Greetings. Welcome to the Constellation Brands Third Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Joseph Suarez, Senior Vice President of Investor Relations. Thank you. You may begin.

Thank you, Darryl. Good morning all and happy new year. Welcome to Constellation Brands Q3 fiscal '24 conference call. I'm here this morning with Bill Newlands, our CEO, and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measures and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we'll also be making available in the Investors section of our company's website, a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I'd like to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance. And now, here's Bill.

Thank you, Joe, and congratulations on your recent promotion. And good morning all. Happy New Year to everyone, and welcome to our Q3 fiscal '24 call. I hope you all had a wonderful holiday season and were able to enjoy some of our great products with your family and friends. We have several topics to address on today's call. So let's start with the key takeaways for this quarter. First, I am pleased to report that our Beer business again delivered very strong performance that accelerated throughout Q3. We achieved depletion growth of over 8% for our beer portfolio with a particularly outstanding end to the month of November. We led Thanksgiving beer sales in US-tracked channels and continued to see accelerating momentum in the last week of the month, reflecting both ongoing strong consumer demand and restocking after the earlier Thanksgiving holiday this year. And once again, for another entire quarter, we achieved leading share gains in tracked channels with more than 2 point expansion in the US beer category and a nearly 3 point gain in the higher-end. This marks the 55th consecutive quarter of depletion growth for our Beer business and the 10th leading share gains. Secondly, in line with our consistent disciplined and balanced approach to capital allocation, we executed $215 million of share repurchases in Q3, while maintaining our net leverage ratio excluding Canopy equity and earnings unchanged from last quarter at 3.2 times, as well as continuing to deliver cash returns through our dividend and advancing our organic growth investments at our Obregon brewery, a new brewery site in Veracruz to support additional production capacity for our Beer business. And thirdly, as noted at our recent Investor Day, over the past few months, our Wine & Spirits business, much like others across the industry, has seen a broader marketplace deceleration. In light of these and other near-term headwinds, we are further revising our fiscal '24 organic net sales guidance for Wine & Spirits to be down 7% to 9% and the operating income guidance for that business excluding gross profit, less marketing of brands divested last year, to be down 6% to 8%, which I will elaborate on shortly. Of course, we are not pleased with these revisions at both our leadership team and our Wine & Spirits teams remain fully committed to improving the performance of this business and to achieving its medium-term targets. In addition, as announced earlier today, Robert Hanson has elected to step down from his role as President of our Wine & Spirits business in a few weeks at the end of the current fiscal year. We have initiated a process to identify a successor for this role and I will step into lead the Wine & Spirits business in the interim, while, of course, retaining my Chief Executive oversight across both the enterprise and our Beer business. Despite these revisions and leadership changes, as noted at our recent Investor Day, we continue to believe that over the medium term, our Wine & Spirits business should accelerate its net sales growth to 1% to 3% and improve operating margins to 25% to 26%, supported by the significant transformation undertaken over the last few years to better align our portfolio with broader consumer-led premiumization trends, expand our omnichannel capabilities and extend into targeted international markets. More importantly, in fiscal '24, we still expect our enterprise comparable EPS guidance excluding Canopy to remain within our previously stated range of $12.00 to $12.20. And over the medium term, we continue to expect low double-digit EPS growth as outlined at our Investor Day. Now let's step through these key points for Q3 in more detail. As noted, our beer team once again delivered remarkable results. Modelo Especial led the charge, achieving a roughly 12% increase in depletions and remained the leading share gaining brand in tracked channel dollar sales, strengthening its position as the number one beer brand in the US market having ultimately achieved that top spot now on a 52-week basis. The broader Modelo brand family also delivered phenomenal results. Cheladas achieved an increase in depletions of approximately 22% year-over-year in Q3. And on a rolling 12-month basis, the combined set of Chelada flavors and pack sizes reached the 20 million case milestone, which is over 350% more than that set of brands was doing just five years ago in fiscal '19. Additionally, Modelo Chelada Especial, our original flavor, which was recently launched in a 12-pack 12-ounce format was a top 15 share gainer in Circana in Q3, and we are excited about the opportunities ahead for our new Chelada flavor and pack size additions. Also in the Modelo family, Oro, continued its strong first year of going national with a third quarter as a top five share gainer in the high-end. We look forward to the growth opportunities ahead for Oro as awareness grows and we introduce new pack sizes next fiscal year. Beyond Modelo, our Corona Extra and Pacifico core beer brands continued to perform strongly in Q3. Corona Extra maintained depletion growth at about 1%, while Pacifico delivered an outstanding 19% increase. And on a rolling 12-month basis, Pacifico also reached the 20 million case milestone, double its volume from five years ago. In addition, both