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Text: Let's dive right into a discussion about the quarter.
There were a number of puts and takes impacting our results in Q2, and Garth and I will spend time walking through them.
However, the fundamentals of our business remain solid, and consumer demand for our brands, particularly our core beer portfolio, remains strong.
In addition, we repurchased a significant number of shares in Q2 at prices that are favorable as we believe Constellation stock is undervalued at current levels.
We've received some feedback from investors on this topic in recent weeks, and we'll address key themes that emerge from these discussions in our remarks.
As we walk through our Q2 performance and outlook for the remainder of the year, there are several key takeaways we'd ask you to keep in mind.
Number one, the momentum of our core imported beer brands provides a point of competitive strength versus industry peers as we're the leading share gainer in the high end of the U.S. beer market.
The majority of our growth continues to be driven by Modelo Especial, supported by strong consumer demand for Corona Extra and Pacifico, and we expect this to continue for the foreseeable future.
We continue to believe that Modelo Especial in particular, has a long runway for growth, given the steadily increasing household penetration for this brand among non-Hispanic consumers and continued strong velocity.
Now we've admittedly had some supply challenges this fiscal year driven by several external factors, the most relevant being the ongoing robust demand for our beer brands.
We expect to return to more normal inventory levels by the end of Q4.
Despite these challenges, we continue to be on track to deliver a better-than-expected year for our beer business.
In fact, our strong performance to date gives us the confidence to increase guidance for our beer business as we now expect to achieve 9 to 11% net sales growth and 4 to 6% operating income growth for fiscal '22.
Our view is reinforced by recent 12-week IRI trends showing the Constellation's beer business is significantly outpacing the high end and total U.S. beer industry.
As it relates to our hard seltzer business and building off our last point, we're unique in our position versus our competitors in this space as our primary growth is coming from our core beer portfolio, and we're not reliant on the growth of hard seltzers and AVAs to achieve the medium-term growth goals for our beer business.
The hard seltzer landscape has shifted considerably in recent months.
Therefore, we've lowered our growth expectations for Corona Hard Seltzer resulting in a sizable obsolescence charge taken for Q2, which includes our view of the total impact for the fiscal year.
Going forward, we plan to focus on competing in this space in where we offer meaningful points of differentiation and unique value to consumers.
I'll have more to say on this topic in a moment.
Number three, while our wine and spirits business was challenged in the quarter by underperformance of several mainstream brands due to tough COVID comparisons, our recent route-to-market transition, and supply chain challenges for our imported wine brands, we continue to see the benefits of our premiumization strategy take hold.
We're performing well in the high end of the wine segment, which represents the vast majority of expected industry growth over the next several years, and we continue to strengthen our capabilities in emerging growth channels key to long-term success such as e-commerce and DTC.
Number four, we continue to enhance our approach to innovation with a more consistent, strategic, disciplined, and consumer-led approach with a focus on high-growth segments aligned with consumer trends.
Our innovation agenda is designed to complement our organic growth, and we're developing sustainable products that are incremental to our business while further premiumizing our portfolio into margin-accretive price points.
Over the years, we've been able to extend some of our brands into new spaces, recruiting new drinkers and expanding occasions, and we've achieved a healthy balance between growth from the core and from innovation.
Number five, our capital allocation strategy remains unchanged since I assumed the role of CEO almost three years ago.
Since then, we've made significant progress in reducing debt and achieving our goal of returning 5 billion in value to shareholders by the end of fiscal year '23 through a combination of dividends and share repurchases.
In fact, to date, this fiscal year, we have repurchased 1.4 billion of our shares.
And when combined with our dividend, we have achieved nearly 60% of our 5 billion goal.
To be clear, our shareholder value equation is based on outsized growth combined with return of dollars to shareholders.
One of the most important capital allocation priorities is to continue reinvesting in our beer business to keep up with robust demand for our products.
Despite initial challenges associated with the build-out of a third brewery in Mexico, we have moved on to other capacity alternatives in the country.
Our expansions in Nava and Obregon helped ensure we have adequate production capacity for the medium term and will create much needed redundant capacity that better enables us to manage through unexpected events like we've experienced these past two years.
We continue to work with the Mexican government to solidify plans for a new brewery in Southeastern Mexico with adequate water supply and an available talented workforce.
Now let's move on to a more fulsome discussion about our performance within the quarter.
During the quarter, the Modelo brand family posted depletion growth of 17% for the quarter and single-handedly drove total import share gains in IRI channels on a dollar basis.
2 beer brand in dollar sales in the entire U.S. beer category, Modelo Especial is the only major beer brand growing household penetration and is leading the way as the No.
