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Text: [Operator instructions] And now here's Bill.
I sincerely hope you were able to enjoy a safe and happy holiday season with family and friends.
Calendar year 2021 was another challenging year given the continued effects of the pandemic, a host of global supply chain issues impacting nearly every industry, inflationary pressures, and severe weather events.
That said, I'm incredibly proud of the determination shown by our team at Constellation throughout the year.
They worked relentlessly, navigating a myriad of evolving dynamics to deliver a very solid performance year to date and in Q3, putting us on pace for another strong year of financial performance and shareholder value creation in fiscal '22.
That said, I'd like to highlight a few key takeaways from the quarter.
First, our beer business delivered a very strong performance in Q3, while lapping tough comps in fiscal '21.
We continue to see robust consumer demand, yielding high single-digit depletion growth.
We extended our leadership position as the top share gainer in the high end of the US beer market behind the strength of our Modelo and Corona brand families, while improving our inventory position.
Our strong performance to date gives us confidence to increase top and bottom-line guidance for our beer business in fiscal '22.
Second, we continue to see significant runway for growth for our core imported beer portfolio in the years ahead, and we're investing in the next increment of capacity additions required to sustain our momentum as this represents one of the most compelling value-creating opportunities for our company and our shareholders.
Third, our wine and spirits business has made solid progress in transforming both its brand portfolio and financial profile.
Q3 marked another step along our journey as we continue to shift to a higher-end wine and spirits business focused on delivering increased revenue growth and margin expansion.
While our wine and spirits business continues to navigate through a series of headwinds impacting its year-to-date performance, our increased focus and investments behind our fine wine and craft spirits portfolio, margin accretion innovation and e-commerce initiatives continue to gain traction and are enabling an increase in our net sales guidance for the business in fiscal '22.
And finally, our strong overall total company performance in Q3 gives us confidence to increase our comparable basis earnings per share guidance for the fiscal year.
Garth will provide additional details relative to our financial performance and fiscal year guidance in just a few minutes.
Today, we are also excited about our announcement of a new agreement with The Coca-Cola Company in the United States to bring FRESCA brand into beverage alcohol through manufacturing and distributing a new line of FRESCA mixed cocktails.
FRESCA is currently the fastest-growing diet soft drink in Coca-Cola's portfolio, and over half of FRESCA consumers already use it as a mixer with spirits.
Building on this great foundation and in alignment with emerging consumer preferences around convenience, flavor, and a preference for high-quality products, we plan to launch FRESCA Mixed later this year, starting with cocktails using real spirits and inspired by recipes created by FRESCA fans from around the globe.
With that, let's talk in more detail about our performance in the most recent quarter.
Our beer business posted depletion growth of more than 80% in the third quarter, outpacing the high end of the US beer category.
Modelo Especial continues to be our most significant growth driver, with depletions increasing over 13%.
That is more than 5 million cases relative to the same quarter last year.
It remains the brightest star in our portfolio as the top share gainer across the entire US beer category in IRI channels, while maintaining its position as the No.
1 high-end beer brand.
Our Modelo Chelada brand family has become an important growth contributor to our portfolio as the No.
1 chelada in the US beer market and maintained its explosive growth, posting 35% depletion growth in the third quarter.
We continue to build on this extremely successful innovation platform with a new entrant, Modelo Chelada Pina Picante, which was launched in August and is already a top share gainer among important brands.
Corona Extra sustained its reinvigorated growth trajectory and position as the second-fastest import share gainer and the No.
3 high-end brand in IRI channels with 11% depletion growth versus prior year.
Similarly, Corona Premier continued its strong performance with 8% depletion growth, which accelerated through distribution gains as supply conditions improved.
From an innovation perspective within the Corona brand family, Refresca and Refresca Mas are back in production and contributing nicely to growth in our ABA portfolio.
Meanwhile, Corona Hard Seltzer remains a top seltzer brand in IRI, following the dramatic slowdown in the seltzer category.
We're making good progress to enhance our flavor profiles, and we're on track to roll out the restaging of our variety packs, tropical mixed pack, and berry mixed pack in the first quarter of fiscal '23.
And we are diligently working to address the brown glass shortage that is acting a big headwind this year, especially for our Pacifico brand, which continues to see strong demand and has a long runway for growth ahead.
