Transcript: Constellation Brands Q2 2027 Earnings Conference Call

On Wednesday, Constellation Brands (NYSE: STZ ) discussed second-quarter financial results during its earnings call. The full transcript is provided below. This content is powered APIs. 90, expecting to hit the high end if positive trends continue.

The company has seen significant gains in market share in the beverage alcohol sector, driven by increased marketing investments; Pacifico has become a top 10 beer brand. Inventory levels have been rebuilt to healthy levels, and distributor inventories remain below historical averages, positioning the company well for the upcoming quarters. Future growth is expected from both core brands like Corona and new wave brands like Pacifico and Victoria, with a focus on expanding distribution and enhancing brand saliency.

The company is confident in its cost management and marketing strategies, planning to continue disciplined capital allocation, including potential M&A like the recent acquisition of Spiked Aid. Management highlighted a positive outlook, with strong cash flow generation enabling both shareholder returns through buybacks and dividends, and strategic investments. Full Transcript OPERATOR Ladies and gentlemen, thank you for standing by. Greetings and welcome to the Constellation Brands' fiscal year 27 second quarter earnings call.

At this time, all participants will be in listen-only mode. The question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that today's conference is being recorded at this time.

I'll now turn the conference over to Blair Venema, Vice President of Investor Relations. Thank you. You may now begin. Blair Venema, Vice President of Investor Relations Thank you, Rob, and good morning, all.

Welcome to Constellation Brands' Q2 fiscal 27 conference call. I'm joined this morning by Nick Fink, our CEO, and Garth Hankinson, our CFO. Before we proceed, we trust you had the opportunity to review the news release and CEO/CFO commentary made available in the Investors section of our company's website, On that note, as a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in the news release and website. We also encourage you to refer to the news release and Constellation's SEC filings for risk factors that may impact forward-looking statements made on this call.

Before turning it over to Nick to kick things off, please keep in mind that, as usual, answers provided today will be referencing comparable results unless otherwise specified. Lastly, in line with prior quarters, I would ask that you limit yourself to one question per person, which will help us to end our call on time. Thanks in advance. And now over to you, Nick.

Nicholas Fink, President and Chief Executive Officer Thanks, Blair. Good morning, everyone. Before we get into the Q&A, I want to take a minute for those of you who may not yet have had a chance to read our posted commentary to summarize a few key takeaways from this quarter's results, which beat our expectations. 90 per share.

And if the positive September trends that we saw continue, we would expect to land at the high end of that range. Second, our increased investments and focus on marketing are working. We were the number one share gainer in beverage alcohol this quarter. Our beer business outperformed and accelerated meaningfully quarter on quarter.

Pacifico became a top 10 beer brand with a very long distribution runway ahead of us. We're significantly outperforming the industry, and we are seeing marketing-driven green shoots across the board. Finally, our inventory levels are healthy. We have spent much of the first half rebuilding distributor inventory levels.

And while there's always going to be month-to-month variability, September depletions are trending in the right direction. Days on hand remain lower than our long-term average, and we entered the third quarter in a much better position. We feel good about where we are for the first half, and this entire team is incredibly focused executing from here. With that, operator, let's please open the line for questions.

OPERATOR Thank you. We'll now be conducting a question-and-answer session. As we remind you to please ask one question so everyone may have a chance to participate, to ask a question today, you may press star one from your telephone keypad. The confirmation tone will indicate your line is in the question queue.

You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, for our first question. Thank you.

And the first question comes from the line of Nick Modi with RBC. Please proceed with your question. Nick Modi, Analyst at RBC Capital Markets Yeah, thank you. Good morning, everyone.

So, Nick, maybe we could just kind of dig into the guidance and some of the comments you just made in the opening. I know there's been a lot of noise, a lot of moving pieces, a lot of timing differences. Maybe you could just give us a little bit more clarity on the back half. Kind of what you're seeing in September in terms of what's driving the improvement.

Is it just timing of Labor Day or is there something else going on and how we should be thinking about what needs to happen to get to the high end versus I think where most people are kind of configured, which is the mid to the lower point of the guide. Nicholas Fink, President and Chief Executive Officer Sure, Nick. Happy to try to unpack that. And I'd just start by saying we feel really good about the trajectory given the results in the first half and the trends in September, which is why we expect now to come in at the high end of the guide should those trends continue.

