On Wednesday, Constellation Brands (NYSE:STZ) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Constellation Brands reported Q2 results that exceeded expectations, reaffirming FY27 EPS guidance of $11.20 to $11.90, expecting to hit the high end if positive trends continue.
The company has seen significant gains in market share in the beverage alcohol sector, driven by increased marketing investments; Pacifico has become a top 10 beer brand.
Inventory levels have been rebuilt to healthy levels, and distributor inventories remain below historical averages, positioning the company well for the upcoming quarters.
Future growth is expected from both core brands like Corona and new wave brands like Pacifico and Victoria, with a focus on expanding distribution and enhancing brand saliency.
The company is confident in its cost management and marketing strategies, planning to continue disciplined capital allocation, including potential M&A like the recent acquisition of Spiked Aid.
Management highlighted a positive outlook, with strong cash flow generation enabling both shareholder returns through buybacks and dividends, and strategic investments.
Full Transcript
OPERATOR
Ladies and gentlemen, thank you for standing by. Greetings and welcome to the Constellation Brands’ fiscal year 27 second quarter earnings call. At this time, all participants will be in listen-only mode. The question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that today’s conference is being recorded at this time.
I’ll now turn the conference over to Blair Venema, Vice President of Investor Relations. Thank you. You may now begin.
Blair Venema, Vice President of Investor Relations
Thank you, Rob, and good morning, all. Welcome to Constellation Brands’ Q2 fiscal 27 conference call. I’m joined this morning by Nick Fink, our CEO, and Garth Hankinson, our CFO. Before we proceed, we trust you had the opportunity to review the news release and CEO/CFO commentary 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.
We also encourage you to 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 it over to Nick to kick things off, 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 yourself to one question per person, which will help us to end our call on time.
Thanks in advance. And now over to you, Nick.
Nicholas Fink, President and Chief Executive Officer
Thanks, Blair. Good morning, everyone. Before we get into the Q&A, I want to take a minute for those of you who may not yet have had a chance to read our posted commentary to summarize a few key takeaways from this quarter’s results, which beat our expectations. First, we are reiterating our fiscal 2027 guidance, including comparable EPS of $11.20 to $11.90 per share. And if the positive September trends that we saw continue, we would expect to land at the high end of that range.
Second, our increased investments and focus on marketing are working. We were the number one share gainer in beverage alcohol this quarter. Our beer business outperformed and accelerated meaningfully quarter on quarter. Pacifico became a top 10 beer brand with a very long distribution runway ahead of us. We’re significantly outperforming the industry, and we are seeing marketing-driven green shoots across the board. Finally, our inventory levels are healthy.
We have spent much of the first half rebuilding distributor inventory levels. And while there’s always going to be month-to-month variability, September depletions are trending in the right direction. Days on hand remain lower than our long-term average, and we entered the third quarter in a much better position. We feel good about where we are for the first half, and this entire team is incredibly focused executing from here. With that, operator, let’s please open the line for questions.
OPERATOR
Thank you. We’ll now be conducting a question-and-answer session. As we remind you to please ask one question so everyone may have a chance to participate, to ask a question today, you may press star one from your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two if you’d like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please, for our first question. Thank you. And the first question comes from the line of Nick Modi with RBC. Please proceed with your question.
Nick Modi, Analyst at RBC Capital Markets
Yeah, thank you. Good morning, everyone. So, Nick, maybe we could just kind of dig into the guidance and some of the comments you just made in the opening. I know there’s been a lot of noise, a lot of moving pieces, a lot of timing differences. Maybe you could just give us a little bit more clarity on the back half. Kind of what you’re seeing in September in terms of what’s driving the improvement. Is it just timing of Labor Day or is there something else going on and how we should be thinking about what needs to happen to get to the high end versus I think where most people are kind of configured, which is the mid to the lower point of the guide.
Nicholas Fink, President and Chief Executive Officer
Sure, Nick. Happy to try to unpack that. And I’d just start by saying we feel really good about the trajectory given the results in the first half and the trends in September, which is why we expect now to come in at the high end of the guide should those trends continue. Now, you’re absolutely right. There was Labor Day timing between August and September this year—we saw that shift—but a lot of that timing was offset by an extra sell day in Q2.
So think of Q2 as neutral. And we actually saw non-timing-related acceleration in the month of September as our college football and other programming took place, and we’re seeing a very healthy response to that. So at this point we feel there’d have to be a real reversal in trends for us to contemplate the low end of the guide, and there’s nothing we’re seeing today on either the top line or the bottom line to indicate that things are going in that direction.
That said, we do want to continue to be prudent in our assumptions and forecasts, and we are just unbelievably focused on delivering for our shareholders. And that’s just going to come back to our evolved focus on marketing, our enhanced execution discipline, and pushing the organization to continue to deliver. So, Garth, I don’t know if you have any color to add.