brands remained top 10 share gainers across the entire US beer market in tracked dollar sales. Our beer brands clearly continued to resonate strongly with the consumer, and I'm incredibly proud of and thankful to our entire beer team for their consistently strong execution. With that backdrop, we remain confident in our fiscal '24 net sales growth guidance of 8% to 9%. And from an operating income guidance perspective, we now expect our beer business to deliver 7% to 8% growth for fiscal '24 as we realize additional benefits this year from the marketing effectiveness actions discussed during our Investor Day. Over the medium term, we still see significant opportunities to continue to achieve net sales growth of 7% to 9% in our Beer business supported by the fundamental distribution, innovation, and demographic drivers, as well as consumer-led trends also discussed at our recent Investor Day, as well as to continue to achieve best-in-class operating margins of 39% to 40% supported by savings and efficiency initiatives across our cost of goods sold, marketing, and broader SG&A. And last but not least, we continue to support the growth of our Beer business through modular investments in brewing capacity and productivity initiatives to unlock further production upside. Moving on to the Wine & Spirits business. As noted earlier, our Wine & Spirits business is operating amid a broader marketplace deceleration. As we have shared in recent quarters, we are actively working to address mainstream headwinds affecting our two largest volume brands Woodbridge and SVEDKA. However, we anticipate these efforts to extend beyond fiscal '24. More broadly, while we are maintaining a disciplined approach to taking price across our portfolio, the competitive environment is now getting pressured with more aggressive discounting and price points beyond mainstream. Again, we believe the broader deceleration in these higher-end categories to be temporary and have continued to execute strategic pricing actions instead of implementing reductions like certain competitors. In addition, we have made the decision to adjust some aspects of our US wholesale distributor agreements focused on improving mix, inventory, and state and channel level sales execution. We are actively engaged with our largest distributor partner to ensure that our portfolio continues to make progress against our vision of leading the higher-end as well as on the revitalization of our mainstream brands. From an international perspective, while we experienced a decline in the quarter driven by previously noted weakness in our more mature markets, inventory levels in Canada, our largest export market, seem to now be normalizing following the destocking from recent changes to inventory regulations. So we anticipate more balanced supply-and-demand dynamics for this market going forward. Importantly, despite the impact of these near-term headwinds on organic net sales, our prudent pricing and cost efficiency efforts enabled margin improvement for Wine & Spirits in Q3. Beyond these near-term challenges, our focus remains on driving growth across our higher-end brands. As shared during Investor Day, over the last few years, our Wine & Spirits business has established a stronger foundation to advance toward these targets. Since fiscal '19, we have doubled the number of fine wine and craft spirits brands in our portfolio and we have invested and expanded our footprint in higher-growth DTC channels in targeted international markets. With our structural transformation securely in place, I want to thank Robert Hanson for his contributions over many years including initially as a non-executive member of the Board. We wish Robert well and all the best in his future endeavors and look forward to announcing the appointment of our next Wine & Spirits business President in the near future. Lastly, I'd like to emphasize again our unwavering commitment to our consistent, balanced, and disciplined approach to capital allocation. As noted at our Investor Day event, we continued to target a strong balance sheet that supports our investment-grade rating and we are working toward a net leverage ratio of 3 times which we expect to achieve within fiscal '25. We expect to maintain a dividend payout ratio of approximately 30%, supporting continued growth of our dividend per share in line with our earnings expectations. We plan to invest approximately $5 billion in growth and maintenance CapEx from fiscal '24 to fiscal '28, primarily focused on brewing capacity expansions for our beer business. We continue to opportunistically buy back shares with $215 million repurchased in Q3, which leaves us with an additional $2.6 billion still within our existing share repurchase authorization. And finally, we continued to look at tuck-in gap-filling M&A opportunities with a highly rigorous transaction criteria. So to close, let's go back to the key takeaways for the quarter. First, we have a beer portfolio and team that consistently delivers industry-leading performance and we see significant opportunities as outlined at our Investor Day to continue to drive similarly strong growth over the medium term. Second, we remain committed to delivering value to our shareholders through consistent execution of our balanced and disciplined capital allocation priorities and third, our Wine & Spirits business is focused on realizing net sales growth and improved operating margins by leveraging its reshaped higher-end leaning portfolio as well as our enhanced DTC channel and international market footprints and capability. And lastly and importantly, we continue to expect our enterprise comparable EPS guidance in fiscal '24 excluding Canopy to remain within our previously stated range of $12.00 to $12.20. And over the medium-term, we continue to expect low double-digit EPS growth as we outlined at our Investor Day. And with that, I will now turn the call over to Garth, who will review our financial results in greater detail.

