Bill Newlands
President and Chief Executive Officer at Constellation Brands
Thank you, Joe, and good morning, everyone. Happy New Year to everyone, and welcome to our fiscal third quarter call. I hope you all had a great holiday season and that our products are able to play a role in some of your special moments with your family and friends. Since our last call in October, Constellation Brands reached a notable milestone in its history as a public Company.
As most of you know, in November, our shareholders approved the elimination of our Class B common stock. With that came the transition of our Company to a single class of publicly listed stock, our Class A common stock, which provides our shareholders with equal one share, one vote rights. I want to thank everyone who supported this important enhancement to our Company's corporate governance profile and capital structure. We believe that our leadership team now has an even stronger foundation to continue to build shareholder value through the strategic initiatives we adopted and have steadily advanced over the past nearly four years since I assumed the role of CEO.
Since fiscal 2020, we agreed to focus on and put in place plans to, number one, continue to build powerful brands that people love. Number two, develop consumer-led innovations aligned with emerging trends and consistently shape our portfolio for growth. Number three, deploy capital in line with disciplined and balanced priorities. And number four, operate in a way that is good for business and good for the world. I'm pleased to say that we continue to build on a strong track record we have established against all of these strategic initiatives.
Starting with number one, building our powerful portfolio of brands. Our Beer business despite a more recent series of headwinds, which we'll address in a few minutes, delivered its sixth consecutive quarter of leading share gains across the entire U.S. beer category in IRI channels that was primarily driven by our two largest brands, Modelo Especial and Corona Extra. In the third quarter, Modelo Especial maintained its position as the top share gainer and as the number one high-end beer brand, and Corona Extra was the third largest share gainer and the number three high-end beer brand.
In fact, our Beer business delivered 3.5 points of share gains and 54% in dollar sales growth when comparing the 52-week period that ended with our latest fiscal third quarter against the 52-week period that ended with our fiscal 2019. And comparing the same periods, the business contributed the highest dollar sales growth in the category, amounting to over $2.5 billion. In our Wine and Spirits business, our largest higher-end brands, Meiomi, Kim Crawford, The Prisoner and High West, all delivered dollar sales growth and share gains in the third quarter. And comparing the 52-week period that ended our latest fiscal third quarter against the 52-week period that ended our fiscal 2019, these brands achieved 72% dollar sales growth.
Moving on to number two, consumer-led innovation and shaping our portfolio for growth. Many of you may be surprised to know that in our beer portfolio, our SKUs introduced over the past three years have driven 20% of the growth delivered by the business since the start of fiscal 2020. An important part of this growth has come from our Modelo Chelada brands, which have evolved from a niche business to a sizable platform. In fiscal 2023 year-to-date, it has delivered 13.6 million cases of depletions, which already exceeds the brand's total depletions for all of last fiscal year. And in the third quarter, Modelo Chelada Limon y Sal moved up nine spots to become the sixth largest share gaining brand in IRI-tracked channels.
Beyond the Chelada brands, we continue to build on the opportunities within the Modelo family with a clear focus on maintaining brand investments. We are excited about the national launch of Modelo Oro in March, which has surpassed internal and external benchmarks in test markets. In our Wine and Spirits business, innovation has also yielded strong results, increasing its contribution to net sales from 1% in fiscal 2020 to approximately 8% in fiscal '23 year-to-date. This expansion has been primarily driven by extending our largest higher-end brand, once again, Meiomi, Kim, The Prisoner and High West. Notably, extensions in The Prisoner brand family, Blindfold, SALDO and Unshackled, have contributed significant growth, especially Unshackled, which has grown to be half the size of The Prisoner brand in just four years.
In addition, since the beginning of fiscal 2020, we have added five brands through acquisitions, like Bronco Wines, My Favorite Neighbor, Empathy Wines, Copper & Kings and Austin Cocktails, all of which are in the higher-end segments of the wine and spirits categories that are contributing to growth. And we divested 36 brands, the vast majority of which were in the mainstream segment, which has mainly been in decline due to consumer-led premiumization trends. Given this reshaping of our portfolio, including the recent additional divestiture, 62% of net sales in fiscal '23 year-to-date were from our higher-end brands. This is a dramatic shift from the 34% higher-end brands represented at the end of fiscal '19.
Now turning to number three, capital allocation. In fiscal 2020, we introduced a thoughtfully structured approach designed to consistently deploy capital with discipline and balance. We made maintaining our investment-grade credit rating, our top capital allocation priority and reduced our net leverage ratio, excluding Canopy equity and earnings from 4.5 times at the end of fiscal '19 to 3 times by the end of the second quarter of this fiscal year. This was partly driven by a $3.2 billion reduction in our debt levels and partly by strong earnings growth in our Beer business.