Now, you're absolutely right. There was Labor Day timing between August and September this year—we saw that shift—but a lot of that timing was offset by an extra sell day in Q2. So think of Q2 as neutral. And we actually saw non-timing-related acceleration in the month of September as our college football and other programming took place, and we're seeing a very healthy response to that.

So at this point we feel there'd have to be a real reversal in trends for us to contemplate the low end of the guide, and there's nothing we're seeing today on either the top line or the bottom line to indicate that things are going in that direction. That said, we do want to continue to be prudent in our assumptions and forecasts, and we are just unbelievably focused on delivering for our shareholders. And that's just going to come back to our evolved focus on marketing, our enhanced execution discipline, and pushing the organization to continue to deliver. So, Garth, I don't know if you have any color to add.

Garth Hankinson, Executive Vice President and Chief Financial Officer No, Nick, I mean I think, as you said, we feel good about how we've delivered the first half and Q2, and we are confident on where we sit for the rest of the year. As we look at Q2 and we think about had we not shipped to the levels we did to rebuild inventories—if we hadn't done that—we still would have come in above our expectations for the quarter. And that's what gives us confidence that we're in a good position to deliver on the rest of the year and, as you said, if September trends continue, to be at the high end of the guidance range. OPERATOR Thank you.

The next question is from the line of Peter Galbo with Bank of America. Please proceed with your question. Peter Galbo, Analyst at Bank of America Hey, good morning, Nick and Garth. Thanks for the question.

You noted that a key focus in the first half was rebuilding the beer distributor inventories and I think improving days on hand heading into 3Q. I think by our math in the first half you shipped around 8 million cases ahead of what you actually depleted. So maybe you could just help us think about the expected unwind, if any, of that inventory build in the second half. Specifically, should we expect shipments to lag depletions kind of as you normalize that inventory, or do you still expect to ship ahead of depletes for the full year?

Any framework around just the inventory movement and shipment-to-deplete dynamics would be helpful. Thanks very much. Nicholas Fink, President and Chief Executive Officer Happy to do that. And, Garth, feel free to add in some color.

Here's the headline I'd start with, which is distributor inventories are now in a great position, and they're actually still lower than historical averages. So we saw an overcorrection of inventories in FY26, and we entered FY27, frankly, too light. And that resulted in us testing the lower limits of how low days on hand can go, and it actually created a number of inefficiencies in the channel, and we were doing a lot of work to make sure that we were covering off and keeping shelves full and consumers satisfied everywhere, but albeit with some inefficiencies as we were working hard to move stuff around.

And so we needed to ship during the quarter to close out distributor order backlogs and avoid out-of-stocks. And so I'd say in math, if you take the undershipment in 26 and you look at what we had to ship this year to date, we're about normal for where we would be first half of the year to meet our expectations for building inventory into the summer and then into the fall sports season, et cetera. So I would expect the back half of the year to look pretty normal compared to any other year, and for the full year we would expect shipments and depletes to track within 99% of each other. OPERATOR Our next question is from the line of Lauren Lieberman with Barclays.

Please proceed with your question. Lauren Lieberman, Analyst at Barclays Great. Thanks so much. So Nick, you're six months in now, and I think we started talking about this a little bit at the conference, and you laid it out in the prepared remarks last night how you're thinking brands in the portfolio.

And you've also started to talk a little bit about cost discipline, finding efficiencies in the business so you can reinvest. So we'd just love to hear you kind of six months in, you know, a big-picture thought about the organization, where there's opportunities for efficiencies and cost discipline to allow you to keep investing for growth. Nicholas Fink, President and Chief Executive Officer Sure, Steve. Lauren, I'll take that.

Two parts. I'll start with the growth opportunity and the brands. And look, as we discussed, I came in very enthusiastic knowing that we had an exceptional portfolio of brands and talent. And I'll tell you that spending time out in the field and spending time with our customers and spending time with our sales folks as well as our marketing teams, et cetera, only reinforced that.

And actually getting into some of the data behind our brands has only left me more enthused. This is an incredibly healthy portfolio. There's no question we're a growth business and we need to get that engine humming again. And that's going to take sustained work across marketing, brand positioning, commercialization, products, packs, et cetera.

And I think we talked about at the conference as well, there are opportunities for us to get more organized and tighter in our execution and discipline behind that brand work. If I start and look at our scaled brands, there are jobs to be done there that are different to the work that we're doing scaling our new wave brands. And we've started that work and we're starting to see some of the green shoots come across from that. And I talk about this often because I think it will be a great case study.

