I don't know if that's mostly a Q1 event, and so that weighs on the margin. Just any help there? And then, Bill, just a question on beer. You mentioned Victoria actually being a nice bright spot for the portfolio. That's obviously a very Hispanic dominant brand. And so just I want to kind of reconcile the comments you have about the Hispanic consumer against one of the stronger brands in the portfolio, albeit small, growing at the rate that it is, given kind of the cautious view.

So on the first piece of that, I would say that there's nothing abnormal or unusual around the phasing of Wine and Spirits margins in FY '27. The inventory destocking with distributors will happen throughout the year and not sort of in one event, if you will.

So relative to Victoria, one of the things we've seen, and I alluded to it on one of the prior questions, is Victoria has been a much younger demographic, 21 to 25. We're bringing in new consumers. And while you're correct, it is heavily driven by Hispanic consumers, it's a Hispanic consumer that is recognizing the heritage of Victoria and the authenticity of Victoria and are adopting that as their brand. We've seen many times over the course of time that generations, new generations will find a brand that they would like to make their own. And it certainly appears at this point in time, recognizing it's early days, that a younger Hispanic consumer is focused on Victoria and is coming to that brand in very strong numbers and quantities. So we're very encouraged about that. It's always good within a portfolio of brands to have a different -- somewhat different demographic base. And we think Victoria is going to be a sleeper. It's more than doubled over the last few years, and we think it has a lot of potential going forward as well, partially because of that younger demographic profile.

Our final question today is coming from Nadine Sarwat of Bernstein.

Bill, it's been a pleasure working with you and best of luck in the next chapter. Maybe 2 for me, just one clarifying on an answer earlier than my actual question. Earlier on the call, you said that you feel that your target margins for Wine and Spirits are still achievable over the medium term. But I know you withdrew your fiscal '28 guidance. Could you help us understand, therefore, what that target you're referring to is? Is that north of 20%? And then my actual question, mix was a 50 basis point drag to the beer top line in this last quarter, you guys called out packaging type. Can you give a little bit more color? How much of this is you guys introducing new mix dilutive offerings? How much is that a behavioral change from the consumer end? And what are you assuming in your full year guidance for this year when it comes to mix?

So as it relates to our Wine and Spirits target margins, we still believe that structurally, we can get those margins in the low 20s. Again, given all the headwinds that we're facing, that's going to take us a bit longer than expected, but we still expect to achieve that over the medium term.

Thank you. At this time, I'd like to turn the floor back over to Mr. Newlands for closing comments.

All right. Thank you, Donna. In closing, literally, thank you all for joining the call today. As you can see, we are confident we're well positioned to achieve our objectives in fiscal '27 and continue driving long-term shareholder value. We have a strong foundation and a clear strategy, and this is the right moment for a seamless leadership transition. It has truly been an honor and privilege to serve as CEO of Constellation Brands over the last 7 years. Together as an organization, we've accomplished a great deal. We've grown our beer business from roughly 280 million cases to well over 400 million cases, nearly doubled the size of Modelo Especial and made it the #1 selling beer brand by dollars in America.

We reshaped our Wine & Spirits business to be focused on a portfolio of higher-end brands. We've established a capital allocation framework that we executed against with consistent discipline, and we invested behind our organization to develop best-in-class talent in a company culture and future truly worth reaching for. While the industry landscape remains dynamic, I firmly believe Constellation is best positioned in this space with advantaged brands, best-in-class marketing and sales capabilities and most importantly, an exceptional team.

Having worked closely with Nick on the Board for the past 5 years, I know he understands our business deeply and has the leadership, judgment and strategic perspective to lead this company into its next phase of profitable growth. So to our investors, partners, employees with gratitude, I thank you for your trust and support over the years. It's been a privilege to lead this remarkable organization.

And with that, Donna, back to you.

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

Greetings, and welcome to the Constellation Brands Q3 Fiscal Year 2026 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Blair Veenema, Vice President, Investor Relations. Please go ahead, Blair.

Thank you, Kevin. Good morning all, and welcome to Constellation Brands' Q3 Fiscal '26 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. We trust you had the opportunity to review the news release, CEO and CFO commentary and accompanying quarterly slides made available in the Investors section of our company's website, www.cbrands.com.

On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. And we encourage you to also refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call.

Before turning the call over to Bill and Garth, please keep in mind that, as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourselves to 1 question per person, which will help us to end our call on time. Thanks in advance, and over to your questions.

[Operator Instructions] Our first question today is coming from Bonnie Herzog from Goldman Sachs.

Hope you're doing well, and Happy New Year. I guess I had a question on your op margins. They came in a lot stronger than expected in the quarter despite the volume deleverage. So hoping you could talk further on some of the puts and takes behind this strength.

And then thinking about your full year guidance, which you maintain, it does imply much more modest beer op margins in the fourth quarter, which I know seasonally is a lower quarter. But is there anything else that is expected to weigh on margins in this next quarter? Maybe aluminum, or if you could just talk through that?

Thanks for the question, Bonnie, and happy New Year to you. So first, starting with Q3 margins. As you indicated, volume declines certainly were a headwind in the quarter. Additional headwinds in the quarter were tariffs, as you noted, logistics and then brewery maintenance. Offsetting those headwinds, we continue to make good progress against our cost savings initiatives. We had favorable pricing from the actions we've taken in both the spring and in the fall. And then there was a depreciation timing benefit that occurred in Q3, which was favorable on a year-over-year basis.

As we think about our move to Q4, just to underscore what you said, it is our lowest quarter from a seasonality perspective, makes up about 20% of our overall volume. So fixed overhead absorption will be most amplified in this quarter. The depreciation benefit that we saw in Q3 will actually turn into a little bit of a headwind into Q4 as additional assets come online or put into service.