And then in the third quarter, these efforts gave us the flexibility to both accommodate the $1.5 billion financing for the elimination of our Class B shares and to maintain our investment-grade rating. As our net leverage ratio remained in line with our prior 3.5 times target, however, we recently updated that set target to three times, given our ability to previously achieve that target and the continued strong cash flow generation capabilities of our businesses. Our second priority became delivering cash returns to our shareholders, and we set a goal to return $5 billion in dividends and buybacks between fiscal 2020 and '23. We virtually completed that goal ahead of schedule in the third quarter, and we're now on track to exceed the $5 billion target with the fourth quarter dividend payment announced today.
As to our third priority, we sought to advance growing capacity expansions to support the strong growth in our Beer business. Since the start of fiscal 2020, we added approximately 9 million hectoliters of capacity through growth investments and another 2 million hectoliters through brewery optimization and productivity initiatives. We are also on track to further diversify our production footprint with the development of our new brewery in Veracruz, where we have recently broken ground.
And last in our capital allocation priorities was M&A. And since the start of fiscal '20, we have judiciously deployed excess cash through acquisitions with a strict focus on small gap filling higher-end brands. And the key strategic acquisitions we have executed over the last nearly four years are delivering top-line growth. All-in, we believe we have unquestionably upheld our capital allocation priorities and have even exceeded some of the associated targets we set out to achieve.
Moving on to strategic initiative number four, operate in a way that is good for business and good for the world by advancing ESG goals. Our ambitions are to protect the environment and natural resources by serving as a model for water stewardship in our industry while reducing greenhouse gas emissions, to champion the professional development and advancement of women within our Company, industry and communities, to enhance the economic development and prosperity in disadvantaged communities and to promote responsible beverage alcohol consumption.
While we still have much work to do, I am proud to say we are making good progress towards our goals. To that end, in the third quarter, we released our 2022 ESG Impact Report, which included several enhancements on the information shared on these important topics and our work towards our targets, including for the first time, references aligned to the Sustainability Accounting Standards Board framework and taking into consideration recommendations from the task force on climate-related financial disclosures.
So as with our capital allocation priorities, we have been consistently working to deliver against our strategic initiatives. Net, we have done, we have said what we do and we have done what we said. And despite current inflationary pressures and the risk of recessionary headwinds, we remain confident in our ability to continue to advance and create value through these initiatives. And on that note, let's move on to a more fulsome discussion of our performance in the third quarter. Depletion growth for our Beer business decelerated to 5.7%, which, as I mentioned earlier, was largely due to a recent series of headwinds that developed toward the latter part of the quarter.
First, as we shared on our last call, we decided to introduce all pricing changes above our usual algorithm due to cost pressures across the chain, and historically, the impact of these types of notable pricing actions take a few months to settle in. Second, distribution growth is returning to more normalized levels after lapping a softer summer period last year when we were managing supply constraints. That said, distribution growth remains at exceptionally healthy levels as well as aligned with our full-year expectations. And third, some of these headwinds were particularly accentuated in a few key regions for our brands, such as California, where we lapped double-digit depletion growth rates and better weather in November of last year as well as more favorable economic conditions.
All of that said, our Beer business continues to perform strongly relative to the wider market and to resonate with consumers who continue to shift to higher-end brands. In IRI channels, we gained 1.5 points across the entire category and 2.3 points in the higher-end segment in the third quarter, which is higher, let me repeat that, which is higher than the share gains in the same quarter last fiscal year. And when looking at depletions fiscal '23 year-to-date, our Beer business achieved growth of 7.8%, which continues to be in line with our annual expectations. Importantly, based on the prior activity we have seen in retail as they adjust to the continued inflationary environment, we expect trends to return to more historical rates over the next few months.
Now shifting to the performance of our beer brands. Modelo Especial delivered depletion growth of 4.4% in the third quarter, lapping a tough 13.2% depletion growth comparison in the corresponding period of the last fiscal year. That said, the brand has achieved depletion growth of 9.9% over fiscal '23 year-to-date. And in the recent quarter, it continued to strengthen its position in the five states where it is already the number one beer brand in dollar sales, delivering another approximately 0.2 points in share gains. Importantly, in the other 39 states tracked by IRI data, Modelo Especial delivered more than four times the share gains at over 0.8 points.
More broadly, Modelo Especial's depletion growth in its secondary markets outpaced the growth in its top five states by over 10 points. As such, we continue to see significant incremental opportunities to maintain the momentum of Modelo Especial, particularly through distribution gains in the states where it is under represented. Corona Extra delivered depletion growth of 1.3% in the third quarter and 4% in fiscal '23 year-to-date. As noted earlier, the brand has maintained its momentum as the number three share gainer in tracked channels. We continue to invest in the growth of Corona Extra through a thoughtful and authentic evolution of the brand's market, such as the augmented reality addition to our O'Tannenpalm campaign, which is one of the more enduring holiday-themed commercials running for over 30 years now. And we continue to see growth potential for Corona Extra with younger legal drinking age and multicultural consumers.
