$STZ Q3 2025 AI-Generated Earnings Call Transcript Summary

STZ

Jan 10, 2025

The paragraph is an introduction to the Constellation Brands, Inc. Q3 Fiscal Year 2025 Earnings Call. The operator informs participants that the call is in a listen-only mode and will be followed by a Q&A session. Joseph Suarez, Vice President of Investor Relations, welcomes everyone to the call, introduces the CEO Bill Newlands and CFO Garth Hankinson, and mentions where to find reconciliations between GAAP and non-GAAP measures. He also highlights upcoming availability of slides with key points from the call on the company's website. Bill Newlands then begins his presentation by noting growth in consumer demand for their beer portfolio in the third quarter, which increased depletions growth compared to the second quarter.

The company experienced accelerated growth in Q3 due to increased marketing investments, despite a challenging macroeconomic environment and reduced consumer spending on beverage alcohol. This sector's growth mirrors a broader trend of value-seeking behavior among consumers. As a result, the company has adjusted its Fiscal 2025 beer business sales growth outlook to 4-7% and operating income growth to 9-12%, with an operating margin of about 39%. Even with these adjustments, the company expects double-digit EPS growth from the midpoint to the high end. Despite macroeconomic challenges, the beer business outperformed the total beverage industry and CPG sector in dollar sales growth for the twelve weeks ending December 1.

The paragraph discusses the company's progress in expanding distribution for its core brands, aiming to meet a target set for Fiscal 2024 to 2028, with significant advancements made in the current year. It highlights challenges faced by their high-end light beer offerings, such as Madeloforo and Corona brands, due to competitive pricing and consumer demand shifts in convenience channels, particularly affecting large pack formats and gelato brands. The company is focused on addressing these challenges through strategic marketing investments, including English language TV ads and new packaging formats. Additionally, there is a noted increase in dollar sales driven by 21 to 24-year-olds, whose spending and shopping frequency have significantly risen, leading to a substantial growth in market share for this demographic.

In the third quarter, the company maintained a net leverage ratio slightly below its target while advancing capacity investments and returning significant cash to shareholders through share repurchases and dividends. The beer business experienced growth, overcoming consumer economic challenges, with shipments increasing by 1.6%. Financially, the business saw a 2% increase in net sales and operating income, aided by strategic pricing and $40 million in cost savings. Modelo Especial outperformed in the U.S. market, gaining market share and demonstrating strong growth potential in key areas such as awareness and distribution.

The paragraph discusses the performance of various beer brands, emphasizing positive growth and strategic expansions. Corona Extra saw a slight decline in depletions but increased its dollar share, benefiting from enhanced marketing efforts, particularly around the World Series. Pacifico experienced robust growth, especially in Southern California, and is expanding into other metro markets. Modelo Chilada brands grew by around 4% despite challenges in the convenience channel, which are expected to be short-term. Overall, the company is focused on continuing its progress in volume growth by increasing distribution, focusing on consumer-led innovation, attracting new customers, and maintaining incremental marketing investments. The paragraph concludes with a transition to a discussion on wine and spirits.

The company has decided to sell Spedka as part of its strategy to focus on higher-end wine and spirits brands, responding to evolving consumer preferences. This move follows actions taken over recent years to align its portfolio with market trends. The company has experienced growth in its craft spirits portfolio, with a 9% increase in the third quarter, but has faced challenges in the wine sector, especially in lower-priced segments, leading to a decline in shipments and resulting in a drop in net sales and operating income. Despite these challenges, their fine wine portfolio has seen a growth of 6%. The company remains committed to several strategic initiatives, including tactical pricing, marketing support for its top brands, better distributor alignment, and cost efficiency measures. In response to market challenges, the company has adjusted its fiscal 2025 outlook, anticipating declines in net sales and operating income.

In the article paragraph, the company is managing a challenging consumer environment due to macroeconomic factors but expects a strong fiscal year driven by growth in its beer business and proactive improvements in its wine and spirits segment. Enterprise net sales were stable year over year, with beer performance offsetting declines in wine and spirits. Enterprise operating income slightly declined, but comparable EPS remained flat at $3.25 due to advantageous tax rates and investments. The company updated its Fiscal 2025 guidance, projecting 2-5% net sales growth, 6-9% operating income growth, and EPS between $13.40 and $13.80. The guidance incorporates segment-specific adjustments and additional updates.

The paragraph discusses the business segment details of a company's peer business for the quarter. Net sales increased by 3%, amounting to a $64 million rise, primarily due to a 1.6% growth in beer shipment volumes and a 2% price increase. Despite facing a slight negative impact from consumers shifting to larger, value-oriented pack sizes, beer depletions grew by 3.2%. The on-premise sales, supported by top-performing brands like Modelo Especial and Pacifico, grew by nearly 5%, while off-premise sales, accounting for 89% of total volumes, increased by nearly 3%. The growth in off-premise channels was slower, particularly in independent retailers, due to higher unemployment rates in key states affecting purchase behavior. Although current trends reflect these dynamics, it is uncertain if they will persist long-term.

