Constellation Brands, Inc. (STZ) Earnings Call Transcript & Summary

Great. So next up in our line of presentations, we have Constellation Brands. While nurturing a beer portfolio that is well aligned with modern-day consumer preferences, Constellation continues to look for ways to build on its competitive advantages through innovation and marketing and, of course, investments in cannabis and their portfolio optimization for wine and spirits. We're happy to have CFO, Garth Hankinson, with us today; and Investor Relations Officer, Patty Yahn-Urlaub, of course, without the video showing, joining me for Q&A session. So I'm going to jump right in through lots of interesting stuff to cover.

So Garth, key topic for the past few weeks for Constellation, of course, has been beer supply and demand. So back in July, you had mentioned that selling day-adjusted beer depletions for the second quarter were running in line with the first quarter. The scanner data since then has shown a slowdown as well as some building share losses. So we know you're dealing with expected out-of-stocks given the production curtailment in Mexico in April and May. But if you could just catch us up on shipment and depletion trends since July, what you're seeing in tracked versus untracked, whether production has fully ramped back up, and if the expectation is still to be back at normal inventory levels in your fiscal third quarter.

Yes. Thanks, Lauren. Thanks for hosting us today. The good news for us really is that due to our strong portfolio of brands, consumer demand remains quite robust, particularly for our core Modelo and Corona SKUs. In the scanner data that you mentioned, we have seen a bit of a deceleration in trends over the last month or so, and that's true of the entire beer category, not just Constellation Brands. We have experienced some out-of-stocks, as expected. I think as you noted and as everyone is aware, we did have a slowdown in production out of our Mexican breweries for nearly 2/3 of our Q1, and that eked a little bit into Q2. But since June, we have been back up and operating at normal production levels, and we are starting to really dig our way out of the -- out of where we were relative to supply. Inventories, as a result of the slowdown, at both our retailers and our distribution centers, was tight. But again, we're playing catch-up right now, and we're in a position where we're getting product out of Mexico as quickly as we can and getting them into the hands of our wholesalers, who are, in turn, getting it into the hands of our retailers. And so any out-of-stocks that we are experiencing, we're replenishing pretty quickly, and the out-of-stocks really only last for a matter of a couple of days. That cycle of us continuing to produce at normal levels, getting product out of Mexico as quickly as we can and into distributors and distributors to retailer, that cycle is going to go on for a few more days or a few more weeks, I should say. But really, the worst of this is behind us. And as you indicated or asked, we still are expecting that come November time frame, we'll be back at more normal levels of inventory across our channel or across our system, meeting with our distributors and with our distribution centers here in the U.S. So as that relates to our second quarter performance in beer, we're going to see depletions up in the range of low to mid-single digits, and we're going to see our shipment trends down probably low-single digits. Obviously, we're just closing the quarter now, so we'll have more on that to come during our quarterly earnings call here in a few weeks. And then in Q3, what we'll see is we'll see -- you certainly will see a reversal in that shipment-to-depletion gap, meaning in Q3, we'll ship more than we've depleted, and that's kind of consistent with how we messaged this back in our last earnings call where we said we needed to kind of look at Q2 and Q3 in aggregate.

Okay. Great. That's super helpful. If I stick with kind of the near term, the fall resets, I suppose, are coming up. But I think many retailers are just completing spring resets and who even knows that we could call it a fall reset given the out-of-stock dynamics across the industry. But if you think about further uptake of Shopper-First Shelf sets and what you kind of discussed with your retailers as an ideal shelf, what are you seeing? Kind of how are retailers viewing the portfolio? Any visibility into what's coming? And if at all, the out-of-stock challenges have kind of played into the equation of that Shopper-First Shelf development.

Yes. So Shopper-First Shelf, the strategy behind that doesn't change. That's -- and that strategy is that if you build the shelf with the consumer in mind, then the category, the entire category benefits. And so going through this COVID environment, we don't think that, that sort of strategy has ever been more relevant. Shoppers, clearly, at this point, are looking to go into the retail outlets. They're wanting to be able to quickly find the brands that they love and the items that they need and then to be able to get out of the store. And so we're able to work with our retail partners to develop those shelf sets that have the best assortment of products that reflect consumer demand, and we've been pretty successful. We're on track to deliver our full year Shopper-First Shelf goals. And we've been able to influence over 18,000 resets so far, and we're going to continue to influence that over time. Fortunately, we have a great stable of brands that consumers really seek out. And so for us, it's easier to influence the retailer that they should be carrying our brands because the consumers are calling for them. As it relates to the out-of-stock and the impact that, that's having, we're not seeing any loss of shelf space at this point. Again, as I mentioned in an earlier question, our cycle right now is such that any out-of-stocks we have are short in duration. And so we're not seeing any shelf-space lossage now, and we're not expecting to experience it going forward.

Okay. That's great. Also, just on the topic of the fall, the sporting events come back online. There was a raging football draft in my house last night, but I wasn't a part of, but that's what I think was happening. Just curious what your latest thinking is on marketing plans, the sequential step-up in spend, choices or changes in channel, be it digital, TV, et cetera, a lot of people will be watching from home.