Overall, our outstanding performance gives us confidence to increase guidance for our beer business as we now expect to achieve 10% to 11% net sales growth and 6% to 7% operating income growth in fiscal '22.
To fuel the continued growth of our imported beer portfolio, we plan to deploy an increased level of investment over the next four fiscal years to support construction of a new brewery in Southeast Mexico in the state of Veracruz as well as to expand and optimize capacity at our existing Nava and Obregon operations.
Garth will give you additional details on that momentarily.
Now moving on to our Wine and spirits business.
We remain committed to our vision to become a bold and innovative, high-end wine and spirits business with distinctive brands and products, delivering exceptional consumer experiences.
In an effort to make this vision a reality, we recently reorganized into two distinct commercial teams within the business, one focused on our fine wine and craft spirits brands and the other focus on our mainstream and premium brands.
While each team has their own distinct strategy, both remain aligned to our goal of accelerating performance by increasing revenue growth and expanding margins.
Our fine wine and craft spirits business is delivering solid growth this year, driven by brands like The Prisoner Unshackled, Roberto Mondavi Winery, and High West as well as strong gains in our direct to consumer, e-commerce, hospitality, and international businesses.
Our mainstream and premium business is focused on maintaining share in the mainstream wine segment, while delivering and continuing to deliver growth through premium segment brands such as Meiomi and Kim Crawford, in line with our consumer-driven premiumization strategy.
While we've experienced recent headwinds on mainstream brands like Woodbridge, Robert Mondavi Private Selection and SVEDKA, IRI trends for these brands have improved since overlapping the peak of the pandemic, supported by an increased focus on more relevant branding, strategic pricing, and innovation.
Throughout our buying experience portfolio, we've launched several innovations that are creating momentum and driving growth, including Kim Crawford Illuminate and The Prisoner Unshackled, both of which were among the top five share gainers in their respective price points and IRI channels this quarter.
During the quarter, we also launched multiple initiatives.
Second, SVEDKA ready-to-drink, soda mixed pack; and third, our new Woodbridge three-liter box.
We've also experienced successful market expansion for our Woodbridge and Robert Mondavi private selection spirit barrel-aged wines.
Within our DTC portfolio, we launched exclusive SKUs from the Robert Mondavi Winery and The Prisoner Saldo Red Blends as well as High West Midwinter Night Dram and the ready-to-serve Manhattan and old-fashioned cocktails.
Within the three-tier e-commerce landscape, Constellation continues to outpace total US wine market growth by double digits.
In fact, Meiomi sales in the three-tier e-commerce channels increased 27% versus the prior year.
Currently, about 10% of Meiomi's sales come from three-tier e-commerce, which is the highest level among leading US line brands in IRI e-commerce channels.
While we advance our strategic agenda in Wine and spirits, we continue to address a number of headwinds that have impacted our year-to-date performance.
We continued to lap last year's COVID pantry-driven loading, where we experienced outsized growth.
However, upcoming comparable growth rates are less challenging.
Throughout the year, we've experienced out of stocks and other operational challenges related to our SAP implementation, a difficult domestic and international logistics environment and our route-to-market transition of 70% of our distribution to Southern Glazer's Wine and spirits.
The encouraging news: These issues are all stabilizing.
We are rebalancing our inventories and expect more standard service levels for the balance of the year.
Based on our year-to-date performance, we are raising organic net sales guidance from 2% to 4% to 4% to 6% for fiscal '22.
And before I close, just a couple of quick notes on Canopy growth.
Clearly, recent results have been disappointing and there are meaningful near-term challenges facing Canopy and the overall cannabis market in Canada.
The store openings have been slower than previously anticipated due to the pandemic.
However, we continue to believe that the cannabis market represents a significant growth opportunity in the CPG space over the next decade given the predicted US market size of roughly 100 billion post-legalization, which is double the size of the spirits market and approaching the size of the beer category.
We're encouraged by Canopy's innovation agenda with more than 40 new SKUs launched globally during their recently reported second quarter.
In addition, Canopy purchased the right to acquire Wana Brands upon a US triggering event, which includes US federal legalization of cannabis.
Wana Brands has the No.
1 share of the gummy market in Canada, with more than 40% market share and the largest multi-market presence in the US gummy market.
The gummies category is one of the fastest-growing segments in both the US and Canadian cannabis markets, accounting for over 70% of all edibles purchased.
Wana's asset-light licensing model approach will allow them to scale quickly in the US and provide Canopy a highly distributed brand upon US legalization.