1 share gainer among high-end brands.
Modelo Chelada has become the No.
2 brand family in the Chelada space, posting depletion growth of more than 50% and for the second quarter.
Corona Extra continues its growth trajectory as the second fastest share gainer and the No.
1 loved brand in the import category, driven by a return to growth in the on-premise, which currently represents approximately 11% of our beer business volume.
In addition to the comments I made earlier about our hard seltzers, I'd like to discuss industry trends and our refreshed approach to this sector of the beer market going forward.
In the short to medium term, we believe that there will be consolidation within the hard seltzer/ABA space primarily due to the chaos of SKU and brand proliferation with too many new entrants that don't have the velocity or consumer demand to warrant shelf space.
We also believe this subcategory will evolve beyond low-calorie, low-carb offerings, and open up to more distinctive consumer value propositions that include things like more flavor, different alcohol bases, and functional benefits.
We've already started to innovate in this way with distinct products like Refresca and Lemonada.
We've also discovered that consumers are looking for more robust taste and flavor in their seltzers.
As a result, we will be altering the flavor and taste profile of our seltzer portfolio to better align with the changing consumer preferences while also introducing single-serve packages to better serve the growing convenience channel, our largest trade channel.
And we have a solid lineup of innovation that we have yet to introduce.
We have several great examples of our innovation strategy at work within our wine and spirits portfolio.
This business continues to drive growth from recently launched innovations, including Meiomi cabernet sauvignon, Kim Crawford Illuminate, the Prisoner cabernet, and chardonnay, all of which are among the top 10 innovations across high-end wine in IRI channels during the quarter.
And our wine and spirits innovation pipeline is ready to go with further consumer-led new products as we head into our peak-selling period, including the expansion of our SVEDKA ready-to-drink platform and the introduction of Woodbridge wine seltzers and box wines.
In addition to driving growth through innovation, we're making progress with our core wine and spirits portfolio despite the previously mentioned challenges.
We continue to take price to further premiumize our mainstream portfolio as these steps are critical to maintain brand equity and to improve profitability, which will serve our brands well over the long term.
Our high-end super premium plus portfolio grew net sales double digits during the quarter.
In on-premise channels, our investments are paying off with enhanced wine offerings at major restaurant chains.
We're driving in critical emerging channels like three-tier e-commerce and direct-to-consumer, which continued to drive high-end growth, where we're outpacing category performance at key accounts, such as Instacart, Amazon, and Albertsons with the resurgence of online shopping due to the COVID pandemic.
For example, Constellation's fine wine share has expanded significantly in the latest 12 weeks due to the robust growth of the Prisoner on Instacart and Robert Mondavi Winery on wine.com.
In fact, e-commerce and DTC sales are up nearly three to four times versus 2019, and they comprise roughly 3 to 5% of our business versus 1% pre pandemic.
Going forward, we will continue to focus on becoming a category leader in e-commerce and DTC as we believe these channels will make up a significant portion of our mix over time and will continue to be an opportunity for high-end growth.
harvest, which is about 70% complete at this point, while our production facilities, wineries, and tasting rooms remain untouched by recent wildfire activity.
This quarter, our ventures activities included investments in adaptogen-infused hot water and Aaron Paul and Bryan Cranston's artesanal Dos Hombres mezcal.
Hop water is a nonalcoholic calorie-free sparkling water, infused with adaptedgens and new tropics to provide the perfect balance of function and flavor for health-conscious consumers.
The nonalcoholic segment of total beverage alcohol grew almost 40% in 2020 in dollar sales through IRI channels.
And according to IWSR research, 60% of consumers are switching between nonalcoholic or low alcoholic and full-strength drinks within the same occasion.
Dos Hombres is an award-winning handcrafted mezcal brand created by Breaking Bad co-stars who have developed an exceptional liquid that receives frequent praise from both the industry and consumers.
The overall U.S. mezcal category grew 14% in 2020 according to IWSR, and super premium mezcal priced above $30 per barrel is projected to be the largest and fastest-growing segment within the category.
Moving on to Canopy Growth.
We're encouraged by the recent introduction of the cannabis opportunity in Administration Act draft bill, which was introduced by Senators Booker, Wyden, and Schumer in July.
More than 90% of Americans are in favor of cannabis legislation for medical purposes and two-thirds of those are in favor of legalizing for recreational use as well.
In fact, nearly two out of three Americans already have legal cannabis access as 37 states have legalized for medical use and 18 states for adult use.
While we're optimistic about federal legislation within this congress, Canopy is not waiting for this reality to materialize.
