Welcome to the Constellation Brands First Quarter 2019 Earnings Conference Call. At this time, all participants have been placed in a listen only mode. Following the prepared remarks, the call will be opened for your questions. Instructions will be given at that time. I will now turn the call over to Patty Yahn Urlaub, Senior Vice President of Investor Relations.
Please go ahead.
Thanks, Laurie. Good morning, and welcome to Constellation's Q1 fiscal 2019 conference call. I'm here this morning with Rob Sands, our President and Chief Executive Officer and David Klein, our Chief Financial Officer. As a reminder, reconciliations between the most directly comparable GAAP measure and any non GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website at www.cbrands.com. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward looking statements we make on this call.
Before turning the call over to Rob, similar to prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time. Thanks in advance. And now here's Rob.
Thank you, Patty. Good morning, and welcome to our discussion of Constellation's Q1 sales and earnings results. These results were in line with our expectations and reflect significant investment across the business designed to ensure that we maintain our growth momentum well into the future as well as other timing issues. We've maintained our earnings guidance as the top line is responding to these investments, including digital enablement for our e commerce initiatives and our new ERP platform as part of our Fit for Growth initiative. We continue to work with Canopy Growth to develop and build cannabis brands.
Our investment in Canopy is certainly paying off as we've recognized gains of more than $700,000,000 in our reported results since we made this investment last year. Now most importantly, we continue to invest in brand building through our innovation and new product development initiatives across the country. Our most significant investment includes an increase in beer marketing to support our newly introduced products, which are exceeding our expectations and fueling sales momentum. The successful launches of Corona Premier and Corona Familiar are the first two major corona initiatives in more than 25 years. Premier has achieved record speed to shelf with velocities increasing each month since launch and familiar has already achieved a healthy share of the category and its regional expansion with velocities outpacing our expectations.
Now these innovations help drive industry leading depletion growth of 9 percent for our beer business during the Q1 despite unfavorable weather related impacts early in the quarter in some of our largest markets. As a matter of fact, this quarter marks 32 consecutive quarters of growth as the winning streak continues for the Constellation beer business. We remain the leader in the high end of the U. S. Beer market, contributing more growth than any other supplier during the Q1.
Constellation also won the Cinco de Mayo and Memorial Day holidays driven by strong execution and sales increases across the Modelo Especial, Corona Premier and Corona Familiar brands, all of which were top 5 share gainers in IRI channels during the quarter. We are well positioned throughout the remainder of fiscal 2019 with a great lineup of marketing and promotional activities to support the ongoing growth momentum of our portfolio. I'd like to take a minute to highlight some of the activities we have underway for the summer selling season. The Corona Extra summer campaign is currently in full stride, leveraging new strategic partnerships and increased media activities. Corona Premier launched new English and Spanish language TV campaigns during the Q1, which will continue throughout the summer and into the fall to drive broad brand awareness.
New premier programming has been developed that is relevant for live sports, including golf, Major League Baseball and the NHL. Earlier this year, Modelo became the official beer for the Ultimate Fighting Championship, which is one of the fastest growing sports in America. Throughout the year, Modelo will celebrate UFC's 25 years of fighting spirit through fight sponsorships and national retail activation. And this summer, Casa Modelo will celebrate soccer as the beautiful game through a national retail promotion as well as Spanish language broadcast of the World Cup. During the Q1, we executed a nationwide launch of the Pacifico 12 pack can to build on the success of the 24 ounce SKU.
In support of Pacifico's national expansion, the brand aired its 1st ever national TV ad campaign and is poised to be a top ten national TV beer advertiser this summer. In addition to the Corona Premier and Familiar Rollouts, we recently launched new brand entrants into test market within the alternative beverage alcohol space, which is a growing market opportunity that has been incremental to the beer category. The new SVEDKA spiked premium seltzer is targeted at the female consumer who is looking for better for you light options that fit an active lifestyle. 3 new flavors made from natural ingredients have been introduced in select Northeast test markets. We recently introduced Corona Refresca in 3 test markets.
This premium spike refresher in 2 tropical flavors is being supported by English and Spanish language TV as well as sampling events and targeted digital and social media activities. Western Standard, a high end barrel finished easy drinking lager will be available in test markets beginning in August. We are leveraging the equity and authenticity of our high end small batch high west whiskey brand and building off trends of craft spirits and barrel aged beverages. From an operational perspective, during the quarter, we began the new expansion of our Obregon Brewery, while continuing to make progress at our Mexicali and Nava sites. The final phase of the 30,000,000 hectoliter expansion project at Nava is on track as we add capacity for production, fermentation and filtration.
And furnace number 4 at our Nava glass plant is now fully optimized and running at capacity. Construction continues at Mexicali with Brewhouse tank fabrication nearly completed. We are also progressing well on the packaging hall and site utility installation. Overall, I'm very excited about the ongoing growth prospects for our beer business. We remain committed to delivering our fiscal 2019 targets for this business with net sales and operating income growth in the 9% to 11% range.