Thank you, Bill, and good morning, everyone. As usual, my discussion on our financial performance will mainly focus on comparable basis results and stepping through our P&L. However, as of this quarter, we will discuss enterprise results, followed by business segment detail to better address our performance against the outlook shared at our Investor Day at these different levels. Beginning with net sales. We achieved enterprise-wide top line growth of 1% for the quarter. This was the result of solid Beer net sales growth of 4%, partially offset by the Wine & Spirits net sales decline of 8%. Wine & Spirits net sales decline was 7% on an organic basis. As Bill noted, Beer business depletions for the quarter were above 8% as the year-over-year growth momentum from summer continued through the fall, supported by ongoing strong consumer demand of our portfolio. Again, we saw a particular acceleration in depletion volumes at the end of November as we extended our leadership across key holidays with outstanding performance during US Thanksgiving. Our on-premise channel realized modest growth in depletions of about 1% for Q3 and accounted for approximately 11% of our total volumes as we've been able to replenish inventories following the keg disruption over the summer and began to advance growth and drive performance in the on-premise. Shipment volumes for beer business grew 3.4%, and we achieved favorable pricing slightly above 1% as we began to lap the elevated pricing increases from last fall. These volume and pricing uplifts were partially offset by a shift in packaging mix. Altogether, these year-over-year shipment, pricing, and mix changes drove the 4% or approximately $77 million increase in beer net sales for the quarter. For our Wine & Spirits business, organic net sales declined 7%, driven by lower shipment volumes due to the previously referenced category headwinds and the change in our process aimed at aligning shipments and depletions. As a reminder, per prior calls this year, we now make quarterly shipment adjustments to align with depletions versus our former practice of only doing one annual adjustment in the fourth fiscal quarter. We believe this process change has partially driven less favorable comparisons for the first three quarters of fiscal 2024. Now shifting to operating margins. For Q3, enterprise-wide operating income increased 7%, and operating margin increased 170 basis points to 32.3%. This was primarily a result of an increase in operating income of 7% for our Beer business, which also drove a 100 basis point increase in Beer business operating margin to 38.5%. Enterprise-wide operating margins also benefited from a 13% reduction in corporate expense. These Beer business and corporate expense tailwinds were partially offset by a 5% decrease in our Wine & Spirits business operating income, which still yielded a 60 basis point increase in operating margin to 25.4% for the Wine & Spirits business. Excluding the gross profit, less marketing, of the brands that are no longer part of the business following their divestiture, operating income and operating margin for the Wine & Spirits business decreased by 4% and increased by 80 basis points, respectively. Stepping through these drivers in more detail, starting with beer. The increase in operating income and margin were a result of benefits and cost of products sold as we continue to build cost efficiency and productivity savings. For the quarter, total cost savings were approximately $55 million. An $11 million or a 6% decrease in marketing costs as a result of shifts in timing of spend. Note that marketing as a percent of net sales was 8.7% for the quarter. A $4 million decrease in SG&A expense, primarily driven by lower legal fees, partially offset by higher compensation and benefit expenses and $6 million of favorability from the divestiture of our craft beer business. These benefits were partially offset by a $12 million unfavorable foreign currency impact as we still realized a higher Mexican peso rate year-over-year, inclusive of our multiyear hedging positions. Additionally, in line with our full year expectations and guidance, we are still facing higher costs in our packaging and raw materials, which resulted in a $17 million headwind for the quarter. We have also faced an $11 million increase in depreciation as a result of our capacity expansions. The reduction in our corporate expense, which for the quarter was $10 million, was primarily driven by the reduction in third-party services, particularly in our digital business acceleration investments partially offset by increased compensation and benefits. Our Wine & Spirits operating income margin, excluding the gross profit less marketing of the brands that are no longer part of the business following last year's divestiture had a year-over-year improvement as the volume declines and unfavorable mix were more than offset by reduced logistics and warehousing costs, favorable SG&A costs due to reduced third-party consulting expenses and lower compensation and benefits. More favorable material costs driven by our cost savings initiatives and reduced marketing expense as we continue to shift our marketing focus towards more efficient, high-return efforts. Interest expense for the quarter was approximately $104 million, driven by higher average borrowings and higher weighted average interest rates. As a reminder, approximately 5% of our debt obligations are subject to adjustable rates. As Bill noted, we ended the quarter with a net leverage ratio of approximately 3.2 times excluding Canopy equity and earnings and remain on track to reach our target goal of 3 times within fiscal 2025. Our comparable effective tax rate, excluding Canopy equity and earnings for the quarter was 18% versus 18.8% last year. Our comparable EPS for the quarter, excluding Canopy equity and earnings, was $3.24, reflecting the consistent growth of our business and representing an 8% increase. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx, we generated free cash flow of $1.4 billion through the first three quarters of fiscal 2024 and a 10% decrease driven by a 33% increase in CapEx investments attributable to the expansions at our existing Obregon facility and the construction of our new brewery located in Veracruz. As we look towards the end of fiscal '24, our guidance for enterprise comparable EPS, excluding Canopy equity and earnings remains unchanged at $12 to $12.20 underpinned by the following expectations. First, an unchanged 8% to 9% net sales growth outlook but a higher 7% to 8% operating income growth expectation for our Beer business. As stated in our prior calls this year and at our recent Investor Day event for our beer net sales, we continue to expect pricing to be between 1% to 2% and mid to high single-digit volume growth in fiscal '24. And we still anticipate shipment volumes for the second half to account for approximately 45% of the full-year total. Bill already addressed the drivers of the uplift in our beer operating income growth guidance but it's also important to note that we still expect beer operating margin to be approximately 38% for the full year. Second, for our Wine & Spirits business, we now expect a decline of 7% to 9% in organic net sales and a decline of 6% to 8% in operating income, excluding the impact of the divested wine brands that are no longer part of our results. Bill also already addressed the drivers for these revisions. Third, from a corporate expense perspective, we now expect that to be approximately $260 million to $270 million for the full year which includes a slightly lower end to the range versus our prior expectation. And similarly, our interest expense expectations are now slightly lower at approximately $450 million. And last but not least, we continue to expect our comparable effective tax rate, excluding Canopy, to be approximately 19% and despite the additional $215 million of share repurchases executed in the third quarter, we also continue to anticipate weighted average diluted shares outstanding to be approximately $184 million. Beyond the P&L, for free cash flow, we expect to be in the range of $1.4 billion to $1.5 billion for fiscal '24, reflective of $2.6 billion to $2.8 billion in operating cash flow and $1.2 billion to $1.3 billion of CapEx. In closing, we continue to deliver industry-leading results in our beer business and remain confident in our ability to achieve our stated EPS targets for this fiscal year despite incremental category headwinds affecting our Wine & Spirits business. As we look further ahead, we remain excited about continuing opportunities to build shareholder value over the medium term, which we hope to achieve by capturing the substantial growth opportunities that exist for our Beer business, executing against our consistent, disciplined and balanced capital allocation priorities and delivering enhanced performance in Wine & Spirits, supported by the significant transformation that business has undergone and the actions that we are taking to improve this business. We encourage existing and prospective shareholders who have not yet had an opportunity to review our recent Investor Day presentations to access those through our Investor Relations website, ir.cbrands.com to gain further insights into our medium-term perspective on these topics. And with that, Bill and I are happy to take your questions.