Garth Hankinson, Executive Vice President and Chief Financial Officer
No, Nick, I mean I think, as you said, we feel good about how we’ve delivered the first half and Q2, and we are confident on where we sit for the rest of the year. As we look at Q2 and we think about had we not shipped to the levels we did to rebuild inventories—if we hadn’t done that—we still would have come in above our expectations for the quarter. And that’s what gives us confidence that we’re in a good position to deliver on the rest of the year and, as you said, if September trends continue, to be at the high end of the guidance range.
OPERATOR
Thank you. The next question is from the line of Peter Galbo with Bank of America. Please proceed with your question.
Peter Galbo, Analyst at Bank of America
Hey, good morning, Nick and Garth. Thanks for the question. You noted that a key focus in the first half was rebuilding the beer distributor inventories and I think improving days on hand heading into 3Q. I think by our math in the first half you shipped around 8 million cases ahead of what you actually depleted. So maybe you could just help us think about the expected unwind, if any, of that inventory build in the second half. Specifically, should we expect shipments to lag depletions kind of as you normalize that inventory, or do you still expect to ship ahead of depletes for the full year?
Any framework around just the inventory movement and shipment-to-deplete dynamics would be helpful. Thanks very much.
Nicholas Fink, President and Chief Executive Officer
Happy to do that. And, Garth, feel free to add in some color. Here’s the headline I’d start with, which is distributor inventories are now in a great position, and they’re actually still lower than historical averages. So we saw an overcorrection of inventories in FY26, and we entered FY27, frankly, too light. And that resulted in us testing the lower limits of how low days on hand can go, and it actually created a number of inefficiencies in the channel, and we were doing a lot of work to make sure that we were covering off and keeping shelves full and consumers satisfied everywhere, but albeit with some inefficiencies as we were working hard to move stuff around. And so we needed to ship during the quarter to close out distributor order backlogs and avoid out-of-stocks. And so I’d say in math, if you take the undershipment in 26 and you look at what we had to ship this year to date, we’re about normal for where we would be first half of the year to meet our expectations for building inventory into the summer and then into the fall sports season, et cetera. So I would expect the back half of the year to look pretty normal compared to any other year, and for the full year we would expect shipments and depletes to track within 99% of each other.
OPERATOR
Our next question is from the line of Lauren Lieberman with Barclays. Please proceed with your question.
Lauren Lieberman, Analyst at Barclays
Great. Thanks so much. So Nick, you’re six months in now, and I think we started talking about this a little bit at the conference, and you laid it out in the prepared remarks last night how you’re thinking brands in the portfolio. And you’ve also started to talk a little bit about cost discipline, finding efficiencies in the business so you can reinvest. So we’d just love to hear you kind of six months in, you know, a big-picture thought about the organization, where there’s opportunities for efficiencies and cost discipline to allow you to keep investing for growth.
Nicholas Fink, President and Chief Executive Officer
Sure, Steve. Lauren, I’ll take that. Two parts. I’ll start with the growth opportunity and the brands. And look, as we discussed, I came in very enthusiastic knowing that we had an exceptional portfolio of brands and talent. And I’ll tell you that spending time out in the field and spending time with our customers and spending time with our sales folks as well as our marketing teams, et cetera, only reinforced that. And actually getting into some of the data behind our brands has only left me more enthused.
This is an incredibly healthy portfolio. There’s no question we’re a growth business and we need to get that engine humming again. And that’s going to take sustained work across marketing, brand positioning, commercialization, products, packs, et cetera. And I think we talked about at the conference as well, there are opportunities for us to get more organized and tighter in our execution and discipline behind that brand work. If I start and look at our scaled brands, there are jobs to be done there that are different to the work that we’re doing scaling our new wave brands.
And we’ve started that work and we’re starting to see some of the green shoots come across from that. And I talk about this often because I think it will be a great case study. Take Corona, for example. You know, we put more behind Corona. We got more focused on, I’d call granular execution of that brand. It’s not a brand that requires awareness driving. It’s a brand that requires saliency. And we’re seeing some green shoots already. Share has stabilized.
If I look at Circana data, our 12 week is better than our 52 week and a 4 week is better than a 12 week. Right. So I’m not satisfied with where it is, but it’s trending in the right direction. Lot better than it was a year ago. I’m looking at Modelo. You’re seeing a nice stabilization of that business. And we know that there are pockets of growth that we can go after both with our Hispanic consumer. But you think about the fall, we’re getting into football season.
That’s the middle of the country, that’s general population, where awareness on this brand is actually incredibly low. A lot of opportunity go there. And so it’s different to what might have gotten us here and how we go about now building those brands. You then move over to the middle, which is scaling our next wave of brands. This is where the company’s playbook is second to none, just world class. And you can see where Pacifico, compounding at something like a 20% growth rate year to date as the number 10 brand already.