Canopy's U.S. business grew 91% year over year in their most recent quarter, driven by robust consumer demand for their CBD and CPG products, including Martha Stewart-branded products, quatro beverages, stores and vape products, and BioSteel's new RTDs.
business is expected to grow significantly as it benefits from increasing distribution and new product introductions.
Once THC permissibility becomes a reality in the U.S., Canopy expects their U.S. business to make a substantially greater contribution to their results.
non-THC business with more opportunities in a world post federal permissibility.
Overall, we're comfortable with Canopy's progress, and we're looking forward to the growth and legalization prospects for the business.
In closing, I'd like to reiterate our main takeaways for this quarter.
First, continued strong demand for our core imported beer brands provides a point of competitive strength versus industry peers led by the No.
1 share gainer in the beer category, Modelo Especial, which we feel has ample runway for growth well into the future, given the steadily increasing household penetration rates among non-Hispanic consumers and continued strong velocity.
The short-term supply disruption to our imported beer business does nothing to dampen our long-term prospects as we expect to return to more normal inventory levels by the end of Q4, and we're on track to deliver a better-than-expected year for our beer business.
Second, we continue to see the hard seltzer and broader ABA space as a meaningful sector within the beer market.
Going forward, we plan to focus on competing in this space in ways where we can offer meaningful points of differentiation and unique value to consumers, and we have some upcoming innovation in this space that we're optimistic about.
Number three, we continue to see benefits of our wine and spirits premiumization strategy take hold.
We're performing well in the higher end of the wine segment, and we continue to strengthen our capabilities in emerging growth channels key to long-term success, such as e-commerce and DTC.
Fourth, we continue to enhance our approach to innovation with a more consistent, disciplined, and consumer-led approach focused on high-growth segments aligned with consumer trends to complement our organic growth while developing sustainable products that are incremental to our business at margin-accretive price points.
And fifth, and certainly not least, our shareholder value equation continues to be based on outsized growth combined with the return of dollars to shareholders.
And let me reiterate, our capital allocation strategy remains unchanged.
We remain committed to our goal of returning 5 billion in value to shareholders by the end of fiscal year '23 through a combination of dividends and share repurchases.
Our strong operational performance and cash flow generation allowed us to make significant share repurchases in Q2 aligned with our commitment, which contributed to the increase in our earnings per share guidance for the year.
At the same time, we remain committed to continuing to reinvest in our business with an emphasis on our beer business to keep up with the robust demand for our products.
Q2 certainly reflected yet another strong quarter of marketplace performance for our beer business.
Due to continued robust consumer demand for our core beer portfolio, we now expect to exceed our initial, top line, and operating income targets for our beer business.
Additionally, our strong cash flow generation enabled us to continue to repurchase shares during the quarter.
And through September, we've repurchased 6.2 million shares of common stock for $1.4 billion.
As a result, we've increased our full-year fiscal 2022 comparable basis diluted earnings per share target, and we now expect to be in the range of $10.15 to $10.45.
This range excludes Canopy equity and earnings impact and reflects the increase in beer operating income guidance and decrease in the average -- in the weighted average diluted shares outstanding based on shares repurchased through September partially offset by an increase in the tax rate for fiscal year 2022.
Now let's review Q2 performance and our full-year outlook in more detail, where I'll generally focus on comparable basis financial results.
Net sales increased 14%, driven by shipment volume growth of nearly 12% and favorable price partially offset by unfavorable mix.
Depletion volume growth for the quarter came in above 7%, driven by the continued strength of Modelo Especial and Corona Extra, as well as the continued return to growth in the on-premise channel.
Depletion trends tempered in Q2 versus Q1, driven by out-of-stocks due to ongoing robust consumer demand, as well as lost shipping days for some of our distributors due to severe weather events, including hurricanes and wildfires.
We estimate that these factors hampered Q2 growth by approximately two to three points.
As Bill mentioned, on-premise volume accounted for approximately 11% 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 accounted for only 6% of our depletion volume in Q2 fiscal 2021 as a result of the on-premise shutdowns and restrictions due to COVID-19.
Selling days in the quarter were flat year over year and will also be flat in Q3.
Wholesaler depletions continued to outpace cases shipped during Q2, resulting in a lower-than-normal distributor inventory on hand at the end of the quarter.
To rectify this gap, shipment case volume is expected to exceed depletion case volume throughout the second half of the fiscal year, resulting in a gradual improvement of distributor inventories during Q3 and Q4 as inventories are expected to return to normal levels by the end of the fiscal year.
Moving on to beer margins.
Beer operating margin decreased 530 basis points versus prior year to 37.2%.
