Release Date: April 11, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Constellation Brands Inc (STZ, Financial) delivered strong performance in fiscal '24 with comparable earnings per share growth of nearly 9%.
- Net sales increased by 5% at an enterprise level with solid operating leverage resulting in a 7% increase in comparable operating income.
- Beer business drove net sales and operating income growth above 9% and 8%, respectively, both exceeding expectations.
- Modelo Especial became the #1 beer in U.S. dollar sales and the beer business captured 1.1 points of share, driving nearly 70% of the total dollar growth in the beverage alcohol sector.
- Generated $2.8 billion in operating cash flow and reduced net leverage ratio by nearly 0.5 point while returning over $900 million to shareholders.
Negative Points
- Wine and Spirits business faced near-term category headwinds throughout fiscal '24, resulting in declines of approximately 8% for both organic net sales and operating income.
- Ongoing challenges in the Wine and Spirits category are not expected to immediately subside, particularly in the mainstream and premium price segments.
- Wine and Spirits business net sales expected to be relatively stable and operating income to be down 9% to 11% in fiscal '25.
- Incremental investments in media spend, price promotions, and sales capabilities, as well as continued inflationary pressures, are expected to impact Wine and Spirits business.
- Despite strong performance, the company faced a write-off of a bad accrual related to bad receivables in Q4, impacting operating margin by about 100 basis points.
Q & A Highlights
Q: Can you give any perspective on if there's any onetime issues that might have affected the gross margin this quarter for beer?
A: (Garth Hankinson - Executive VP & CFO) There was a write-off of a bad accrual related to bad receivables in Q4, impacting the operating margin by about 100 basis points and the full year by about 30 basis points. The impact of the Aguas Frescas launch on Q4 was minimal, with the strength of the portfolio driving Q4.
Q: Can you give us any sense for momentum so far in March and April when the weather normalized or maybe how big a drag January was in Q4?
A: (William A. Newlands - President, CEO & Director) March was consistent with expectations, with two less selling days, and April has two more. The company had a strong March and expects a solid year. Modelo Especial continues to be the #1 beer in U.S. dollar sales, and the company captured low double-digit percent incremental shelf space this spring.
Q: At an enterprise level, we get back to being basically on algorithm for the year, but in a year where Wine and Spirits underdelivers beer -- at least in terms of growth rate on operating profit, maybe a little faster than normal, a little help from below the line on interest expense. So just is it a coincidence, right, that basically, there can be a hole with Wine and Spirits under delivering but there were other offsets. Or was this more a function of you all maybe making some adjustments to get to that place, whether it's pulling some savings forward or using some tax credits?
A: (William A. Newlands - President, CEO & Director) The numbers reflect strong results in the beer business and challenges in the Wine and Spirits business. The company is focused on execution and has not manipulated the numbers. Constellation Brands was recognized as the #1 growth company by Circana, reflecting the company's success.
Q: Can you comment on the promotional environment and kind of state of the union on inventory levels within the system, knowing it's tough to have visibility within 3 tier?
A: (William A. Newlands - President, CEO & Director) There was some inventory reduction in the U.S. and Canada. The company is refocusing efforts on premium and above brands and making additional investments in media spend and price promotions. There is a focus on 11 brands that represent a significant portion of net sales and volumes.
Q: Can you just perhaps expand a little bit on what specifically is driving the commodity input inflation?
A: (Garth Hankinson - Executive VP & CFO) While commodity prices have abated from their highs, they are still higher than historical norms. Some commodities have been resilient and haven't come down as much as hoped. The company is hedged against the peso and has cost savings initiatives to manage input cost inflation effectively.
Q: How much incremental shelf space do you expect as we think about this spring? And to what degree did you consider divestments as part of the strategic valuation on Wine and Spirits?
A: (William A. Newlands - President, CEO & Director) The company expected and is getting low double-digit shelf space in spring resets. The company believes it is important to access significant additional consumer occasions and spending by being able to play in all three categories of beer, wine, and spirits.
Q: What are you seeing in terms of the health of the U.S. consumer today? Any signs of down trading or shift in behavior?
A: (William A. Newlands - President, CEO & Director) The company is pleased with the health of its consumer and the brand loyalty within its franchise. The high end of the beer category, where Constellation competes, continues to see an increase in buy rate. The company is also emphasizing betterment trends with products like Corona nonalcoholic.
Q: Can you comment maybe on depletion trends outside of California versus inside California during the quarter and how those progressed throughout the quarter?
A: (William A. Newlands - President, CEO & Director) The company saw broad-based growth across the country, with significant growth in secondary markets. Pacifico's depletions were up 17%, and Modelo Especial continues to be the #1 brand in California. The company expects continued share growth in the on-premise channel.
Q: I think you mentioned roughly $200 million of cost savings for beer in fiscal '24. Can you just talk about maybe some of the projects where you saw a benefit and how we should be thinking about cost savings for fiscal '25?
A: (Garth Hankinson - Executive VP & CFO) The cost savings ramped up throughout the year, with initiatives in procurement, logistics, and operations. The company will continue with an aggressive set of cost savings initiatives in fiscal '25.
Q: Can you please expand further on the state of on-premise activity that you saw towards your end and more important currently?
A: (William A. Newlands - President, CEO & Director) The company saw some volatility in the on-premise channel, with some issues related to kegs that are now resolved. The company is optimistic about the on-premise channel, especially heading into Cinco de Mayo, and expects continued share growth in this channel.