It’s not a small brand and yet it’s powered at that kind of growth rate. And you have Victoria performing similarly behind that. And then we’ve said, you know, we’re going to have to access some areas where the consumer is and where the growth is. And, you know, whether we’re doing that organically through things like our NA portfolio, which is gaining more and more traction, you got Corona NA now number three, by the way. Not satisfied with it being number three.
But there’s a whole lot more we can put behind that. And you’ll see us do that. And then something like Spiked Aid, which is the hottest subcategory of the subcategory right now. And, you know, we’ve been able to get into a leading position in a very disciplined way with a huge runway ahead of us to take the Constellation Brands machine and muscle and go build that business. So, you know, I’m feeling, as you can tell, quite enthusiastic about the growth opportunities ahead of us.
And then the second part of your question about, you know, the state of the organization in terms of its ability, you know, is it lean? Can it fuel this? You know, we’ve done a great job over the last several years driving cost efficiencies, I think about $600 million since Investor Day. But I believe we can be more systematic and programmatic about how we go after that. And the best consumer companies have a multi-year continuous improvement program.
And that is built up where we would have visibility to the activities that are going to drive margin and fuel for growth four years from now. And with the team in place, we’re now putting that, and I think that is going to turbocharge our ability to sustain margins as well as reinvest for future growth. I don’t have anything to add.
Garth Hankinson, Executive Vice President and Chief Financial Officer
Well, yeah, as we’ve said previously, and I think as you’ve all seen in our results, getting our capacity build behind us has freed us up to focus on driving those sustainable efficiencies on our business as well as stepping up our free cash flow generation. You know, as we’ve evolved from a builder to an operator, we’ve already generated significant savings in our results, and as Nick just mentioned, the $600 million since Investor Day, and we’re not done there.
There’s still a lot of opportunity for us as we continue to take the company on a more focused journey and increase our level of operating excellence. So certainly more to come.
OPERATOR
The next question is from the line of Chris Carey with Wells Fargo. Please proceed with your question.
Chris Carey, Analyst at Wells Fargo
Hi, good morning, everybody.
Nicholas Fink, President and Chief Executive Officer
Morning, Chris.
Chris Carey, Analyst at Wells Fargo
I wanted to go back to, you know, recent expectations and guidance, kind of this topic. I think there was a view coming out of the conference earlier or last month that there was incremental pressure on inflation in the back half of the year and that was going to impact your gross margins. Specifically, I think today, based on the guidance, and correct me if I’m wrong, gross margins are implied to be up in the back half of the year, which I think is surprising to some people today.
Can you just give us a sense of did people interpret the back half gross margin expectation wrong? What is delivering that expansion into the back half of the year? And I think maybe what’s underlying the question is whether you have good cost exposure this year and whether that’s going to, inflation will kick up going into fiscal 28, when perhaps you have a bit more depreciation coming on on Veracruz. So I know that’s a lot, but I think that’s a key theme this morning and I would just love for you to dig a bit deeper into that and help contextualize this dynamic for us.
Thank you.
Garth Hankinson, Executive Vice President and Chief Financial Officer
Yeah, Chris, as you said, there’s a lot there to unpack. So let’s try. And Nick, you can weigh in here too if you like. So first, I think that there probably was a little bit of confusion coming out of the conference last month as we noted those headwinds. We also noted that we expected to deliver the business in line with guidance, which we said at the conference, and obviously we’re saying here again today. As you look at the second half of the year and our expectations for beer margins, we expect to come in in the second half at 34.5% to 35.5% operating margins.
This is pretty normal for us from a seasonality perspective, as you know, the second half of the year is our lowest volume period. So we have less fixed cost absorption in the second half. This is also the point of the year where we go through maintenance capex, which has an impact on margins. We do expect to have a higher percent of SG&A in the second half of the year as it was in our commentary. That should be around 7% in the second half of the year.
That’s driven largely by short-term incentive compensation where last year we had a lower level of accrual, and so it’s an overlap issue for this year. We also intend in the second half of the year to continue to support the brands. As Nick laid out, we’re seeing real green shoots from the marketing initiatives that we have underway, and you know, we’re confident in the results that they are providing. And that’s evidenced by our leading share gains as we pounded through the first half of the year.
And so from a marketing perspective, in the second half of the year we expect marketing to be about 10% of net sales, but in the third quarter this will be above 11% as we continue to lean into our investments in Major League Baseball and in NCAA football. You brought up next year and the impact of Veracruz. I’d like to just say we are progressing nicely on Veracruz. We had expected to bring Veracruz online this fiscal year. Progress continues. We’re about 85% done with the site.