And then tariffs will be a further headwind in Q4, really related to a couple of factors, one of which you mentioned, which was aluminum and the pricing of aluminum, which continues to be pretty strong. There is also the ongoing and as expected shift in product mix, so more to aluminum from glass, and we'll see that in Q4. And then there's also a timing element to tariffs as to when the tariff gets accrued and goes into inventory and then when it gets released in the P&L. And that will be a bit of a headwind in Q4 as well.

Next question is coming from Nadine Sarwat from Bernstein.

Another one on beer margins, so perhaps with a longer-term perspective. So you called out a number of the factors in your prepared release in your answer just now about the pressures that beer margins will face in Q4. So with that in mind, how should we be thinking about the 39% to 40% beer margins for fiscal '27 and 28 that you guided to back in April of last year. Is that something you still believe you can achieve? Should we be thinking of margins closer to where we were this year? Any color would be helpful.

And then if I could just squeeze in one more on depletion. It's nice to see that come in, I think, ahead of some expectations. Any color on exit rate or what we're seeing in December? Is there any sequential improvement, or more of the same?

Thanks, Nadine. I'll take the first question, and then Bill will take the second. But as it relates to FY '27 [ beer margins ], as we said back in our Q2 earnings call, we'll provide more color on what our expectations are for FY '27 and beyond in our April earnings call. That's our normal cadence, if you will. It allows us to see how the rest of the year unfolds from a consumer perspective and from a macroeconomic perspective as well. So more to come on that.

That being said, the guidance that we provided last April was given under a different set of macroeconomic conditions, and the macroeconomic environment has worsened since that time. So that will all go into our planning process and will be reflected in the guidance that we gave in April.

And Nadine, relative to December, December came in roughly where we expected. It was fairly consistent with our expectations. For those of you who track the Circana IRI data, you saw there was a very strong result against our business around the Christmas holiday. Noting, of course, that that's a great reflection of the strength of our overall brands and the brand health that exists for our brands. And therefore, we were quite comfortable coming out of December as the first month of our last quarter of the year.

Your next question is coming from Lauren Lieberman from Barclays.

Want to talk for a second about capacity and CapEx. So in the slide deck, you reiterated the plans for 7 million [indiscernible] of capacity through fiscal '28. I think that implies sort of heavier CapEx in 4Q tied to Veracruz. I just wanted to maybe get an update on how you're thinking about the modular capacity build-out over the next couple of years, managing that against growth projections to support kind of what are really the optimal utilization levels. And particularly, when we think about the fiscal '26 volumetric pace, is going to be lower than what you kind of originally thought back in April, to your point, under a very different macro backdrop.

Yes. Lauren, thanks for the call. So the approach on the modularity of the breweries is we'll continue with that approach going forward. As we've said over the course of the last couple of quarters, the way we'll manage that really is when we bring assets online, and we'll manage to bring -- or we'll manage through the capacity in that manner. What we've also said though is that when you're building capacity in a manner which we've been building capacity with long lead items, you are making commitments to that spend. And our plan for this year is reflective of commitments that we've made on capacity expansion.

But again, we continue to monitor this and assess where the volume is expected to be. And again, we'll bring the assets online when we can. And to the extent we can delay or defer CapEx, we will. But there's a lot of long lead equipment that goes into a brewery, and those commitments have been made.

Your next question is coming from Rob Ottenstein from Evercore ISI.

Great. Moving more to over to the brand side. The Pacifico brand has been an extraordinary success. It's still relatively small, but you've been working on it very diligently for 10-plus years or so. Just wondering, how -- what you've learned about the brand over this time? How incremental is it? Any tweaks that you see in terms of the brand positioning and the pressure -- the marketing pressure, investment pressure behind the brand for it to kind of get to what you think is its full potential, which my understanding is to be a very strong #3 brand in your portfolio?

Yes, Robert, Pacifico, obviously, has been a tremendous success to date, much in the same way that Modelo initially developed in the West of the United States and then has progressively moved East to become the #1 player by dollars in the United States. Pacifico is doing a very similar approach. It's the #2 brand in the state of California today. It skews younger relative to our overall portfolio, and really has resonated well with consumers.

As you know, it's the #1 social -- #1 on social media in terms of share of voice, and it has gained 1.5 points in the on-premise. So you're seeing significant gains in that arena as well.

So we continue to invest behind this brand. As you point out, we think it's going to be a strong #3 in our portfolio as time goes forward. And you should expect to see us continue to put significant emphasis on this as it builds its way across the country, similar to what Modelo did several years ago.

Your next question is coming from Dara Mohsenian from Morgan Stanley.

So you mentioned mid-single-digit distribution growth for the beer portfolio in the quarter. Just as we look out to calendar 2026 post the spring resets, do you think it's realistic you can drive shelf space gains for your portfolio with macros where they are? Or is that less realistic just given the weaker velocity we've seen over the last year or so? And maybe also you can just touch on the beer category itself and what you're hearing from retailers as we think about shelf space for the category in the balance of 2026.

Sure. Let's start with the distribution side. We continue to see distribution as one of our strongest opportunities going forward. Given that our portfolio gained share in 49 of the 50 states, we continue to earn additional distribution capability and distribution positions across the country.

Now those will probably change some. You've seen a radical increase in distribution around Pacifico, going back to Robert's question a moment ago as well as Victoria, which also has grown double digits for the most recent past. So we continue to see distribution as a significant opportunity going forward.

Remember, Modelo itself, despite the fact that it's the #1 beer by dollars in the U.S., it still has 20% fewer pods than the broader domestic players who we compete against. So there remains plenty of opportunity for distribution to be an important part of the future. That has been reemphasized by our Shopper-First Shelf, which has allowed retailers to recognize the opportunity to build a stronger section. And that will be a significant part of your category question, is as more people do Shopper-First Shelf, it will be better for the category, and as you would expect, on brands that are growing their share like ours are, it will be good for us as well.

Relative to the beer category overall, it still remains challenged, and it's largely around the Hispanic consumer. 75% of the Hispanic consumers are very concerned about the socioeconomic environment and they're being much more careful about their spending patterns, spending much more on what you would call consumer essentials versus other categories. So I think that's going to continue to be volatile going forward. But this is where -- our focus remains on controlling the controllables, and that is distribution, that's price pack architecture, that's doing the right things to set ourselves up for a successful future.

