Constellation Brands Inc (STZ) — Q3 2026 Earnings Call Transcript

Thank you, Kevin. Good morning, all, and welcome to Constellation Brands' Q3 Fiscal '26 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. We trust you had the opportunity to review the news release, CEO and CFO commentary and accompanying quarterly slides 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. And we encourage you to also 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 the call over to Bill and Garth, 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 yourselves to 1 question per person, which will help us to end our call on time. Thanks in advance, and over to your questions.

Hope you're doing well and happy New Year. I guess I had a question on your beer operating margins. They came in a lot stronger than expected in the quarter despite the volume deleverage. So hoping you could talk further on some of the contributing factors behind this strength. And then thinking about your full-year guidance, which you maintained, it does imply much more modest beer operating margins in the fourth quarter, which I know seasonally is a lower quarter. But is there anything else that is expected to weigh on margins in this next quarter? Maybe aluminum, or if you could just talk through that?

Thanks for the question, Bonnie, and happy New Year to you. So first starting with Q3 margins. As you indicated, volume declines certainly were a headwind in the quarter. Additional headwinds in the quarter were tariffs, as you noted, logistics, and then brewery maintenance. Offsetting those headwinds, we continue to make good progress against our cost savings initiatives. We had favorable pricing from the actions we've taken in both the spring and in the fall. And then there was a depreciation timing benefit that occurred in Q3, which was favorable on a year-over-year basis. As we think about Q4, just to underscore what you said, it is our lowest quarter from a seasonality perspective, making up about 20% of our overall volume. So fixed overhead absorption will be most amplified in this quarter. The depreciation benefit that we saw in Q3 will actually turn into a bit of a headwind into Q4 as additional assets come online or are put into service. And then tariffs will be a further headwind in Q4, related to a couple of factors, one of which you mentioned, which was aluminum and the pricing of aluminum which continues to be pretty strong. There is also the ongoing and expected shift in product mix, moving more to aluminum from glass, and we'll see that in Q4. Additionally, there's a timing element to tariffs concerning when the tariff gets accrued and goes into inventory and when it gets released in the P&L. That will be a bit of a headwind in Q4 as well.

Another one on beer margins, though perhaps with a longer-term perspective. So you called out a number of the factors in your prepared release and in your answer just now about the pressures that beer margins will face in Q4. So with that in mind, how should we be thinking about the 39% to 40% beer margins for fiscal '27 and '28 that you guided to back in April of last year? Is that something you still believe you can achieve? Should we be thinking of margins closer to where we were this year? Any color would be helpful. And then if I could just squeeze in one more on depletions. Nice to see that come in, I think, ahead of some expectations. Any color on exit rate or what we're seeing in December? Is there any sequential improvement or more of the same?

Thanks, Nadine. I'll take the first question and then Bill will take the second. But as it relates to FY '27 and beyond, as we said back in our Q2 earnings call, we'll provide more color on what our expectations are for FY '27 and beyond in our April earnings call. That's our normal cadence, if you will. It allows us to see how the rest of the year unfolds from a consumer perspective and a macroeconomic perspective as well. So more to come on that. That being said, the guidance that we provided last April was given under a different set of macroeconomic conditions, and the macroeconomic environment has worsened since that time. So that will all go into our planning process and be reflected in the guidance we give in April.

And, Nadine, relative to December, it came in roughly where we expected. It was fairly consistent with our expectations. For those of you who track the Circana/IRI data, you saw there was a very strong result for our business around the Christmas holiday. Noting, of course, that that's a great reflection of the strength of our overall brands and the brand health that exists for our brands. Therefore, we were quite comfortable coming out of December as the first month of our last quarter of the year.

Want to talk for a second about capacity and CapEx. So in the slide deck, you reiterated the plans for 7 million additional hectoliters of capacity through fiscal '28. I think that implies sort of heavier CapEx in Q4 tied to Veracruz. I just wanted to get an update on how you're thinking about the modular capacity build-out over the next couple of years, managing that against growth projections to support what are really optimal utilization levels. And particularly, when we think about the fiscal '26 volumetric pace being lower than what you originally thought back in April, to your point, under a very different macro backdrop.

Yes. Lauren, thanks for the call. So the approach on the modularity of the breweries is we'll continue with that approach going forward. As we've said over the course of the last couple of quarters, the way we'll manage that is when we bring assets online, and we'll manage through the capacity in that manner. What we've also said, though, is that when you're building capacity in a manner which we've been, with long-lead items, you are making commitments to that spend. Our plan for this year reflects commitments we've made on capacity expansion. But again, we continue to monitor this and assess where the volume is expected to be. We'll bring the assets online when we can. To the extent we can delay or defer CapEx, we will. However, there's a lot of long-lead equipment that goes into a brewery, and those commitments have been made.