There’s still some work to be done on utilities, site works on roads and things of that nature. So our expectation now is to bring that online in the first part of our fiscal year. When we do bring that online, the depreciation impact on an annualized basis will be about $75 million. And on an annualized basis, that’s about 90 basis points of margin headwind.
OPERATOR
Our next question comes from the line of Bonnie Herzog. Oh, excuse me. I’m sorry. Pardon. Did you have anything else to add? Thank you. The next question will be coming from the line of Bonnie Herzog with Goldman Sachs.
Bonnie Herzog, Analyst at Goldman Sachs
All right, thank you. Good morning, everyone. So you continue to demonstrate disciplined capital allocation and then as the heavy beer investment cycle winds down and free cash flow inflects, how are you thinking about the balance between debt paydown, organic investment, M&A, and share repurchases? I guess I’m ultimately wondering what should we expect for the pace of buybacks? Thanks.
Garth Hankinson, Executive Vice President and Chief Financial Officer
Yeah, Bonnie, thanks for the question. I mean, I think, as you can see in the results, we remain very active in repurchasing shares in the second quarter and year to date. We’ve now bought back $530 million worth of shares. I think over the last few years we’ve developed a strong track record of buying shares back in a programmatic way, but also through accelerating repurchases when we see a dislocation in our stock price versus its intrinsic value.
And that approach is going to continue, you can expect that to remain the case. Given our strong cash flow generation and the $2.5 billion that we have left on our repurchase authorization that runs through FY28, we have the flexibility and the capability to repurchase more shares. And I think we’ve demonstrated that we’re very shareholder friendly and we continue to expect to be so. Anything you want to add, Nick?
Nicholas Fink, President and Chief Executive Officer
Yeah, just to add with respect to the M&A part of your question, we feel we’re going to have the flexibility to do, frankly, both and to drive the highest value creation for our shareholders as long as we’re doing it in a very disciplined manner. And I think we got an announcement, a small acquisition here, but I think it’s a good example of a framework that the company will use for doing things in a highly disciplined way. We’re very excited about adding Spiked Aid to the portfolio.
We think that brand’s going to approach 2 million cases for calendar ’26. So it will be accretive to growth next year. And yet we’ve gotten this done for probably somewhere in the same zip code as it would take to develop and launch a new organic innovation without a track record of success already. And so I look at something like that and here’s an example of, you know, we’ll be happy to pay for it if it’s hyper successful and if not, we’ve already gotten something that’s got some real momentum behind it that will be accretive next year.
And we’ve done it in a highly disciplined way and I think, you know, I’d look to that as an indication of how we’re thinking about M&A going forward.
OPERATOR
Thank you. The next question is from the line of Kaumil Gajrawala with Jefferies. Please proceed with your question.
Kaumil Gajrawala, Analyst at Jefferies
Hey guys, good morning. You know, if you think about marketing spend, there was a lot of reasons for a big step up in the first half of the year. Obviously World Cup was part of it. I hear lots of indications from you, at least on this call and in your comments, on continuing the pace. Does that mean the right level is that same new higher level that you had earlier in the year? Maybe that’s college sports, maybe that’s something else. But what should be the correct run rate when we try to sort of adjust for a once in every four years event that happened recently?
Nicholas Fink, President and Chief Executive Officer
I’ll share some perspectives and go ahead and give some more color around the reinvestment rate. But I’d start the headline: we believe we’re reinvesting at a healthy rate now. We’re a branded company. I talked a little bit earlier about this company needs to be a growth engine and that growth is going to be driven by our brands and the relevance and saliency of our brands to our consumers. And there are specific things we can do, drive distribution, drive awareness, drive relevancy that we know how to do.
And marketing is critical to that. You brought up the World Cup as interesting, a major event but wound up being disappointing from industry expectations. So what was the learning from that event for us? I mean a couple things. Firstly, I think we did it in a very thoughtful and disciplined way. And the way we went about executing that, we came away as—I’m going to say it—the winner of World Cup because we had three times more market share gains in beer than the next best competitor, which was 400 basis points of outperformance versus the category.
And we did that with significantly less spend than other people. So it’s an execution machine. Now we won’t have a big lap from World Cup next year because most of the benefit we got from World Cup was share gains on-premise. We saw the off-premise being fairly flat. But what we did learn from it is it’s an opportunity to re-engage consumers and younger consumers around the beer occasion, around sports. And so it doesn’t have to be every four years.
It can be the operating model through which we engage consumers in the category. So you’ll see us continue—college football’s coming up. Right. We talked about we saw a really healthy September as that programming started to roll out and the teams think forward from that. I expect more from us over the next coming weeks and months as we talk about how we’re going to use this type of programming to drive awareness all the way through to shelf and the kind of activation that you might see above the line, all the way through the line into retail at store.
