Constellation Brands 2Q17 Earnings Call Notes

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Constellation Brands’ (STZ) CEO Robert Sands on Fiscal Q2 2017 Results

Could get into the food and beverage category

“there’s definitely whitespace that we think is very good whitespace that we don’t participate in. You mentioned, for instance, the F&B category. That’s a very good category in terms of its premium positioning margins and growth, so that’s clearly a subcategory that we’ll be looking at in terms of developing our portfolio for the future.”

Scale allows for a virtuous cycle

“. Look, the virtuous cycle. Our performance enables us to invest more in our businesses, in particular our wine and spirits business, which is now driving significant growth in that business and enabling us to both leverage the P&L and achieve market share growth as our focus brands are now growing at a rate that more than offsets the decline in our tail brands, which are in categories which are fundamentally not growing. So we’re over-investing. And when I say over-investing, I mean we’re investing more than we have traditionally, specifically in marketing of our wine and spirits brands”

Greater premiumization happening in the wine category

“Well, I think the category is performing very well. I think that we’ll continue to see sort of mid-single digit volume type growth in the category, right? And I think that we’ll see the spread between volume and sales and, therefore, premiumization in trade, I think we’ll continue to see that grow. I think we’re a real shift, whereas five years ago we were sort of talking, what they used to call, the super-premium category, which was the $8 to $12 range, is really being the hot and premium segment of the industry. We’re seeing a definitive shift up in that regard. And, now, you’re sort of seeing this $15-$25 segment really coming on strong, as well as segments above that. So this is what is driving the wrong of brands like Meiomi, which are about $20 a bottle, or even Prisoner, closer to $40 a bottle, is this premiumization trend, which we think is going to continue unabated in certainly the mid-term”

No interest in distribution agreements

“Distribution agreements, we have no interest in whatsoever, okay? Number one, you don’t own the brand. Number two, distribution agreements are short term. Nobody is going to sign up and give you distribution rights for a life. Number three, distribution margins are small relative to the kind of margins that we at Constellation generate through our owned brand portfolio and certainly the type of margins that we’re talking about on luxury spirits. So we don’t have really any interest at all in distribution, low margin, short-term distribution agreements that would utilize probably one of our most valuable assets, which is our sales and marketing organization. So we don’t see distribution arrangements as an add-on for the future. As I said, way, way, way too low margin and no brand equity related there too.”

Craft is over SKU-ed

” I would say that, as a general proposition, we probably think craft is over SKU-ed and over-spaced. And imports – given the importance in the growth, high-end imports are under-SKU-ed and under-spaced. And premium domestics are way over-SKU-ed and over-spaced. That’s something that we spend a lot of time sort of thinking about, which is assortment in the high end especially, and I think we’re in a very strong position to advise our retail customer through our category management initiatives as to ways that they can improve their velocity as well as their profit per-unit space that they’re devoting to beer. So that’s a big part of what we’re doing. And I think the trend that you’re alluding to is definitely occurring. And I think that that bodes really well for us in a couple of areas.”

You are going to see some shake out in Craft

“Craft, even though you are going to see some shake out there, I think that what will also occur there simultaneously is that the bigger, stronger, faster growing brands like Ballast Point will and should be given more space, more SKUs sort of for the obvious reason because it’s moving and it’s highly, highly profitable. And I think that you can say the same about imports because it’s going to become obvious to the retailer that that’s the best way to maximize, as I say, their velocity and profitability for the unit space that they’re devoting to the category”

We’re in line with inflation when it comes to price increases

“Yeah. I’m not sure that our price is really going up more than others. It’s going up to the extent that we’re taking pricing. We’re right in line with sort of the typical, I’d say, inflationary increase that occurs every year and we continue to look at it on a market by market basis. We’re probably under the 2% when we combine everything, sort of between 1% and 2%. I would say that that’s normal just to keep up with the pace of – with cost of goods and inflation and so on and so forth. So nothing different, I would say, is occurring on the pricing front – period – industrywide from what we can see.”