[Operator Instructions] Our next question is coming from Drew Levine from JPMorgan.

I wanted to follow up again on the beer margins implied for fourth quarter given the low single-digit absolute COGS increase for the year. Implies gross margins, I think, something in the 47% range. I understand that it is lower volume, as Garth, you well mentioned. But I guess maybe if you could sort of provide a little bit more context on the expected headwind from aluminum and depreciation that you mentioned, any sort of quantification there?

I'm just asking because, I guess, last year in fourth quarter, volumes were down as well and, obviously, much stronger margin performance. So just on the margins, that would be great.

And then another follow-up just on the depletions in the off-premise, I think were down 2.9%, ran decently ahead of where we saw both Nielsen and Circana end up in the third quarter, the second quarter in a row that's happened. So wondering what you're seeing in the independent channels, if it's just sort of a function of easy comparisons, or are you seeing any sort of encouraging trends in that channel?

Yes. So just to reiterate on the margins, what the headwinds were. And again, you noted that it is our low seasonal quarter. Just for clarity, again, it's 20% of our overall volume for the fiscal year. As I mentioned, depreciation, which was a benefit for us in Q3, will be an incremental headwind in Q4 because incremental assets are being placed into service. So that will be a headwind in the quarter.

And then on tariff, as expected with tariffs, aluminum pricing has gone up, so the tariff has gone up. There's been an ongoing shift in our business and our portfolio towards aluminum. That's continued through the fiscal year, right? So we'll see the impact of that in Q4. And then there is a timing element around tariffs, which is you incur the tariff when you bring it into the U.S., but then it doesn't run through your P&L until you sell it on. And so given the way tariffs have layered in through the year, there's going to be a higher tariff impact as expected in Q4.

Another minor impact headwind in Q4 is there were some expenses that we expected to incur in Q3 that had pushed into Q4. That's just timing. So a bit of a benefit in Q3 versus headwind in Q4.

Relative to your question related to depletions. I think a couple of things to keep in mind that you don't always see. Some of the regions have less tracked channel coverage, and those have been stronger, on-premise. A year ago, Modelo was #5 on draft, today it's #2. I already mentioned when I was answering Robert's question on Pacifico, that we picked up significant share with Pacifico in the on-premise as well. So some of those areas that are not as easily tracked have gone in our favor, and that certainly has helped the depletion layout versus what some of the expectations were.

Next question is coming from Gerald Pascarelli from Needham & Company.

Question for Bill. Just despite the continued macro pressures, your depletions have remained relatively consistent this year, just kind of down 2.5% to 3%, so not getting materially worse. Your Beer Business continues to outperform the category. It looks like scanner showed a little bit of an improvement in December. So just curious how you're thinking about a potential recovery, if at all, in your Beer Business looking out over the next year when you just consider some of the obvious tailwinds, the easier compares, the benefit of the World Cup, those types of things? Any color there would be great.

Sure. Obviously, we're cautiously optimistic that we're on the sort of the plateau of where the business will be. But it's been really tough to judge. The volatility has been great. What -- so it's very hard to say that you've sort of hit the bottom. When you look at our Omnibus study, we continue to see Hispanic consumers being particularly concerned. There seems to have been a little bit of uptick with the broader market community. And as I alluded to earlier, Christmas week was particularly strong for our business. But I think that's more reflective of when consumers are coming out and they're buying. They continue to buy our brands because of the brand health of those brands.

There are some things, as you point out, next year, world Cup is a great example where there will be things that are beer moments. And certainly, we believe our beers will help to support those beer moments. But it's very difficult to project at this point how this is all going to go. A lot of it is going to relate to what the -- how the consumer is feeling and how they're feeling about the sort of macroeconomic issues that exist today.

Next question today is coming from Robert Moskow from TD Cowen.

Thanks for the question; unfortunately, it was also Gerald's question. But maybe if there's a way to think about it just quantitatively, your Hispanic consumer really started feeling the pressure in February of last year, you kind of see it in the data. And I guess what we're all kind of wrestling with is, once we lap that initial shock of restrictions on immigration policy, is it possible that it just gets a little bit less bad? So instead of mid-single-digit declines just theoretically with this cohort, since you're lapping the initial shock, it could be a little bit better than that?

Well, we hope -- we assume that -- we hope you are correct. That would be a lovely outcome. The thing that we consistently see, and as you know, and we've said this in prior quarters, we track it by ZIP code. And with ZIP codes that have greater than 20% Hispanic representation, it still remains very challenging. That has seen some improvement in ZIP codes with less than 20% Hispanic representation, and you see a lot of volatility state-by-state depending on what is going on with immigration policy in particular markets.

So all of those factors have been why it's been very difficult to predict, because you do have that volatility that goes on state by state, market by market. It's why we continue to talk about controlling the controllables. It's why we continue to talk about and put ourselves in a good position to win. It's why we have focused on the things that are working in our favor, things like Pacifico and Victoria, Modelo Draft, Corona Sunbrew, Corona Non-Alcoholic, all of which are working very well against our business and are positioning us not only to have near-term success, but for the long run as well.

Next question is coming from Filippo Falorni from Citi.

Happy new year. I wanted to ask on the beer pricing environment. You had 1.5% pricing in the quarter, but you have also some negative mix from package types. Can you discuss like how you're thinking that would evolve going forward? Should we still think this dynamic continues? And then maybe if you can touch on like some of the initiatives that you did with Modelo Oro and Corona Premier in terms of the price adjustments. Are you seeing a volume uptick as a result of the price adjustment there that could we see some more -- in some more other brands to try to respond to the macro environment?