Benefits from favorable pricing, mix, and foreign currency were more than offset by unfavorable COGS, increased marketing investments, and higher SG&A.
The increase in COGS was driven by several headwinds that include the following: First, a Q2 obsolescence charge of $66 million.
As a result of our production constraints earlier in the year, we prebuilt hard seltzer inventory in advance of the key summer selling season based on our best estimates for fiscal year 2022.
Due to the overall slowdown in the hard seltzer category in the U.S., some of that growth is not going to materialize in the fiscal year, resulting in excess inventory.
Second, increased brewery costs, driven by labor inflation in Mexico, increased headcount, and incremental spend related to capacity expansion.
Third, a step-up in depreciation expense, largely due to the incremental 5 million hectoliters at Obregon.
And finally, as expected, increased material costs predominantly driven by increased commodity prices and inflationary headwinds on pallets, cartons, and aluminum.
These COGS headwinds were partially offset by favorable fixed cost absorption.
Marketing as a percent of net sales increased 150 basis points to 9.9 versus prior year as we returned to our typical spending cadence, which is weighted more heavily toward the first half of the fiscal year.
As a reminder, marketing spend in the first half of the prior year was significantly muted resulting from COVID-19-related sporting and sponsorship event cancellations and or postponements.
Lastly, the increase in SG&A was primarily driven by an increase of approximately $12 million in legal expenses, as well as higher compensation and benefits.
As mentioned earlier, we are increasing full-year fiscal 2022 net sales and operating income guidance for our beer business.
We are now targeting net sales growth of 9 to 11%, reflecting the strength of our core beer portfolio and pricing actions that are higher than initially planned.
Furthermore, we are now targeting operating income growth of 4 to 6%, which implies operating margin in the low to midpoint of our stated 39 to 40% range.
Please note that the updated guidance includes all obsolescence charges and legal expenses incurred in the first half of the fiscal year.
We continue to expect our gross margin to be negatively impacted for the fiscal year as benefits from price and our cost savings agenda are expected to be more than offset by several cost headwinds.
However, the mix and magnitude of these headwinds have changed from our original assumptions presented at the beginning of our fiscal year.
First, we're still estimating a significant step-up in depreciation expense, which began to accelerate in Q2.
However, some of this depreciation started later in the year versus planned.
As such, we are now estimating total beer depreciation expense to approximately $250 million, an increase of approximately $55 million versus last year, or a $10 million decrease versus our original planned estimate.
Second, we still expect expect substantial inflationary headwinds across numerous cost components to continue during the second half of our fiscal year as commodity prices continue to rise, specifically across aluminum, diesel, and pallets resulting from a rather volatile inflationary market.
And third, due to the growth moderation within the hard seltzer market, as well as lower ACV levels across the category on new items, we do not expect our hard seltzer SKUs to meet originally planned volume expectations, which results in a positive mix benefit versus our original estimate.
Conversely, due to the slowdown in the hard seltzer sector, excess inventory resulted in a fiscal year-to-date obsolescence charge of approximately $80 million.
Please note that these losses cover our hard seltzer obsolescence exposure and as such, we do not expect to take any additional obsolete charges in the back half of the fiscal year for hard seltzers.
From a marketing perspective, we continue to expect full-year spend as a percentage 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.
Looking ahead to Q3.
I'd like to remind everyone of the difficult buying overlaps we will encounter as we're facing a 28% and 12% growth comparison for shipment volume and depletion volume, respectively.
Additionally, we expect to perform our normal annual brewery maintenance during Q3, which will result in less throughput versus Q2 as we have to shut down production for a few days.
As such, we are estimating low single-digit shipment volume growth for Q3.
Moving to wine and spirits.
Q2 fiscal 2022 net sales declined 18% on shipment volume down 36%.
Excluding the impact of the wine and spirits divestitures, organic net sales increased 15%, driven by organic shipment volume growth of nearly 6%, favorable mix and price and smoke-tainted bulk wine sales.
Robust mix driven by the Prisoner brand family, Meiomi, and Kim Crawford accounted for approximately nine points of the year-over-year organic net sales growth.
Shipments were negatively impacted by port delays for our international brands and route-to-market changes, which also impacted depletions.
Depletion volume declined 2% during the quarter and was additionally impacted by the challenging overlap the consumer pantry loading behavior especially for our mainstream brands that experienced robust growth during the beginning of the COVID-19 pandemic.
However, as we head into the second half of the fiscal year, we feel as though most of these challenges are behind us and expect shipment volume and depletion volume to generally align in the second half of fiscal 2022.
Moving on to wine and spirits margins.