In closing, I would like to reiterate our main takeaways from this quarter.
Our beer business continues to deliver impressive performance.
Its growth remains ahead of the high end of the US beer market in IRI channels, and we now expect to achieve 10% to 11% net sales growth and 6% to 7% operating income growth for fiscal '22.
We remain confident in the robust longer-term growth prospects of our beer business, and we're securing our ability to capture the significant value creation opportunity by expanding and optimizing our production capacity over the next four years.
Our wine and spirits business continues to move toward its long-term revenue growth and margin expansion vision, which is further enabled by the clearer strategic focus of its newly configured fine wine and craft spirits and mainstream and premium teams.
And in spite of an ongoing challenging environment, our strong overall total company performance gives us the confidence to increase our comparable basis earnings per share guidance for the year.
We look forward to continuing to build a portfolio of products that consumers love and delivering another strong year of financial performance and shareholder value creation in fiscal '22.
Q3 was another quarter of strong execution by our beer business.
This continued strength, coupled with tax favorability, enabled us to deliver 8% comparable basis diluted earnings per share growth for the quarter, excluding Canopy.
As a result, we have increased and narrowed our full year fiscal 2022 comparable basis diluted earnings per share target to a range of $10.50 to $10.65 versus our previous guidance of $10.15 to $10.45.
This range excludes Canopy equity earnings, includes an increase in beer operating income guidance and reflects a decrease in the tax rate for fiscal 2022.
Now let's review our Q3 performance and full year outlook in more detail, where I'll generally focus on comparable basis financial results.
Net sales increased 4% driven by shipment growth of 3% and favorable price, partially offset by unfavorable mix.
As a reminder, we are lapping a significant inventory rebuild in Q3 of the prior year, which generated 28% shipment growth.
Depletion growth for the quarter came in above 8% driven by the continued strength of Modelo Especial and explosive growth of Corona Extra as well as the continued return to growth in the on-premise channel.
Again, keep in mind the difficult volume overlap we encountered during the quarter as we faced a 12% depletion growth comparison driven by robust inventory replenishment at the retailer in the prior year.
On-premise volumes account for approximately 12% of the total beer depletions during the quarter and grew strong double digits versus last year.
As a reminder, the on-premise accounted for approximately 15% of our beer depletion volume pre-COVID and was only 8% of our depletion volume in Q3 fiscal 2021 as a result of on-premise shutdowns and restrictions due to COVID-19.
Selling days in the quarter were flat year over year, and please note that in Q4, there is one additional selling day.
Cases shipped exceeded cases depleted as distributor inventory levels began to rebuild during the quarter.
Inventories are expected to return to normal levels by the end of the fiscal year as shipment volume is expected to continue to exceed cases depleted for the remainder of the fiscal year.
Moving on to beer margins.
Beer operating margin decreased 130 basis points versus prior year to 41.3%.
Benefits from favorable pricing and marketing timing were more than offset by unfavorable costs.
The expected increase in COGS was driven by several headwinds that included the following: First, increased material costs due to rising commodity prices and inflationary headwinds that on average are in the mid to high single-digit range, predominantly driven by wood pallets, aluminum, steel, and carpets.
Please note that this range includes the impact of hedging more positive.
Second, increased brewery costs driven by labor inflation in Mexico, increased head count, incremental spend related to capacity expansion and annual brewery maintenance that was performed during the quarter.
As a reminder, the annual brewery maintenance took place during the fourth quarter last fiscal year.
And third, a step-up in depreciation expense, largely due to the incremental 5 million hectoliters at Obregon completed earlier this fiscal year.
These COGS headwinds were partially offset by favorable fixed cost absorption driven by increased production levels.
Marketing as a percent of net sales decreased 130 basis points to 8% versus prior year as we have returned to our typical spending cadence, which is weighted more heavily toward the first half of the fiscal year.
In the prior year, a significant amount of marketing spend was shifted from the first half to the second half of the fiscal year due to COVID-19-related sporting and sponsorship event cancellations and/or postponements.
Additionally, we continue to expect full-year spend as a percent of net sales to land in the 9% to 10% range, which is in line with fiscal 2021 spend of 9.7% of net sales.
For full year fiscal 2022, we now expect net sales growth to land in the 10% to 11% range and operating income growth to land in the 6% to 7% range, reflecting the continued strength of our core beer portfolio.