Sure. We continue to project 1 to 2. We still think that's an appropriate level. As you know, it will vary higher or lower within that range depending on the market conditions that we face. But to your point, we are quite pleased with the initial work. As many of you know, during this past -- or this past calendar year, we adjusted Oro and Premier pricing to be more in line with the average price point the consumer was expecting for white beers. We're very pleased with what that looks like. Our trends on Oro and Premier have both improved, and we're pleased with that positioning.

It also points to price pack architecture, which is also an important part of what we have done. We have added 7-ounce in a number of forms and formats in different states, to again meet the needs of consumers who are concerned about price points because of their socioeconomic concerns and financial concerns that exist at the moment. Again, all of those things are trying to meet the consumer where they are today, and that process will continue going forward.

The next question is coming from Peter Galbo from Bank of America.

I maybe just wanted to ask a clarified comment from your prepared remarks about the fourth quarter specifically. You talked about an expectation of year-over-year volume declines in the Beer Business to improve, I think, in the first sentence. And I just -- I wanted to clarify whether that is a shipment comment, a depletion comment, both potentially, but you should still be expecting kind of a negative in the fourth quarter, and whether it applies to both ships and depletes in beer.

Garth will add on to what I'm about to say, but as we've made note -- we made note in our last quarter, we expect over the course of the last 2 quarters that ships and depletes will be basically equal. As you saw, there was some minor variation in this quarter. You would expect that to probably reverse itself next quarter. But over the course of the 2, third and fourth quarters, we expect depletes and ships to basically be exactly the same.

Bill, that's precisely right, and the comment was specific to billings, to your point. So that the second half of the year billings and depletions are largely aligned.

Next question is coming from Bill Kirk from ROTH Capital Partners.

So a different type of question. In December, President Trump signed the executive order pushing to reschedule cannabis. I guess if that happens, how would it impact how you think about your exposures to that segment?

And then on the ban on intoxicating hemp and intoxicating hemp beverages, in some states, those have become kind of a real market, do you think you'll benefit if those products go away, those intoxicating hemp beverages go away?

Obviously, we have shares in Canopy that we still have available to us. And I think that could ultimately be interesting as that market develops. But we don't engage on a day-to-day basis in the cannabis business today. I think we have not seen a significant issue related to our Beer Business related to hemp. It has mostly been around ready-to-drink and ready-to-serve scenarios where there seems to be interaction there, and that seems to be where most of the interaction has come.

But admittedly, consumers make choices around their disposable income and where they choose to spend money. And therefore, as this develops, that's certainly something that we're going to be quite aware of and keep our eye on closely.

Your next question is coming from Michael Lavery from Piper Sandler.

I was wondering if you could maybe just elaborate a little bit on how to think about World Cup. It's, as you pointed out, just a driver of occasions. But have you -- can you give a sense of maybe what you've seen in the past in terms of maybe a positive lift or any changes to your spending approach? I realize you're not a sponsor, so do you still plan some ways to kind of spend additionally around it or just kind of benefit from occasion momentum? How should we think about just what impact that might have both on the top line side and maybe your spending side?

Sure. As you would expect, this is a big sporting element for the coming year. Sporting elements tend to be big beer moments. It's also a sport that over-indexes in the Hispanic community. All of those things, therefore, over-index into our business. So we would expect as the consumer engages with that event and those -- and the various games that will attest to those, that will have some incremental benefits for us. We will remain as diligent as we always are to get the right promotions and to get the right shelf presence and floor presence around that particular time.

We'll also have in-game media, TV media. As you know, Modelo is the #1 share of voice and Corona is the #3 share of voice in traditional media. All of that will be done consistent with investing against sports, which has been the focus of our attention anyway. So we believe that has an -- that creates an opportunity for a strong window of time for beer generally and more specifically to us.

Thank you. We've reached end of our question-and-answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Greetings, and welcome to the Constellation Brands Q2 Fiscal Year 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It's now my pleasure to turn the call over to Blair Veenema, Vice President, Investor Relations. Please go ahead, Blair.

Thank you, Kevin. Good morning all, and welcome to Constellation Brands Q2 Fiscal '26 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. We trust you had the opportunity to review the news release, CEO and CFO commentary and accompanying quarterly slides made available in the Investors section of our company's website, www.cbrands.com.

On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. And we encourage you to also refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call.

Before turning the call over to Bill and Garth, please keep in mind that, as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourselves to one question per person, which will help us to end our call on time.

Thanks in advance and over to your questions.

[Operator Instructions] Our first question today is coming from Nik Modi from RBC Capital Markets.

So I just had a big picture question on volume growth. So the debate across the industry has been primarily about structural versus cyclical. But for Constellation Brands, there's a bit of more of a nuance right within the cyclical bucket. So you're dealing with the overall macro consumer slowdown but also suppressed sentiment among Hispanic consumers.

So we did some work, and it shows like there was a rapid drop off in sales volume around March, April of this year for the brands and the pack sizes that really over-index the Hispanic consumers across your portfolio. And that's right when the ICE activity started to pick up.

So the question, I guess, is this. Do you think volumes would have grown in absence of the ICE activities based on everything that you've seen and all the data that you have? And I guess, in other words, will volume growth resume when we start lapping these activities next year?

Yes. Thanks, Nik. The key thing, I think, around that whole question is exactly what you put your finger on, which is what is the consumer sentiment. And as you know, we are doing a monthly study of all consumers, both Hispanic and non-Hispanic. And the thing that has stood out for us is that 80% of surveyed Hispanic and non-Hispanic consumers continue to express concern about the socioeconomic environment we face. And 70% of those are specifically concerned about their personal finances, which goes right back to your point about cyclical versus noncyclical. We've got a consumer base that's pulling in a bit and they are not engaging.

At the same time, you're seeing increased loyalty. Our loyalty is up with Corona in the general market. Our loyalty is up with Hispanic consumers for Modelo. A lot of people ask the question about Gen Z often. We have twice the share of Gen Z as part of our overall mix versus the industry average. So we're sitting in a good spot as the consumer turns around and gets more comfortable with where they are. But at the moment, there's just a tremendous amount of concern about socioeconomic issues really across the board, and our view is that's the significant thing that's been challenging both for us and for the category in general.