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Nik Modi with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone and Happy New Year.

Same to you.

So, Bill, maybe you can provide some context. Obviously, you provided a few intra-quarter updates, one at the Analyst Day and one at the Morgan Stanley conference. Just regarding both the Beer and the Wine & Spirits business and obviously things came out a little bit differently. So I was hoping you can just kind of give us a perspective on what exactly happened to cause some of the delta. And if some of the clarity or perspective you gave us around the gaps between scanner data and your actual results, how we should think about that because I'm sure that's going to be something we're all going to have to start thinking about over the next couple of weeks?

Sure. Thanks, Nick. And again, Happy New Year to you. As we said in our prepared remarks, we're obviously very pleased with our Beer business in Q3 and we are particularly happy with the strong acceleration in the momentum that sort of came out of November. Interestingly enough, the delta between Circana and our numbers sort of changed about the minute Garth stopped speaking at the conference in November. So that was always interesting how that works. As we've noted, we expect about 45% of our Beer business volumes will be achieved in H2, which is in line with the normal seasonality of that business. And for Q4 specifically, we expect those shipments in depletes will end up being about 20% to 21% of our total fiscal year volumes. But we also expect that we're going to continue to drive mid to high single-digit volume growth annually, which is consistent with the depletion performance that we've now achieved for over a decade. And again, that's consistent with what we've also said, 1% to 2% annual average pricing increases, which supports the 7% to 9% annual net sales algorithm that we've said we will do in the medium term. On the Wine & Spirits side, obviously, we're further revising our guidance down, was not a decision we took lightly, and we're certainly not happy about it. We examined numerous scenarios and ultimately determined the adjustment was really needed to reflect a number of things. The broader category deceleration and other factors that affected our performance including gaps from our prior US wholesale expectations that we're actively addressing with our distributor partners and importantly, while making sure we maintain an appropriate inventory level for the remainder of this year, setting ourselves in good position to see sequential improvement in fiscal '25. Of course, as I said, we're not pleased with these revisions, and neither is our leadership team nor our Wine & Spirits team, but we're certainly committed to improving that performance in the medium term and expect that our net sales and operating margin targets will be consistent with what we said at Investor Day. As you've also seen, I'm going to be temporarily taking over that business, and I will be spending a fair amount of time with the Wine & Spirits division as we work through the process of appointing a new leader, which we have already started considering both internal and external candidates. As you probably know better than many, I spent several years of my career within the Wine & Spirits categories, and I look forward to working more closely with that team in the interim, particularly as that business turns its focus toward enhancing operational effectiveness and marketplace execution to build on the reconstituted higher-end portfolio and organizational structure that we put in place over the last few years. But ultimately, and I'd like to, Nik, reiterate this one more time. In fiscal '24, we still expect our enterprise EPS guidance to remain within our previously stated range of $12.00 to $12.20 and over the medium term, we also continue to expect low digit EPS growth, as outlined at Investor Day. Hopefully, that gives you some good perspective on those elements you asked about.

Thank you. Our next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed with your question.

All right. Thank you. Good morning and Happy New Year, everyone. I wanted to drill down a bit more on your beer margins. Bill and Garth, you raised your fiscal year beer operating income growth guidance. But this does still imply very low op margins in Q4. So I guess I'd like to better understand the drivers of this. And really how much visibility you have in terms of whether it's your marketing expense or commodities, hedges, et cetera, for the rest of this fiscal year? And then perhaps any color on how margins should be phasing next fiscal year would be helpful. Thanks.

