We can do it.

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 investor 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 Constellations 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. 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 dollar share gainer in beverage alcohol this quarter, Our beer business outperformed and accelerated meaningfully quarter-to-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've spent much of the first half rebuilding distributed inventory levels, and while there's always going to be month-to-month variability, September depletions are turning 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.

Thank you. We'll now be conducting a question and answer session. As we ask, we remind you to please ask one question so everyone may have a chance to participate. To ask the question today, you may press star 1 from your telephone keypad. The confirmation tone indicate your line is in the question queue. You may press star 2 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 Motey with RBC. Please proceed with your questions.

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, you know, 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. I'm happy to try to unpack that. And I'll 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. 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, 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 overall 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 shifted 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.

Thank you. The next question is from the line of Peter Galba with Bank of America. Please proceed with your question.

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 can 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.

Sure, Peter, happy to do that, and Garth, feel free to add in some color. Here's the headline I'd start with, which is distributed 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 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 I'll be up with some inefficiencies as we were working hard to move stuff around. And so we needed to shift during the quarter to close out distributor order backlogs and avoid out of stocks. And so I could say, Matt, if you take the undershipment, in 26, and you look at where 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, etc. 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. Please receive your question.

Great. Thanks so much. So, Nick, you're six 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 thinking about different 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. Thanks.

Sure. I'll take that, Lauren. I'll take that in 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 opportunity. 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. 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. And so 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 shoes We got more focused on what I 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 Circonda data, our 12-week is better than our 52-week, and our 4-week is better than our 12-week. 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 Nadella. 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 know you think about the fall we're getting into football season that's the middle of the country right that's the general population where awareness on this brand is actually incredibly low a lot of opportunity go there and so it's you know it's different to what might have gotten us here and how we go about now you know building those brands you then move over to the middle which is you know Scaling that, our next wave of brands, and, you know, this is where the company's playbook is second to none, just world class, and you can see what Pacifico, you know, compounding it at something like a 20% growth rate year to date as the number 10 brand already. It's not a small brand, and yet, you know, it's powered at that kind of growth rate, and, you know, 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 whether we're doing that organically through things like our NA portfolio, which is gaining more and more traction. You've 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 Spike Day, 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 multi-year 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 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 as well as reinvest for future growth.

Garth, do you have anything to add? Garth Hankinson Well, yeah. As we've said previously and I think as you've all seen in our results, getting our capacity to 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. 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. Please proceed with your question.

Hi, good morning, everybody. Morning, Chris. 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 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, you know, 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 inflational 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. and many more.

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 year, as was in our commentary. That should be around 7% in the second half 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 we're confident in the results that they are providing. and that's evidenced by our leading share gains as we plumb 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.

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.

All right, thank you. Good morning, everyone. So, you know, you continue to demonstrate discipline, capital allocation, and then as the heavy, you know, beer investment cycle winds down and free cash flow influx, how are you thinking about the balance between debt pay down, you know, organic investment, M&A, and share repurchases? I guess I'm, you know, ultimately, you know, wondering, you know, what should we expect for the pace of buybacks? Thanks.

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?

Yeah, just to add with respect to the M&A part of your question. You know, 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, you know, we've 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 Spike Day 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 I'm like, here's an example of, you know, will 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.

Thank you. The next question is from the line of Kumail Gajwala with Jefferies. Pleased to see your question.

Hey, guys. Good morning. You know, if you think about marketing spend, there's a lot of, and many more 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 You know, a once in every four years event that happened recently.

I'll share some perspectives and maybe give some more color around the reinvestment rate. But I started the headline, you know, we believe we're reinvesting at a healthy rate now. We're a branded company. I talked a little bit earlier about, you know, this company needs to be a growth engine and that growth is going to be driven by our brand. and many more. 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 was 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. You know, we saw the off-premise being fairly flat. But what we did learn from it is it's an opportunity to reengage consumers and younger consumers around the bureaucracy and 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 is coming up. 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 was this is an opportunity for us to continue to win from the 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 out of performance with our brains and our know-how.

Yeah, 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 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 Falerni with Citi. Let's just see if you have a question.

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 because we don't really see a material acceleration in the track channels. So is it coming mainly from the untracked piece? maybe the off-premise on track or on-premise continuing to do well. So any color you can give there, and especially given the off-premise on track is very tied to the Hispanic consumer base, and you see 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.

I'll give some color on the pricing equation. I'd say that the September recovery we saw was pretty broad-based. As I said earlier, it went well beyond just the timing of Labor Day. If you just count that on a gross basis, it was a very strong recovery. We kind of feel that out and go, there was some 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, international accounts, but even in C-Store, getting that mix right. and getting their 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. And so 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, It's a quick few words. It was 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 of 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 Elasticity is the Consumer, the Opportunity, and the Packed 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.