Next question is coming from Nadine Sarwat from Bernstein.

I'd like to touch on, on CapEx. So you cut your top line guidance last month. You have not cut your GAAP CapEx guidance. Can you comment on the rationale behind that? And is there scope to cut CapEx for years beyond this fiscal year given the weaker top line?

Nadine, thanks for the question. And let me try to answer that, and there is a little bit of a near-term and a long-term answer there. So first of all, consistent with our capital allocation priorities, we're going to continue to invest in the long-term growth in our business. And despite the near-term headwinds that Bill just highlighted, which we see as being primarily cyclical in nature, we're confident in the longer-term growth trajectory of the portfolio. So we still believe that we need to invest in incremental capacity.

Again, the answer is a bit nuanced. As we look at FY '26, we didn't adjust CapEx for FY '26 because, as we discussed last month, much of what you incur from a CapEx perspective in a fiscal year is related to longer lead items. And so those are sort of committed dollars, if you will. As we look beyond FY '26, however, even though we do have confidence in the longer-term trajectory of the portfolio, we are being very mindful in looking at ways that we could slow down or avoid CapEx if possible. I don't have anything to share with you on that. As we said last month. As it relates to anything beyond FY '26, we'll cover off on that later this year as we give guidance for FY '27.

Next question today is coming from Rob Ottenstein from Evercore.

Great. I just want to get a little bit more sense about what you mean by seeing more loyalty for Corona and Modelo. And particularly Corona, if we just -- from the outside, without your data, Corona Extra is down more than Coors Light or Miller Lite, never seen that before. And Corona is more general population, I think it's, what, 20% or 30% Hispanic. So just like to understand what you're seeing in terms of loyalty.

And perhaps connected to that, very interesting movement within the Corona portfolio, right, with Corona Familiar doing actually extremely well and maybe actually a larger brand than we may think. So maybe give us a little bit of sense of how big Corona Familiar is, what you're seeing within the Corona portfolio, and what's the data that's telling you about increased loyalty for Corona.

Sure, Robert. As you would expect, we measure our brand health metrics consistently over time and analyze what the intent to buy is, what the purchase intentions are for all of our brands and businesses. That's where we begin to talk about brand loyalty, what first choice consumers would have in buying within our franchise. Now as you point out, while Corona Extra has been somewhat challenged recently, the broader family has done very well.

Corona Extra provides an exceptional halo for the overall brand family. Familiar is doing extraordinarily well and one of the top share gainers in the category. And Sunbrew, as you probably know, is the #1 new brand in dollars and the #4 share gainer overall in the category this year. So Corona Extra continues to provide the kind of halo for us for the broader market that has been very valuable for the overall franchise of Corona.

You'll also notice as an example, Corona has been the focus on Major League Baseball. If you watch any of the playoffs, you probably would have noticed that Corona has been all over the baseball playoffs as the official import beer of Major League Baseball. So we continue to feel that Corona Extra is going to be an important part of our business going forward. But it also, as you note, really is a tremendous halo for other SKUs within the franchise.

Next question is coming from Dara Mohsenian from Morgan Stanley Investment Management.

So Bill, I just want to return to the first question. In your response to the question and prepared remarks, you continue to emphasize that the recent beer depletion weakness you think is caused more by macro factors. Certainly understand there's a big macro component, but you don't seem to attribute much of it to other more secular factors on the beer category, including health and wellness particularly with GLPs, cannabis substitution, lower consumption from younger consumers than past generations.

Just how much impact do you think you're seeing from factors beyond the macro component? And I know you emphasized your strong brand equity and your share gains, but these factors do seem to be impacting the beer category more broadly. So just wanted to understand your thought process there. Has your thinking changed at all on those nonmacro sort of drivers as you look at the trends in recent months?

And then if I can slip it in part B, just the corporate response to the weaker top line growth we're seeing. Can you talk about strategy tweaks to drive top line growth within a tougher environment? And any opportunities on further productivity beyond what you've already done as you think going forward here?

Sure. We continue to feel that the structural element is relatively minor in the scheme of things versus the cyclical element. As we've covered numerous times now, there just isn't a lot of evidence that GLP is having much impact whatsoever. I think cannabis could be as you go forward, to be frank, because as consumers are constrained about their spending patterns, they make choices as to where they spend their discretionary funds. But again, today, that's also relatively minor in the scheme of things.

Part of what you're seeing with our work in -- Corona Sunbrew is a great example, is going after a younger legal drinking age Gen Z consumer. Part of what we observed is consumers, particularly around spring break, were mixing orange juice and Corona. Our view was we could do something much better than that in real time, which we did. And it's part of the reason why that is the #1 dollar SKU this year and the #4 share gainer in the category.

Relative to your question about the top line, one of the things that you historically have seen in other downturns within categories is that some organizations pull back on their marketing spend. We have no intention whatsoever to do that. In fact, in many respects, we're spending more than we ever have. You've probably seen, as I mentioned on the prior question, Corona's presence in Major League Baseball. Modelo with the NFL and with College Football has been very aggressively positioned. And Pacifico is the #1 voice in digital.

So I think the important point to all of that is we're continuing to invest in the long-term success of our business because we recognize, at some point, some of these socioeconomic elements will ease and we'll be in a great position to return to more traditional growth profiles that we've seen in the past. Even in this tough environment, we continue to gain share in the market and have been the #1 share gainer. So hopefully, that answers -- that was a complex set of questions, but hopefully that answers them.

Next question is coming from Bonnie Herzog from Goldman Sachs.

So I had a question on margins. I'd love to hear more color on the beer op margin expansion in the quarter, I guess, as well as key headwinds to margins in the back half considering your guidance implies a decent step down versus 1H.

Yes. Thanks, Bonnie. Look, I mean, I'd say we feel pretty good about the margin profile that we laid out last month in terms of what our expectation is for the year. If I think about all the elements to your question there, let me just start by talking about headwinds for the second half.