And a big takeaway from it is this is an opportunity for us to continue to win in this space and that we know how to do that. So it doesn’t imply higher spending. It implies that we think we’re at good levels and you’re going to see us continue to drive the portfolio outperformance with our brains and our know how.
Garth Hankinson, Executive Vice President and Chief Financial Officer
Yes. I mean, I think the only thing that I would add to that is as Nick has said, we’ve tested the limits on a number of things and I would say that we feel comfortable with the amount of marketing spend that we’re going to have this year on a full-year basis. In the last couple years we probably underspent a bit from where we should have been. And so we’re getting that marketing spend back to what we think are the most healthy levels in order to drive the top line in the manner in which we want to drive the top line.
That being said, we hold ourselves very accountable and have a very disciplined approach to how we measure the effectiveness and the returns generated by our marketing spend and we’ll continue to do that. But again, at this point we feel good with the levels that we’ll have on a full-year basis.
OPERATOR
Our next question is from the line of Filippo Filarni with Citi. Please proceed with your question.
Filippo Filarni, Analyst at Citi
Hi, good morning everyone. I wanted to go back to your comment, Nick, about the September improvement. I was hoping you can give us a little bit more color on where you’re seeing the improvement from a channel standpoint. And I’m asking this because we don’t really see a material acceleration in the tracked channel. So is it coming mainly from the on-trade piece? Maybe the off-premise on-trade or on-premise continuing to do well? So any color you can give there and especially given the off-premise on-trade is very tied to the Hispanic consumer base.
Are you seeing any signs of improvement there? That will be very helpful. And then a quick follow-up on pricing in beer: price/mix was flattish for the quarter. You called out being a little bit more cautious on the price increases. How should we think about that evolving in the back half of the year? Thank you.
Nicholas Fink, President and Chief Executive Officer
Yeah, I hope to give some color and more color on the pricing equation. I’d say that the September recovery we saw was pretty broad-based and, you know, as I said earlier—it went well beyond, and we couldn’t test this—it went well beyond just the timing of Labor Day. I mean, if you just count that on a gross basis, it was a very sharp recovery. I think, you know, we kind of feel that there was some very healthy growth in September, but it was broad-based.
We saw, kind of, consumers across the board engaging in the category. I think, you know, as we look at channels right now, we are continuing to see some strength in club in particular. I think particularly with fuel prices, it’s been a place that we’ve seen consumers go and that leans really well into our relationships there. And so that’s a place where we’ll continue to lean in. Of course, international accounts, but even in C-store, getting that mix right and getting the consumer proposition with the right product, right pack at the right place for that consumer is key to winning in those channels where consumers are looking for different things at different moments. Short answer is pretty broad-based, but our ability to dial in the right mix and right portfolio and right offering within the channels I think is also helping the cause here. And then just with price, I’ll say a quick few words—Garth may give a bit more color—but I’d say philosophically we believe in this portfolio, it’s a strong portfolio of brands and we believe in our long-term ability to drive our pricing algorithm.
We also have the financial flexibility to move up and down. We talk about our pricing algorithm somewhere between 1 to 2%, generally speaking, over the long run. I think you’ll see us in there. If we think we can sharpen competitiveness by being at the lower end, we have the financial flexibility to do that. And so we’re spending a lot of time looking deeply at our elasticity, consumer, the opportunity, the pack-price architecture. Are there price gaps, places we can go, value we can offer?
And I think you’ll see us get much sharper at that over time, which in turn will also help us drive the growth of our larger brands.
Garth Hankinson, Executive Vice President and Chief Financial Officer
Yeah, just to pick up from where you left off, Nick. I mean there really is no change to our pricing discipline. I mean we continue to think that we’ve got the right approach on a very disciplined and methodical basis—looking at markets, looking at brands, looking at SKUs. As we entered into this year, we did say that we intended to be at the lower end of that range as we’ve been selective with our pricing actions, given the macroeconomic backdrop and the impact that that’s having on our consumer.
And as we’ve always said, it’s much more cost-effective to retain your consumers than it is to try to regain your consumers. Now specific to Q2: in Q2, pricing net of mix was roughly flat. That is reflective of an impact of mix headwinds, commercial investments to support demand through distributor incentives and couponing, and then the carryover from our high-end light beer portfolio repositioning, which was a 25 basis point headwind in the quarter.
OPERATOR
The next question is from the line of Dara Mahassine with Morgan Stanley. Please proceed with your question.
Dara Mahassine, Analyst at Morgan Stanley
Hey, good morning, guys. So, Nick, I just wanted to spend some time discussing what attracted you to spiked aid strategically, but also really wanted to use the specific deal in the context of if we should expect a broader push into RTDs from an M&A standpoint. Obviously it’s a high-growth segment within alcohol, but also one where barriers to entry or sustainability of brands have been lower. So I just wanted to understand broad thoughts around the RTD space and the opportunity you see there and how STZ capabilities may or may not apply to that space and, again, how aggressive STZ might be in expanding further into RTDs.