Operating margin decreased 620 basis points to 19.7% as mix benefits from the existing portfolio and divestitures combined with favorable price were more than offset by increased marketing and SG&A spend, higher COGS, and margin-dilutive smoke-tainted bulk wine sales.
Higher COGS were driven by unfavorable fixed cost absorption and increased transportation costs.
These headwinds were partially offset by lower great raw materials and other cost savings initiatives.
Keep in mind that we're lapping lower SG&A spend in Q2 fiscal 2021 due to COVID and having smaller business post divestitures, resulting in significant marketing and SG&A deleveraging, impacting operating margins.
For full-year fiscal 2022, the wine and spirits business continues to expect net sales and operating income to decline 22 to 24% and 23 to 25%, respectively.
This implies operating margin to approximately 24%, which is flattish to prior year on a reported basis, which shows significant margin expansion on an organic basis.
Excluding the impact of the wine experience divestitures, organic net sales is expected to grow in the 2 to 4% range.
From a Q3 perspective, keep in mind that we are lapping unfavorable fixed cost absorption of $20 million in the prior year resulting from decreased production levels as a result of the 2020 U.S. wildfires.
We expect this favorable overlap to be partially offset by a continued increase in transportation costs and incremental unfavorable fixed cost absorption due to the New Zealand frost.
Also, we continue to expect marketing and SG&A deleveraging as a result of the wine and spirits divestitures.
As such, we expect marketing and SG&A to continue to be a significant drag to operating margins in Q3 fiscal 2022.
Now let's proceed with the rest of the P&L.
Fiscal year-to-date corporate expenses came in at approximately $117 million, up 7% versus last fiscal year.
The increase was primarily driven by higher consulting services and compensation and benefits partially offset by a favorable foreign currency impact.
We now expect full-year corporate expenses to approximate $245 million, driven by increase in compensation and benefits.
Comparable basis interest expense for the quarter decreased 4% to approximately 96 million versus prior year primarily due to lower average borrowings.
We now expect fiscal 2022 interest expense to be in the range of 355 to $365 million.
The slight decrease versus our previous guidance reflects early redemption of higher interest rate debt, as well as $1 billion of senior notes issued in July at attractive rates.
Our Q2 comparable basis effective tax rate, excluding Canopy equity earnings, came in at 21.8% versus 16.9% in Q2 of last year, primarily driven by the timing of stock-based compensation benefits and a higher effective tax rate on our foreign businesses.
We now expect our full-year fiscal 2022 comparable tax rate, excluding Canopy equity and earnings, to approximate 20% versus our previous guidance of 19%.
This increase is primarily due to a higher effective tax rate on our foreign earnings than originally estimated.
I would also note that we expect stock-based compensation tax benefits to be weighted toward Q4.
As a result, we expect our Q3 tax rate to be higher than our full-year estimate at approximately 21%.
We also now expect our 2022 weighted average diluted shares outstanding to approximate 192 million, reflecting the impact of our September year-to-date share repurchases previously discussed.
Moving to free cash flow, which we define as net cash provided by operating activities less capex.
We generated free cash flow of $1.2 billion for the first half of fiscal 2022, which is flat to prior year, reflecting strong operating cash flows offset by an increase in capex.
Capex totaled $353 million, which included approximately $295 million of beer capex, primarily driven by expansion initiatives at our Mexico facilities.
Our full-year capex guidance of 1 to 1.1 billion, which includes approximately 900 million targeted for Mexican beer operation expansions, remains unchanged.
Furthermore, we continue to expect fiscal 2022 free cash flow to be in the range of 1.4 to $1.5 billion.
This reflects operating cash flow in the range of 2.4 to $2.6 billion and the capex spend previously outlined.
In closing, I want to iterate that while we had our fair share of challenges during the first half of our fiscal year resulting in several puts and takes impacting our results, the fundamentals of our business remain strong, and consumer demand for our products, particularly our imported beer portfolio, remains robust, providing us with strong momentum as we head into the second half of our fiscal year.

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constellation brands - updates fiscal 2022 reported basis earnings per share outlook to $0.30 - $0.60; increases comparable basis earnings per share outlook to $10.15 - $10.45.
qtrly reported net sales $2,371 million, up 5%.
constellation brands - affirms fiscal 2022 operating cash flow target of $2.4 - $2.6 billion and free cash flow projection of $1.4 - $1.5 billion.
beer business now expects 9 - 11% net sales growth and 4 - 6% operating income growth for fiscal 2022.
sees 2022 wine and spirits ; organic net sales growth 2% - 4%.
constellation - wine & spirits business continues to expect fiscal 2022 reported net sales & operating income decline of 22 - 24% & 23 - 25%, respectively.

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