As previously communicated, we expect price increases within our beer portfolio to land slightly above our typical 1% to 2% range.
However, we anticipate this incremental pricing favorability to be partially offset by unfavorable net sales mix, primarily driven by a shift in package types and return of on-premise draft SKUs.
We continue to expect our gross margin to be negatively impacted for the fiscal year as benefits from price and cost savings agenda are expected to be more than offset by cost headwinds, predominantly driven by a significant step-up in depreciation and increased inflation across numerous cost components as the inflationary environment resulting from economic supply chain and other byproducts of the pandemic continues to be dynamic and variable.
We now anticipate these elevated inflationary pressures to persist well into fiscal year 2023 and expect inflation on the commodity spend component of direct materials to land on average in the high single-digit to low double-digit range next fiscal year.
We will continue to maintain our disciplined approach to address these evolving conditions through our commodity hedging program, cost-saving initiatives, and balanced price adjustments.
However, due to a persistent and tough inflationary environment and incremental depreciation driven by our capital expansion plans, operating margins could land below our stated 39% to 40% range in fiscal 2023.
Let me reiterate that these are still best-in-class operating margins within our industry, which reflects the strength of our core beer portfolio and efficiencies of our operations.
We will continue to refine our outlook for fiscal year 2023 and will provide more details and official guidance during our Q4 earnings call in April.
Moving to wine and spirits.
Q3 fiscal 2022 net sales declined 25% as shipments declined approximately 39%.
Excluding the impact of the Wine and spirits divestitures, organic net sales increased 3%, driven by shipment growth of approximately 3%, favorable price, incremental sales to Opus One and smoke-tainted bulk wine sales, all partially offset by unfavorable mix.
Depletions declined approximately 7% during the quarter and continue to be challenged by port delays for our international brands and distributor route-to-market changes in transition markets.
Additionally, depletions faced a difficult overlap, especially for our premium and luxury brands, which experienced robust growth during Q3 of the prior year.
However, we expect depletion growth to accelerate during the fourth quarter driven by the continued strength of our higher-end brands, led by the Prisoner brand family, Meiomi and Kim Crawford, a robust innovation agenda, and an easier buying overlap versus a year ago.
From a shipment perspective, we expect shipment growth for the fourth quarter to decelerate versus Q3 as we continue to rightsize distributor inventory levels for our mainstream brands.
Moving on to wine and spirits margins.
Operating margin increased 140 basis points to 25.4% as decreased COGS, mix benefits from divestitures and favorable price were partially offset by increased marketing and SG&A as a percent of net sales and unfavorable mix from the existing portfolio.
As expected, lower COGS were driven by net favorable fixed cost absorption, lower grade raw materials, and cost savings initiatives, partially offset by increased transportation costs.
The net favorable fixed cost absorption resulted from lapping the unfavorable impact of $20 million in the prior year, which was a result of decreased production levels due to the 2020 US wildfires.
This benefit for the quarter was partially offset by unfavorable fixed cost absorption, resulting from decreased production levels in New Zealand due to a late frost during their harvest season earlier this year.
Marketing and SG&A as a percent of net sales increased versus the prior year due to a loss of top-line leverage resulting from the divestitures.
In the prior year, a significant amount of marketing spend was shifted from the first half to the second half of the fiscal year due to COVID-19-related cancellations and/or postponements.
As a result, marketing as a percent of net sales for Q4 is expected to be lower than the prior year.
For the full year, we expect marketing as a percent of net sales to be in the 10% range.
For full year fiscal 2022, we now expect net sales and operating income to decline 21% to 22% and 23% to 25%, respectively.
Excluding the impact of the Wine and spirits divestitures, organic net sales is now expected to grow in the 4% to 6% range versus our previous guidance of 2% to 4%.
It is important to note that the increase in our top line guidance is mainly due to incremental shipments to support our route-to-market transition earlier this fiscal year and revenues associated with sales of smoke-tainted bulk wine.
Both are onetime in nature, and thus, we do not expect them to be repeated in future years.
As such, going forward, we remain confident in our medium-term top-line growth algorithm for the Wine and spirits business 2% to 4%.
Looking ahead to fiscal year 2023, we expect significant cost increases for the business, including supply chain disruptions and inflationary cost pressures on product, freight, and warehousing costs.