Nicholas Fink, President and Chief Executive Officer
Sure. And why don’t I start with the second part of your question first and I’ll talk about selective in particular on the category itself. Look, I’ve said from the outset we have to remain relevant to our consumers and to our customers. There is no question in my mind that the vast majority of the value creation in our portfolio is going to come from beer. And we are steadfastly focused on beer. And we have a family of brands that are incredible and powerful.
And if I can get some growth out of the big ones and continue the journey of the Pacifico and Victoria, that alone will create enormous value. But that doesn’t mean that there isn’t capacity in our system to dial in other areas of growth and just—you know this, but just as a reminder—our portfolio is so simple today we have one-fifth the complexity of the next least complex competitor. And so what our distributors are telling us is there are spaces that are growing and we want you to get into those spaces.
By the way, they’re going to distribute these products whether they’re owned by us or not. So it’s an opportunity to dial up. And so I think as we look at that, we see the opportunity but very conscious of the point that you just raised, which is what is the sustainability of these brands? Where do we think things are going to last over long term, where’s it worth putting in the investment? And this is a discussion that’s happening not just on M&A, but on the organic things that you will see us put into market and launch as we access points of growth.
I’ll tell you, flavors aren’t new. Flavors have been around forever. What’s new is the amount of iteration around it, the amount of shelf that’s given to it, the consumer’s desire to experiment. And so as we look at that, we go, look, the long-term trend is there. It’s always been an access point. What we can do is leverage that access point to find new occasions. Might be our consumer in a different occasion might look for a product like this. And so we will look at this space.
We’ll be very disciplined about where we choose to participate because, to your point, some things aren’t sustainable and we don’t want to chase things down rabbit holes. And spiked aid’s a great example of that. We’ve looked at plenty of things—there’s a very long list of things that we would not do. But we looked at this one and we saw something that was the first mover in the category, a category that is actually differentiated, brings something new and different to the consumer, mimics an existing consumer behavior—aid and vodka we know as being mixed on certain occasions.
And so now this is just a more convenient format. A brand positioning that’s incredibly telegraphic, tells the consumer exactly what it is. And from a value creation standpoint, a long, wide-open runway for Constellation to go flex its muscle and demonstrate what it can do from both a brand-building perspective where we think we can bring some value and also a distribution runway perspective where this is still wide open and our distributors are primed and ready to go after this and make this the winning brand in the category.
And so those capabilities are there. What we’ll also have to be able to demonstrate is that we can also come with the type of iteration, pack-price architecture, extensions if necessary to keep the brand fresh and relevant. So we’re well aware of that. And finally we’ll also be demonstrating our integration capabilities, which we’ve honed in other parts of the business, and actually at this point have a pretty good track record of taking smaller businesses, integrating them and scaling them really well.
And we’re going to take that capability and deploy it on this. And so I think this will be a good case study for what we can do.
Garth Hankinson, Executive Vice President and Chief Financial Officer
Yeah, and the other thing I want to add to that, Nick, is that given our strong cash flow generation, we have the ability to be able to do this very disciplined M&A, finding the right target, striking the right deal, structuring it in the right nature to enhance our portfolio. And we have the ability to continue to return cash to shareholders through share repurchases and our dividend policy.
OPERATOR
Our next question is from the line of Rob Ottenstein with Evercore ISI. Please proceed with your question.
Rob Ottenstein, Analyst at Evercore ISI
Great, thank you very much. I’m wondering if you could give us your updated views on Victoria. Maybe give us a sense of, in its strongest zip codes or towns or however you measure it, what kind of market share it has, how incremental is it and, you know, dream the dream — next five, 10 years, how big do you think it can be?
Nicholas Fink, President and Chief Executive Officer
Thank you. Yeah, well, you know, I’ll give you some thematic thoughts around it just for a starter and add some color. But before I even actually answer the question for Victoria itself, I think what I want to highlight about Victoria as well as the other brands in the beer portfolio is the work that we’re doing to develop very distinct lanes for each of our brands. Because if we have distinct lanes for each of our brands, they will play as a portfolio with significantly more incrementality than if they sit on top of each other.
So that’s how we’re developing them. So you’ll see specific work from Corona, you’ll see specific work from Modelo, Pacifico — just been through the marketing and activation plans for next year, highly differentiated from the other brands, will play in a really exciting space. And then Victoria, to answer your question, is really going to live in the space of a very authentic Mexican brand. We only advertise today in Spanish. It is our consumer who might travel across the portfolio, but in that particular occasion of either sitting with family, discovering the culture, returning to the roots of authenticity, that is the brand that will play there. And so we’ve built that very, very specifically and we’ve seen the brand respond well. I mean, off the top of my head, the growth for the first half of the year is mid-teens compounding — not a small base — but we think that there is a lot of runway to go and take a brand like that which is growing right alongside Pacifico. Pacifico now number 10 brand in beer, which was compounding at closer to 20%. And they’re living in very different spaces.
