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

Okay. We're going to get started. It's a pleasure to have Constellation Brands' CEO, Nick Fink; and Executive Vice President and CFO, Garth Hankinson, with us this morning. Nick, a special welcome to you. It's your first time at our conference in Boston. So thanks, guys, for being here. So Nick, you joined the company as CEO in April. So I think it's still fair to describe your eyes is very fresh when it comes to the business. And the earnings call in July was a great opportunity for those of us on the outside to get some sense of your early perspectives on the business. One thing that struck us is particularly interesting because when you mentioned needing distinct strategies for scaling brands and for sustaining growth for brands that have hit a certain size. So how would you say that applies to Constellation?

The company has evolved a great deal in 5-plus years I've been on the Board. And when I joined, I mean, we had a strategy, I think we executed very well of taking the brands that we had with enormous distribution and awareness runway and just executing very single-mindedly against that. That opportunity still exists in parts of our portfolio and in the parts of our portfolio that have matured into brands that take corona, for example, we have pretty much full distribution. We have great awareness there's a different playbook for growing a brand like that. And so as I've gotten into the business a little bit and applied a bit more thought like, okay, what's the nuance behind managing this portfolio that has some more mature brands, has some very high-growth brands, has some incredible assets like in our retail market and our marketing ability and it really is to develop distinct capability. So we'll continue to be a brand scaler. And I think we're one of the best in the world at that, and we have a track record to prove it. And you can see Modelo has still got a lot of room to go. You can see Pacifico coming up right behind that. You can see Victoria. But we have to be excellent at taking things that we've scaled in continuing to drive saliency and relevance continuing to find in the granular pockets of growth, activating in those areas that really speak to consumers. And then I think there is a third pillar, which is there is some stuff that's new to the world, and you've seen us put some of late some newer products out there, some innovation. And that, again, is a different skill set and a different playbook. And I think we need to hone in on that as well.

Okay. So another thing that you had mentioned on the call was the idea of becoming more occasion-led in how you think about competition and also about consumer behavior. Historically, I think it's been much more of a conversation specifically about beer consumers and beer occasions and this is a more holistic look. Can we talk a little bit about how that shift in mindset externally? Any early learnings or opportunities that you're kind of seeing uncovered in these first few months of trying to bring this way of thinking to the organization?

Yes, Sure. I mean it really starts with the consumer and understanding everything about the consumer, how they're thinking, what are they looking for in those need state occasions and then choosing those needs occasions where we want to participate. Today's consumer is moving across the category, I think, more than they ever have. They've always moved across category. I mean I'm not sure people ever just singularly one thing, but they're moving across the category more than they have. And our customer, distributor is moving across category more than they ever have. And it's going to be critical. We remain relevant with both of those. And so really understanding in that need to say, what is the competitive set? What are the choices that they're making? And then how do we best play against that across our portfolio? We have a portfolio of products, right? And so picking occasion, and we don't have to participate in every single occasion. We can be choiceful. But you pick an occasion and with my portfolio, how do I best want to win that vacation. And I think a great example of that is Pacifico, which is really leaning into an active adventure sports lifestyle type occasion. I was just out with our distributors in California looking at some of our activation around the world surfing championship. And you could see just how seamlessly fit into that occasion that becomes more of an occasion thing where that consumer may choose beer, they may choose something else. And how do we win more of those occasions is the thinking? And I think as we get into next financial year and already we're seeing some of the early work around our brand activation. It's going to have more of that consumer focused lens around occasion, which, in turn, creates different lanes for our brands and allows us maybe to go harder to frustrate some of the opportunities we have.

Okay. Do you think there have been, though, a lot of blurring across those lanes? Because I feel like when I think about your ramp portfolio, the brands have lived in their lane. But maybe I'm wrong, and maybe there's been more intersection in the marketing historically.

They definitely have distinct personalities. I think given our success, it's something it's easy for us to default to, here's the way we build a Mexican brew beer in market X right? And if you do that too much, it can start to look similar. So what can you take from the skill set and apply consistently over and over again, and then where do you need to create distinction. And I think just putting -- this is not a revolution, it's evolution. It's really just tweaking that a little bit to make sure that there is a distinction that we can access more occasions than we might have if we just had sort of the very strict blinders on.