Moving to Wine and Spirits. Our Wine and Spirits business delivered 1st quarter results that were consistent with the guidance we provided last quarter. As previously discussed, we experienced the Myomi supply shortage, which caused the timing overlap versus last year's Q1. In addition, this year's Q1 depletion trends were muted following a better than expected finish to 2018. However, we continue to see strong consumer takeaway trends for our wine brands in the U.
S. Marketplace during the quarter as we gained share in IRI channels. And we continue to make progress in executing a steady evolution to the high end of the U. S. Wine and spirits category by capturing growth at higher price points to achieve mix and margin benefits, particularly at the greater than $11 price point at retail.
A good example of our success in this area includes key focused brands at these price points that posted double digit depletion growth during the quarter, including Franciscan, High West, Robert Mondavi and the Prisoner portfolio. Currently, Constellation's WAN business at the greater than $11 retail price point is growing 12% versus market growth of 10%. Overall, our focus brands continue to drive growth of our wine and spirits portfolio and have consistently delivered growth at the 3 to 4 times the U. S. Market rate.
From an innovation perspective, we are well positioned with a strong pipeline of new brands, including Blackbaud Spirits, Robert Mondavi Selection Rum Barrel Aged Merlot and Spoken Barrel, a Washington State red blend. In addition, we've expanded our Rose offerings to include Kim Crawford, Meiomi, Black Box, Band of Roses, a Charles Smith brand, to capitalize on this hot growing category within the U. S. Wine industry. We will continue to support these innovation and brand building efforts throughout the remainder of the year with impactful marketing campaigns to strengthen and build the portfolio.
During the
Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference call. Please hold and the conference will resume momentarily. Ladies and gentlemen, this is the operator. Please hold and the conference will resume momentarily.
Indicate that our total beverage alcohol strategy is working as we achieved the most retail sales growth by a wide margin among our U. S. Beverage alcohol tiers. As such, we remain one of the best growth stories within the U. S.
CPG space. With that, I would now like to turn the call over to David, who will review our financial results for the quarter.
Operator, this is Patty Anurlev. Are we back online?
Yes, ma'am. Please go ahead.
Okay. Thank you.
Thanks, Rob, and
good morning, everyone. Q1 results were in line with our expectations and we're on track to achieve our full year comparable basis diluted EPS goal of $9.40 to 9.70 dollars Now let's review Q1 performance in more detail where I'll generally focus on comparable basis financial results. Starting with beer, net sales increased 11% on volume growth of 9%, favorable pricing and a $10,000,000 federal excise tax reduction related to tax reform. This benefit will not recur in the remaining months of calendar 2018 as we've reached the maximum reduction. Depletion growth came in strong at 9% with excellent portfolio performance during the key Cinco and Memorial Day holidays.
This growth is even more impressive considering the 12% depletion growth we're overlapping from Q1 last year and weather related softness experienced throughout the industry in March April. Beer operating margin decreased 230 basis points to 37.8% as the benefit of favorable pricing was more than offset by marketing investments, higher COGS and unfavorable foreign currency. The higher COGS reflects increases in transportation costs and depreciation. Beer segment depreciation increased $10,000,000 to 49,000,000 for Q1. Marketing as a percent of revenue increased 110 basis points to 11% of net sales, driven by the upfront marketing investments supporting the successful Corona Premier and Familiar introductions.
For fiscal 2019, we continue to expect net sales and operating income growth of 9% to 11%. This includes 1% to 2% of pricing within our Mexican portfolio. As a reminder, we're facing a 12% shipment growth comparison for Q2 and 6% shipment growth comparison for Q3. We continue to expect operating margin improvement for fiscal 2019, although benefits from product pricing, glass sourcing and operational efficiencies are expected to be mostly offset by marketing investments, increased transportation costs and higher depreciation. We continue to target fiscal 2019 marketing as a percent of revenue in the range of 9.5% to 10.5% versus 9% for fiscal 2018.
This increase primarily reflects investments supporting our innovation activities and is weighted toward the first half of the year in an effort to generate strong marketplace performance throughout the key summer selling season. As a result, Q2 marketing as a percent of revenue is expected to be in the range of 10% to 11% versus Q2 fiscal 2018, which came in at 8.4%. This marketing investment and the overlap of the strong Q2 fiscal 2018 shipment volume is expected to move our Q2 fiscal 2019 operating margin into the 39.5% to 40% range versus our record 41.2% operating margin result achieved in Q2 last year. Q1 fiscal 2019 wine and spirits net sales and EBIT decreased 3% 15%, respectively. This was in line with our expectations as we overlapped strong Q1 fiscal 2018 Wine and Spirits financial results where EBIT grew approximately 20% and U.
S. Shipment volumes significantly outpaced depletions. Net sales were impacted by the overlap of strong shipment volume in Q1 fiscal 2018, driven by replenishment of Meiomi supply, which was constrained coming out of Q4 fiscal 2017. U. S.
