Constellation Brands, Inc. (STZ) Q2 2027 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Greetings, and welcome to the Constellation Brands Fiscal Year 27 Second Quarter Earnings Call. [Operator Instructions] Please note that today's conference is being recorded. At this time, I'll now turn the conference over to Blair Veenema, Vice President of Investor Relations. Thank you. You may now begin.

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.

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 #1 dollar 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 on executing from here. With that, operator, let's please open the line for questions.

[Operator Instructions] And then first question comes from the line of Nik Modi with RBC.

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 kind of 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?

Sure, Nik. 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 timing -- 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 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?

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.

The next question is from the line of Peter Galbo with Bank of America.

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.

Sure, Pete. 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 FY '26, and we entered FY '27, 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 our 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 your 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 ships and depletes to track within 99% of each other.

Our next question is from the line of Lauren Lieberman with Barclays.

Great. So Nick, you're 6 months in now, and I think we started to talk about this a little bit at the conference and you laid it out in the prepared remarks last night, how you're [indiscernible] different brand in the portfolio. And you've also started to talk a little bit about cost discipline, finding efficiencies in the business that you can reinvest. So would just love to hear you kind of 6 months in, a big picture thought about the organization, where there's opportunities for efficiencies and cost discipline to allow you to keep investing for growth.

Sure. Lauren, I think that's kind of 2 parts. And 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, has 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, right, 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, right? And so if I start and look at our scaled brands, that 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. I take -- and I talk about this often because I think it will be a great case study. Take Corona, for example. 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 our 4-week is better than our 12-week, right? So I'm not satisfied with where it is, but it's trending in the right direction, a lot better than it was a year ago. I'm looking at Modelo, right? 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 get into the football season, that's the middle of the country, right? That's general population where awareness on this brand is actually incredibly low, a lot of opportunity to 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. And 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 #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 we're going to have to access some areas where the consumer is and where the growth is and whether we're doing that organically through things like our NA portfolio, which is gaining more and more traction. You got Corona NA now #3, by the way, not satisfied with it being #3, but there's a whole lot more we can put behind that, and you'll see us do that. And then something like SpikedAde, which is the hottest subcategory right now, and 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 machine and muscle and go build that business. So 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 the state of the organization in terms of its ability, is it lean? Can it fuel this? 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 multiyear continuous improvement program and that is built out where we would have visibility to the activities that are going to drive margin and fuel for growth 4 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. So Garth, I don't know if you have anything to add?

Well, yes, 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 in our business as well as stepping up our free cash flow generation. 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 increasing our level of operating excellence. So certainly more to come.

The next question is from the line of Chris Carey with Wells Fargo.

I wanted to go back to 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 kind of 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 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.

Yes, 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% of 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 of the year. 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 were -- 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 we're confident in the results that they are providing, and that's evidenced by our leading share gains as we've gone 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 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.

Our next question comes from the line of Bonnie Herzog -- I'm sorry, did you have anything to add? The next question will be coming from the line of Bonnie Herzog with Goldman Sachs.

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?

Yes, 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 FY '28, we have the flexibility and the capability to repurchase more shares. And I think we've got -- we've demonstrated that we're very shareholder friendly, and we continue to expect to do so. Anything you want to add, Nick?

Yes. Bonnie, I'd just 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 what we've got announcement of 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 SpikedAde to the portfolio. We think that brand is 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 [indiscernible] look at here's the example of we'll be happy to pay for it if it's hyper successful. And if not, we've already gotten something that 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 I'd look to that as an indication of how we're thinking about M&A going forward.

Next question is from the line of Kaumil Gajrawala with Jefferies.

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 4 years event that happened recently?

I'll share some perspectives and Garth may give some more color around the reinvestment rate. But as sort of 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, right, 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 an interesting, right, a major event that wound up being disappointing from industry expectations. So what was the learning from that event from us? I mean, a couple of things. Firstly, I think we did it in, again, a very thoughtful and disciplined way in 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 3x 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-coast being fairly flat. But what we did learn from it is it's an opportunity to reengage consumers and younger consumers around the beer occasion, around sports. And so it doesn't have to be every 4 years. It can be the operating model through which we engage consumers in the category. So you'll see us continue. College football is 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 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 from the space and that we know how to do that. And 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 brands and our know-how.

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 of years, we've 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.

Our next question is from the line of Filippo Falorni with Citi.

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 track channel. So is it coming mainly from the untracked piece, maybe the off-premise untracked or on-premise continuing to do well. So any color you can give there and especially given the off-premise untrack is very tied to the Hispanic consumer base. Are you seeing any signs of improvement there? That would 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?

Yes, I'll give some color and might get a bit more color on the pricing equation. I'd say that the September recovery we saw was pretty broad-based. And 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 very strong recovery. I think we kind of filtered that out and 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 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, in national accounts, but even in C-store, like getting that mix right and getting the consumer proposition to 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. And so the short answer is it is pretty broad-based. But our ability to dial in the right mix and the 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 little more color. But I'd say philosophically, we believe in this 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 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 of the 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.

Yes. 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 couponings and then the carryover from our high-end light beer portfolio repositioning, which was a 25 basis point headwind in the quarter.

The next question is from the line of Dara Mohsenian with Morgan Stanley.

So Nick, I just wanted to spend some time discussing what attracted you to SpikedAde 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 want 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?