In the third quarter, beer shipments were exceeded by depletions due to seasonal maintenance, but full-year shipment and depletion volumes are expected to align. The beer business anticipates 4% to 7% net sales growth, including a 1% to 2% price increase. Operating income rose by 2%, but operating margin fell by 60 basis points to 37.9%, driven by higher gross profit and increased marketing investments. Gross profit improvements were due to sales drivers and a $40 million cost-saving initiative, partially offset by a 1% COGS increase. Marketing expenses were just over 10% of net sales for the quarter, expected to be around 8.5% for the year. Other SG&A expenses were 5% of net sales. For Fiscal 2025, beer operating income is expected to grow by 9% to 12%, with a stable operating margin of 39%. In contrast, the wine and spirits business saw a 14% net sales decline in the third quarter, mainly due to a 16% drop in shipment volumes, influenced by reduced consumer demand and retailer inventory destocking in the US wholesale market.

In the fourth quarter, the wine and spirits business expects improved organic shipment volume growth due to pricing, marketing, and distribution initiatives, along with stabilized retailer inventory destocking. Despite anticipated positive trends, projected wine and shipment organic net sales for Fiscal 2025 are expected to decline 5% to 8%, reflecting ongoing volume challenges and the recent divestiture of Spedka. Operating income fell by $32 million, largely due to reduced shipment volumes, with marketing expenses above target, primarily for high-end brands. Fiscal 2025 operating income is projected to decline 17% to 19%, excluding profits from the divested Spedka brand. Corporate expenses decreased by 3% for the third quarter due to lower compensation, although consulting and depreciation costs rose due to a headquarters relocation.

The company has updated its Fiscal 2025 corporate expense outlook to $250 million, with a consistent interest expense of $104 million for the quarter and an expected full-year interest expense of $410 million. The comparable effective tax rate is projected at 18.5% for the year. They have generated $1.6 billion in year-to-date free cash flow for Fiscal 2025, a 13% increase from the previous year, allowing them to return over $1.2 billion to shareholders and continue brewery investments. They anticipate annual operating cash flow of $2.9 billion to $3.1 billion and free cash flow of $1.6 billion to $1.8 billion, surpassing initial targets. The completion and startup of an expansion at their breweries in Mexico have been moved to Fiscal 2026, while the new brewery in Veracruz is on track for late Fiscal 2026 or early Fiscal 2027 completion.

The paragraph discusses a company's strategic and financial plans and responses to market conditions. It mentions a shift in capital expenditure for brewery expansion from Fiscal 2025 to 2026, with a total of $3 billion expected to be invested between Fiscal 2025 and 2028. The company emphasizes its progress in strategic initiatives, maintaining growth, investing in brand momentum, operational efficiency, cost discipline, and cash generation, while adhering to capital allocation priorities. The company is also monitoring consumer spending trends, economic drivers, and potential macroeconomic shifts like tariff policies. The speaker reaffirms the company's commitment to balancing consumer focus and stakeholder value as they approach the end of Fiscal 2025. Finally, they open the floor for questions, with Dara Moshenian from Morgan Stanley asking about factors affecting beer depletion, including short-term consumer behavior and long-term trends like health and wellness, demographics, and cannabis.

In the article, Bill Newlands discusses the impact of short-term dynamics on long-term beer revenue growth guidance. He mentions that recent moves in the market have been longer than expected, but he doesn't see them as structural or long-term issues. A key factor affecting the business is rising unemployment, noted in 31 states, which can influence consumer spending, especially among those earning $50,000 a year or less. Despite this, the consistent percentage of alcohol in the consumer basket is reassuring. Newlands anticipates a recovery from this downturn in the near term. Kaumil Gajrawala from Jefferies then inquires about the company's approach to capital allocation and CapEx deployment for new capacity amid the current economic slowdown and uncertainty.

In the paragraph, Bill Newlands and Garth Hankinson discuss their company's approach to capital deployment, weighing the benefits of delaying certain capital expenditures (CapEx) like the Veracruz project against the option of increasing share buybacks. They emphasize that their expansion projects are modular, allowing flexibility depending on market conditions. The company has continued to prioritize share repurchases, having spent $220 million this quarter, with $1.9 billion remaining authorized for buybacks. Garth highlights the agility in their strategy and projects potential positive cash flow changes in the coming years.

The paragraph features a discussion about the company's disciplined approach to capital allocation, particularly emphasizing a shift towards returning capital to shareholders as major commitments, such as the brewery expansion in Mexico, near completion. Bonnie Herzog from Goldman Sachs queries the company about the reasons behind lowering the full-year net sales growth guidance, noting the widened range despite only two months left in the year. She asks about potential factors affecting this range, such as unemployment in the core demographic or impacts from California fires. Bill Newlands responds that the updated range accounts for potential risks like unemployment and tariffs.

The paragraph discusses the company's response to macroeconomic volatility and unexpected events like fires in Los Angeles. Despite challenges, the company is focusing on safety and supporting affected individuals through donations. During a conference call, Lauren Lieberman of Barclays inquired about the ongoing negative trends in the wine and spirits division. Bill Newlands responded by acknowledging the downturn and the need for adjustments in their turnaround plan, highlighting some positive developments, such as growth in certain brands like Naomi and Kim Crawford and a 9% increase in their craft spirits portfolio.

