Greetings, and welcome to the Constellation Brands Q1 Fiscal Year 2026 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Joseph Suarez, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Kevin. Good morning all, and welcome to Constellation Brands Q1 Fiscal '26 Conference Call. I'm here this morning with Bill Newlands, our CEO; Garth Hankinson, our CFO, and Blair Veenema, our new Vice President of Investor Relations, who will assume leadership of the function after today. Blair brings great expertise to the role. He began his career as a buy-side equity analyst and has worked across our corporate development, treasury and beer commercial finance teams for the last 10 years. I will work closely with Blair over the coming weeks to ensure a seamless transition of the function. We trust you had the opportunity to review the news release, CEO and CFO commentary, accompanying quarterly slides and a recently updated annual brand appendix 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 measures and any non-GAAP financial measures discussed on today's 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 end our call on time. Thanks in advance, and over to you for questions.

Our first question today is coming from Dara Mohsenian from Morgan Stanley.

So just wanted to discuss your confidence in the unchanged full year Beer revenue growth outlook as well as margin guidance. So we've obviously seen some industry weakness ramp up in May and June. Your depletion decline in fiscal Q1 was similar to Q4 if you strip out one less day. I understand that. But presumably, some of this industry pressure ramped up towards the end of the quarter in June, at least in the tracked channel data. So can you just discuss confidence in your Beer volume growth outlook? And at some point, it implies you move back to depletion growth. Maybe just give us some more context on a quarterly basis when we should start to see that. And then also just on the margin side, with incremental aluminum pressure with the higher tariffs, can you talk about what sort of the offset is to allow you to still deliver profitability on a full year basis on the beer side in line with what you were expecting previously?

Sure. Dara, why don't I start and Garth will come in with the margin question. I think it's important to point out that the quarter was as we expected. We saw a significant amount of consumer concern that has continued from the past quarters into this quarter, but this quarter was as we expected. Recall, this is going against the strongest quarter that we had last year. Q1 was what I would describe as a normal quarter for us. And as you pointed out, there was one less selling day in the quarter. I think the important thing to point out is sequential improvement is required for us to accomplish our guidance, but it's not predicated on significant consumer change. We're going against much easier comps as we head into the summer and scanner data. You may recall that in July of last year was when things started to decelerate both for us and for the overall industry. So we're going against easier comps as we progress into the summer months. Garth, do you want to touch on the margin point?

Yes. I'll touch on the margin point. But before I touch on the margin point, again, as Bill said, we feel confident with our outlook for the year, which is why we affirmed guidance, and we haven't seen any changes in consumer behavior. That being said, there are still some macroeconomic factors, if you will, that we continue to monitor, and there continues to be some uncertainty in the macro backdrop. We've seen from our banking partners and from the Fed, some reductions in expectations around GDP growth as well as some softening in expectations with inflation, unemployment, and interest rates. That being said, there's a lot of guesswork, I think, more so in this year's forecast as it relates to things like the impact of potential tariffs or the potential impact of tariffs and the potential impact of unemployment or government-related layoffs. So again, just a fair amount of uncertainty as we go through the year. On the margin front, we feel good about our ability to deliver margins in line with what we laid out in April, specifically to the incremental tariff that went into effect in June. To be clear, that did not impact our Q1. Going forward, we think that the impact of that is going to be roughly $20 million. As a reminder, what was announced earlier in the year was an impact of about $30 million. It's obviously less for us given that it's one quarter into the year or the incremental is less for us because we're one quarter into the year. And from a seasonality perspective, the first quarter is the highest quarter. Volume-wise, we don't expect that we're going to be able to fully offset this incremental tariff. So that will be about a 20 basis point hit, but we still believe that we can deliver margins in line with what we outlined in April.

Our next question today is coming from Nik Modi from RBC.

Bill, I understand this may be a difficult question, but I know you are focusing a lot on the Hispanic consumer. It seems like the situation is getting worse regarding their shopping habits, based on what I've read about current rates and targeting in typical shopping areas. I'm wondering if there is a breaking point ahead, as this seems to significantly affect your business. Do you have any thoughts on how long this situation might continue? I realize this is challenging to answer, but any insights from the administration about when these rates might start to stabilize would be helpful.

