‘Seltzer business is going to continue to be a growth driver’: Constellation Brands CEO

President & CEO, Constellation Brands, Bill Newlands, joins Yahoo Finance to discuss how despite Constellation Brands narrowly missing Q1 earnings expectations, the strong sales mixed with the reopening of bars is a sign of good things to come.

Video Transcript

BRIAN SOZZI: Investors toasted the latest earnings report from Constellation Brands, the maker of household name beers, such as Corona and Modelo. Big quarterly revenue estimates primarily on strong sales of those beer brands. Company said strength in beer will continue this year, as bars and restaurants rebuild from the pandemic. Constellation added, it will repurchase another $500 million in stock this quarter, after buying back $523 million in the first quarter.

Joining us now is Constellation Brands' President and CEO, Bill Newlands. Bill, good to see you ahead of a long weekend of, I'm sure, a couple drinks here.

Let me start here. I got a good report in my box, email just now, from Goldman Sachs. They're saying on-premise draft beer trends continue to improve, but overall volume is still below pre-COVID levels. When do you think your business gets back to those pre-COVID levels?

BILL NEWLANDS: We're very excited of how it's gone so far. Our depletions in our first quarter in the on-premise was up 250% versus last year. So on the surface, you think that's fantastic. But you also realize that it was only 11% of our business. Before the pandemic, that channel was 15% of our business. So we still think there's a long way to go and a lot of opportunity as people begin to get out and really decide how they're going to engage and in what channels they're going to make their purchases.

MYLES UDLAND: You know, Bill, we talked a little bit on this program the other day about the seltzer market. And you had some really interesting commentary about the dynamics you see there, that ultimately you think only a couple of major players are going to be long-term winners there. And you're hoping to be one of the top three brands. What have you guys seen, just as we get into the summer and really the heart of what's become the seltzer season over the last few years?

BILL NEWLANDS: Well, we still see that as a as a big growth driver in the high end part of the beer business. And our business is doing very well. As you know, we did 10 million cases in our first year, with literally one SKU. We've just introduced a second variety pack, which is doing very well. It's almost half the size of the first variety pack already. And we just introduced Limonada here in the last few weeks, and we're very excited about that product. So we think the seltzer business is going to continue to be a growth driver, probably not at the accelerated levels that it has in prior years, but it can still see 30%, 40%, 50% growth this year, which will be very healthy.

BRIAN SOZZI: Bill, do you think there will be a hard seltzer shake out? I'll use me as an example. I go over to my local convenience store. I mean, the shelves are overrun with choices, by some brands I've never even heard of. What's the end game here?

BILL NEWLANDS: We do think that'll happen. Much like the light beer category, where you see a few to several critical brands that tend to be the strong players, we think that's going to happen in seltzer as well. And we certainly expect to be there with our Corona hard seltzer.

MYLES UDLAND: And certainly within the beer category, let's talk a little bit about what you guys have seen there for the continued kind of at-home trends that went on during the pandemic. Certainly a lot more people were buying a lot more, consuming a lot more at home, out of necessity. But have you guys seen follow through on people changing their habits, given even new options to be able to go out again, but, you know, people realize, hey, having a couple of buddies over is actually maybe preferable, certainly cheaper than heading out to a restaurant or bar?

BILL NEWLANDS: It can be. Certainly we're seeing a lot of change of how people buy. So even though they may be buying at home, they might be doing it by three tier e-commerce or click and collect or Instacart or some of these alternate ways for people to get a hold of product.

How all those channels mix together as we're coming out of the pandemic I think is going to be one of the more interesting things. We've been waiting for many, many years to see an increase in some of these direct-to-consumer style purchasing scenarios. And we finally saw it around the pandemic. Fortunately, our company invested heavily against this. You know, in our wine business, we were up 45% versus last year in the direct-to-consumer space, which, considering the consumer had gone to that space pretty aggressively, we think that's really here to stay.

BRIAN SOZZI: You highlighted on the earnings call, Bill, supply chain challenges. What are some of those challenges you're dealing with now, I guess, as you try to help restaurants, bars rebuild their stock?

BILL NEWLANDS: The biggest single thing that we had is when the power grid in northern Mexico and Texas had a challenge at the end of February, it gave us a limited window where we had a challenge of producing product. That's really our only issue. Frankly, the biggest challenge-- and this is a good one-- is demand is just through the roof. You know, our business is extremely strong. We saw a double digit growth profile in our beer business. And that's really the biggest thing that's made inventory just a bit tighter than we'd like to see.

We certainly-- we're working aggressively with our partners and our distributors to make sure that we're able to fulfill. But it's going to be a little tight over the course of the next several months.

MYLES UDLAND: Bill, this is certainly like, let's call it, inventory adjacent. But you guys talked about, let me get the term here, smoke tainted bulk wine sales during the most recent quarter. Can you-- I read it and I was trying to figure out exactly what happened and how that fits in. Can you just outline for us a little bit of just what that part of the business, or how that became something that came up on the call?

BILL NEWLANDS: Well, as you probably know, last year there were wildfires in California, and smoke settled into some of the areas where there was a lot of grapes being grown. So what that does is that creates smoke taint in the wine. And obviously, we do not make wine out of anything that doesn't meet the quality standards that we have for our products. So what that simply referred to is we sold some of that bulk wine that did not meet the standard that we would expect to go into our exceptional brands.

BRIAN SOZZI: Bill, we've seen a lot of inflation. Have you been able to increase your prices this year?

BILL NEWLANDS: We're in our beer business looking at 1% to 2%. That's pretty consistent with what we do on an annualized basis. Certainly we're watching inflation, but we also hedge ourselves pretty well. We assumed that it would be, inflation would be up a few points this year, and we built that into our planning cycle. But we're pretty well ahead. So we think we're in a pretty good spot. And you know, you always have to be careful in raising your price. You don't want to get ahead of the consumer. And that's what we're watching very carefully. But certainly we expect to do what we traditionally do, which is in that 1% to 2% range.

BRIAN SOZZI: And are you still on pace to repurchase, what, about $2.5 billion of your stock, what, through fiscal 2023?

BILL NEWLANDS: '23, correct. You know, one of the beauties of our business being high growth, high cash flow is we can not only invest for the future growth that we expect around our portfolio, but we can also buy back stock. And by the time we're done with another three or four months, we'll have $1 billion against our $5 billion commitment, as you point out, half of which is in stock repurchases, by the end of fiscal '23.

BRIAN SOZZI: You have a wide selection, Bill. What's your beer of choice this July 4th weekend?

BILL NEWLANDS: I've got to say, I've got to have a Negra Modelo. I love the full flavor of Negra Modelo. It's one of my favorites. But you know, you've got to be careful. You've got to love all your children. So I may be more flexible than that.

BRIAN SOZZI: Well, I'll give you some love. I'm Corona Premiere guy here myself. All right. Well, have a good, safe long week. And Constellation Brands President and CEO, Bill Newlands, we'll talk to you soon.

BILL NEWLANDS: Thanks very much.