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.

The next question is in the line of Dara Mahasin with Morgan Stanley. Please receive your question.

Hey, good morning, guys.

Good morning.

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. Again, how aggressive STZ might be in expanding further into RTDs.

Sure, and why don't I start in the second part of your question first. And I'll talk about Spectate 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 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, you know, we see the opportunity but very conscious of the point that you just raised which is, you know, what is the sustainability of these brands? You know, where do we think things are going to Lost of a long time, 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. It might be our consumer in a different occasion might look for a product like this. 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. Spike Day is a great example of that. People looked at plenty of things. I mean, 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, category that is actually differentiated, brings something new and different to the consumer, mimics an existing consumer behavior, right? AID and BACA we noticed 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 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.

Yeah, 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 deal, structuring it in the right nature to enhance our portfolio and and we have the ability to continue to return cash to shareholders through shareware purchases in our dividend policy.

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

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 pounds or however you measure it, you know, what kind of market share it has, how incremental is it, and, you know, dream the dream, you know, next five, ten years, how big do you think it can be? Thank you.

Yeah, well, I'll give you some thematic thoughts around it. just sort of started and got some color. But before I even actually answer the question of 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 Medela. Pacifico, just been through the marketing and activation plans for next year, highly differentiated from the other brands we'll play in a really exciting space. And then Victoria, to answer your question, is really going to live in the space of very authentic opportunities 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, I think growth for the first half of the year is mid-teens. Compounding, you know, not a small base, but, you know, we think that there is a lot of runway to go. And, you know, take a brand like that, which is growing right alongside Pacifico, Pacifico, now number 10 brand of beer, which is compounding at closer to 20%, and they're living in very different spaces. And what gets me excited about it is that, you know, the fact that we can co-develop those things and access different occasions in different spaces and 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 very strong out west in that like a Pacific Cup 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. Anything? No, I think that's pretty complete. Thanks.

The next question is in the line of Steve Powers with Deutsche Bank. Pleased to see your question.

Hey, thanks very much. Appreciate it. You know, Nick, as you think about, I guess, Constellation's medium-term growth in the context of the three pillars that you've outlined and that 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 and 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 talked about with Spike Dade. I think maybe for the context there would be helpful. And then, Garth, if I could, just to clean up on Chris's 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 your 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.

All right, so I'll start and give you some conceptual things. We don't currently have the term 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 Mecompo. which homegrown innovation, launched from scratch, compounding at 50% right now. Expect that to be a multi-million case, a 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. There's not just a couple. There's a track record here of our ability to take things that have momentum and scale them. You know, next wave, I mean, 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, you know, anything close to, say, where, you know, 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 in that space. You see something like Spike Data, I said, you know, approaching Two main cases just already in calendar 26 and just getting started. So you can start to dimensionalize 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's scaled. 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 chicken in the armor? And I've got to tell you, these are some of the healthiest brands I've You know, 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, you know, things like pack price architecture, residency relevancy, showing up every day in people's lives, not just from an awareness perspective, but activating, you know, 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, you know, I think Constellation's brought that, but now it's getting to a scale of, you know, it can really lead the industry. There's a lot of runway on the growth of our bigger brands. I mean, you know, you take our biggest market, California, or Modelo's, 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 go play in the middle of the country, and 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 a really great response in markets like New York and Miami, which are culturally important markets, where the brand's 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 Billy 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 that are much more granular. 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.

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 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 FY28 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, I'd say that I'm not sure there's been a year in my career as a QML manager that hasn't been sub-inflation. You go all the way back to remember when health care 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.

Thank you. Our last and final question comes from the line of Carlos Laboy with HSBC. Please just use your question.

Yes, thank you very much. Nick, can you expand on your diagnosis of insufficient saliency for Crohn and extra a little bit more? But beyond saliency, how do you think about Krona's utility and relevance? In other words, is Krona 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?

Yeah, I think that's a great question. You go through all the brand data and you're like, okay, well, what's the chicken 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.

You find brain awareness.

Most love beer brand. Most love 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 it and go, and I think it should be a challenge to us. But 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, you know, when you talk about fancy utility relevance, I mean, a great consumer is more occasion-based, right? Don't depend on the repertoire. What's the moment? How are they coming together? And then are we present there? 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 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. 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 massive share of small sizes. We're the leader in large sizes. We're the massive share of large sizes. How do we pull those levers to be much more granular about how we use those sizes in packs to show up exactly where our consumer is. Those are the types of challenges put to the team and the game. 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's getting better. What I really want to see as we get into next year, and I've now seen the plans, is I guess 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 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.

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.

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 thoughts for it. 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.