Bonnie, to address your question about the next fiscal year, we will provide guidance during our next conference call in April. Regarding margins this year, they are advancing as we anticipated. The third quarter marked our first year-over-year margin improvement, which was expected from the outset. Historically, 55% of our activities occur in the first half of the year and 45% in the second half. For the fourth quarter, in line with your question, it is typically one of our lower shipping quarters, which naturally results in lower margins due to reduced throughput at our facilities. Additionally, we are experiencing rising depreciation costs as mentioned earlier. However, we anticipate that this year's fourth quarter margins will surpass last year's figures, continuing the trend of year-over-year improvement, and we are confident in our ability to return to the 39% to 40% range, as we detailed during our Investor Day.

Thank you. Our next question comes from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.

Hi, good morning. You're experiencing a depletion rate of about 8% for the quarter. There are expectations for significant shelf space gains in April. Can you provide some context on how that might impact depletion?

Well, here's what I'd say about that. As we said earlier, we were very pleased with the 8.2% that we got in the quarter, and we finished November very, very strong. And certainly, we were up, as you would have expected, that strong performance in late November continued into December. So we're very excited about our ability to continue to see exceptional depletions as we move into this calendar year and soon into the new fiscal year. The important thing to me is we continue to gain share. Our two-share point gains that you saw in the overall category, nearly three in the high end, continue to be industry leading and are frankly an acceleration of what our share gains had been earlier in the year. So we're very comfortable again, 79% top line driven by mid-plus single-digit growth profile, which we've said we see the runway on that for a long time to come. And certainly this quarter and certainly our expectations for the rest of the year are consistent with that.

Thank you. Our next question comes from the line of Bryan Spillane with Bank of America. Please proceed with your question.

Thank you, Operator. Good morning, everyone. I wanted to ask you, Bill, about the management transition in Wine & Spirits. What are you looking for in terms of attributes or skills? Additionally, can you clarify the extent to which the focus on wine and the improvement path will depend on uncontrollable factors, such as category improvements, versus controllable elements like execution and efforts that Constellation can take to enhance performance?

Thank you for the question, Brian. I would say that our transformation of the business is mostly complete. It is significantly different from what it was a few years ago, though we still have a substantial portion of business at the lower end. Our focus will be on bringing in someone who can drive operational efficiencies and execution in the market. It's crucial for us to enhance our wholesale performance in the United States, and we believe there are ongoing opportunities for strong performance in DTC and international channels, which we've developed over the past couple of years. I would argue that all of these elements are well within our control. We are actively working on improving the mainstream aspects of the business, especially with SVEDKA and Woodbridge, to boost their performance. I expect to see improvements as we enter the new fiscal year. We also believe that some of the recent softening in our overall business is temporary and will rebound, considering the solid performance of our higher-end brands like Meiomi, Kim Crawford, The Prisoner, and Mi Campo. I have always believed that a significant portion of your results are within your control, and we will concentrate on those critical factors that enhance our business performance as we move into the new fiscal year.

Thank you. Our next question comes from the line of Nadine Sarwat with Bernstein. Please proceed with your question.

Hi everybody, thank you for taking my questions. I have a two-part question. First, you've posted impressive beer depletions this quarter, but looking at 2023, the overall US beer market has weakened compared to the historical trend of plus or minus 1% we've experienced over the last decade. I would like to know your insights on why this is happening and any key takeaways on consumer health. What do you anticipate for the industry as a whole in 2024? Lastly, regarding Wine & Spirits, it's great to hear you reiterate the medium-term growth strategy shared at the Investor Day. Could you provide more details on your conviction in achieving that, considering the guidance provided today? I appreciate the initiatives you've mentioned, but there's a noticeable gap between this fiscal year's guidance and the medium growth expectations. Any additional insights would be appreciated. Thank you.

Sure. Let's start with the overall beer market. We've observed an increasing separation between the low end and the high end. The high end remains strong, and we are leading in that segment, gaining nearly 3 share points recently. This is partly due to our strong presence among Hispanic consumers, for whom beer is an important part of their consumption habits. Our brands enjoy significant loyalty, which is valuable to us moving forward. However, in the light beer category, despite the brand changes, the overall sector is not performing well and is declining, a trend we’ve consistently noted. It's crucial to view the beer sector as bifurcated: the low end is struggling on a volume basis, while the high end is thriving, and we are fortunate to lead there. Regarding Wine & Spirits, I plan to conduct a detailed analysis of that business and will provide more insights on our progress during the next earnings call at the start of the new fiscal year. I want to emphasize that we will be very focused on execution and collaborating closely with our distribution partners to ensure we outperform the categories we operate in through our distributor network. This will be essential for our ongoing success and where I will be dedicating my efforts.

Thank you. Our next question comes from the line of Chris Carey with Wells Fargo. Please proceed with your question.

Hi, good morning.

Good morning.

Hi, Chris.

Garth, the beer savings number that you called out, which I believe was $55 million, is a big number, certainly in the context of the savings targets through fiscal ‘28 that you laid out at Investor Day. And so I guess, are you pulling forward savings into fiscal ‘24 from other years, or are you perhaps just getting better at the ability to drive savings in the near term and perhaps we should be thinking about over-delivery or maybe just building more confidence in your ability to hit those targets over time? So again, I'm just trying to get some context for your self-help capacity in the beer gross margin, which was quite strong this quarter.