The paragraph discusses a company's strategic focus on the higher-end segment of their business, which is seen as having better growth and profit potential compared to the lower-end, currently facing difficulties. The company is optimistic about the performance improvement of their key brands, exemplified by Naomi and Kim Crawford. Following this, Bryan Spillane from Bank of America asks whether the company agrees with the assessment that their beer category will reach shipment levels in 2024 comparable to those in 1990, suggesting the category is struggling.

The paragraph consists of the word "to" repeated numerous times without any context or coherent content, making it impossible to summarize meaningfully.

The paragraph discusses the performance and growth opportunities of a company's beer brands, noting that although the beer category hasn't been particularly healthy, the company has consistently outperformed it. Modelo is highlighted as having significant growth potential due to its strong awareness and household penetration. Other brands like Pacifico and Victoria are also seeing strong double-digit growth, appealing to different demographics. Additionally, products like Corona Sunbrew and Corona nonalcoholic offer new opportunities. The company has been growing faster than the Consumer Packaged Goods (CPG) sector for over a decade and expects to continue this trend. The paragraph ends with a question from Robert Ottenstein about inventory levels and shelf space expectations for 2025, which Bill Newlands begins to address.

In the paragraph, the speaker discusses inventory levels, noting that they are slightly higher on one side of the border compared to historical figures due to potential order disruptions. This approach is described as good business practice, and it doesn't impact ongoing inventory levels. They anticipate normalizing this year after significant gains in shelf positions from the previous year. The speaker expects to continue gaining shelf space due to strong performance in the beer category. Andrea Teixeira from JPMorgan then asks about the impact of potential tariffs on volumes and operating margins and seeks clarity on volume projections, which have a wide range from -5% to +9% with limited time remaining in the period. Bill Newlands responds to these questions.

The paragraph involves a discussion between Andrea Teixeira and Bill Newlands on the company's volume growth projection and tariff scenarios for the fourth quarter. Andrea corrects an earlier statement, clarifying that the volume growth projection is 4% to 7% plus, not negative. Bill Newlands mentions that the tariff scenario involves many "what-ifs," making it too early to predict outcomes, but the company is prepared with various strategies. The discussion also covers the broader range of projected outcomes for Q4 due to potential macroeconomic risks, highlighting unemployment as a key concern. However, recent positive unemployment data may serve as a tailwind. The operator then announces a question from Filippo Falorni of Citi about beer margins.

The paragraph discusses the company's perspective on beer margin opportunities. Garth Hankinson explains that their target beer margin range is 39% to 40%. This range is influenced by various factors such as increased advertising, pricing actions, cost-saving initiatives, and inflationary impacts. While incremental volume and efficiency initiatives may provide tailwinds, normal inflation and fixed overhead absorption during capacity growth present potential challenges. The company acknowledges that margins may fall below 39% during periods of high inflation, as seen in 2023 and 2024, but could exceed 40% in years with more favorable conditions, like in 2022. The operator then introduces a question from Robert Moskow about price competitiveness in the whiteboard segment, seeking insight into the company's response.

The paragraph is a conversation from an earnings call where Bill Newlands discusses the light beer sector strategy amid weak industry volumes. He explains that they assess opportunities on a market-specific basis, considering factors like market velocities and growth profiles, as well as pack sizes. They aim to maintain a consistent one to two percent pricing strategy, which they believe is consumer-friendly and preferable to drastic changes. During COVID, they consistently adhered to this strategy to avoid negative impacts. Next, Peter Grom from UBS asks about fourth-quarter guidance, specifically regarding shipments versus depletions. He seeks confirmation that shipments are expected to be slightly below depletions in the fourth quarter, aligning with their annual expectations.

In the paragraph, Garth Hankinson discusses the discrepancies between the company's depletion data and the SARCANA data, noting that SARCANA only captures about 50% of their sales activity, which contributes to volatility in the gap between the two datasets. Hankinson emphasizes that questions regarding the gap should be directed to SARCANA. The conversation then shifts to CapEx, where Steve Powers from Deutsche Bank inquires about the flexibility of ongoing expansions, particularly in Northern Mexico, and whether the beer CapEx outlined through Fiscal 2028 is discretionary. Bill Newlands is set to respond to the first part of the question.

The paragraph primarily discusses plans to open a facility in Veracruz within the next eighteen months, highlighting the ability to adjust capacity at this location and others like Obregon as needed. It emphasizes improved readiness compared to previous years, attributing this to better alignment of capital expenditures with business delivery targets. Garth Hankinson notes that the first production module at Veracruz will be relatively small at three million hectoliters. The discussion concludes with Bill Newlands highlighting the company's strong performance in the beer segment despite economic challenges and detailing significant shareholder returns of approximately $670 million through share buybacks.

The company has lowered its growth outlook for Fiscal 2025 due to uncertainty around consumer spending but still expects solid results with double-digit EPS growth. This is supported by its strong performance in the beer business and improvements in wine and spirits. The call concludes with New Year wishes and gratitude to participants.

This summary was generated with AI and may contain some inaccuracies.