And what gets me excited about it is the fact that we can co-develop those things and access different occasions in different spaces. You said, so dream the dream. I mean, the dream is you build these things alongside each other really for different occasions. And they can live and play together with the rest of the portfolio — Corona, Modelo — and continue to build. It’s still so very strong out west. And that, like a Pacifico and in fact like a Modelo, also gives us a lot of runway to build distribution and awareness very deliberately around the coast and then into the center of the country.
Garth Hankinson, Executive Vice President and Chief Financial Officer
No, I think that’s pretty complete.
OPERATOR
The next question is from the line of Steve Powers with Deutsche Bank. Please proceed with your question.
Steve Powers, Analyst at Deutsche Bank
Hey, thanks very much. Appreciate it. Nick, as you think about, I guess, Constellation’s medium-term growth in the context of the three pillars that you’ve outlined and you were just speaking to, is there a way to dimension maybe how you expect contributions to divide among them? Because I think, to me, the pillars individually each make good intuitive sense. But I’m still left with a question of to what degree, in your mind, the focus is still on sustaining growth in scale brands like Modelo and Corona versus how strongly focus may be shifting towards those next-wave brands or to newer demand spaces such as what we’ve talked about with Spiked Aguas Frescas. I think maybe some further context there would be helpful. And then, Garth, if I could, just to clean up on Chris’ gross margin question from earlier in the call, it sounds like the Veracruz shift is a modest benefit to the second half that we should consider on beer margins going into ’28, I guess. Is there anything notable on how you’re contracted or hedged on other operating costs that could be an advantage in ’27 that could trigger a catch-up in ’28 should current conditions hold?
Thanks for that. Appreciate it.
Nicholas Fink, President and Chief Executive Officer
All right, so I’ll start and give you some conceptual things. We don’t currently have midterm guidance out there, so I don’t want to get ahead of it too much. But I’ll give you some thoughts, which is if you look at scaling our next-wave brands, you can see the growth there. I talked about what Pacifico is doing. I talked about what Victoria is doing. By the way, we have Mi Campo, which — homegrown innovation launched from scratch — compounding at 50% right now, expect that to be a multi-million case, full-strength spirits brand.
Spent a lot of time in spirits. I know how hard that is to do. Our distributors are fully behind it. And so, you know, there’s not just a couple — I mean, there’s a track record here of our ability to take things that have momentum and scale them. You know, next wave — you can see what the category is doing. You can see what NA is doing, I would put in there, and the speed at which that’s growing and our ability to get that to scale. By the way, if that scales to anything close to, say, where you see some of the mix in places like Europe, we expect that to be a massive opportunity for the company, and we expect to grow within that space.
You see something like Spiked Aguas Frescas — I said approaching 2 million cases already in calendar ’26 and just getting started. So you can start to dimensionalize, at those growth rates, what might happen there. And then to come back to the core of your question — okay, so you’ve got some stuff that scales. What do you do with that? I’ve spent the better part of the last six months peeling every piece of data back on our big brands and looking at where’s the chink in the armor?
And I gotta tell you, these are some of the healthiest brands I’ve ever seen in my career. And so then the question comes, well, what else should we be doing? And I think that comes down to a more mature set of capabilities around running things that are large and at scale, and things like pack-price architecture, relevancy, showing up every day in people’s lives, not just from an awareness perspective but activating at their point of consumption.
It’s dialing in that toolkit. And when I look at that and when I look at the brand shares, when I look at historically how some beer brands have been able to grow, when you’ve had leadership in the industry engaging consumers — which we may not have had for a long time, notwithstanding the fact that I think Constellation’s brought that — but now it’s getting to a scale where it can really lead the industry. There’s a lot of runway on the growth of our bigger brands.
You take our biggest market, California — the Dallas 20s — that’s by no means the ceiling for a beer brand. You then go to markets like New York and Miami, where it’s big but plenty of room to go. And then you’ve got, in the middle of the country, awareness doesn’t even register, which is why you see us doing things like college football and accessing people. Similarly with Corona, as we started to turn the dial on Corona, we’re seeing really great response in markets like New York and Miami, which are culturally important markets where the brand is now starting to gain share again and consumers are reengaging with it.
And I’ll tell you, that was a pretty blunt instrument of coming in and saying, we’re going to focus on these things after our marketing plans were set for the year. And Millie, Garth and I worked to kind of dial up the investment and challenge the team to come up with new ideas. The plans that they’ve set for ’28 now, with the benefit of some time to work on it, are much more granular. And so, longer term — to cue the headline — I expect that part of the business to grow.