Chris, thanks for the question. And I guess the short answer to our question is no, we're not pulling anything forward from future years in FY ‘24. I do think that what you're seeing this year is a continuation of a couple things. One which we detailed at Investor Day, which is the shift from us from being builders of breweries to operators of breweries. And so we're getting more efficient, we're doing a better job from an end-to-end supply chain, and that's what gave us the confidence not just in this year, but in the cost savings targets that we laid out at Investor Day. Another thing that we're seeing benefits from is out of our digital business acceleration activities, which have been coupled with the discipline that we're creating on an end-to-end supply chain and it's driven significant savings in a whole host of areas as it relates to procurement. So again, it is somewhat new muscle that we're building, really more an extension of existing muscle as we, again, migrate from being builders to operators.

Thank you. Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Please proceed with your question.

Hey, guys. Just two follow-ups probably on Nik's question. Just first on beer, just to understand the strength and depletions at the end of the quarter. Is that more underlying strength? Was there anything timing related there? Is it continued in December? Should we look at sort of the 8% result in the quarter as sort of a true underlying gauge of the business, at least short-term, understanding that's not the guidance, but how should we think about that? And I know it's tough to talk about the gap versus scanner data. Obviously, it bounces around. But just any specific thoughts on what that could be going forward? And then I also have a wine question, if I can follow up on that.

Dara, why don't you do that right away? Because usually once you ask a question, you don't have further access. What's your wine question?

Okay. I mean, just look, the comments on the revision were helpful in the longer-term portfolio transformation, but at the risk of being blunt, it's been sort of years of disappointment on that business. It's a pretty large negative revision after Analyst Day in a short period of time. So I just wanted to hear a little more about the response, Bill, and how you might manage that business differently from a strategic lens longer term, perhaps a greater focus on productivity or whatever the changes are. But how do you think about managing the business differently and maybe how it fits in the portfolio just juxtaposition versus what's a very attractive beer business as we saw again this morning from a growth and margin standpoint.

Sure. So let's cover the first one initially about the depletions coming out of the quarter. Obviously, there's always a little bit of benefit when you have an early Thanksgiving because you give retailers a chance to restock after Thanksgiving. But let's make no mistake, the takeout that we had around the Thanksgiving holiday was exceptional, which you wouldn't get the great restocking if you didn't have an exceptional takeout period. And obviously we're very pleased to see, without going into specifics, that the strong November is playing into December as we expected it would because the underlying trends for our business remain very strong. And as I stated at an earlier question, our actual share gains have accelerated during the course of the year, which I think is very positive as well relative to our continuing success in that business. As it relates to wine, as I said before, the thing that we were most concerned about coming out of this particular quarter is that we end our year in an appropriate inventory position and that we are preparing ourselves to work closely with our wholesale distributor partners to accelerate that business going forward so that we are winning in the categories and channels in which we participate. We've got a lot of work to do there, but we continue to believe the strategy work that's been done over the past few years to reposition our portfolio much more to the higher end is going to pay dividends. And again, as I said, I think, to Nadine a moment ago, I'll come back with some more specific thinking. We're going to do, as you can understand, a fairly deep dive into that business. And I'll have some more thoughts on that as we get to our next call.

And, Dara, regarding the discrepancies between Circana and depletions, it can be challenging to compare the two. Looking ahead for the remainder of the year, we anticipate that the gap will remain in the mid-single digits. I want to reiterate what we discussed at your conference last month, which is that syndicated consumer takeaway data is more useful for assessing long-term trends and relative performance. It's important to note that Circana captures only 50% of our overall volumes, and there are variances in volume growth reported by different channel data providers. Additionally, time period differences can complicate the connection between depletions and Circana data, as shifts in key weekends or holidays may occur from one period to another. Therefore, we do not rely on syndicated consumer takeaway data in the same way you might, which is why we believe it isn't the most effective measure for evaluating our business.

Thank you. Our next question comes from the line of Andrea Teixeira with JP Morgan. Please proceed with your questions.

Thank you, operator and good morning, everyone. So, with your comments just now on the cadence of the quarter and into the fourth quarter, I wonder why you haven't raised guidance for the end of fourth quarter in terms of top line? And the second part of your question, looking ahead into the strength, how much do you expect that the sharp resets on the back of the strength will come, will structure for that type of 7% to 9% algorithm? Thank you.

Well, let's start with the second question first. We were quite pleased with the more limited changes that occurred on the shelf set in the back half of last calendar year. But we're expecting significant gains greater than our growth profile here as we get to the spring resets. You would notice that we fully expect that we're going to finish our year in a very strong performance. You will note that we raised the bottom of our guidance, as Garth noted, and I think I noted in my remarks as well. So we actually have raised our expectations around the income side. And of course that translates through into better cash and various other things as Garth noted. So I think you should take away what I hopefully we were trying to portray, which is our business continues to deliver exactly what we've told you what we would deliver on the beer side, 7% to 9% top line growth and strong bottom operating growth to match. And certainly, I think our depletion rate coming out of Q3 reflects that strength.

Thank you. Our next question comes from the line of Rob Ottenstein with Evercore. Please proceed with your question.