First of all, the second half of the year, as you know, is always kind of our lower volume year. And even though we changed guidance for the full year, that doesn't change our expectations for how the first half of the year comes in versus the second half of the year from a volumetric standpoint. And as you know, in the second half of the year, that's, as I say, the lower volume half. It's also when we do some of our maintenance. So just traditionally, that's going to be when we have our lowest margins of the fiscal year.

As I think about, again, sticking on margin, the headwinds that we noted last month still remain. We have about 100 basis points of margin headwinds related to fixed costs and incremental tariffs. We have about 60 basis points related to, as Bill just mentioned, keeping our marketing investment in line. Oh, by the way, I misspoke just now. There's 100 basis points with fixed overhead and then there's another 60 points on incremental margins. So those are some pretty big headwinds. They get offset a little bit by some lower comp and benefits in the second half of the year, but that really is the margin profile for the full year.

Next question today is coming from Chris Carey from Wells Fargo Securities.

Garth, just a follow-up. Are you seeing a pickup in inflation in the back half? Or is that specifically around the seasonal volume assumptions? Just to clarify something on Bonnie's question.

But then the question that I had today was actually around the Wine and Spirits margins. I think going to the second half of the year, you need to believe that these margins are going to turn positive, more than a little positive to get to the full year guidance. So what do we have to believe in improvement from the first half into the back half to see that level of improvement to get to that full year outlook, maybe some of the key drivers?

And then as you think about going into fiscal '27, there was an expectation that this business could return to a low 20s operating margin, which seems to be embedded in consensus expectations. Is that still the right way to think about it? And again I would ask it in a similar vein as the back half of this year. What do we have to believe that, that outcome of substantial margin improvement in fiscal '27 is achieved?

Sure. So just on the first question related to the beer margins as a follow-up to Bonnie's question, we're not really seeing any tick up in inflation in the second half of the year. So really it's just the drivers that I outlined.

As it relates to Wine and Spirits for this fiscal year and the improvement that you'll see in the second half of the year, a couple of things that are going on there which make the full year and certainly the first half of the year a bit messy, if you will. So first of all, the converse of what I laid out for beer is true for Wine and Spirits, which is the bulk of our volume and sales occur in the second half of the year. So we will see benefits from additional volume in the second half. And that also tends to be when you see vintage releases related to our DTC business, which tend to lead to higher sales and higher margins.

And then back to the messiness of the first half of the year, as we laid out at the beginning of this fiscal year, there are a number of factors driving performance this year specific to the first half related to distributor payments as well as some post-transaction inventory trips between ourselves and with our distributor partners. And therefore, that's what's made the first half of the year sort of look like it is and why we feel confident that we can turn that in the second half of the year and achieve the operating profit that we laid out in April.

And just to add on to that. We made clear at the beginning of the year that the focus in the Wine and Spirits business this year was to get the top line in line and to beat the market. We have now beaten in the market for 6 straight months. Our business in Q2, very similar to Q1 on an apples-to-apples basis, was up 2% driven by Kim and Mi CAMPO. Mi CAMPO, you may remember, was a brand we started from scratch several years ago.

And the 12-week numbers in Circana show Ruffino up 2 points, The Prisoner up 4, Unshackled up 11 and Harvey & Harriet, up roughly 23. So while we're not going to give any specific guidance yet for fiscal '27, I think we're very pleased with the development of the top line in the Wine and Spirits business. And we've returned that business to a strong share gaining position and have been presenting those results for the last several months. So we feel pretty comfortable with how that is developing and how the team has executed against that strategy.

Next question today is coming from Andrea Teixeira from JPMorgan.

This is Drew Levine on for Andrea. I wanted to ask on the beer inventory rebalance, maybe if you could provide some context on inventory on hand to distributors now versus before the rebalance and what gives you confidence that this was sort of more of a onetime event, I guess, rather than something that we should be more concerned about going forward.

And with that visibility that ships and depletes, I think the guidance is to largely track in second half. I think typically there's a bit more depletes second half versus first half. So just any comments on visibility to that.

So look, I can start and then Bill can weigh in. So first of all, the ship/dep true-up that happened in Q2 related to our beer business was a result of a couple of things. One was that, as typical with every year, we tend to ship in more in Q1, Q2 ahead of the key summer selling season. So that's just normal operating procedure. This year, as we went through the summer selling season, the takeaway wasn't in line with expectations. Therefore, distributors had a little bit more than expected as we exited this summer.

Now the second thing that drove it is, the ship/dep true-up, is that again we typically overship in the first half of the year to ensure that there's product on the shelves. And then there's a little bit of rebalancing that occurs in the second half of the year, usually in Q3. And so we pulled that rebalancing into Q2 versus Q3. So that's really what drove it. As we sit there and look at inventory levels with distributors, they're at a good spot right now. We feel good about where our inventory levels are relative to where they are historically.

And I think it's important for us to note that the rebalancing of inventories really occurred strictly with distributors. There's been no retailer destocking. We continue to gain PODs in shelf space. We have very good confidence in our ability to continue to generate significant shelf share gains as one would expect for a portfolio that's growing, as Bill highlighted before, in 49 out of 50 states and with the #1 beer brand by dollar sales. So we feel good about where we are for our inventory levels, and that's why we have confidence that for the balance of the year, shipments and depletions will be aligned with one another.

Next question is coming from Bill Kirk from ROTH Capital Partners.

So price pack architecture was a big focus before this recent deceleration. So I guess how has the deceleration impacted the plans for different pack sizes and price points? And maybe if you had been further along in those price pack architecture plans, do you think depletions performance would have been better?

Well, price pack architecture is something that we've said we're going to spend a fair amount of time on. If we had known all the socioeconomic issues, would we have gotten that out sooner? I hope the answer would have been yes. But the reality is this is a good long-term play for the business. Many of you have heard us talk before, we think there are some exceptionally good businesses at putting that together, meaning when you go in a store, you have an opportunity. No matter how much money you have to spend, you have a product available to you.

