CONSTELLATION BRANDS, INC. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Key Highlights: Outpaced the total CPG sector in dollar sales growth, Beer business led in dollar sales growth and share gains, significant margin expansion in Beer, double-digit comparable EPS increase, achieved 2.9 net leverage ratio, returned ~$250M to shareholders via share repurchases in Q2 with ~$450M YTD.
• Beer Business: Strong financial performance with 4.6% shipment growth, 2.4% depletion growth, margin expansion due to cost savings, and expecting marketing investments in Q3 to support largest beer brands.
• Wine and Spirits Business: Facing category headwinds in lower-priced segments, but higher-end wine brands showing green shoots, Craft spirits as positive driver, expecting sequential improvement in the back half of fiscal 2025.
• ESG: Annual ESG impact report to be published in line with fiscal year-end materials to align with financial updates.

Segment Performance

• Beer Business: In Q2, net sales and operating income grew nearly 6% and 13% respectively. Shipments increased 4.6%, depletions 2.4% (58th consecutive quarter of growth). Modelo Especial depletions rose nearly 5%, Corona Extra depletions declined ~3% but remained top five in dollar sales, Pacifico depletions jumped ~23%. For fiscal 2025, expected net sales growth 6%-8%, operating income growth 11%-12%, and operating margin ~39%.
• Wine and Spirits Business: Shipments fell 9.8% in Q2, leading to net sales and operating income declines of 12% and 13% respectively. Higher-end wine brands like Kim Crawford, Meiomi showed green shoots. Craft spirits delivered strong depletion volume and high single-digit dollar sales growth. For fiscal 2025, expected net sales and operating income declines of 4%-6% and 16%-18% respectively.

Guidance

• Beer: Fiscal 2025 net sales growth expected 6%-8%, operating income growth 11%-12%, and operating margin ~39%.
• Wine and Spirits: Fiscal 2025 net sales and operating income declines expected 4%-6% and 16%-18% respectively.
• Capital Allocation: Reached 2.9 net leverage ratio, returned ~$250M to shareholders in Q2, with ~$450M YTD through share repurchases, while continuing dividend and brewery investments.

Risks

• Macroeconomic Headwinds: Rising unemployment affecting consumer demand, particularly in Hispanic market and key states where Beer volume is concentrated.
• Wine and Spirits Challenges: Continued category headwinds in lower-priced segments, requiring operational and commercial execution improvements to drive net sales growth.

Question and Answer

Q: Moving forward, appetite for share repurchasing now that leverage target is hit?

A: $2.2B authorization left under current Board approval, will be opportunistic in the second half of the year.

Q: Beer depletions softer in Q2, key factors?

A: Higher unemployment, federal election close affecting consumer spending, but buy rate strong, 4-week trend better, and Fed rate cuts expected to help manage unemployment and stimulate consumption.

Q: Corona performance, cannibalization?

A: Slightly softer in Q2 due to macro factors, but pickup seen in IRI takeout data, excited for Corona Sun brew launch, expecting growth in the back half of the year.

Q: Wine and Spirits marketing plans, acquisitions?

A: Focus on operational improvement of existing brands, no immediate plans for more acquisitions, expecting sequential improvement in the back half of fiscal 2025 as commercial and operational execution initiatives play out.

Q: Wine and Spirits impairment, why?

A: Non-cash impairment, formulaic based on future business assumptions, doesn't change the strategic outlook for the business.