Depletions were down 4% as overall depletion performance was muted following strong Q4 fiscal 2018 results. Wine and Spirits operating margin decreased 430 basis points to 25%, primarily driven by higher COGS, mostly reflecting increased grape and transportation costs and marketing investments for key focus brands and innovation initiatives. We recognized approximately $5,000,000 of income from our OPUS One investment during Q1 due to a first time spring release of certain older vintages. The 2015 OPUS 1 vintage to be released this fall is expected to be smaller than the previous year. As a result, fiscal 2019 investment earnings from OPUS are expected to be similar to our fiscal 2018 earnings, but Q3 fiscal 2019 investment earnings will be below Q3 last year.
In Q2, we expect to see ongoing cost pressures and marketing investments impact wine EBIT performance. However, we expect financial performance to improve in the back half of the year, which includes the key holiday selling season. As a result, we continue to expect Wine and Spirits net sales and operating income growth of 2% to 4% for fiscal 2019. For wine and spirits sales, we continue to target low single digit volume growth and mixed benefits from our premiumization efforts. We continue to realize benefits from the increased marketing spend on brands like Naomi and Kim Crawford over the next several quarters.
As Rob mentioned, the wine business gained IRI market share in the Q1 and has a strong innovation pipeline and solid programming in place for the remainder of the year. We continue to expect mix benefits and COGS productivity enhancements, which are targeted for the back half of the year to be mostly offset by higher grape and transportation costs in marketing investments. Even with some of the cost pressures I just noted, we expect full year operating margin expansion for both business segments. However, we expect the deltas between sales and operating income growth to be contained within the guidance range provided. The increase in corporate expenses primarily reflects investments in people and consulting services in support of our growth organization, cannabis investments and our digital enablement and fit for growth initiatives.
These investments will continue in Q2 when corporate expenses as a percent of sales is expected to be similar to that of Q1. Interest expense for the quarter increased 7%, primarily due to higher average borrowings. Fiscal 2019 interest expense is still expected to be in the range of $355,000,000 to 365,000,000 dollars When factoring in cash on hand, our net debt totaled $10,000,000,000 a decrease of $199,000,000 since the end of fiscal 2018. Our net debt to comparable basis EBITDA leverage ratio came in at 3.5 times at the end of May versus 3.6 times at the end of fiscal 2018, while we continue to invest in our Mexican operations and return cash to shareholders with $141,000,000 of dividends paid and $100,000,000 of share repurchases for the quarter. Our comparable basis effective tax rate for the quarter came in at 21.4% versus 19.2% for last year.
Our rate benefited from the new 21% U. S. Federal statutory rate, but was more than offset by higher tax on foreign earnings and lower benefits from stock based compensation activity due primarily to timing. We anticipate that our fiscal 2019 effective tax rate will be similar to the Q1 rate in the 22% range. However, we continue to forecast our full year fiscal 2019 effective tax rate to approximate 19% with stock based compensation benefits expected to be weighted toward the back half of the year.
Moving to free cash flow, which we define as net cash provided by operating activities less CapEx. For Q1, we generated $336,000,000 of free cash flow compared to $165,000,000 for Q1 last year. This improvement primarily reflects lower CapEx and strong operating cash flow growth. While CapEx was down for the quarter, we still have significant spending planned for the balance of the year as our full year CapEx guidance of $1,150,000,000 to $1,250,000,000 remains unchanged. This guidance includes approximately $900,000,000 targeted for our Mexico beer operations expansion.
We expect fiscal 2019 free cash flow to be in the range of $1,200,000,000 to $1,300,000,000 This reflects operating cash flow in the range of $2,350,000,000 to $2,550,000,000 and the CapEx spend that I just outlined. In Q1, we recognized an additional $258,000,000 pre tax unrealized gain from the change in fair value of the Canopy Growth investment and warrants, bringing the total pretax gain on this investment to over 700,000,000 Earlier this month, we acquired CAD200 1,000,000 worth of convertible debt securities issued by Canopy in support of their growth initiatives. We also recognized a $101,000,000 net gain on the sale of our Accolade wine investment. The gains I just noted were excluded from our comparable basis financial results. As mentioned earlier, we continue to project our comparable basis diluted EPS to be in the range of $9.40 to 9.70 dollars Our comparable basis guidance excludes comparable adjustments, which are detailed in the release.
Before closing, I'd like to note we adopted new accounting standard guidance for revenue recognition at the beginning of the year. Under this guidance, we are recognizing certain sales incentives earlier than we have historically. We've provided restated income statement information for fiscal 2017, fiscal 2018 and fiscal 2018 quarters in the Investor Overview section of our website. As a result of this activity, our fiscal 2018 comparable basis diluted EPS was restated from 8.72 dollars to $8.70 per share. In closing, we're executing against our plans and on track to achieve our financial performance goals for fiscal 2019.
While our first half financial results are being impacted by the investments behind the marketing, innovation and growth initiatives I noted earlier, we're confident that we will produce top tier financial performance versus CPG for fiscal 2019. We also believe the investments we are making in support of growth opportunities today position us to generate industry leading, sustainable and profitable growth in FY 2020 beyond while we deliver on our FY 2019 commitments. With that, Rob and I are happy to take your questions.