Sure. And look, it's a challenging environment to be supporting the brands and clearly, our team here has been incredibly nimble and agile and performed really well. But we're committed to continuing to spend aggressively behind our brands. Clearly, in the first half of the year, we didn't spend as much as we would have -- as what was in our plan, but that was really due to some of the venues, some of the platforms not being available to spend behind, thinking about live sports. As we move into the fall and as sports come back online, we are committed to continue to spend. We're seeing that consumers really have a hunger or a thirst, even, so to speak, to consume live sports. And in your house, where you're doing a draft, in my house, it's the NBA finals that -- or the NBA playoffs that is getting everybody's attention. And so far, the viewership and the ratings for sports has been very, very positive. Baseball, opening day for baseball, had record viewership or set a record for the last several years. The NBA regular season playoffs is performing very well. And clearly, people are looking forward to the start of the NFL. So we're going to spend big behind the Corona brand family. The Gameday Beach is back with Tony Romo, Corona is the official cerveza of the Los Angeles Rams, and we've extended our presence with the NBA and the NFL. And then likewise, with Modelo, we got major sports presence there as well with the NBA playoffs and finals. And we're doing some things digital and social as well with -- doing some interesting things with websites, Bleacher Report and DraftKings and The Players' Tribune. So we're gearing up to spend -- to continue to spend aggressively behind our brands as live sports come back online.

Great. And I've caught all the -- the Kim Crawford ads make me very thirsty watching the U.S. Open, too. Okay. So just taking a step back, maybe a little bit bigger picture about the beer category as a whole, it's been remarkably resilient throughout this crisis, but we've certainly been debating what might happen as government stimulus fades or it doesn't come back, and in particular, if that has a greater impact for imports and other high-end beer brands. So are you seeing any signs of either slower takeaway or trade-down in the category? Kind of how are you thinking about the potential for that from here?

Well, clearly, this is something that we watch really closely. We're monitoring all of the economic indicators to see if we can get any early indications that there's any reason for concern or any reason that we need to adjust on the fly. The good news there is that so far we're not seeing anything to suggest any slowdown in consumer uptake nor are we seeing any impact to the premiumization trend. In fact, if you look at the consumer takeaway trends, you'll see that premiumization has continued, and the premium brands continue to outpace their more popular-priced counterparts. That is consistent with what we've seen in prior recessions. In 2008, we saw a bit of a slowdown in premiumization, but we didn't see any reversals there. And again, premium brands outpaced their competitors. So we don't have any reason to be concerned as we sit here today that our premium profile -- our premium portfolio is at risk. But again, we do watch it very, very closely. One of the other things that we're watching very closely as it relates to the economy is the impact on the Hispanic consumer. Hispanic consumer has been disproportionately impacted by higher unemployment versus the general population. And typically is -- it takes the Hispanic consumer, the Hispanic demographic a little bit longer to rebound as the upturn starts, so that's something that we're watching very closely. The good news there is that the unemployment rate for Hispanic consumers has improved significantly since April, where it hit its highs and it's fallen almost in half since that point. So again, something that we watch closely so we can be ready to respond if needed.

Okay. That's great. And then we also -- we can't talk about beer without talking about seltzer. So part of Corona seltzer's appeal, right, has been the potential for it to tap into that Hispanic community. According to Numerator data that we've looked at, Hispanics under-index other demographics in seltzer category with just 3% household penetration. I think the national average is closer to 20%, 22%. Of course, we get other brands trying to tap into this opportunity, right, you recently had the announcement from Coke on Topo Chico Hard Seltzer. So how is Corona seltzer launch -- how is it faring versus your expectations? I think last -- I think it was in July, you commented it was close to 90% incrementals to the Corona franchise. I guess is that still the case? And how is that going on the uptake amongst Hispanic versus general market consumers?

Yes. So we're really pleased with the performance of Corona Hard Seltzer. We've launched that at the beginning of our fiscal year, which is -- so just corresponded with the onset of the corona or the COVID pandemic, so to speak. And in that tough environment, it's performed very well. We've got distribution around 70%, which is in line with where we thought it would be at this time of the year. I think that, that's a testament to the -- our sales team as well as the commitment that our retail and distributor partners have for the brand. Velocity is very strong. We're now the #4 seltzer in the category. As it relates to incrementality, yes, we said 90% incremental previously. That has held true through sort of the latest information we have. We don't expect that it will stay at 90% forever, but the fact that it's at 90% now and it stayed at 90%, I mean, is very, very encouraging. And so we continue to be very, very bullish on the total seltzer category. Its growth has continued to defy gravity, so to speak, and we're really bullish on what we can do with Corona Hard Seltzer. As it relates to the Hispanic consumer, for us, we're, right now, sourcing about 15% to 25% of our volume from Hispanic consumers. And for other brands, that's closer to 10%. So we do seem to be able to tap into that consumer, resonate with that consumer a bit better than our competitive set, and we think that adoption rates will improve over time and continue to benefit us.

Great. And the last thing I just wanted to -- yes, the last one on beer, was just to touch on longer-term production. Headlines continue to come out of Mexico, new ones in August again, about negotiations around other regions to replace the inability to build in Mexicali. So could you provide us with an update on how those conversations are going? Maybe to the degree you can share, how much the CapEx already invested you might still be able to leverage or recover? And then also related is, if Corona seltzer kind of takes off, does your current production capacity allow you to meet that demand? And are you completely going to producing that in Mexico?