Pacifico's depletion growth accelerated in the third quarter to 40.7%, and over fiscal '23 year-to-date, its depletion growth was 32.9%. The brand remains a top 10 share gainer in tracked channels in the third quarter, mainly supported by its growing footprint in states like California, Nevada, Utah, Colorado and Arizona. We continue to see fantastic growth runway for Pacifico as one of our new wave brands with significant distribution potential relative to Modelo and even more so relative to Corona Extra. Particularly, as the brand also continues to build momentum by shifting East in the U.S., building on the 26% depletion growth delivered in our Eastern business unit in the third quarter.
Lastly, our Modelo Chelada brands achieved depletion growth of 44% in the third quarter and 48% over fiscal '23 year-to-date. Our Modelo Chelada brands remain the number one set in the Chelada space, and the brands gained nearly half a share point across all U.S. beer and tracked channels. For perspective, that is as much as Corona Extra's gain. In fact, these gains were largely driven by innovations launched this fiscal year, including Naranja Picosa flavor, the Limon y Sal 12-ounce 12-pack, which is a top 10 new packaged SKU and our new variety pack, which is among the top 15 new brands.
We continue to expect significant growth from the Modelo Chelada brands as we invest in marketing to the general market consumer to broaden the demographic appeal for this product. All-in, the strong demand for our brands in the third quarter supported a net sales increase of approximately 8% for our Beer business. And despite the impact of inflationary headwinds on operating income, we were able to maintain operating margin at 37.5%. This gives us the confidence to once again raise guidance for our Beer business this fiscal year lifting the low end of our growth outlook. We now expect to achieve 9% to 10% net sales growth and 4% to 5% operating income growth for fiscal '23.
Moving on to Wine and Spirits. Our Wine and Spirits business continues to advance its vision to be the high-end market leader. As noted earlier, our largest higher-end brands delivered strong performance relative to their categories in the third quarter. In our Aspira portfolio, which includes our fine wine and craft spirits brands, over the third quarter in tracked channels, The Prisoner brands grew dollar sales by 4.3%, while the fine wine segment contracted by 5.7%. And High West grew dollar sales by 22%, while high-end spirits segment grew by only 3.4%, And in our premium and mainstream wine and spirits portfolio, which we refer to as Ignite, both Meiomi and Kim Crawford gained share in the U.S. wine category.
Depletions for our Wine and Spirits business declined by 5.5% in the third quarter, mainly driven by continued headwinds based across our mainstream brands. However, our Aspira portfolio delivered strong performance with 8.5% depletion growth in the quarter. And in fiscal '23 year-to-date, our Aspira portfolio has now achieved an overall 6.3% increase in depletions, supported by strong double-digit depletion growth for The Prisoner and High West. Among Ignite brands, Meiomi and Kim Crawford have also delivered solid depletion growth in fiscal '23 year-to-date, supporting an overall 2.3% increase in depletions for our premium wine portfolio.
Our Wine and Spirits business also continued to expand its global omnichannel footprint, advancing its growth in direct-to-consumer and 3-tier e-commerce channels as well as international markets. Wine and Spirits DTC net sales grew 23% in the third quarter, and we continue to perform particularly well in 3-tier e-commerce which delivered dollar sales growth nine points above the competition. These results were underpinned by our strategic DTC investments in both hospitality through facility upgrades and talent development and our own e-commerce website platforms, as well as our continued leadership in 3-tier e-commerce through marketing innovations like launching video ads on Instacart. And a strategic focus on major omnichannel national accounts, third-party marketplaces and digitally native retailers like Amazon, where we were the number one overall supplier and number one growth supplier in higher-end wine in the third quarter.
International markets accounted for 9% of the total net sales in the Wine and Spirits business in the third quarter as our strategically focused approach continued to target select metropolitan markets, including London, Tokyo, Seoul, Sydney, Mexico City, Zurich and Toronto with some of our most renowned premium and fine wine brands like The Prisoner, Schrader, as well as more recently acquired brands like Lingua Franca and My Favorite Neighbor. And with our craft spirits portfolio, which includes brands like Casa Noble and Mi CAMPO high-end tequilas, that delivered international shipments five times greater than the third quarter of the prior year. We are also pleased that our efforts to establish a leading global higher-end wine and spirits portfolio are gaining recognition with several of our brands receiving remarkable accolades, including Schrader Cellars winning its 37 [Phonetic] 100-point [Phonetic] score, and its Double Diamond brand being recognized by the Wine Spectator as its number one wine of 2022.