Great. Moving more to the brand side. The Pacifico brand has been an extraordinary success. It's still relatively small, but you've been working on it diligently for 10-plus years or so. Just wondering what you've learned about the brand over this time, how incremental is it, any tweaks that you see in terms of brand positioning and marketing pressure behind the brand for it to get to what you think is its full potential, which my understanding is to be a very strong #3 brand in your portfolio.

Yes, Robert. Pacifico has been a tremendous success to date, much in the same way that Modelo initially developed in the western United States and has progressively moved east to become the #1 player by dollars in the United States. Pacifico is taking a very similar approach, currently the #2 brand in California. It skews younger relative to our overall portfolio and resonates well with consumers. As you know, it's the #1 on social media in terms of share of voice and has gained 1.5 points in the on-premise. So you're seeing significant gains in that arena as well. We continue to invest behind this brand and believe it will be a strong #3 in our portfolio as time goes forward. You should expect to see significant emphasis on this as it builds its way across the country, similar to what Modelo did several years ago.

So you mentioned mid-single-digit distribution growth for the beer portfolio in the quarter. Just as we look out to calendar 2026 post the spring resets, do you think it's realistic you can drive shelf space gains for your portfolio with macros where they are? Or is that less realistic just given the weaker velocity we've seen over the last year or so? And maybe also you can touch on the beer category itself and what you're hearing from retailers as we think about shelf space for the category in the balance of 2026.

Sure. Let's start with the distribution side. We continue to see distribution as one of our strongest opportunities going forward. Our portfolio gained share in 49 of the 50 states, and we continue to earn additional distribution capability and positions across the country. Those will probably change some. You've seen a significant increase in distribution around Pacifico, going back to Robert's question, as well as Victoria, which has also grown double digits in recent times. We continue to see distribution as a significant opportunity going forward. Remember, Modelo itself, despite being the #1 beer by dollars in the U.S., still has 20% fewer Points of Distribution (PODs) than the broader domestic players we compete against. So there remains plenty of opportunity for distribution to be an important part of the future. That has been reinforced by our Shopper-First Shelf, which has allowed retailers to recognize the opportunity to build a stronger section. That will significantly affect your category question, as more people do Shopper-First Shelf—it will be good for the category and, as you would expect, on brands that are growing their share like ours, it will benefit us as well. Regarding the overall beer category, it still remains challenged, particularly among Hispanic consumers. Seventy-five percent of the Hispanic consumers are very concerned about the socioeconomic environment and are being much more careful about their spending patterns, focusing more on consumer essentials versus other categories. I think that volatility will continue going forward. However, our focus remains on controlling the controllables, which include distribution, price pack architecture, and doing the right things to position ourselves for a successful future.

I wanted to follow up again on the beer margins implied for fourth quarter given the low single-digit absolute COGS increase for the year. It implies gross margins, I think, something in the 47% range. I understand that it is lower volume as Garth mentioned, but could you provide a bit more context on the expected headwind from aluminum and depreciation that you mentioned? I’m asking because last year in the fourth quarter, volumes were down as well, and obviously, the margin performance was much stronger. So just any additional context on the margins would be great. Additionally, regarding depletions in the off-premise, I think those were down 2.9%, running decently ahead of where we saw both Nielsen and Circana end up in the third quarter. It’s the second quarter in a row that’s happened. Wondering what you're seeing in independent channels, whether it’s just a function of easy comparisons, or if you're seeing any sort of encouraging trends in that channel.

Yes. Just to reiterate on the margins, the headwinds and again, as you noted, it is our low seasonal quarter. For clarity, it's 20% of our overall volume for the fiscal year. As I mentioned, depreciation, which was a benefit for us in Q3, will be an incremental headwind in Q4 because more assets are being placed into service. Concerning tariffs, aluminum pricing has gone up, and with it, the tariff has increased. We've seen a consistent shift in our portfolio towards aluminum, which will impact Q4. There's also a timing element with tariffs: you incur the tariff when you bring it into the U.S., but it doesn’t run through your P&L until you sell it. Given the manner in which tariffs have layered in throughout the year, we anticipate a higher tariff impact in Q4. A minor impact, a headwind in Q4, is related to some expenses that we expected to incur in Q3 that have moved into Q4. It's simply timing, resulting in a bit of a benefit in Q3 versus a headwind in Q4.

Relative to your question related to depletions, there are a couple of things to remember. Some regions have less tracked channel coverage, and those have been stronger, particularly on-premise. A year ago, Modelo was #5 on draft, today it's #2. I already mentioned that Pacifico has seen significant share growth in the on-premise as well. Some areas that are not as easily monitored have gone in our favor, helping the depletion outlook versus some of the expectations.

