Constellation Brands(STZ) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Net sales increased by 7% to $9.5 billion, and comparable operating income rose by 3% to $3 billion in fiscal 2023 [8] - Beer business net sales grew by 11% to $713 million, exceeding the upper end of the guidance range [38] - Wine and Spirits business net sales declined by 2% on an organic basis, primarily due to lower demand for mainstream brands [49] - Free cash flow for fiscal 2023 was $1.7 billion, above the upper end of the guidance range [52] Business Segment Performance - Beer business achieved 13th consecutive year of shipment volume growth, with a 12% increase in dollar sales [10] - Modelo Especial increased depletions by 9%, Corona Extra by nearly 4%, and Pacifico by over 30% [11] - Wine and Spirits business saw a 2.1% volume decline, outperforming the broader market's 2.6% decline [16] - Aspira portfolio, including Fine Wine and Craft Spirits, delivered double-digit shipment growth [17] Market Performance - Beer business extended its lead as the number one high-end beer supplier in the U.S. [10] - Direct-to-consumer and international markets for Wine and Spirits grew net sales by 29% and 4%, respectively [25] - On-premise depletions for beer grew by 15% year-over-year, nearing pre-pandemic levels [46] Strategic Direction and Industry Competition - The company focuses on building powerful brands, consumer-led innovations, and disciplined capital deployment [9] - Investments in beer business capacity expansion and hospitality in Wine and Spirits are prioritized [29] - The company divested mainstream brands and acquired higher-end wine and ready-to-drink cocktail brands to reshape the Wine and Spirits portfolio [23] Management Commentary on Operating Environment and Future Outlook - Management remains confident in the growth drivers for core beer brands and expects strong volume growth momentum in fiscal 2024 [55] - The company plans to continue investing in premium wine, fine wine, and craft spirits brands to support growth in direct-to-consumer and international markets [26] - Inflationary pressures and macroeconomic conditions are being closely monitored, with pricing actions planned within the 1% to 2% range [58] Other Important Information - The company returned $2.3 billion to shareholders through share repurchases and dividends in fiscal 2023 [28] - ESG goals include reducing Scope 1 and 2 greenhouse gas emissions by 15% by fiscal 2025 and restoring over 1 billion gallons of water [30] - The company has already surpassed its fiscal 2025 water restoration goal [31] Q&A Session Summary Question: Confidence in 7% to 9% sales growth outlook and pricing dynamics [76] - Strong start in markets like Texas and Florida, with double-digit increases, supports the sales growth outlook [77] - Pricing will remain within the 1% to 2% range, with flexibility to adjust based on macroeconomic conditions [80] Question: March depletion trends and Oro launch expectations [82] - March depletions were in line with expectations, with strong performance in Texas and Florida [83] - Oro launch showed over 60% incrementality in test markets, with significant media support planned for the summer [84][90] Question: On-premise trends and trade-down impacts [92] - On-premise growth continues to accelerate, with draft panels in California up 9% in Q4 [94] - Minimal trade-down observed, with most impacts at lower price points than the company's brands [87] Question: Productivity measures and hedging programs [95] - Productivity initiatives and hedging programs are in place to offset inflationary pressures, with 10% to 15% of COGS hedged [96][97] Question: Resets and pricing philosophy [99] - The company is performing well in reset situations, with strong shelf presence for its brands [102] - No plans to roll back pricing, with a focus on maintaining consumer engagement [104] Question: Free cash flow guidance and capital allocation [106] - Free cash flow guidance of $1.2 billion to $1.3 billion reflects higher interest expenses and CapEx investments [107] - The company has nearly $1 billion left under its share repurchase authorization and will remain opportunistic [109] Question: Pricing cadence and margin targets [112] - The company plans to maintain its 1% to 2% pricing algorithm, supported by strong brand performance [113] - Beer margins are expected to be flat, with inflationary pressures impacting gross margins [119] Question: Wine and Spirits margin outlook [117] - Wine and Spirits margins are expected to increase by at least 40 basis points, driven by premiumization and cost management [118] Question: Beer margin expectations and medium-term targets [121] - Beer operating margins are expected to be approximately 38% in fiscal 2024, with no guidance provided for future years [123] Question: Impact of Woodbridge and SVEDKA on Wine and Spirits margins [126] - Woodbridge and SVEDKA have a drag on margins due to their lower price points, but revitalization plans are in place to stabilize these brands [127]