Our focus on price pack architecture and smaller sizes and things of that ilk make sure that we would have something that our consumer would be able to buy depending on what they have available to them. So we're working aggressively on that in a number of fronts and with a number of brands. And that process is going to continue because we think that's not only important now, but that's also important for the long run as well.

Next question is coming from Filippo Falorni from Citigroup.

So I wanted to ask first on the beer margin and beer cost savings. Particularly, you realized $65 million in cost savings in Q2, $105 million in year-to-date. Any sense of what's the target for the year? And if you can give a little bit more color on the opportunities there on the beer cost saving front.

And then just a follow-up on the prior question. On tariffs, can you give us a sense of how much you realized in the first half in terms of tariff headwinds and how much to expect for the balance of the year?

Yes. So just on the cost savings. First of all, I'd say that this is just -- we continue to reap the benefits of this evolution from being a builder to an operator. As you highlighted, since our Investor Day a couple of years ago, we've delivered over $500 million worth of cost savings. And again as you noted, so far this year, we've delivered over $100 million in savings.

We continue to find ways to make our operations more efficient. A lot of that so far is focused on supplier and sourcing optimization and material and cost innovation. Included in that would be our move to 60-foot railcars and our double stacking within railcars as well as a big initiative around suppliers and terms, if you will. So this is going to continue to be a focus for us over time. We continue to think that there will be opportunities for us in logistics and manufacturing optimization.

We don't provide quarterly or annual guidance related to our cost savings initiatives, but we will continue to provide updates on a quarterly basis once we achieve those savings.

Next question is coming from Carlos Laboy from HSBC.

Bill, maybe you can go back a little bit and talk to us about the brand positioning of Corona itself. How might you be refreshing or tweaking it? And the reason I'm asking the question is because we've had over 40 years of beach rest and relaxation.

And I'm wondering, has that become too sedentary an interpretation of beach for a premium beer consumer that's turning to more active lifestyle positioning, so for example, Michelob ULTRA, right? And even in other countries where the Corona brand is doing very well, it's sort of been reinterpreting beach more as an active lifestyle and as a regeneration concept. What are your thoughts on how you tweak that brand if it needs to be?

So we're going to start -- we didn't answer the last half of the last question. Garth is going to cover the tariff, and then I'll come back and answer your question, Carlos.

Yes. So just on the tariffs, just to be clear on that, right? So in our beer business, we're expecting the tariff impact to be about $70 million this year and on the wine business for that to be about $20 million. I would say in terms of how that occurs throughout the year, I mean, that will largely track volume. So that's the way to think about the impact on a half year-to-half year basis.

So progressing to the current question relative to Corona. You may have most of the evolution this year of the Corona advertising proposition to really return to the focus being on the beer. I would argue that we probably got a little too celebrity heavy for a window of time. And we brought that Corona essence right back to where its iconic value has been, which is the beach.

Now the beach lifestyle, I would argue, fits into many things that consumers are looking for today. They're looking for refreshment, That's, first and foremost, what Corona is known for. They are looking for things that are different in experimentation, particularly younger consumer. I'd say Sunbrew is a great example of us playing right into that speech and attitude. And that goes right to a more active lifestyle that Corona Sunbrew has been presented against.

So I think the important part for this is one of the things that both Corona and Modelo and currently Pacifico is developing is we haven't flip-flopped our positioning over time. Many organizations have a tendency to flip-flop their positioning every couple of years whenever there's a change of brand management. Our approach has not been that. Our approach is to stay focused on what we feel are the strong essences of those brands with some minor evolution as part of the marketing development.

And I would argue Sunbrew is a great example of where we can leverage that sort of beach lifestyle and refreshment value of Corona Extra into a new and exciting piece of business for us in the form of Sunbrew.

Next question today is coming from Kaumil Gajrawala from Jefferies.

I'd like to follow up on two questions. The first is you have these obvious economic challenges in addition with Hispanic consumer. If you're twice the share with Gen Z, Gen Z also has twice the amount of unemployment. It sounds like your responses to what to do is to keep up on marketing and such.

But is there anything you're looking to do to make it more affordable, get them to go back out? Just not necessarily on the marketing and the branding side, I think it sounds fine there, but rather what can you do about it if they don't have as much money, they're not as willing to go out?

And then the second question on margins. I get the 160 bps of sort of natural drag, which you talked about. But the split between depletes and shipments isn't expected to be nearly as substantial. So I'm just curious why the margin guidance is still maybe a bit lower than we would have guessed given the beat this quarter.

Sure. Why don't I take the first half. Garth, you can take the second. Relative to the whole question of affordability with where -- when consumers are somewhat constrained, you probably all are quite aware, we have repositioned Oro, Modelo Oro because our belief is the light beer comes is looking for a bit of a different value proposition than it would be for core Modelo as an example. We've done the same now with Premier, and we're positioning that again at a somewhat lower price point from where those have been historically.

We believe those are going to be valuable. First of all, it speaks to where the consumer of high-end light beers want to spend and at the price point they want to spend. And I think that's going to position us well. Early days on Oro, which started earlier, have been quite positive. And we're pleased to see that development both in terms of consumer takeaway as well as in terms of our ability to get more features and displays against that business.

The last thing I would say, and it relates to one of the prior questions, is the price pack architecture. We briefly touched on that. But having the opportunity for the consumer who is financially constrained to find one of our iconic brands at a price point which they can afford at the current time is an important part of why price pack architecture is one of our key focuses now and will be going forward.

Yes. And as it relates to the margin profile, just you've reiterated what we talked about earlier just around the first half versus the second half, second half always being a lower margin profile as it relates to lower volume through our breweries as well as that's when we do our normal maintenance CapEx.

[Operator Instructions] Our next question today is coming from Kevin Grundy BNP Paribas.

I wanted to ask about the suitability of the 39% to 40% beer operating margin target. I think there's a lot of questions among investors about that and the sustainability of it. Very clear, I guess, in terms of positioning of management in terms of it's cyclical and volumes are going to come back. But what if they don't? Like what if volumes stay down low single digits?