Okay. So speaking of occasions, the summer started out with a lot of beer drinking occasions anchored by all the excitement around the World Cup. And I love the idea that all this gathering could prove lasting but people remember it's fun to kind of get together and hang out and drink beer. But what have you seen since? I mean, how is the category trends improve? What have you seen today or the last month or so, call it, post World Cup versus pre-World Cup?

Yes. So very interesting, and I have a number of thoughts about it. And I agree with you. It was great. World Cup was great. The next run was great. I mean just the photos you saw people are coming together. And I think actually, I'm hopeful that has some long-term impact. And you can see it in some of the Gen Z numbers where we're seeing people now come up the edition curve, albeit later than the generation prior to them, but coming up the same curve. And I think having moments like that help bring people together in a post covered world and start to unlock that. And so I think that was a big positive. World Cup itself from a competitive perspective, we were delighted with the performance. We walked away as the #1 share gainer for World Cup, almost a full point of share. There, which we were very pleased with all the work and I was out in the field a lot and got to see what the team did. It was really incredible. So a lot of activation, I think, really prove the power of our system where we really go and apply it. The actual underlying performance itself, you saw nice performance in the on-premise, where we're actually underrepresented. So that's a distribution opportunity for us. And the off-premise was frankly pretty lackluster. And then you got into August, and you can see the Circana data was also pretty lackluster. And I think as we saw gas prices start to spike back up again, diesel prices start to slide back up, some other factors. Frankly, it was a pretty lackluster August relative to the start of the summer. And I think some of these macroeconomic and geopolitical things have to play out a little bit for us to say, how much of the -- how much of this kind of bringing people together can be sustaining versus whether the blip in the pain, I think it will sustain because I think there are a lot of cyclical headwinds right now that will dissipate at some point, but time will tell.

Okay. Let's just stay on the consumer for a moment. So just wanted to get your latest read on the Hispanic consumer and also general market cohorts. You touched a little bit on the macroeconomics. I'm just curious more specifically.

Yes. Look, I mean I'm sure a lot of companies here today would say because we were stretched and we feel the consumer is stretched. And we still see very much at the very highest end of our portfolio, and it's interesting to -- even though it's small for us to participate there, you see a continued strength. But then across the board, otherwise, we see a stretched consumer by and large. And then when you double-click down into the Hispanic consumer and our ZIP code data and look at that, it's a little bit of a tale of 2 cities. There are markets that are performing very nicely, like California and New York, where the lines have actually come together, right? We see less pressure on that Hispanic consumer than we do or about the same as you see in general market, right? And so we've seen less distinction there. But I'd say Florida and Texas, in particular, this year have had more headwinds, and that's where we see more divergence in the data with the meta consumer.

Okay. Let's talk a little bit about the beer portfolio. So you guys have started to build out the pricing ladder, but it's still kind of a newer effort. I was curious how you think about balancing playing offense in the stretched consumer environment but also protecting premium positioning and brand equity across your brands, in particular, when you think about Modelo Oro or Corona Premier and then you've got low index test like [indiscernible].

So it is a premium portfolio. And if you look at price for 12-ounce or like that data. We still are at a pretty significant premium to most of the market. And I think that's where the portfolio sits. And remarkably, you look at how much -- how loved the brands are consumers see value in that as -- come back to where we started a little bit about really dialing in about how do we manage brands that have scaled and how do you get much more granular about it. And I think there are 2 things. One is having a bit more pricing across the portfolio. So an example of you brought up Oro, Corona Premier, we were really sitting at a price point where there wasn't a market for a light beer, right? The entire market was sitting at a different position, which we call a 120 index to domestic. We've now repositioned those, and we've seen a lot of growth. There's still a lot more opportunity to get that price realization, not fully through on that repriced positioning, but we expect to see velocity and distribution grow. And the performance has been really pretty good. And so now you start to have a little bit more of some opportunity across the pricing scale. And then [ Barrilito ], it's really interesting. I mean we were seeing that product, frankly, pop up gray market in the market anyway. And so it sort of led us to go, well, we should probably test and see how it performs and how catalystic it is to the rest of the portfolio. And so we've really been testing it in parts of Texas, Fresno, a couple of other states. And so far, the test is going really well. It's a lot less cannibalistic than we feared. It plays at an interesting price point of play. It's an interesting liquid. By the way, it's fairly low. ABV is local. And so it's just sort of part of a routine for that consumer where it's a pretty light beer. And I expect we'll scale that test more. We're going to be careful, though, because we do want to protect those premium positions. That's one element of it. The other part about really getting more dialed into managing business with scale brands is really having a really defined price pack architecture and revenue growth management function. And we've been building that for years. I think we can develop that further. We're the leader in small size. We're the leader in large size. How do we start to play that across our business better to help the consumer access what they're looking for at a particular moment.

