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Constellation Brands, Inc. (STZ) Q1 2024 Earnings Call Transcript

Constellation Brands, Inc. (STZ)

Q1 2024 Earnings Conference Call

Company Participants

Joe Suarez - VP, IR

Bill Newlands - CEO

Garth Hankinson - CFO

Conference Call Participants

Dara Mohsenian - Morgan Stanley

Lauren Lieberman - Barclays

Peter Grom - UBS

Bryan Spillane - Bank of America

Bonnie Herzog - Goldman Sachs

Nadine Sarwat - Bernstein

Andrea Teixeira - JPMorgan

Chris Carey - Wells Fargo Securities

Filippo Falorni - Citi

Andrew Strelzik - BMO Capital Markets

Presentation

Operator

Hello, and welcome to the Constellation Brands Q1 Fiscal Year 2024 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference call is being recorded.

It's now my pleasure to turn the call over to Joe Suarez, Vice President, Investor Relations. Please go ahead, Joe.

Joe Suarez

Thank you, Kevin. Good morning, all, and welcome again to Constellation Brands' Q1 fiscal 2024 conference call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO.

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 made on this call.

Following the call, we'll once again be making available in the Investors section of our company's website, a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters, I'd like to ask that we limit everyone to one question per person as noted, which will help us end our call on time.

Thanks in advance, and now here's Bill.

Bill Newlands

Thanks, Joe, and good morning, everyone.

We are off to a strong start in fiscal 2024, with a solid first quarter. Our Beer Business delivered net sales growth of 11%, mainly driven by continued strong volume growth in line with our medium-term algorithm.

As anticipated, depletion performance accelerated throughout the quarter, resulting in a 5.5% increase for the period and acceleration that has continued into June, supported by our beer team's unrelenting push to increase distribution for our high-growth, high-velocity brands, continued incremental investments in marketing focused on the highest return opportunities and ongoing strong demand for our high-end Mexican beer brands aligned with consumer-led premiumization trends.

Particularly in large markets with significant runway for Modelo Especial, like Texas, Florida, Illinois and North Carolina with the brand posted double-digit dollar sales growth in Circana track channels. And yes, also in California, where our share gains actually accelerated and as expected, demand for our portfolio did ramp up after the unseasonably cold weather in early March.

All in, our Beer Business delivered strong growth for the quarter, while consistently advancing all four areas of our strategic initiatives. First, the business continued to propel its powerful core brands that people love.

Modelo Especial remained the number one dollar share gainer in the entire beer category, delivered double-digit dollar sales growth in tracked channels, and as most of you likely already are aware, became the number one beer in America in dollar sales during the first quarter. Both Corona Extra and Pacifico also achieved share gains and delivered dollar sales growth of approximately 4% and 26%, respectively.

Second, our beer innovations, which are still centered around the flavor and betterment consumer-led trends are off to a great start. Our Modelo Chelada brands remained a top 10 dollar share gainer with further support from our variety pack launched last year, the number four new product in Circana channels and from the launch of new Sandía Picante flavor, the number five new brand.

Modelo Oro was also a top 10 share gainer and incrementally has actually been slightly above what we saw in initial test markets. And Corona NA was the number one share gainer in the non-alcoholic beer category in tracked channels.

Third, the expansions of our beer brewing capacity continued to advance as planned. Our latest modular addition to Obregon successfully ramped up in Q1 and we are on track with the new ABA facility at Nava for Q4 of this fiscal year. At Veracruz, site development and construction work are underway, and we expect that to build up through this year and next.

And fourth, the ESG efforts of our Beer Business further drove progress on our company-wide goals, particularly those on water stewardship. As noted in our last call, we recently surpassed our target of restoring 1.1 billion gallons of withdrawals from local water sheds. The initiatives in our Beer Business drove most of this achievement, and we plan to announce a new water target later this fiscal year.

Building on our existing water and emissions targets, we also recently announced two new commitments focused on reducing waste and enhancing our use of circular packaging. In support of that commitment, within our Beer Business, we plan to attain a true zero waste to landfill certification for our breweries in Mexico and replace hi-cone plastic rings with recyclable paperboard for all applicable four and six pack SKUs.

Similarly, within our Wine and Spirits Business, we also plan to attain the same certification for our key U.S. operations, as well as reducing our packaging to product weight ratio by 10% and ensure that 80% of the business packaging is returnable, recyclable or renewable.