Sure. Thanks, Nik. As you know, you're right, this is very hard to call as to what the consumer reaction is going to be going forward. I think the important part that we continue to look at is, first of all, our loyalty is very strong and remains very strong with the Hispanic consumer base. Our loyalty is increasing in the general market, and we are continuing to invest against our business to support the consumer as they progress down this path. Importantly, our brand health measures remain as strong as they ever have. We'd be hard pressed to tell you when you see a fair amount of change. Both Hispanic and non-Hispanic consumers are concerned about inflation and about cost structure. But I also would point out that the percentage of alcohol in the basket has remained constant even though the basket has gotten smaller relative to what consumers are doing with consumer goods. So our focus has been on controlling the controllables. We have seen high single-digit share gains in the shelf; our buy rates. While visits are down, spend is up when people visit and when they actually go to stores. NPD continues to be an important part of what we do. We're pleased with the development of Sunbrew. It's ahead of what we had expected. And as I said earlier, we continue to invest against the business. So our focus continues to be monitored carefully where the consumer is and control the controllables, do everything we can possibly do. So as the consumer hopefully returns in the near term to more normal behavior, we're there and ready to take advantage of just that.

Our next question is coming from Lauren Lieberman from Barclays.

I just want to talk a little bit about marketing. It was interesting to see stronger marketing in the quarter. So I was curious if you could talk a little bit about marketing cadence this year versus last. And then also in that standpoint, it feels like not so much from a pricing standpoint, but from a marketing standpoint, the competitive landscape has picked up, and you've got Mic Ultra that's been a fast-growing brand for some time, the only other fast-growing brands alongside Modelo, has really picked up its activity. And I think picked up, it seems sort of the target market they're going after. So I just was curious if you could talk a little bit about kind of brand competitiveness, your marketing efforts, not just quantum and timing, but also kind of thoughts around any changes or differences in targeting and what you're seeing in the competitive landscape?

Yes, you bet. So I think it's important to point out that because of seasonality heading into the summer, Q1 is always slightly higher in terms of our marketing investment versus the rest of the quarters. But I think it's also important to point out, Modelo and Corona are the #1 and the #2 share of voice within the Beer sector for marketing. We continue to invest against our brands to build long-term success for those brands. And we're investing in places that we think are high impact: football, soccer, Major League Baseball, things that are live, things that are action-oriented and things that tend to be beer occasions. So we're going to continue to invest against our business. Our fundamental belief is, as I said on the prior question, our brand health metrics are very strong. Our intent is to keep those metrics as strong as they are, if not to improve those. And part of the way we will do that is to continue to invest against the consumer. So as the consumer begins to revert to more normal behavior, whenever that occurs, we're going to be in a position to win.

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

So I was thinking about the investor presentation at the Investor Day, and there's a lot of pride in the fact that the portfolio is so focused and you're gaining share in the category behind such a focused portfolio. And I think when you look across some of your peer set, there's actually been an attempt to continue to diversify the portfolio to perhaps hedge against some of these situations, if the floor, the slowing growth or market share loss, it's offset by something else, right? You've seen that with some of your competitors. Does this moment in time give you a bit more credence to think about maybe investing or diversifying the portfolio, however significant that may be in the coming years to give yourself a bit more diversification against such events? And then within that, can you just talk about how elevated maybe Pacifico will become now because it's been such a reliable growth driver. Can you accelerate that growth even more? So just some thoughts there would be helpful.

Yes, absolutely. First, it's important to note the changes since our Investor Day; many developments have occurred. Non-alcohol beverages were not part of our strategy back then, but today, they are the second largest share gainer in the growth category. Oro was also not introduced at that time. We are adjusting Oro's pricing to target the high-end light beer segment, where we see strong competitive opportunities. This year, we launched Sunbrew, which is performing well ahead of our expectations and appeals to consumers looking for flavor. As I mentioned in previous calls, we are pleased that our share of sales among 21- to 25-year-olds is double the sector average, indicating we are successfully attracting younger consumers. Additionally, one of our best innovations did not exist during the Investor Day, and I believe these elements contribute significantly to our innovation strategy. We anticipate that 20% to 40% of our annual growth will continue to stem from new products, and we remain focused on reaching more consumers more often. Regarding Pacifico, it remains very strong. What's particularly exciting is that, even though Pacifico is now the second largest brand in Los Angeles, 50% of its growth is coming from outside California. We are seeing significant expansion of this brand nationally, and we plan to further support its growth. We view it as a prime opportunity because its demographic profile differs from our other brands, making it a crucial growth driver and a key share gainer as we progress.

Our next question is coming from Kaumil Gajrawala from Jefferies.

I’m going to follow Nik's lead with a tough question. Let's assume things improve from an economic standpoint. How can we be sure that consumer behavior will return to previous patterns? It seems we are learning that COVID has fundamentally altered consumer behavior, particularly in the beer market. Could this eventually be seen as a significant change, where even as things begin to reopen, consumer habits might not revert to what they were before?

Yes, that's an interesting question. I think the important part of that for us to all keep in mind is, especially with our Hispanic consumer, which reflects roughly half our business, that consumer is very interested in beer. What has occurred is that occasions on which beer is consumed have decreased because of concerns of the socioeconomic area that you mentioned. So when you look at the fact that consumers are not going out to eat as much as they had, they're having less social occasions at home. It doesn't change their interest in consumption of beer. It simply has been that those occasions have been decreased of when that occurs. So I think you're going to easily see it revert to a more normal scenario as the macroeconomic scenario comes back to a more normal environment.