Your first question comes from the line of Bonnie Herzog of Wells Fargo.
I was hoping you could help us understand your conviction levels for the rest of the year given the weak Q1 results and your ability to hit your guidance ranges for the full year specifically for beer. When you look at the midpoint of your guidance, it implies that beer margins for the balance of the year need to expand 80 bps. So could you drill down just a little bit more on the key drivers of that? And I guess I'm just concerned that this might be tough given the spending and strong commodity and transportation cost inflation you touched on? And then does your guidance assume a price increase, for instance?
Thanks.
Yes. Bonnie, I'll start out and then I'll let David address some of your points. But our conviction level is very high. I think that as I said in my comments, the Q1 was very much in line with our own internal expectations. We had planned to invest behind in particular the new products and the beer portfolio as well as some other investments in a big way during the first half of this year and in particular the Q1.
And we did make those investments and we see the top line coming through. And that's what I would say, is the most important thing that everybody should be looking at is, is the top line coming through? And in that regard, the top line is probably a little bit above our own internal expectations, and our new products are performing, I would say, a little bit above our own internal expectations. So our confidence level on the year and the guidance,
I would say, is very strong. David? Yes. So Bonnie, let me start out with GP margins in beer. So GP margins in beer benefited from robust pricing and then that was offset by incremental depreciation, which we had planned on as well as about a 70 basis points drag from incremental freight and logistics cost as a result of a tighter trucking market in the U.
S. It also was impacted by a headwind on FX, meaning the peso. Now that may seem a little counter intuitive, but the weakening of the peso really happened at the very end of May. And our production cycle is such that transactional FX benefits or headwinds actually don't flow through for about 30 days. So we didn't get any benefits from the weakening peso at the GP line in Q1.
We expect the remainder of the year to have a to experience a tailwind from FX. We also have had several COGS improvement initiatives underway that we believe will offset the transportation headwinds that we're facing. We fully expect to expand GP margins in FY 2019 versus FY 2018. Now I'll also go on and talk about overall operating margins. So in Q1, we had about 110 basis point headwind versus last year from the marketing investments that we made behind our brands, in particular Premier and Familiar.
We expect in Q2 that we'll spend about 10% to 11% of net sales on marketing, primarily because the brands are getting real good traction in the marketplace. As Rob outlined, the distribution performance has been astounding and we now want to make sure that we continue to drive increasing velocity on the shelf. However, we're still committed to being in that 9.5% to 10% marketing load for the full year. So when you kind of do all of that math, you get to the place where with confidence in the top line, understanding that we have a path to expanding GP margins and getting the timing right on our marketing investment that we are very confident that we'll deliver both our top line and our bottom line guidance in the beer business.
Okay. Thank you.
Your next question comes from Dara Mohsenian of Morgan Stanley.
Hey, guys. So first just a couple
of follow ups. The drag from freight that you mentioned in the quarter, is that fairly consistent in the guidance in the balance of the year in terms of the year over year drag you're expecting in the balance of the year? And then on the beer pricing front, are you guys looking to perhaps be more aggressive with pricing given the rise you're seeing in transportation costs? Or do you look at it really more from a competitive standpoint and consumer demand elasticity than being tied to cost spikes? And then just the last one on the innovation front, can you just talk about Premier repeat rates at the consumer level so far?
Obviously, you mentioned the distribution was strong, but what are you seeing in terms of repeat rates and cannibalization across the rest of your portfolio? Thanks.
So I'll start out and I'll leave Rob to talk about the cannibalization. So yes, we've in our thinking about the rest of the year, we've fully internalized the effects of the transportation drag and expect to be able to cover it. From a pricing standpoint, we typically talk about being able to take price of 1% to 2% a year across the portfolio. We're seeing a fairly robust pricing environment in the high end. I wouldn't expect that we'll go outside of our pricing range, that 1% to 2% range, although that work is going on literally this month as our teams are working through pricing.
And then I'd say as to consumer takeaway and repeat on Premier, in particular, which is what you asked about. As I said, Premier is responding probably a bit above our expectations. We were very we were able to gain distribution on the product at a pretty rapid rate. You see velocities at rates which we think are very strong. So I'd say all good for Premier.
We don't see any chinks in that armor. We think it's going to be a very, very successful brand launch. Plus we put a lot of investment behind the marketing of the brand. And I think that we're seeing the response to that. And then to your question on cannibalization, we're not seeing cannibalization at a rate greater than what we expected in the 1st place, period.
So pretty much I mean that's the bottom line. So I'd say as it relates to the new products, I'd put that above expectation. I'd say as it relates to the entire Mexican portfolio, I'd have to say that that's also slightly above expectations as well. That business, our Mexican beer business is performing very strongly as we go through this fiscal year. So we see no issues whatsoever there.
Your next question comes from the line of Caroline Levy of Macquarie.
Thank you so much. Just a couple of quick ones. Could you just discuss the level of beer inventories with distributors at the end of the quarter, how that looked versus where you're comfortable? Is it a little high, a little low? And are there any out of stock issues?
