Constellation Raises Full-Year Beer Growth Guidance Following Q3 Performance: Shipments +3.4%, Depletions +8.2%

Constellation Brands has raised its full-year operating income guidance for its beer brands to +7% to +8% (previously +6% to +7%), following another quarter of shipments and depletions growth, the company reported today in its Q3 earnings results.

Beer depletions (sales to retailers) increased +8.2% year-over-year (YoY), above the +7.9% increase recorded in Q2. Beer shipments (sales to wholesalers) increased +3.4% YoY. While the growth is less than half of what Constellation recorded in Q2 (then +8.7%), the acceleration in shipments can be attributed to more than half of the company’s business (about 55%) typically occurring in the first half of the year.

Net beer sales increased +4%, to nearly $1.97 billion, and operating income increased +7%, to more than $757 million.

Operating margin for beer increased 100 basis points, to 38.5%, driven by “benefits from net sales growth, pricing and marketing spend and cost efficiencies,” which offset raw materials costs, incremental depreciation and increased operating costs, according to the earnings release. Packaging and raw materials resulted in “a $17 million headwind for the quarter,” on top of a $11 million increase in depreciation from capacity expansions, Constellation CFO Garth Hankinson told investors on a call following the earnings release.

Constellation is projecting to end the fiscal year with beer operating margins of +39% to +40%.

Beer business growth was driven by Modelo Especial, which grew shipments +12% YoY. Modelo Chelada (22%) and Pacifico (+19%) also posted double-digit gains. Pacifico also doubled its volume versus five years ago, reaching the 20 million case mark on a rolling 12-month basis in the quarter, CEO Bill Newlands said. Corona Extra increased shipments by nearly +1%.

Constellation also continued to gain share of beer dollars in the quarter, increasing overall share +2% and share of high-end beer by nearly +3%, “frankly, an acceleration of what our share gains had been earlier in the year,” Newlands said.

“The high end continues to be where the strength is and we continue to be the leader in the high end,” Newlands said. “I think the important part, as you think about the overall beer sector, is to look at it bifurcated. The low end has not been successful and has been challenged on a volumetric basis, but the high end continues to perform well. And we’re fortunate that we’re leading at the high end.”

Constellation was also the No. 1 share gainer in beer dollars for the 10th consecutive quarter.

The on-premise accounted for 11% of the company’s volume in Q3, with depletion growth of +1%, as the company was able to “replenish inventories following the keg distribution over the summer, and began to advance growth and direct performance in the on-premise,” Hankinson said. And in 2023, Modelo Especial and Pacifico were the No. 1 and No. 2 draft share gainers, respectively, “despite some of those temporary issues,” Newlands added.

The on-premise will be a particular focus for Constellation and its Mexican import brands moving forward. Newlands acknowledged the brands’ room to grow in the channel, with Modelo being the No. 5 draft offering by dollars, despite being No. 1 in the off-premise, and Corona Extra being the No. 1 packaged beer on-premise, but still having “opportunity on the draft side.”

Looking ahead, Constellation expects shipment volumes for the second half of FY24 to account for 45% of the year’s total volume, and Q4 shipments and depletions to be about 20% to 21% of total volume. Newlands also noted that the company’s “strong November” is already “playing into December” and that “underlying trends for our business remain very strong.”

Constellation leadership did not share predictions for 2024, but noted that the company’s sales per point of distribution is “radically better than the competition” and Newlands expected that it’s “going to continue to serve us well, especially when you consider the strong brand loyalty that we have with consumers.”

Newlands was also asked about rumors of innovation around Corona SunBrew Citrus. Anheuser-Busch InBev (A-B) launched its own Corona SunBrew, an alcohol-free beer with Vitamin D, in Canada in January 2022. The beverage was promoted as “the world’s first non-alcoholic beer with vitamin D,” according to a press release. Constellation’s offering is expected to be a malt-based bev-alc offering, according to a Alcohol and Tobacco Tax and Trade Bureau (TTB) filing, approved on December 21.

Newlands declined to share details until closer to March, but said the company is “particularly excited about what we think it’s going to be – again, another very interesting new product launch for our company on the heels of a very successful [Modelo] Oro launch and very successful Aguas Frescas launch that has occurred in Modelo.”

“Please stay tuned on that one, but I think we’re very optimistic that that provides some great opportunity in the Corona franchise,” Newlands said.

Wine and Spirits EVP and President Robert Hanson to Step Down

Prior to the earnings release, Constellation announced Thursday that the company and Robert Hanson, EVP and president of the company’s wine and spirits division, had “mutually agreed” for Hanson to step down, effective February 29 (the end of FY24).

Hanson has been a part of Constellation for 11 years, beginning as a board director. He officially joined the company as wine and spirits president in 2019.

“I am proud to have served both the board and the wine and spirits division of Constellation Brands, have a deep admiration and respect for the company and its iconic beverage alcohol portfolio and, in particular, its talented team members,” Hanson said in a press release. “With the strategic, operational and capability transformation of the company’s wine and spirits business in place, this is the right time for me to transition leadership and to step down from my role with the company and pursue my future career goals. I look forward to the continued success of the team in the years ahead.”

Hanson’s departure comes as Constellation’s wine and spirits business continues to struggle. The company recorded wine and spirits shipment declines of -11.6% and depletions declines of -10% in Q3, with net sales declining -8% in the quarter. As a result, Constellation lowered its full-year guidance for the division, with net sales now expected to decline -7% to -9%, and operating income expected to decline -6% to -8%.

“Further revising our guidance data was not a decision we took lightly and we’re certainly not happy about it,” Newlands told investors. “We examined numerous scenarios and ultimately determined the adjustment was really needed to reflect a number of things – the broader category deceleration and other factors that affected our performance – including gaps from our prior U.S. wholesale expectations that we’re actively addressing with our distributor partners.”

“I want to thank Robert Hansen for his contributions over many years, including initially as a non-executive member of the board,” Newlands continued. “We wish Robert well, and all the best in his future endeavors, and look forward to announcing the appointment of our next wine and spirits business president in the near future.”

The search for Hansen’s replacement is in process. In the meantime, Newlands will take over leadership of the division. When asked to describe an ideal candidate for the role, Newlands said the company “will be focused on an individual who can bring great operating efficiencies and execution in the marketplace,” and will be looking both externally and internally.

“We think it’s critically important that we improve our wholesale performance in the United States, and we think there’s going to be continuing opportunities for us to perform very well in DTC [direct-to-consumer] and international channels,” Newlands added.

Constellation will focus on tackling headwinds for Woodbridge Wines and Svedka Vodka, the company’s two largest volume brands in the division. The company also plans to look at its distributor agreements, with a focus on “improving mix, inventory and state and channel level sales execution,” Newlands said.

Overall Company Performance

Constellation’s overall net sales increased +1% in Q3, to more than $2.47 billion. Operating income increased +7%, to $797 million. The company’s adjusted net earrings, before interest and taxes, increased +10%, to $755 million.

Operating cash flow for the company increased +3%, to $2.3 billion, while free cash flow decreased -10%, to $1.4 billion, driven by the previously mentioned brewery capacity investments.

Constellation projects to end FY2024 with operating cash flow of $2.6 to $2.8 billion, and free cash flow of $1.4 to $1.5 billion.