Our To Kalon Vineyard was being recognized again as a top vineyard in North America for the fourth consecutive year among top vineyards in the world. And I'm pleased to report that our To Kalon Vineyard has now also been certified as organic, expanding the appeal of its wines to a broader set of consumers and adding to its differentiation. And in our spirits portfolio, our recently launched Nelson Brothers Bourbon Reserve was ranked among Whiskey Advocate's top 10 most exciting whiskeys of 2022. So all-in, our Wine and Spirits business continues to make meaningful progress on its transformation.
And while net sales and operating margins to net of recent divestiture were slightly lower relative to the third quarter of last fiscal year due to volume shifts from shipment timing only being partially offset by mix and pricing benefits, we did see a significant sequential uplift in operating margins of 55 basis points relative to the second quarter of this fiscal year. This gives us confidence to reaffirm our fiscal '23 guidance for our Wine and Spirits business of stable to 2% lower net sales and 3% to 5% operating income growth, which we are providing against the fiscal '22 baseline adjusted for the recent divestiture. Looking further ahead, we are also confident that over the medium term, both our Beer business and our Wine and Spirits business remain well placed to deliver strong growth and best-in-class operating margins. That said, given continued inflationary pressures and the potential impact of recessionary environment, we remain mindful of balancing the momentum of our brands against near-term cost challenges.
To that end, based on our current expectations of the precedence [Phonetic] that the consumer will continue to face in the near term, we are giving even more careful consideration to our pricing actions for fiscal '24. In particular, we currently expect pricing actions for our Beer business to be more muted in fiscal '24 as our pricing actions in the current fiscal year were ultimately above our medium term algorithm. While input costs remain at historically elevated prices, we strongly believe that additional consideration in our approach to pricing in fiscal '24 is warranted to sustain healthy growth for our brands. In addition, while some input costs are below the peaks from earlier this fiscal year, we now anticipate inflation to remain above historical trends in the high-end single-digit range for fiscal '24.
As always, we will continue with our disciplined approach to manage these evolving conditions through cost-saving initiatives, but these persistent inflationary headwinds will be compounding on the double-digit cost uplift we have faced in fiscal '23. As such, we now expect operating margins for our Beer business in fiscal '24 to be more in line with our anticipated margin structure for this fiscal year, and therefore, below our stated 39% [Phonetic] to 40% [Phonetic] medium term range. We are still refining our outlook for '24 and will provide more detailed guidance in our next earnings call, but we wanted to share some context today now that our annual planning process is underway.
With all that said, let me be clear, our Beer business continues to have best-in-class operating margins and our Wine and Spirits business continues to make progress toward achieving that same differentiation. We are also confident that over the medium term, our Beer business remains well positioned to deliver leading operating margins, supported by the sustained momentum of our core Modelo Especial and Corona Extra brands, the significant opportunity being captured by our Pacifico and Modelo Chelada brands, the incremental upside from our broader existing portfolio and the continued development of our innovation lineup, particularly from exciting imminent additions like Modelo Oro.
And we continue to expect our Wine and Spirits business to make progress on its operating margins, supported by continuing to pursue the exciting runway for growth of our higher-end brands and ensuring these brands represent an even greater portion of our mix over time, enhancing the performance of our mainstream portfolio through a greater focus on brands and initiatives with higher returns, including through relevant and innovative products and growing our omnichannel and international leadership particularly as an incremental opportunity for higher-end growth.
Now before I conclude, I wish to quickly touch on Canopy. We remain supporter of Canopy sellers to create an exchangeable share structure designed to support the consolidation of all its U.S. cannabis assets into a single entity. And to that end, our intention continues to be to transition our existing common share ownership interest in Canopy Growth into new exchangeable shares once its shareholders approve this transaction. We believe that the conversion of our ownership interest will maintain our ability to realize the potential upside of our investment in Canopy. At the same time, this transaction and the surrender of our warrants are expected to eliminate the impact to our equity and earnings, mitigate risk to our organization and further reinforce our intent to not deploy additional investment in Canopy in line with our capital allocation priorities.
In closing, I'd like to reiterate three main takeaways today. First, nearly four years ago, we committed to a series of strategic initiatives aimed at delivering profitable growth and shareholder value. And I'm pleased to say that we are delivering against those initiatives and in many cases, even exceeding the goals we set out to achieve. Second, our third quarter results demonstrate that we continue to execute against these strategic initiatives and that our Company remains in a strong position to deliver best-in-class results. Despite the headwinds in the quarter due to macroeconomic pressures and tough comps versus prior year, the strong performance of our Beer business has put us on track to deliver better-than-expected results in fiscal '23, and the transformation of our Wine and Spirits business is also yielding results. And third, we remain confident we will continue to build on our track record of solid growth and value creation through our strategic initiatives.
And with that, I turn the call over to Garth.
