Greetings, and welcome to the Constellation Brands Q3 Fiscal Year 2026 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star 1 on your telephone keypad, and we ask you to please ask one question and then return to the queue. If anyone should require operator assistance, please press star 0. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Blair Venema, Vice President of Investor Relations. Please go ahead, Blair.

Thank you, Kevin. Good morning, all, and welcome to Consolation Brand's Q3 Fiscal 26 Conference Call. I'm here this morning with Bill Newlands, our CEO, and Garth Hankinson, our CFO. We trust you have 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 Constellations 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.

And I'll be conducting your question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. And as a reminder, we ask you to please ask one question and return to the queue. You may press star 2 if you'd like to move your question from the queue, and the confirmation phone will let you know your call is in queue. Our first question today is coming from Bonnie Herzog from Goldman Sachs. Your line is now live.

Thanks, and good morning, everyone. Hope you're doing well and happy new year. I guess I had a question on your beer op margins. They came in a lot stronger than expected in the quarter, despite the volume to leverage. So hoping you could talk further on some of the puts and takes behind this strength. And then, you know, thinking about your full year guidance, which you maintain, it does imply, you know, 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? You know, maybe aluminum, or if you could just talk through that. Thank you.

Thanks for the question, Bonnie, and happy New Year to you. So first, starting with Q3 margins, as you indicated, volume decline certainly were a headwind in the quarter. Additional headwinds in the quarter were tariffs, as you noted, logistics, and then brewery 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, you know, 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 and are 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, you know, when the tariff gets accrued and goes into inventory and then when it gets released in the P&L, and that'll be a bit of a headwind in Q4 as well.

Next question is coming from Nadine Sarwo from Burns Senior Line is now live.

Hi, thank you for my question. Another one on beer margins, though perhaps with a longer-term perspective. So you called out a number of the factors in your prepared release and 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 depletions, 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? Thank you.

Thanks, Nadine. I'll take the first question, and then Bill will take the second. But as it relates to FY27 and beyond, as we said back in our Q2 earnings call, we'll provide more color on what our expectations are for FY27 and beyond in our April earnings call. You know, 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, you know, more to come on that. You know, 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'll all go into our planning process and will be reflected in the

guidance that we give 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 Serkana 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.

Next question is coming from Laura Lieberman from Barclays. Your mind is now live.

Great. Thanks. Good morning. I want to talk for a second about capacity and CapEx. So in the slide deck, you reiterated the plans for 7 million additional hectoliters 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 base is going to be lower than what you kind of originally thought back in April, to your point, under a very different macro backdrop.

Yeah, Lauren, thanks for the call. So the approach on the modularity of the breweries is, you know, 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, you know, 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 the manner in which we've been building capacity with long lead items, you know, you are making commitments to that, to that, to that spend. and our plan for this year is reflective of, you know, commitments that we've made on capacity expansion. But, you know, again, we continue to monitor this and assess where the volume, you know, is expected to be. And, you know, again, you know, 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 goes into a brewery, and, you know, those commitments have been made.

Thank you. Next question is coming from Rob Ottenstein from Evercore ISI. Your line is now live.

Thank you very much. Moving more, too, over to the brand side, you know, the Pacifico brand has been an extraordinary success. It's still relatively small, but, you know, you've been working on it very diligently, you know, for 10-plus years. or so. I'm just wondering 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 number three brand

in your portfolio. Thank you. Yeah, 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 number one player by dollars in the United States. Pacifico is doing a very similar approach. It's the number two brand in the state to California today. It skews younger relative to our overall portfolio and really has resonated well with consumers. As you know, it's the number one on social media in terms of share of voice, and it has gained a point and a half 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 number three 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.

Thank you. Next question is coming from Tara Moshinian from Morgan Stanley. Your line is now live.

Hi. 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 and the balance of 2026.

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 have probably changed 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 it's the number one 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.

So relative to the beer category overall, it still remains challenged, and it's largely around the Hispanic consumer.

Seventy-five percent 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.