Thank you. I have two questions. First, could you discuss the current pricing environment in the beer industry? I understand you're indicating a range of 1% to 2%, with 1% being the current figure. Can you elaborate on the general landscape for pricing in the industry? Additionally, I know your pricing is somewhat sporadic, with some areas at zero and others at around 4% or 5%, resulting in an average of 1% to 2%. Can you explain the timing of your price increases? I believe your major competitors are adjusting prices at the end of January and the beginning of February. How does your pricing strategy align with that? My second question pertains to the innovation surrounding Corona Sunbrew, particularly Sunbrew's Citrus, which seems to be performing well. Could you provide more details about that? Thank you.

Sure. Obviously, I'm not going to comment on competitor pricing, but what I would say, Robert, is we said early on, and in fact, some of you probably questioned Garth and I on occasion about it, that we believe that 1% to 2% was the right approach. We've done that historically over the long run. We were a little bit higher than that during the really high inflationary timeframe around COVID which we fully acknowledged and recognized. But I go back to what we've always said, which is, we really want to keep our consumer. It's a whole lot more expensive if you chase them off and have to go reacquire a consumer than it is to never lose them in the first place. And the 1% to 2% algorithm has proven very solid for us over the long term and it's one that we're going to continue. I think certainly you see in other categories, people being careful about pricing. And I think that reflects just an understanding of where the consumer may or may not be in various categories. As it relates to innovation, Sunbrew is coming. We plan to talk mainly about that at our introduction for that, which will occur at the beginning of March. So I'm not going to spill all the beans on it, but we're particularly excited about that. We think it's going to be, again, another very interesting new product launch for our company on the heels of very successful Oro launch and very successful Aguas Frescas launch that has occurred in Modelo, which, as you know, is also expanding here in the coming years. So please stay tuned on that one. But I think we're very optimistic that that provides some great opportunity in the Corona franchise.

Our next question comes from the line of Lauren Lieberman with Barclays. Please proceed with your question.

Great. Thanks. Good morning. I know we've covered a lot of ground, but I was hoping you could just touch on the improved cash flow outlook for the year. It was a pretty material change and exciting. So I'm just wondering if you could talk a little bit about the key drivers on that uptick in outlook. Thanks.

Thank you, Lauren. There are several factors contributing to the change in cash flow. The increase in cash flow demonstrates our disciplined approach to managing the company's finances. Some key drivers include the rise in beer operating income that Bill mentioned, favorable tax conditions I alluded to earlier, and other favorable factors related to tax rates. These are the main contributors to the change.

Thank you. Our next question comes from the line of Filippo Falorni with Citi. Please proceed with your question.

Hey, good morning guys and Happy New Year. I want to go back to the on-premise channel for the Beer business. I think Garth mentioned we grew about 1% in the quarter. I was wondering if there's any more to recover from the keg issue that you guys had. And then if you think about next fiscal year, we talked a lot about the opportunity to gain share in off-premise, but can you comment on your ability to gain tap handles and gain more distribution in the on-premise channel as well? Thank you.

Sure. As we mentioned, there was some temporary impact related to kegs, primarily in the second quarter of this year. However, it’s worth noting that last year, both Modelo Especial and Pacifico were the top two brands in terms of market share gains in draft, despite these temporary challenges. This presents a significant opportunity. For example, Modelo Especial ranks fifth in draft sales but is the leading beer by revenue in the country, even though it’s not currently the top choice in the on-premise space. Similarly, Corona Extra is the leading packaged beer on premise but still has room to grow in draft sales. We believe that draft will continue to be a key growth driver for us. Moreover, even though Pacifico was the second largest gainer, the momentum in that brand indicates substantial potential for both Modelo Especial and Pacifico, particularly in the on-premise market. I hope to see both brands continue to maintain their leading share gainer positions as we enter this calendar year.

Thank you. Our final question will come from the line of Gerald Pascarelli with Wedbush. Please proceed with your question.

Great. Thanks very much for the question. Just had a question on your measured versus non-measured channels within beer. So if we look at Nielsen, your price mix is moderated at retail. It looks to be currently running right in line with the midpoint of your 1% to 2% target. So if we compare this to non-measured channels, just curious if you've seen any near-term moderation in pricing. And if not, would you maybe expect trends to become a little more aligned as we look out over the near term? Thank you.

I think by and large the answer to your question is yes, that those are usually reflective. We don't see a lot of variation amongst channels on that particular thing. Although, you do have some very big markets that are not generally covered by some of those tracked channels, New York being an interesting one. So you do see some variation from time to time, but we don't expect that to be significant moving forward about what the tracked versus what the non-tracked channels look like.

And the moderation that you referenced is really just attributable to the lapping of the incremental pricing that we took control of last year.

Thank you. Our next question comes from the line of Peter Grom with UBS. Please proceed with your question.

Thanks, operator, and good morning, everyone. Hope you're doing well. So, Garth, I may have missed this, but is the expectation still for beer depletions and shipments to be roughly equal for the year? And then I think it was mentioned that shipments in the fourth quarter would be around 20% to 21% of full-year shipments. Is that quarterly mix similar for depletions as well? Just, we've seen a lot of changes in quarterly mix over the past few years that have resulted in differences in growth rates between depletions and shipments. So just trying to understand how we should think about it specifically for the fourth quarter. Thanks.