Sure. And why don't I start the second part of your question first, and I'll talk about SpikedAde in particular. On the category itself, look, I mean, 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 -- and I know you know this, but just as a reminder, our portfolio is so simple today. We have 1/5 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 the long term, where is 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 say flavors aren't new. Flavors has been around forever. What's new is the amount of iteration around it, the amount of shelf that's given to it, the consumers' 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 in rabbit holes. And SpikedAde is a great example of that. I mean we've looked at plenty of things. I mean [indiscernible] there's a very long list of things that we would not do. But we looked at this one, we saw something that was the first mover in the category, category that is actually differentiated, brings something new and different to the consumer, mimics an existing consumer behavior, right? [indiscernible] and vodka, we know is 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. But 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 have honed in other parts of the business. And actually, at this point, we 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.

Yes. And the only 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 deals, structuring them in the right nature to enhance our portfolio, and we have the ability to continue to return cash to shareholders through cash -- through share repurchases and our dividend policy.

Our next question is from the line of Rob Ottenstein with Evercore ISI.

Great. 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 dream the dream next 5, 10 years, how big do you think it can be?

Yes. Well I'll give you some thematic thoughts around it just for a starter and Garth, if you want to add some color. But before I actually answer the question on 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, right? 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. And so that's how we're developing that. 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 very authentic Mexican brand. We only advertise today in Spanish. It is our consumer who might travel across the portfolio that 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, I think 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 #10 brand in beer, which is compounding or closer to 20%, and they're living in very different spaces. And what gets me excited about it is that the fact that we can codevelop those things and access different occasions in different spaces, you 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 -- [indiscernible] less than that like Pacifico and in fact, like Modelo also gives us a lot of runway to build distribution and awareness very deliberately kind of around the coast and then into the center of the country. Garth, you want to add anything?

No, I think that's pretty complete.

The next question is from the line of Steve Powers with Deutsche Bank.

Nick, as you think about, I guess, Constellation's medium-term growth in the context of the 3 pillars that you've outlined and that you're 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 scaled 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 talked about with SpikedAde. 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 to '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?

All right. So I'll start and give you some conceptual things as I don't want to -- 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, right? I talked about what Pacifico is doing. I talked about what Victoria is doing. By the way, we have Mi CAMPO, which is a homegrown innovation, launched from scratch, compounding at 50% right now. Expect that to be a multimillion case full-strength spirits brand. From a lifetime in spirits, I know how hard that is to do. Our distributors are fully behind it. And so 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. Next wave, I mean, you can see what the category is doing. You can see what NA is doing that 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 go win in that space. You see something like SpikedAde, I said they're approaching 2 million cases just already in calendar '26 and just getting started. So you can start to dimensionalize, right, 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 at scale. What do you do with that? I've spent the better part of the last 6 months peeling every piece of data back on our big brands and looking at where is the chink in the armor, and I got to tell you that 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 before things like pack price architecture, saliency, relevancy, showing up every day in people's lives, not just from awareness perspective, but activating at their point of consumption, right? 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 has brought that, and now it's getting to a scale of -- it can really lead the industry. There's a lot of runway on the growth of our bigger brands. I mean, you take our biggest market, California, [indiscernible], 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 open in the middle of the country. And awareness doesn't even register, which is why you see us do things like college football and accessing people. Similarly with Corona, I mean, as we started to turn the dial on Corona, we're seeing a 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 really 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 set for '28 now with the benefit of some time to work on it are much more granular. And so longer term, to the headline, I expect that part of the business to grow. It's not going to grow at the same rate as Pacifico, but we expect that part of the portfolio to grow.

Yes. And on the point around Veracruz, so I appreciate the opportunity to clarify that the -- 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 have 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 protect the P&L for FY '28 and beyond as is typical with our normal hedging process.

I'll just add on that point because it's come up a couple of times. As we think about inflation, look, I'd say I'm not sure there's been a year in my career that I can remember where there hasn't been some inflation all the way back to remembering when health care inflation was off the charts. So what great companies do is get ahead of that and run a cost agenda to offset the inflation to sustain their margins and drive 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.

Our last and final question comes from the line of Carlos Laboy with HSBC.

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?

Yes. I think that's a great question, right? And so you go through all the brand data and you like, okay, well, kind of what's the chink in the armor? Is it that it's got high awareness, but it's not relevant to people. I'll tell you we're happy to share some of this stuff we went through it. You find great awareness, most loved beer brand, most loved beer brand by Gen Z, most famous Hispanic brand in the world, and I could go on and on and on. And so you step back from that and go, and I think it should be a challenge to us, right? If you have that kind of an asset, why aren't we seeing greater performance out of it? That's a challenge I 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 can be everything from -- when you talk about saliency, utility, relevance, I mean, I agree that the consumer is more occasion-based, right? I don't depend on them to report 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, the park? Have we given some of that up? And so do we need to redirect some of our dollars 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. Are -- 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, a massive share of small sizes. We're the leader in large sizes with the massive share of 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 I put to the team. And again, I think, sort of, 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 head into next year, and I've seen the plans is us get 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 as we can prove that we can do this on the 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.

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.

All right. Well, thank you, everyone. I really appreciate you joining the call today and the thoughtful questions. I'd also like to thank the Constellation 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. I'm 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.

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.