It’s not going to grow at the same rate as a Pacifico, but we expect that part of the portfolio to grow.
Garth Hankinson, Executive Vice President and Chief Financial Officer
And on the point around Veracruz — I appreciate the opportunity to clarify that. We expect to put Veracruz in service in the beginning of our fiscal ’28, and the depreciation and impact on margins that I articulated will start to occur when we put that in service. And again, that is in fiscal year ’28. As it relates to some of the other costs that we’re managing across the P&L, we’ve been very active in terms of managing our commodities and currencies as we’ve seen opportunities throughout the fiscal year at moments of weakness.
And there have been periods of time where there has been weakness. We’ve layered in incremental hedges for this year. And in this fiscal year we are highly hedged across all commodities and currencies — over 90% or at 90% for most — with the exception of diesel, where we’re kind of fully hedged for the year. And we’ve used the opportunities of weakness to layer in incremental hedges to help protect the P&L for FY28 and beyond, as is typical with our normal hedging process.
Nicholas Fink, President and Chief Executive Officer
I’ll just add on that point, because it’s come up a couple times now as we think about inflation. I’m not sure there’s been a year in my career not managing a business with inflation — all the way back to when healthcare inflation was off the charts. What great companies do is get ahead of that and run across the agenda to offset their inflation to sustain their margins and drive fuel for growth. And I just want to make that point very simply, because we’ve had a great program to date, but I think you’re going to see it get more programmatic, more systematic.
And that’s part of our jobs.
OPERATOR
Thank you. Our last and final question comes from the line of Carlos Lavoie with HSBC. Please proceed with your question.
Carlos Lavoie, Analyst at HSBC
Yes, thank you very much. Nick, can you expand on your diagnosis of insufficient saliency for Corona Extra a little bit more? But beyond saliency, how do you think about Corona’s utility and relevance? In other words, is Corona competing less effectively for a role within people’s lives, and are there adjustments that are maybe still necessary, particularly with younger beer consumers, since the way they live their lives has certainly changed over the last several years?
Nicholas Fink, President and Chief Executive Officer
Yeah, I think that’s a great question. Right? You got to throw the brand data in each other. Like, okay, well, what’s the chink in the armor? It’s got high awareness, but it’s not relevant to people. And I tell you, we’re happy to share some of this stuff. We go through it, you find great awareness. Most loved beer brand. Most loved beer brand by Gen Z. Most famous Hispanic brand in the world. I could go on and on and on. You step back from it and go, and I think it should be a challenge to us, if you have that kind of an asset, why aren’t we seeing greater performance on it?
That’s a challenge to put to the team. And in my mind it is part of what is the playbook that you use to go after this. And so it could be everything from when you talked about fancy utility, relevance. I mean, I agree consumer is more occasion based. Right. Don’t depend on them for repertoire. Like, what’s the moment, how are they coming together, and then are we present there? Right. So we do a lot of big awareness building, but do we still own the bucket at the beach bar?
Have we given some of that up? And so do we need to redirect some of our knowledge into doing things like that? And you’re going to see us be more active in music, sports, at the beach, actually showing up in those moments and being part of that cultural fabric. But it also goes beyond that. We have to look at our pack-price architecture. Do we have the right product at the right price point in the right channel for the right consumer? We’re the leader in small sizes, the maximum share of small sizes.
We’re the leader in large sizes with the messenger large sizes. How do we pull those levers to be much more granular about how we use those sizes and packs to show up exactly where our consumer is? And so those are the types of challenges put to the team. And again, I think we saw a rapid response this year and I’m not satisfied with the result, but I’m encouraged that we’re bending the trend. You’re not seeing it in the share loss column and we’re gaining share in two of the most culturally relevant markets that we’re in, as well as whatever period you look at, the data is getting better.
What I really want to see as we get into next year, and now seeing the plains is us gets more granular in how we deploy the dollars to do the kinds of things I just described. And I’m pretty encouraged that we will see that brand respond well. Why I am passionate about it is we can prove that we can do this under Corona. We’ll be able to prove we can do this on any other large-scale brand and we intend to build large-scale brands in this company.
OPERATOR
Thank you. At this time we’ve reached the end of our question and answer session and I’ll turn the floor back to Nick for closing comments.
Nicholas Fink, President and Chief Executive Officer
All right, well, thank you everyone. I appreciate, really appreciate you joining the call today and the thoughtful questions. I’d also like to thank the Constellation Brands team who has shown exceptional focus as we’ve executed across these strategies. And I’m really excited about what we’re seeing in the business, confident in our path forward and I think there is plenty of goodness to come. So with that, thank you everyone and have a good day.
OPERATOR
Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today’s conference. You may now disconnect your lines at this time and have a wonderful day.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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