Were there any out of stock issues as a result of all the new products being managed? The second thing really is just I've never in the past decade, I don't think heard you call out grape costs. So it sounds like those are creeping up, if you could explain why. Thanks.
Yes. So in terms of inventory levels at distributors, they're in line with where we typically are at this point of the year, perhaps a bit on the low side. So I don't think there are any there aren't distributor load issues clearly. And there weren't significant out of stocks to the best of my knowledge. From a great cost standpoint, the call out is really based upon the flow through of a tight naphtha harvest year 20 16, which is starting to come through our P and L.
Also, there was issues in Italy as well in terms of the grades that are coming through that are driving increased costs. Now that said, the operations team in the wine business has some overhead initiatives and some blend management initiatives that we've put in place that we'll start to see flow through the P and L over the remainder of the year. So I don't think there's anything that's worrisome there. It's just a call out in terms of our margins in line.
Your next question comes from the line of Andrea Teixeira of JPMorgan.
Hi. Good morning, everyone. So I want to just perhaps go back to the kind of depletion trends how you see it evolving for the rest of the summer? And on the price in the pricing commentary that you gave in terms of timing, do you still is it the timing around October, which is the typical historical trend for the industry? Or given the cost pressures, you may anticipate this price increase or perhaps reduce the promotional levels as we go?
And then related to that, just to as a clarification, so you're saying the 2nd quarter pressures on gross margin for the beer business would be slightly less than what we saw and then compounded the cadence through the rest of the fiscal year given that the FX has been more favorable now with the peso depreciating? Or should we still see some sort of the same magnitude pressure on the Q2? Thank you.
Let me start with the last one first. So in terms of gross margin in Q2, we expect that some of we'll still have some transportation headwinds. We actually expect instead of having an FX headwind, we'll have a bit of an FX tailwind and we'll get some of the operational benefits that I touched on earlier. So any operating margin pressure in Q2 will really come from the incremental spend behind our brands that I talked about from a marketing standpoint being in that 10% to 11% range of net sales. We are working through our price increase process.
Our revenue councils have been meeting, working with our sales people to try to arrive at our pricing increase, which will take place in October. It will be announced before then. So we see no changes on that front. And depletions, I would say, at 9% were quite strong, especially given the weather effects that we're seeing across the country. But in particular for us in California, which is our largest market.
So we're very happy with those depletion trends and we're feeling pretty bullish on the performance of that business throughout the remainder of the year.
Thanks, David. And on depletion, can you give us like how much was each quarter so that we can see the cadence?
No, we don't really give depletion guidance.
Okay. Yes, no, I'm saying within the month, sorry, within the month of the Q1 fiscal 2019?
Yes. Again, we don't break it out to that level. But again, we just generally and you can assume that March was soft in California, April was soft elsewhere in the country and may look pretty strong.
Your next question comes from the line of Vivien Azer of Cowen.
Hi, thank you.
Hi, Vivien.
So I wanted to touch on Premier and Familiar as well, please. So two questions. In terms of the distribution gains, can you contextualize how your kind of ACV like has changed and perhaps like kind of the size of your shelf set has changed with this incremental innovation, 1? And number 2, any callouts in terms of competitive responses? Thank you.
Yes, Vivian. ACV is a great story. We built ACV in Premiere thus far to 63% and Familiar without it being introduced everywhere to 37%. So we're pretty excited about that. And as I sort of indicated, I'd place that in the category of excellent results and even potentially above our own expectations.
And then, I would say in terms of the shelf, we're fundamentally getting incremental shelf space for these products, which is great and makes a lot of sense for the retailers. I mean, I would say that retail is getting it, okay? Retail understands and they're getting that they can increase their own sales and profitability by getting behind this portfolio, Constellation's portfolio. So we continue to be, by by a factor of many folds, the largest provider of growth at retail of any beverage alcohol company period in the United States. So, we're pretty pleased with these results, which is one of the reasons, I would say, why we have the stomach, okay, to invest behind the portfolio, the way that we've invested behind the portfolio.
So, we're pretty confident as we sit here right now that this is going to work out well.
Your next question comes from the line of Judy Hong of Goldman Sachs.
Hi, Judy.
Hi. So one is just a quick follow-up on gross margins on beer. David, just was there any impact on Q1 related to any of the trade spend linked to the Premier and the Familiar expansion? And then secondly, the broader question just really on the Corona brand family. So obviously, the new innovations are lifting the growth rate of the entire family, which is positive.
But you are seeing, slowdown in terms of the corona Extra and the corona Lite declining. And I know, Ravi, talked about cannibalization actually being pretty close to your expectations. So what do you think is happening to those particular brands? And is there any concern that even though the family is accelerating that particularly those brands are a little bit soft as you think about the growth rate into maybe next year as you lap the innovation driven growth this year?
Yes. I guess I'll comment on the last point. As I said, cannibalization is well within what we expected and predicted. We don't see cannibalization really being a huge factor except perhaps against corona white, which I would say is what we expected. Any impacts on corona, which Corona Extra, which is performing very well is probably mostly weather related in March in the 1st month.
