Constellation Brands executives tackled a number of issues, from supply “tightness” to Modelo Especial’s growth, and their hard seltzer ambitions during a first quarter 2022 call with investors and analysts today.
Here are the highlights of the maker of Mexican imports Corona, Modelo and Pacifico’s quarter.
Beer Shipments +11.3%, Depletions +10.7% in Q1; Supply Tightens
Constellation Brands’ beer portfolio shipments (sales-to-wholesalers) increased 11.3%, to 84.8 million case equivalents, while depletions (sales-to-retailers) increased 10.7% during the first quarter. Net sales for Constellation’s beer division during the quarter increased 14%, to $1.572 billion.
The company credited the depletions growth to “continued strong consumer demand in off-premise channels, as well as a return to growth in on-premise channels.”
Constellation Brands president and CEO Bill Newlands admitted that Constellation’s off-premise scan data trends were “muted” during the quarter as the company lapped the pandemic’s stock-up period last year. However, he said he expects those trends to improve during the next quarter as the company cycles out-of-stock issues caused by the slowdown in production at its facilities in Mexico due to COVID-19 restrictions.
In fact, he pointed to recent four-week trends that showed that Constellation’s beer business “is outpacing the high end and continues to significantly outpace the total U.S. beer industry.”
Additionally, Newlands touted “robust growth” in “the more sizable non-tracked channels, including the on-premise, which grew depletions 250% versus last year, when this channel was essentially closed, and the liquor chains, which grew almost 13% in the first quarter.”
“These levels of robust consumer demand are impacting availability for certain package sizes in certain geographies,” he admitted. “We are working with our distributor partners to ensure consumers can continue to find our brands on shelf throughout the summer, and we plan to make up some of this impact, beginning in the third quarter.”
Constellation Brands’ chief financial officer Garth Hankinson added that on-premise channel volume accounted for 11% of Constellation’s total beer depletions during the quarter. Pre-pandemic, the on-premise accounted for about 15% of Constellation’s depletion volume, and during the pandemic, that was cut to just 3% of the company’s depletion volume in the first quarter of FY2021.
Hankinson explained that increased consumer demand, as well as the February winter storm in Texas and northern Mexico that caused power outages during the quarter have caused supply challenges that led to depletion volume exceeding shipment volume and lower than expected distributor inventory on hand during the first quarter. The latter cost the company “several points of top line growth,” Newlands said.
Nevertheless, Hankinson assured analysts that the company is “fully producing and shipping products out of our breweries.”
“However, inventories will remain tight throughout the second quarter, as we enter our peak selling season,” he said.
Newlands contrasted the company’s position this year with last year when it was producing about 75% of the SKUs in its total portfolio.
“We are fully expecting to meet the demand that we’ll see in the marketplace, which we continue to say will be in that 7% to 9% [net sales growth] range over the course of the year,” Newlands added.
Modelo Especial the No. 2 Selling Beer in the Quarter
Modelo Especial remains Constellation’s shining star. During the quarter, the brand increased depletions 12%, and became the second best-selling beer brand — overtaking Anheuser-Busch’s Michelob Ultra — and the top share gainer in the U.S. beer category, the company said, citing IRI data for the quarter. The brand was boosted by sales during the Cinco de Mayo and Memorial Day holidays.
Even as the conversation veered to the $4.5 billion hard seltzer segment, Newlands reminded analysts that Modelo is the company’s top priority.
“Despite doubling the size of our ABA [alternative beverage alcohol] and hard seltzer capability for this year, the No. 1 growth driver in our portfolio will remain Modelo irrespective of that significant growth,” he said.
Asked about household penetration, Newlands said Modelo is growing its reach into non-Hispanic households. However, it remains unclear how much of that expanded reach was accelerated by the pandemic.
Meanwhile, Corona brand family depletions increased more than 7%, driven by the growth of Corona Premier, Corona Hard Seltzer and Corona Extra. The return of the on-premise channel has helped the Corona brand family’s trends, Newlands said.
Pacifico depletions increased more than 35% during the quarter, and the brand was the top share gainer in the import segment. Newlands credited the performance to the brand’s focus on Generation Z consumers.
Gunning for Top 3 in Hard Seltzer
Constellation Brands’ ambitions are to eventually be a top three player in the hard seltzer space, according to Newlands. Currently, Constellation is sitting in fourth place.
The company sees opportunity to move up with its second Corona Hard Seltzer variety pack, which launched in March, and Corona Hard Seltzer Limonada, which hit the market in early June.
Variety pack No. 2 has gained shelf space, and dollar sales are now half of those of the brand’s first variety pack, Newlands said. He added that the new pack has been incremental to variety pack No. 1, which has maintained its distribution and velocity levels.
Early consumer response to Corona Limonada has been favorable, Newlands said.
Constellation plans to double its hard seltzer and alternative beverage production capabilities by the end of the fiscal year, with plans to bring an additional 5 million hectoliters of capacity online next fiscal year.
Innovations such as the company’s hard seltzer brands are helping it reach more consumers on more occasions than ever before, Newlands said. He added that the company’s hard seltzer are “over developed” in the Hispanic community and helping the company reach new consumer needs and occasions.
Newlands said Constellation is projecting 30% to 50% growth for the hard seltzer segment this year.
Building E-Commerce Team
After accelerating last year, Constellation Brands’ three-tier e-commerce business is still performing at three to four times what it was in the spring of 2019 across beer, wine and spirits, Newlands said. Meanwhile, the direct-to-consumer portion of that business is up 45% compared to the first quarter of last year.
Newlands called out the partnerships Constellation is building with “pure play retailers” name-checking Amazon, GoPuff and Wine.com; omnichannel retailers such as Walmart, Kroger and Albertsons; and third-party marketplaces such as Instacart and Drizly.
To help maintain that growth, Constellation is expanding the capabilities of its three-tier e-commerce team by expanding sales and marketing resources, building new selling capabilities, investing millions of dollars where consumers shop, Newlands said.
Constellation Believes Canopy Will Reach Profitability
Constellation remains “bullish” on Canadian cannabis company Canopy Growth’s ability to become profitable by the end of its fiscal year, Newlands said. He added that he’s also optimistic about federal legalization in the U.S. before the end of this congressional session.
During the quarter, the company recognized an unrealized loss of $745 million as part of a decrease in the fair value of its Canopy investment. Hankinson said the company’s unrealized total pre-tax net gain on its initial November 2017 investment in Canopy is $366 million.
Mexicali Impairment Charge is $665 Million
After the Mexican government forced Constellation to pull the plug on its production facility in Mexicali, the company said it would not be able to repurpose the site. As previously communicated, the company recorded an impairment charge of $665 million impairment charge during the quarter.
Accelerated Share Buyback
Constellation also announced an accelerated share repurchase agreement with Goldman Sachs to buy back $500 million of its Class A common stock, which will be completed no later than October 2021. As part of the agreement, Constellation will receive 1.7 million shares on July 2, which it said represented about 80% of the expected share purchase under the agreement.
“This accelerated share repurchase transaction demonstrates our strong commitment to maximizing shareholder value, and aligns with our commitment to return $5 billion to shareholders through fiscal 2023,” Newlands said in a release.