Your next question today is coming from Peter Galbo from Bank of America.

I wanted to go back to maybe Dara's question on just the Beer gross margins. And actually, there was probably some favorability or upside to what we thought in the quarter. Garth, I think in your prepared remarks, you talked about kind of a $40 million tailwind on kind of operational improvements. I'm just wondering how much of that as well is maybe some favorability on the peso that you guys locked in kind of at a more favorable value? And maybe how we should think about that on the go forward in the back half of this year or even into early next year as the dollar has weakened and peso has gotten stronger relative? Any context there would be helpful.

No, thank you for the question. As you know, we have a strong hedging policy that begins about three years before any fiscal year. This allows us to effectively manage and mitigate the impact of currency and commodity risks from year to year. At the start of this year, we had hedged the peso in the low 70% range, which is slightly higher than our usual target. When we experienced favorable conditions with the peso earlier in the year, we added more hedges, and now we are hedging the peso at over 80%. We also made additional hedges for fiscal years 2027 and 2028 to capitalize on these favorable conditions. Looking ahead, there are still some opportunities across various currencies and commodities, but we believe the peso is somewhat overvalued currently due to dedollarization. We will keep looking for opportunities to benefit from any positive changes, but the impact is not as significant as it was earlier this year, mainly because of the additional hedging we implemented during the quarter.

Next question is coming from Andrea Teixeira from JPMorgan.

I was hoping to see if there is any update on your new distribution, as you mentioned a good amount of high single digits into the summer. I want to understand how the velocity has been so far and the level of incrementality you're observing within the baseline. We are aware of the challenges the industry is facing and the negative depletions. As we approach the summer season, how is the velocity performing right now?

Distribution will continue to be a vital component for us. As the leading share gainer in the category, we are well-positioned to expand our distribution and shelf presence. This is particularly important given the strong growth we see in brands like Pacifico and Sunbrew, which are gaining popularity and require more shelf space. We believe that expanding our distribution will remain a key factor in our growth as we move forward, and our team is dedicated to this effort. This aligns with our principle of controlling what we can. Our brand loyalty is strong and continues to improve, particularly among our Hispanic consumers, which is also noticeable in the general market. This trend will positively impact our velocity. Additionally, we are focusing on price pack architecture. As consumers become more wary of inflation, it’s crucial to offer the right packaging at the right price points, ensuring we have products available for whatever budget consumers may have. These elements are essential aspects of our strategy that we will prioritize as the year progresses.

Next question is coming from Filippo Falorni from Citi.

I wanted to get your perspective on the pricing environment in beer. The category is clearly facing significant pressure. How is the pricing being implemented this year in the market? Are you noticing any competitors relying more on promotions to boost volume in the category?

I think there is some additional price promotion that's gone on in the marketplace. I'll use our example. We have addressed our Oro pricing starting this past month going after the high-end light beer consumer, where we feel there's a great opportunity. So we have made that adjustment in our own business in the interest of building additional share in the high-end light sector of the business. So I think you're always going to see a bit more promotional activity at a time when there's economic concerns. So that doesn't surprise us. But again, this goes right back to what we started with, which is our brands are strong and the loyalty is strong, and that at the end of the day is going to win the date.

Next question today is coming from Bonnie Herzog from Goldman Sachs.

So I actually wanted to ask about the California wildfires that happened last year, and I guess the expected rebuild. Could you give us some color on what is happening with the rebuild? And what type of growth or upside you might be expecting from this considering how important this market is for you? And then maybe clarify for us that the rebuild potential upside is factored into your guidance?

Sure. As many people know, and we've seen this at various external factors, hurricanes in the East or fires in the West. Anytime you see that sort of thing, there's a short-term hit and a somewhat long-term upside because as you, a, clean up and then rebuild, you're creating great job opportunities that tend to include interesting beer moments. So I think as we are starting that process, and as you know, it takes a while to start the process of rebuilding with permits and so forth, that will likely be a bit of a tailwind. The amount of that tailwind remains to be seen as a lot of it depends on permits and development and how much construction capability exists in the marketplace. But you are correct, that ultimately will be a bit of a tailwind. And yes, that is built into our expectations of our guidance going forward.

That being said, Bonnie, I think it's important to point out that California has experienced some consumer challenges from the macro environment as it relates to things like unemployment, particularly for the Hispanic consumer and even construction there, where we expect that there will be some benefits. As Bill just noted before, construction plans remain down year-over-year in California. So again, should be some benefit longer term, but short term, still some macro headwinds in the state.

We have reached the end of our question-and-answer session. And ladies and gentlemen, 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.