And frankly, I don't really like to bring the weather up, because it doesn't really matter. And I think that we fully expect the portfolio and the base portfolio to respond or to perform as we expected. If you take a look at the whole Corona family, for instance, we were tracking, I don't know, 200 or 300 basis points or 200 basis points behind where we were for the Q1. So, it definitely appears to us that 1 plus 1, meaning the base portfolio plus the new products is adding up to 3, not just 2 or even below 2. So I think we're at, what, 14.7 percent IRI.
Yes. That's about even higher than that for the very distant.
And higher than that for the latest. So consumer takeaway is very, very strong across the entire portfolio. As I said, Corona Light, we expected some cannibalization there.
And Judy, there was no real meaningful effect on drag on margins as a result of the new product launches. Those were quite smooth based upon some really good work out of our production folks.
Okay. Thanks. Your next question comes from the line of Robert Ottenstein of Evercore ISI.
Great. Thank you very much. Rob, I was wondering if you could perhaps reflect on how you're looking at the cannabis opportunity, touching on what roughly kind of your investment level in cannabis related projects this year? Do you see that being more or less than what you thought it would be 6 months ago? And in addition, can you address the potential of doing something in California, Lagunitas is coming out of a product in 1 to 2 months?
Is there any way in which you can create a separate subsidiary or something that would give you regulatory comfort that you could enter that market at some point in the future even if we don't get full federal legalization? Is it even a remote possibility? Thank you.
So first of all, Robert, our investment in cannabis is completely in line with what we expected. But that said, we're making a significant investment in cannabis from an operating point of view. We all know of our investment in Canopy. And of course, that's working out quite well, but we didn't do it specifically to speculate on Canopy stock, because that's not what we do. We did it to, in essence, have a stake in Canopy and to create what's almost a joint venture between ourselves and Canopy to develop product for the world market, okay, including the U.
S. So we have a team and a significant team of people that both came out of Constellation as well as new hires, sort of the full accoutrement that's necessary to really develop products. They're headquartered we call them GreenStar. They're headquartered in Toronto. And they're working diligently with many of the major, both advertising firms and marketing firms and consulting firms for that matter.
We also have been engaged on that topic, meaning cannabis, so that we're ensuring that we're covering all fronts on that. I think that as to your question about the United States, the answer is that we're not going to do anything that is violative of federal law. But that said, we're looking closely at precisely that issue and making sure that we understand what we can do and what we can't do. And sort of as you've implied, there may be things that we can do and we will do them if we can do them, if it's as I said, it's not a positive of federal laws and we'd like to. So yes, we're aware of the laganitas.
What they're saying, let me put it that way. I don't have any really true inside knowledge of exactly what they're doing and how they're doing it. But we're pretty interested in what they're doing and how they're doing it. And we don't intend to get caught and be coming from behind. So I suppose therefore the answer to your question is yes, we're looking at it pretty carefully.
And if we see that opportunity within the confines of what we can legally do, we will do it.
Terrific. That's very clear. Thank you.
Your next question comes from the line of Tim Ramey of Pivotal Research Group.
Thanks so much.
Hey, good morning. I think Rob probably continued talking in the couple of minutes that you weren't on the call. And if it was true to form a previous calls, it might have been when you were discussing some of the brand performance in beer, Modelo Especial, we didn't hear any commentary on that if there was some. So that would be one question to maybe repeat some of that. And second on the wine grapes, based on my data, it looks like 2017 would have been flat to down from 2016.
So understanding your FIFO structure, should we expect some easing of that as we roll forward?
I'll let David address that. Yes, I think we had some technical difficulties in the call. And I believe I was talking about wine and spirits and perhaps what the part that was deleted was the fact that I said that we would reiterate we wanted to reiterate that we're committed to growing net sales and operating income for our wine and spirits business in the 2% to 4% range in fiscal 2019, which is what our original guidance was. So and then I think I was talking a little bit about pointing Jim Sabia, who's our beer marketing guy historically to the position of Chief Marketing Officer for the whole company. So I think that that's what was cut out.
And then on Modelo Especial, I think that I was saying that we had double digit depletions in Q1. And so we see everything to be all good with Modelo Especial. Like some other brands, March was a bit dicey in the beer industry as a general proposition, especially in California, in our largest market. But I think that the good news there is that we outperformed everybody else probably to the same extent that we have in the past and we saw everything bounce back. And if you look at Modelo Especial's latest IRI, it's up 20%.
So we just don't see anything there that's indicative that our Mexican beer portfolio won't perform in accordance with our guidance. And in fact, we think it's performing above a bit above our expectations at the current time. So we're very optimistic in general about hitting both the beer guidance and the wine and spirits guidance. I'll just talk a moment about the wine side of the business, which Q1 was weaker than we would have liked on the depletion front. And that was largely due to a couple of factors, really two factors.
Number 1, strong finish to last year. So I think that there was some timing there and some borrowing perhaps at retail from the Q1, but nothing untoward. And I think that we'll see that made up as we go forward here. I think we'll see depletions fundamentally performing at sort of the historical level. And you can look at sort of the 12 week or the 52 week and sort of see what that is.