Question for Bill. Just despite the macro pressures, your depletions have remained relatively consistent this year, down 2.5% to 3%, not materially worse. Your beer business continues to outperform the category. It seems scanner data shows a little improvement in December. So I'm curious how you perceive a potential recovery, if at all, in your beer business over the next year considering tailwinds such as easier compares and the World Cup. Any insight would be great.

Sure. We're cautiously optimistic that we're on the plateau of where the business will be. However, judging that has been quite challenging. The volatility has been significant. It’s tough to assert that you’ve truly hit the bottom. When looking at our omnibus study, Hispanic consumers remain particularly concerned, although there's been a slight uptick among the broader market community. Christmas week was especially strong for us, which indicates that consumers are still purchasing our brands due to their health. Looking ahead, the World Cup is a notable example of events that could drive consumption. We believe that our beers will enhance those experiences. Still, projecting the future remains challenging—it will largely depend on consumer sentiment and macroeconomic conditions.

Thanks for the question. Unfortunately, it was also Gerald's question. But maybe there's a way to quantify your Hispanic consumer sentiment. You noticed pressure starting in February of last year, so the data reflects that. What we’re wrestling with is once we lap that initial shock of immigration policy restrictions, could it be that the situation becomes a little less severe? So instead of mid-single-digit declines, might this group improve a bit?

We hope—your outlook would be a delightful outcome. However, we consistently track by ZIP code. For ZIP codes with more than 20% Hispanic representation, conditions remain very challenging. There’s been some improvement in areas with less than 20% Hispanic representation, but volatility varies significantly state by state, depending on immigration policies. These variables make predictions challenging. That’s why we emphasize controlling the controllables, maintaining our focus on strategies that work in our favor, such as Pacifico and Victoria, Modelo Draft, and Corona Sunbrew—brands that perform well and are well-positioned for long-term success.

Happy New Year. I wanted to ask about the beer pricing environment. You had 1.5% pricing in the quarter, but also faced negative mix from package types. Can you discuss how you envision that evolving going forward? Should we still expect this dynamic to continue? Additionally, could you touch on some initiatives with Modelo Oro and Corona Premier regarding price adjustments? Are you seeing a volume uptick as a result, leading to possible adjustments for other brands too?

Sure. We project 1% to 2% pricing increases going forward, which we believe is appropriate. As you know, it can vary depending on market conditions. To your point, we're pleased with our adjustments to Oro and Premier pricing to align with consumers' expectations for light beers. Our trends on both have improved significantly, which is encouraging. We have also added 7-ounce packages in various forms across states to meet consumers looking for price-sensitive options amid current economic conditions. So, we'll continue that customer-focused approach.

I wanted to seek clarification from your prepared remarks about the fourth quarter specifically. You mentioned an expectation of year-over-year volume declines in the beer business, and I wanted to clarify whether that is a shipment comment, a depletion comment, or both potentially. Should we still expect a negative trajectory in the fourth quarter, and does that apply to both shipments and depletions in beer?

Garth will elaborate on this, but as we noted in the previous quarter, we expect shipments and depletions to be roughly equal in the last two quarters. There was some minor variation this quarter, which is likely to reverse next quarter. However, over the third and fourth quarters, we expect depletes and shipments to be essentially the same. Would you like to add anything, Garth?

That’s precisely correct, Bill. The comment pertains specifically to billings; both shipments and depletions are expected to align.

So a different type of question. In December, President Trump signed an executive order pushing to reschedule cannabis. If that happens, how would it impact how you think about your exposure to that segment? Additionally, regarding the ban on intoxicating hemp beverages in some states, do you think you'll benefit if those products go away?

We still hold shares in Canopy, which could be interesting as the market develops. However, we do not engage daily in the cannabis business. We haven’t noticed significant issues impacting our beer business from hemp, with most interactions occurring around ready-to-drink scenarios. That said, consumers will make choices based on their disposable income, so as this market develops, we will watch closely.

I was wondering if you could elaborate a bit on how to think about the World Cup. You pointed it out as a driver of beer occasions, but can you share insights from past experiences concerning positive impacts? Do you plan to increase spending around it or rely on occasion momentum? What’s the anticipated effect on the top line?

Sure. This sporting event is significant for the coming year and tends to create major beer moments, especially since soccer over-indexes with the Hispanic community. We anticipate that as consumers engage with the World Cup, it will generate incremental benefits for us. We'll remain diligent in organizing the right promotions and ensuring our products have proper shelf and floor presence leading up to the event. Additionally, we will utilize in-game media and television advertising, maintaining our commitment to sports marketing, which has been a key focus for us. Therefore, we believe this presents a prime opportunity for beer in general, and more specifically for our brands.