However, in order to mitigate some of these cost headwinds, we intend to take incremental price that will be staggered throughout the first half of calendar year 2022.
We will continue to work through the puts and takes of our fiscal -- of our full year fiscal 2023 outlook, and we'll provide more details and official guidance during our Q4 earnings call in April.
Now let's proceed with the rest of the P&L.
Fiscal year-to-date corporate expenses came in at approximately $162 million, down 6% versus Q3 year to date last fiscal year.
The decrease was predominantly driven by compensation and benefits, due to the reversal of an accrual for performance share units, which will not be earned due to not achieving the threshold level of earnings performance from our Canopy investment and a favorable foreign currency impact.
These tailwinds were partially offset by increase in consulting services and T&E spend.
We now expect full-year corporate expenses to approximate $230 million, reflecting the year-to-date compensation and benefits favorability.
Comparable basis interest expense for the quarter decreased 8% to $88 million versus prior year primarily due to lower average borrowings.
We expect fiscal 2022 interest expenses to land toward the midpoint of our previous guidance range of $355 million to $365 million.
Our Q3 comparable basis effective tax rate, excluding Canopy equity earnings, came in at 14% versus 17.7% in Q3 last year, primarily driven by the timing and magnitude of stock-based compensation benefits, partially offset by higher effective tax rates on our foreign businesses.
We now expect our full year fiscal 2022 comparable tax rate, excluding Canopy equity earnings, to approximate 19.5% versus our previous guidance of 20%.
This half-point decrease primarily reflects the impact of increased stock-based compensation tax benefits received during the quarter.
Additionally, stock-based compensation tax benefits were weighted toward Q3 versus our previous expectation of Q4, resulting in a sequential rate increase to our implied Q4 tax rate, which is now expected to approximate 23%.
Moving to free cash flow, which we define as net cash provided by operating activities less capex.
We generated free cash flow of $1.8 billion for the first nine months of fiscal 2022, reflecting a 3% increase in operating cash flow, offset by an increase in capex spend.
Capex spend totaled approximately $600 million, which included approximately $500 million of beer capex primarily driven by expansion initiatives at our Mexico facilities.
Our full year capex guidance of $1 billion to $1.1 billion, which includes approximately $900 million targeted for Mexico beer operations expansions, remains unchanged.
Furthermore, we continue to expect fiscal 2022 free cash flow to be in the range of $1.4 billion to $1.5 billion.
This reflects operating cash flow in the range of $2.4 billion to $2.6 billion and the capex spend previously on, as Bill mentioned, our beer business continues to significantly outperform the US beer industry driven by robust consumer demand, and it is essential that we invest appropriately to support the expected ongoing growth momentum for our exceptional beer brands.
As such, we have updated and increased our brewery expansion investment plans in Mexico.
Total capital expenditures for the beer business are now expected to be $5 billion to $5.5 billion over the fiscal 2023 to fiscal 2026 time frame with the majority of spend expected to occur in the first three years.
In total, this investment will support an incremental 25 million to 30 million hectoliters of additional capacity and includes construction of a new brewery in Southeast Mexico in the state of Veracruz as well as continued expansion and optimization of our existing sites in Nava and Obregon.
Please note that this investment includes the previously disclosed beer capex guidance of $700 million to $900 million annually during the fiscal 2023 to fiscal 2025 time line to support a 15 million hectoliter build-out between our Nava and Obregon facilities.
As a reminder, our existing brewery footprint currently supports 39 million hectoliters between Nava and Obregon.
In closing, I'd like to reiterate our medium-term growth expectations for our beer business.
As Bill and I outlined, we expect continued momentum, and thus, continue to target top-line growth in the 7% to 9% range over the next three to five years, which includes one to two points of price and implied volume growth in the mid to high single-digit range.
This expectation provides us with the conviction to support incremental capital investments in Mexico.

user
plans incremental capacity investments	in mexico to support continued strong growth of core beer	portfolio.
affirms fiscal 2022 operating cash flow target of $2.4	- $2.6 billion and free cash flow projection of $1.4 - $1.5 billion.
now sees 2022 comparable basis eps	of $10.50 - $10.65.
sees fy 2022 beer business net sales growth 10 -11%.
total capital expenditures	for beer business expected to be $5.0 billion to $5.5 billion over fiscal 2023 to fiscal 2026.
sees fy 2022 wine and spirits business net sales decline 21-22%.

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