Let's talk about Corona Extra. I think that's been -- you hinted that earlier, you were talking about different strategies for different parts of the portfolio. But the key question is continue to be Corona Extra volumes, right how you kind of [ sort ] that up. So I guess what have you learned so far in diagnosing the gap between is like really strong brand equity health metrics, but these weaker -- but then weaker consumption trends and when do you think you'll be ready to shift from sort of diagnosing to executing in terms of turnaround plan?

Yes. Well, first, we've already made that shift. Now I would say that shift today is a blunt instrument. We're going to get much more specifically type as we get into next year, but we already made that shift, and you are seeing the brand respond to it. And so the brand trends have been far better. It's gone from us to kind of holding share. We're seeing markets like New York. We're starting to perform a lot better. Miami, where it's leading, starting to perform a lot better by the way, very important markets, culturally. But what's so interesting about that brand is given the challenges I've had particularly last year, I went in looking for the faults in the brand, like I've run tired brands in my career. I've run leading brands in my career, I run new brands in my career. And so you sort of look for those data points. And there's nothing in corona that is broken. It's the most loved bureau brand. It's the most famous Hispanic brand in the world. We have great awareness, great [indiscernible] so the more I peel the onion on the data, it's just -- it's an incredibly powerful brand. To your point, what's missing. And I think it's going from that big awareness driving, which we don't need quite as much of that to really being in the cultural moment, turning it on, being present, showing up and activating around occasions with consumers need to be. So that's when it's saliency. Part of that will be a better drive to be active on-premise. We're either the #1 or #2 on-premise package brands in most markets. We need to show that leadership and demonstrate being part of those occasions where consumers really discover and rediscover brands, pack price architecture, right? We've seen great growth in our 7-ounce business. That's a great opportunity there, both from a price point, but also they're very fresh, they're very cold, people just love them. So it's to the earlier discussion, it's a different playbook than scaling awareness and distribution. It's getting really granular around brand tactics. This year, we put a good deal of money behind it, and it's responded well. Next year's plan is going to get much more granular around some of these items and try to be a much more of a cultural conversation to have that relevance that I think will connect our consumers. But we're happy to see it already starting to respond.

Okay. Are there any specific examples because I didn't know we were already in execution mode of things you did in New York or Miami that you can think of that have been had a particularly good return?

I'd say at this point, again, blunt instrument, it's really just making sure that we had the spend in place that we were trying to activate that we were getting some of these other pack sizes into distribution, doing some things on-premise. So -- but again, it's early days.

Okay. So let's turn to Modelo Especial, runway that still remains there. So where are you seeing the most encouraging progress outside of existing stronghold states? And are there markets where structural factors, meaning population mix really might limit the brand's long-term share potential?

Yes. Look, I don't most think of it as -- so you could think of it like 3 different big markets or 3 different types of markets and businesses. And so there are places where it's extremely strong to California for your example, just out there with our distributor. And yet they still are -- they still believe there are pockets of growth where we haven't penetrated. And so getting away from the coast a little bit, looking at certain urban markets or certain submarkets where maybe other brands are playing very strong and we can get in there. So big market. Then there are other markets where New York, Miami, Dallas, Chicago, it's a big brand, but there is plenty of room to go in terms of share distribution. And then the markets, it's still pretty small, right? And you go more towards the center of the country, and we're not playing at all. Look at the awareness numbers are very low on Modelo. I mean it's shocking to have a brand that's the #1 dollar share brand with the awareness that we have. And that's the opportunity there. It's just to continue to drive that awareness. There's some distribution to go about 20-point GAAP that we believe is there. But even just kind of moving off the coast a little bit towards the center, everything is going to give more runway to that rate.

Okay. The 20-point gap, sorry, that's overall in national distribution?

Yes. That's overall national distribution to domestics.

Okay. Great. And then Pacifico and Victoria are becoming really meaningful growth contributors. You mentioned Pacifico in particular earlier. So how do you decide when to like accelerate support, really push distribution, the on-premise activity behind these more up-and-coming brands, I don't know if we can call Pacifico up and coming anymore. But the smaller brands, the portfolio, but at the same time, minimizing cannibalization and making sure execution doesn't get too complex.