Yeah, so shipments and depletions, yes, those should be largely in line with one another for a full year. That's consistent with how we operate the business every year. And from a Q4 timing as it relates to shipments and depletions, yes, both of those are in that 20% to 21% range that Bill referenced earlier.

Thank you. Our next question comes from the line of Andrew Strelzik with BMO. Please proceed with your question.

Great. Thanks for taking the question. Mine's about the competitive and promotional environment in beer. You've talked about your expectations on shelf space gains in the spring, the wider spread between light and premium beer and even some of the pricing dynamics in wine. So just curious, then what you're seeing across the competitive set now, how you're expecting that to evolve as the year progresses next year and maybe any plans or programs or levers should the environment intensify? Thanks.

Certainly. We expect the promotional environment to be fairly consistent with what it usually is. We don't think there's going to be any radical changes around that topic. I think a lot of it goes back to what we've often said, which is the velocities that we have on our brands are superb. And obviously at the end of the day, the retail environment is very interested in having brands focused on those that deliver outstanding velocities and sales per point of distribution. We shared at our Investor Day that our sales per point of distribution is radically better than the competition, And I think that's going to continue to serve us well, especially when you consider the strong brand loyalty that we have with consumers. As we've also said on numerous occasions, our judicious 1% to 2% pricing actions, we don't pull back on our pricing in the marketplace, which I think is important also. So when we make those commitments to 1% to 2%, that's what we deliver.

Thank you. Our next question comes from the line of Bill Kirk with Roth. Please proceed with your question.

Hey, just one for me, maybe for Garth. I heard the comment about $17 million higher in packaging and material costs for beer. I think that's the lowest year-over-year increase in some time. So is that the low level of inflation you'd be expecting there going forward or is deflation on those items even possible in calendar 2024? And I guess separately it'll probably be in the 10-Q later, but was the transportation cost line for beer, was that deflationary year-over-year in the period?

Yeah, so as we said all year long, we would start to see benefits from easing inflation as we move through the year. And obviously, we saw that in Q3. Going forward, you asked the question around whether this is at a low point or inflationary in nature. What I would say on that is we laid out a pretty good detail at our Investor Day around what the drivers are that we're expecting over the medium term that are going to result in us getting back in our 39% to 40% percent operating margins. And that includes low single-digit inflation net of our cost savings initiatives. And obviously there's some other offsets that can sound like depreciation, but those really are the drivers moving forward. And then logistics was a bit favorable in Q3 as well.

Thank you. Our final question will come from the line of Bill Chappell with Truist Securities. Please proceed with your question.

Hey, thanks for taking my question. Hey, just one follow-up on the acceleration of the beer in November and into December. I think I'm right in saying a year ago you had started to see a slowdown due to weather in California and the price increases had just taken, there was some elasticity. So was there more than I guess more favorable comps that you saw that drove the acceleration or is that a key part of it or were the comps maybe not as affected by weather and price increases last year as we had assumed?

Well, as you often know, lots of things go into why you see acceleration. I think you've pointed out some. I think weather in California was better than it was in prior year. You saw Thanksgiving being slightly earlier than it was in prior year. I think all those things are true. What I would emphasize, though, is that the takeout around our business, around Thanksgiving, was particularly strong. And our share gains that occurred during that period were as good as we saw during the entire year, which again, just speaks to the strength of the brand. There's gives and takes all the way along in the year, as you know, from various factors that occur. But when you see that kind of share acceleration that we've been seeing in the sort of the 2 point range in the overall category and 3 point range in the high end, that just speaks to the continuing strength of our Beer business, irrespective of the potential gives and takes that occur naturally over the course of the year. Thanks very much, and thank you all for joining today's call. Again, we're very pleased that our Beer business delivered strong performance in Q3 and is on track to achieve the higher end of our initial net sales and operating income guidance for the fiscal year. Our beer portfolio continues to deliver industry-leading performance, and we see a long runway of opportunities to continue to drive strong growth. In our Wine & Spirits business, we're fully committed to realizing net sales growth and improving our operating margins in line with our medium-term outlook for that business as we leverage its reshaped, higher-end leaning portfolio and enhanced DTC and international footprint. And from a capital allocation perspective, we continue to consistently execute against our balanced and disciplined priorities, which are maintaining our investment grade balance sheet, consistently returning cash to our shareholders through our dividend, and executing opportunistic share repurchases beyond those needed to cover dilutions, while advancing our organic investments to support additional production capacity for our Beer business and deploying excess cash to smaller acquisitions that fill portfolio gaps, but with a thoughtful and prudent approach. Altogether, we remain confident in our outlook for the full year and continue to expect our enterprise comparable EPS guidance for fiscal ’24, excluding Canopy, to remain within our previously stated range of $12.00 to $12.20. And over the medium term, we continue to expect low double-digit EPS growth as we outlined in our Investor Day. So, thanks again, everyone, for joining the call, and I wish you all a safe, happy, and prosperous new year. Thank you again for joining.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Have a great day.