And then last year, we had we ran ourselves out of Meiomi, and I say ran ourselves out of it, it was really due to the fact that sales were so stellar that we ran out of Miomi and then we refilled that pipeline in the Q1. As you recall, we had like this wildly good Q1 last year in wine and spirits. And so we were overlapping that fill, which also accounted for some of the performance below expectations on wine and spirits for the Q1. But we don't really see that necessarily impacting the whole year, and we see the wine and spirits business performing in line with the market, as we've been saying for quite a long time now, and we don't see any real chinks in that armor. There's nothing happening with our brands that is contrary to what's been happening in the past.
In fact, we've got a lot of really strong marketing programs that are hitting, strong promotional programs that are hitting. Our innovation pipeline on the wine and spirit side, I think, is the strongest that it's ever been. So we're optimistic on wine and spirits as well.
And on the COGS question, Tim, so last year, we finished with gross margins in the wine business kind of just sub-forty 5 percent and then coming out of Q1 where we were just above 43%. We expect to grow our gross margins year over year in the wine business. So yes, that implies a combination of mix improvements, some work we've done from an overhead and operational standpoint as well as blend improvements, which are inclusive of grade costs.
Is it a fair statement that 2017 was flat to down versus 2016 in terms of grade costs?
Yes. I'm not sure as it relates across as it ties out across our portfolio, but we can get back to you on that.
Your next question comes from the line of Bill Chappell of SunTrust.
Just following back up on Premier and Familiar, you had given out the ACV numbers. Can you just kind of give us some color of where you thought they were going to be this quarter? Because you last reported 3 months ago and something happened obviously in the 3 month timeframe to pull forward the marketing. Was it a big customer added more? Was it just across the board?
There was much more ACV than you had expected kind of going into the planning process? Just trying to understand how I mean, it seemed like it was a pretty quick shift and meaningful shift in a very short amount of time. So maybe even just on ACV, what you thought it would be?
So Bill, we don't really plan ACV quite that specifically in terms of the number. So all I can really say is I think that the numbers that I quoted were above what we expected, which basically means that we had more even better retail take up than we expected. I mean, it's sort of as simple as that. I can't tell you like whether it's 300 basis points or 400 basis points or whatever. And I think it would be sort of sophistry to start talking about those numbers in hindsight.
And then on the marketing investment, we did not pull it forward. We planned it. We planned to do what we've done period. In actuality, we thought that we had communicated that pretty specifically that we were going to be making significant investments behind the introduction of these new products in the first half of this year. We thought we had communicated that.
And the only reason I'd say I thought we communicated that is I think that there people seem a little surprised about it. But to be clear, we didn't pull anything forward at all. We did exactly as we planned to do and there's no way around it. We have some significant investment spending in the Q1 against these new products. The good news is this is not a plan to invest money for some long term and some long term basis that is immeasurable.
We do think it's a very, very good investment for the long term. But in terms of seeing our return on this investment, we expect to see the return on this investment this year. So that's why and we're seeing it and that's why we're confident in the guidance and that's why we were able to give the guidance that we gave in the 1st place, which we think is pretty robust performance for our company and for a consumer goods company, period. I mean, it still puts us I mean, in a percentile that can hardly be measured. So that's basically the story.
So we didn't pull anything forward.
That helps. So it's just reading it and I understand what you're saying. The comments at a conference maybe a few weeks ago was more of we said this before, we on the street just didn't hear it clearly and so we're trying to reemphasize that. Is that the right way to think about that?
Yes, I would say that. And again, I just reemphasize one thing in particular, which is we didn't do anything. Our explanation is not that we did something this quarter that we weren't fully planning to do. We did what we plan to do and based on our own internal expectations, things performed as well as we expected, if not better. So we're on track for our guidance for the full year.
I mean, I guess in the end, you can wait and see how the year turns out. We're only in the Q1.
Perfect. That's crystal clear. Thank you.
Your next question comes from the line of Bryan Spillane of Bank of America.
Hey,
Bryan. Hey, good morning. Two quick ones. 1, David, on the FX effect on beer gross margins, just how much of a headwind was it in the Q1? And how much of a like tailwind given where the exchange rate is now do you expect it to be in the balance of the year?
Yes. So there are really 2 components. So FX was a small headwind to GP in Q1, but it was a larger headwind through operating income because we have as the peso weakened in the quarter and we had to reval our peso receivables with the biggest one being our VAT receivable, there was a reasonably sized SG and A drag on our beer business. So again, at the operating income line, it was a larger drag than it was at the GP line. And then going forward, we're about just over 80% hedged for the year at reasonably favorable rates.
And so actually the pace has been a bit volatile leading into the elections this weekend. So I would say it's probably too early to say, but we know we had a headwind in the Q1 and we're pretty confident it's a tailwind for the rest of the year. And I guess the size will be determined on what happens maybe even in the election over the weekend.