Take Corona, for example. You know, we put more behind Corona. We got more focused on, I'd call granular execution of that brand. It's not a brand that requires awareness driving.

It's a brand that requires saliency. And we're seeing some green shoots already. Share has stabilized. If I look at Circana data, our 12 week is better than our 52 week and a 4 week is better than a 12 week.

Right. So I'm not satisfied with where it is, but it's trending in the right direction. Lot better than it was a year ago. I'm looking at Modelo.

You're seeing a nice stabilization of that business. And we know that there are pockets of growth that we can go after both with our Hispanic consumer. But you think about the fall, we're getting into football season. That's the middle of the country, that's general population, where awareness on this brand is actually incredibly low.

A lot of opportunity go there. And so it's different to what might have gotten us here and how we go about now building those brands. You then move over to the middle, which is scaling our next wave of brands. This is where the company's playbook is second to none, just world class.

And you can see where Pacifico, compounding at something like a 20% growth rate year to date as the number 10 brand already. It's not a small brand and yet it's powered at that kind of growth rate. And you have Victoria performing similarly behind that. And then we've said, you know, we're going to have to access some areas where the consumer is and where the growth is.

And, you know, whether we're doing that organically through things like our NA portfolio, which is gaining more and more traction, you got Corona NA now number three, by the way. Not satisfied with it being number three. But there's a whole lot more we can put behind that. And you'll see us do that.

And then something like Spiked Aid, which is the hottest subcategory of the subcategory right now. And, you know, we've been able to get into a leading position in a very disciplined way with a huge runway ahead of us to take the Constellation Brands machine and muscle and go build that business. So, you know, I'm feeling, as you can tell, quite enthusiastic about the growth opportunities ahead of us. And then the second part of your question about, you know, the state of the organization in terms of its ability, you know, is it lean?

Can it fuel this? You know, we've done a great job over the last several years driving cost efficiencies, I think about $600 million since Investor Day. But I believe we can be more systematic and programmatic about how we go after that. And the best consumer companies have a multi-year continuous improvement program.

And that is built up where we would have visibility to the activities that are going to drive margin and fuel for growth four years from now. And with the team in place, we're now putting that, and I think that is going to turbocharge our ability to sustain margins as well as reinvest for future growth. I don't have anything to add. Garth Hankinson, Executive Vice President and Chief Financial Officer Well, yeah, as we've said previously, and I think as you've all seen in our results, getting our capacity build behind us has freed us up to focus on driving those sustainable efficiencies on our business as well as stepping up our free cash flow generation.

You know, as we've evolved from a builder to an operator, we've already generated significant savings in our results, and as Nick just mentioned, the $600 million since Investor Day, and we're not done there. There's still a lot of opportunity for us as we continue to take the company on a more focused journey and increase our level of operating excellence. So certainly more to come. OPERATOR The next question is from the line of Chris Carey with Wells Fargo.

Please proceed with your question. Chris Carey, Analyst at Wells Fargo Hi, good morning, everybody. Nicholas Fink, President and Chief Executive Officer Morning, Chris. Chris Carey, Analyst at Wells Fargo I wanted to go back to, you know, recent expectations and guidance, kind of this topic.

I think there was a view coming out of the conference earlier or last month that there was incremental pressure on inflation in the back half of the year and that was going to impact your gross margins. Specifically, I think today, based on the guidance, and correct me if I'm wrong, gross margins are implied to be up in the back half of the year, which I think is surprising to some people today. Can you just give us a sense of did people interpret the back half gross margin expectation wrong? What is delivering that expansion into the back half of the year?

And I think maybe what's underlying the question is whether you have good cost exposure this year and whether that's going to, inflation will kick up going into fiscal 28, when perhaps you have a bit more depreciation coming on on Veracruz. So I know that's a lot, but I think that's a key theme this morning and I would just love for you to dig a bit deeper into that and help contextualize this dynamic for us. Thank you. Garth Hankinson, Executive Vice President and Chief Financial Officer Yeah, Chris, as you said, there's a lot there to unpack.

So let's try. And Nick, you can weigh in here too if you like. So first, I think that there probably was a little bit of confusion coming out of the conference last month as we noted those headwinds. We also noted that we expected to deliver the business in line with guidance, which we said at the conference, and obviously we're saying here again today.

5% operating margins.