And a couple of important points of context here. I think for a really long time, as you guys are well aware, volumes are outstanding, up high single digits. There's a certain degree of operating leverage in the business that you're able to sustain the 39% to 40%. But now it's down and potentially it could stay down. And I think there was a worry over a long period of time, also as you guys are well aware, it was a constraint on the multiple. And that is the weak volume trends in the category, which had been in decline for the better part of 15 years.

And there was always a worry that you're going to get this mean reversion for Constellation, how long can they continue to gain share. So that's all kind of a big wind up for where we are. Category volumes are down mid-single. You guys are doing better than that and the pace of share gains have slowed. But what is the -- how plausible is it that you can sustain that level of margin if you're going to be facing year-after-year operating deleverage of volumes down sort of low single digits? So sorry for all of that, but I appreciate your thoughts.

No, thanks for the question. Right. So look, 39% to 40% operating margins have been best-in-class. And even where we're going to be this year with some deleveraging, we'll still have best-in-class operating margins in all beverage alcohol, certainly within beer. As we think about the impact going beyond FY '26, I mean, I think we've been really clear is that we're not in a position where we want to give guidance beyond FY '26 at this point. We want to see how the macroeconomic and socioeconomic conditions play out and then see how the consumer responds to that.

And then we'll have a better sense for where margins go from here. Obviously, there are multiple things that will go into our margin profile, inclusive of depreciation that comes online with some of the investments that we've made and we'll make. As I mentioned earlier, we're looking at ways to -- or we're reviewing our footprint, both our current footprint and our expected footprint, to see what the opportunities are there. We have a robust savings agenda every year that help margins and certainly offset things like inflation.

Again, we do think that we'll return to growth and that will be beneficial for margins going forward. So there are a lot of things. The normal headwinds and the normal tailwinds should be available to us going forward. But we'll provide more color on where we think margins are as we go through this year and, again, see how the environment plays out and how the consumer responds.

Next question is coming from Chris Pitcher from Rothschild & Co Redburn.

Can I ask a question about the Wine and Spirits in the second half? I mean, it's obviously quite difficult trying to compare against the base that's disrupted by the divestments. But Q3 last year was a big destocking quarter. And based on the positive depletions in the current quarter, is it a fair assumption to assume that inventories are at a good level at your wholesalers, and therefore, you could see quite a benefit in the third quarter just from a normalization of that destocking?

Yes. Our inventory levels in our Wine and Spirits business are in a quite a good spot. Part of what you heard Garth speak of earlier, which was some of the distributor alignment after the divestiture, part of what we focused our attention on is to getting and making sure that our inventory levels of our ongoing business were in the right spot. And they are. Again, our focus at this point -- so I don't think inventory is going to be an issue going forward in the least.

But we're very focused on continuing to win in the market, as we have for the last several months, based on the strong performance of some of our critical brands like the Prisoner and Kim Crawford and Ruffino and Mi CAMPO in particular. And that's really going to be the continuing focus of that business as we said it would be at the beginning of this fiscal year.

Next question is coming from Robert Moskow from TD Cowen.

This is Victor on for Rob Moskow. I want to ask about the feasibility of the 1% to 2% pricing algo. Given the macro pressures around the Hispanic consumer, are these price increases more in low Hispanic markets? And also on the negative mix impact from the prepared remarks, could you give us some more color on what this was from? Could this be from Corona Familiar's strong demand and the brand's larger bottle size?

So our expectation around pricing is what we have always done, which is we look at it SKU by SKU, market by market. And we still expect 1% to 2% to be what our overall delivery will be over the course of this fiscal year. Again, a lot of that goes right back to what we've said before, which is there are pockets of opportunity and we go after those pockets of opportunity.

I think a great example, and I'd be remiss if I didn't point this out, that as Garth mentioned earlier, Modelo Especial remains the #1 top-selling beer by dollars in the United States by tracked channels. It's at a roughly 10% share, and that's 2 full share points ahead of the next largest brand. Some of that also translates over into the on-premise. And the on-premise has gone from #5 to #2 in terms of draft.

So again, those kinds of things where you have that strong brand equity allows you to look specifically on a market-by-market basis and get to that 1% to 2% algorithm that we've consistently talked about. As you would expect, we always look at, is the market available to us? And we will do the right thing on a market-by-market basis no matter what. But we still believe that 1% to 2% is sort of the algorithm that we expect to remain within.

Next question is coming from Chris Barnes from Deutsche Bank.

I just wanted to follow up on your depletions expectations for the second half. I appreciate the 1% to 2% comment on pricing and your expectation for shipments and depletions in absolute cases to track closely. But that seems to imply a pretty material step-down in the second half in depletions growth. So could you maybe unpack the drivers there?

Yes. We don't give forward expectations on a quarter-by-quarter basis, but here's what we'd say. We've seen unprecedented volatility and there's very mixed results.

One of the things that we track very carefully is ZIP code data. And the results that you are seeing in high Hispanic ZIP code areas is significantly worse than what you see in the general market. We've seen some positive uptick in some of our top 5 states within the general market, where the general market ZIP codes are a higher proportion of the overall consumer base.

So we're cautiously, and I would stress that word again, cautiously optimistic that we've hit the bottom here. But the volatility, as I said, is unprecedented and the results are very mixed. The state of California has been the single biggest problem as some of those 4,000 calorie jobs, as we often talk of, haven't materialized to the rate that we would have expected.

So part of that question is going to be, will some of that construction opportunities reinvigorate? Because that's good for the beer business and that's particularly good for us given our strength in that particular market.

But all in, we don't expect a radical change nor have we projected, based on our overall guidance, a radical change in the back half of the year.

But we're going to watch that very closely and see if there's any improvement in the volatility that's been going on in the overall marketplace over the last several months.

Thank you. We have reached the end of our question-and-answer session, and that does conclude today's question-and-answer session and our telecast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.