Thank you. As a reminder, that's star one to be placed in the question queue, and we ask you to please ask one question, then return to the queue. Our next question is coming from Drew Levine from J.P. Morgan. Your line is now live.

Hey, good morning, guys. Thanks for taking a question. I wanted to follow up again on the beer margins implied for fourth quarter, given, you know, the low single digit absolute cogs increase for the year, you know, implies gross margins, I think, something in the 47 percent 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, you know, the expected headwind from aluminum and depreciation that you mentioned, any sort of quantification there. And just asking because, you know, I guess, you know, last year in fourth quarter, you know, volumes were down as well and obviously much, 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 we're down 2.9, ran decently ahead of where we saw both Nielsen and Serkana end up in the third quarter, the second quarter in a row that's happened. So I'm wondering what you're seeing in the independent channels, if it's just sort of a function of easy comparisons, or you're seeing any sort of encouraging trends in that channel. Thanks.

yeah so just to just to reiterate on the margins what the headwinds were uh and again you noted uh that it is our low seasonal quarter uh just for clarity again it's 20 percent of our overall volume for the for the fiscal year uh 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 in the service so that'll be that'll 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 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 have pushed into Q4. That's just timing, so a bit of a benefit in Q3 versus a 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. You know, a year ago, Modelo was number five on draft. Today, it's number two. 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. Thank you. Next question is coming from

Gerald Pasquale from the company. Your life is now live.

Great. Thank you very much for the question. Question for Bill. Just despite the continued macro pressures. Your depletions have remained relatively consistent this year, just kind of down two and a half to three percent. 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.

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. 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's 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 how the consumer is feeling and how they're feeling about the sort of macroeconomic issues that exist today.

Thank you. Next question today is coming from Robert Moskow from TD Cowan. Your line is now live.

Thanks for the question. Unfortunately, it was also Gerald's question. But maybe if there's a way to think about it just quantitatively, you know, your Hispanic consumer really started feeling the pressure in February of last year. You can kind of see it in the data. And I guess what we're all kind of wrestling with is, you know, once we lack that initial shock of restrictions on immigration policy, is it possible that it just gets a little bit less bad? And so instead of, you know, 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 hopefully assume that you're – we hope you're correct. That would be a lovely outcome. You know, 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 good position to win. It's why we have focused on the things that are working in our favor, Things like Pacifico and Victoria, Medela 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.

The next question is coming from Filippo Florini from City Airlines Now Live.

Hi, good morning, everyone, and Happy New Year. I wanted to ask on the beer pricing environment. You had 1.5 pricing in the quarter, but you had 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 adjustment. Are you seeing a volume uptick as a result of the price adjustment there that could we see in some more other brands to try to respond to the macro environment? Thank you.

We continue to project one to two. 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 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-packed architecture, which is also an important part of what we have done. We have added seven-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. Your line is now live.

Hey, Bill and Garth, good morning, and thank you for the question. I maybe just wanted to ask a clarifying comment from your prepared remarks about the fourth quarter specifically. You talk about an expectation of year-over-year volume declines in the beer business to improve, I think, in the first sentence. And I just wanted to clarify whether that is a shipment comment, a depletion comment, both potentially, but that we should still be expecting kind of, you know, a negative in the fourth quarter and whether it applies to both ships and depletion beer. Thanks very much.

Garth will add on to what I'm about to say, but as we've made note, and we made note in our last quarter, We expect over the course of the last two 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 two, third and fourth quarters, we expect depletes and ships to basically be exactly the same. Anything you want to add to that?

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

Thank you. Next question is coming from Bill Kirk from Roth Capital Partners. Your line is now live.

Good morning, everybody. So a different type of question. In December, President Trump signs 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 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?

You know, 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 uh in the cannabis business today i think um we we have not seen uh a significant uh 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 you know 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. Thank you.

Next question is coming from Michael Avery from Papers, Haley. Your line is now live.

Thank you. 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 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 the 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 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 number one share of voice, and Corona is the number three 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 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

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