Okay, great. And then just one second one on Corona Premier. Can you give us a sense of where it's sourcing its share from? So is it coming from domestic premium lights? Is it coming from above premium?
Or even outside the sector, is it coming from spirits? Just any sort of color or early indication you have of where it's pulling its consumers from? Thank you.
I would say it's pretty much pulling its consumers from across domestic premium as a general proposition. So I think that your characterization of it is probably correct. Meaning, it's I think it's probably pulling its consumers from domestic premium lights. And that kind of makes sense when you think about it because it's a low calorie, low carbohydrate beer. I would say that its primary competition, Michelob Ultra, continues to perform well.
So I don't think that it's evident that it's pulling necessarily from there. But MiC Ultra and I think Corona Premier is pulling from the premium lights is probably the bottom line. People aren't going to drink a light beer in the 1st place aren't all of a sudden switching from non light beer to light. They already made the decision that they weren't going to drink light. So I think that the simple logic would suggest that this is a premium choice for the already health conscious and light consumer.
That's what I would believe.
Okay, great. Thank you. Have a great weekend, everyone.
You too. Your next question
comes from the line of Lauren Lieberman of Barclays.
Hi, Lauren.
Hey, thanks. Good morning. Two quick things. One was just one brand we haven't mentioned much is Pacifico outside of your prepared remarks. And I know I get Nielsen data, which doesn't seem to be all that representative.
IRI seem to do a better job for you guys. But Pacifico, even as the weather improved, looks to not be performing terribly well again in the scanner data. I was just surprised to see that as you're kicking off the national launch of the 12 pack on the TV. So I would just be curious to hear any commentary on Pacifico performance and what the scanner might be missing? And then also just on the distribution footprint.
So there's the trade press, the gossipy stuff, there's been a lot of chatter about some changes you guys have been making in your distributor footprint. So any color you could offer there on what's been driving the decision making process and if there's any records to be set straight versus what's kind of been reported in the again in
the trade press, it would be great. Thank you.
Sure. So, first of all on Pacifico, Pacifico is almost I mean the vast, vast majority of it is very regional and largely Southern California. So it was probably affected by the weather in Southern California in the earlier part of the quarter to a greater extent than others. If you look at the performance outside of Southern California, it continues to perform double digits. And in general, it's looking very good.
We see no real issue with Pacifico other than that. That market has been was pretty weak in the Q1 and Pacifico was affected by it. But it continues to be a very strong brand that I think that we have very high hopes for and we don't see anything dashing those hopes. Now on the distributor question, number 1, I would say that we have the best distribution The one change that we The one change that we made in Southern California was only one change. So I think that characterizing it as some kind of change in our distributor footprint in general or some kind of change in our philosophy of how we deal with or treat our distributor partners is simply incorrect.
I think that it was kind of interesting news and there's a lot of pundits that have a lot to say about it. But the fact of the matter is that it was one change in a market and the change made a lot of sense because we were able in that particular market to give that territory to another one of our very important distributor partners. So that change, as I said, made a lot of sense to us. Interestingly, I think that the trade press glossed over another change that we made, which I think is very significant and probably more significant, which is the fact that we gave our entire wine and spirits business in the Pacific Northwest, I. E.
Washington and Oregon to our long time beer distributor up there, Columbia, which I think is an interesting thing, because it is aligned with our total beverage alcohol strategy. Not that that's necessarily something that we intend to do either on a broader basis. So in either case, it's just simply not appropriate to extrapolate what we did in either one of those cases necessarily to any broader, I'll say, point about the network, other than what we did in those specific instances. So we have a great relationship with our wholesalers. We're the company that's really providing 100% of their growth in many cases now, especially as you see Craft having slowed down a bit.
And I have to say that the results that we have achieved in our beer business and that we continue to achieve in our beer business is in a large part due to the efforts and the investment and really the skill of what we call our gold network and those distributors. So the only thing I would say is you can't take one move and extrapolate it to mean anything whatsoever. In a distributor in a network that has 500 or 600 distributors across the entire United States, there's always something going on in soft market relative to the network. And I would say we have better relationships than anybody. I would say we will have better relationships than anybody.
And I would say that the network is completely intact and a very, very strong network. We may change the name of it from the gold network to the platinum network, in fact.
All right. Thank you.
It always gets better.
Your final question comes from the line of Amit Sharma of BMO Capital Markets. Ahmet, your line is open. Please state your question.
Well, that's an easy question to answer, Amit.
Sir, if your phone is on mute, please unmute it. There is no response from that line. I will now return the call to Rob Sands for any additional or closing remarks.
Okay. Well, I want to thank everybody for joining our call today. Let me just reiterate that our business prospects remain very strong, and I'd like to reiterate that we're confident in achieving our full year goals as we're expecting a strong back half to the fiscal year. As the July 4th holiday approaches, I hope that everybody gets to enjoy some of our fine beer, wine and spirits products at your celebrations with family and friends. So thank everybody and have a fantastic rest of your summer.
Thank you for participating in the Constellation Brands First quarter 2019 earnings conference call. You may now disconnect your lines and have a wonderful day.