With that, let's turn more fully to our Wine and Spirits Business. As noted previously, over the last few years, the Wine and Spirits Business has strategically shifted its portfolio to a bold, innovative and higher-end product mix that continues to be driven by consumer-led premiumization.

In Q1, the higher-end wine portion of the business gained share in the U.S. wine category and outpaced the dollar sales growth of the corresponding segment and tracked channels. Meiomi and Kim Crawford, the portfolio's largest premium wine brands and The Prisoner Wine Company, the largest fine wine brand group were main drivers of this strong performance.

The innovation efforts across these brands also continued to deliver excellent results with Meiomi Bright, the brand's lower alcohol, lower calorie offering aligned with consumer-led betterment trend capturing the number one new brand spot in the category.

In the main streamline portion of the business, the reinvention of Woodbridge is underway to address the growth headwinds and facing that segment of the category while keeping the brand's core consumers engaged. And while there is certainly more work to be done here, the brand's year-over-year dollar sales decline in U.S. tracked channels improved throughout the quarter.

The overall spirits portfolio maintained its share in U.S. tracked channels with notably strong dollar sales performance across its higher-end tequila and RTD products. In particular, Mi Campo tequila and High West ready-to-drink cocktails, both delivered significant double-digit dollar sales growth. Beyond the evolution of the portfolio over the last few years, the Wine and Spirits Business has also been investing in capabilities to accelerate its performance in key growth channels.

This omni-channel focus has provided additional pillars of consumer-led growth such as international and direct-to-consumer. The latter of which grew the channel's net sales 13% in Q1. And in fact, the e-commerce and customer loyalty portions of our DT business - DTC business, pardon me, were up over 40% in Q1.

From a volume perspective, the Wine and Spirits Business continued to face lower demand primarily for our mainstream brands, reflecting continued consumer-led premiumization trends noted earlier, which in turn affected top line performance. In the higher end line portion of our portfolio, our larger premium and luxury brands faced softer segment demand in April, but we did see solid acceleration in May, and that has continued into June.

Meanwhile, in our spirits portfolio, our higher-end craft brands posted very strong depletion growth of 40%. The Wine and Spirits Business also delivered significant operating margin expansion in Q1, adjusted for the contribution after marketing of the divested brands. This further demonstrates the benefits of the strategic refocusing of the portfolio to higher end, higher growth, higher-margin brands and channels.

To sum up the shift of the Wine and Spirits Business toward driving growth and margin improvement through its pivot to the higher-end brands and broader channels and markets, remains well on track. All in, we are confident in our outlook for the Wine and Spirits Business in fiscal 2024 as performance is expected to continue to accelerate throughout the course of the year, in line with seasonality and the business' annual plan, particularly as the share of net sales from our Aspira, Fine Wine and Craft Spirits portfolio increases over the coming quarter.

In closing, I once more want to highlight that our solid performance for the first quarter of fiscal 2024 was anchored by the consistent execution of the annual plans and strategic initiatives across both businesses.

And with that, I would like to turn the call over to Garth, who will review in more detail our financial results for the quarter.

Garth Hankinson

Thank you, Bill, and good morning, everyone.

As Bill noted, fiscal 2024 is off to a solid start. We steadily executed against our annual plans, remaining both focused and adaptable as the economic and consumer backdrop continue to evolve and we remain on track to deliver against our stated financial performance goals for this fiscal year.

As Bill noted, our Beer Business achieved double-digit net sales growth and the higher-end segment of our Wine and Spirits Business outperformed the higher end of the wine category. We also continue to execute and deliver against our capital allocation priorities, and we are reiterating our guidance for the year.

Now, let's review our Q1 fiscal 2024 results in more detail where I will mainly focus on comparable basis financial results. Starting with the Beer Business. Net sales increased by $200 million representing an uplift of 11%. This was driven primarily by our volume growth of 7.5% as strong demand continued across our industry-leading portfolio.

We also benefited from favorable pricing, which contributed $60 million of the overall net sales increase. Staying on the topic of price for just a moment, the incremental pricing we realized this quarter primarily reflects the wraparound impact from the elevated pricing taken in fiscal 2023 that was above our typical 1% to 2% algorithm.

As a reminder, we expect pricing to account for 1% to 2% of our net sales increase this fiscal year, which represents the combined uplift from the wraparound impact and the average of any other additional pricing actions to be taken in fiscal 2024 on a market-by-market, channel-by-channel and SKU-by-SKU basis....

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