Things just keep getting better for Constellation Brands (STZ -1.71%). The alcoholic beverage giant recently wrapped up its fifth straight year of 20% or better earnings growth as its portfolio, which tilts toward premium beer, wine, and spirits, soaked up market share.
CEO Rob Sands and his executive team held a conference call with analysts in late March to put those fiscal year results in perspective and explain why they see a long runway for growth ahead, even if profit gains will be slower over at least the next year.
Here are a few highlights from that discussion.
Beer leading the way
Our beer business continues to be a powerhouse for growth, with its winning streak of 31 quarters of consecutive growth as the No. 1 brewer and seller of imported beers in the U.S. market. Constellation also remains the No. 1 high-end beer company and growth contributor to the U.S. beer category, outperforming the overall U.S. beer industry and all key competitors.
-- CEO Rob Sands
The broader beer industry was stagnant in the U.S. last year, but Constellation Brands' premium import brands had no trouble achieving market-thumping growth.
Corona was a standout, gaining market share every month of the year to make it the only top beer brand to grow last year. The Modelo franchise was a winner, too, having boosted consumption by 17% to pass the 100-million case milestone last year. Overall, the beer segment grew 10% while boosting profit margin by 3.2 percentage points to 39.5% of sales.
Progress in wine and spirits
Our wine and spirits business ... achieved significant margin improvement for the year while gaining market share in the U.S. wine category. These results demonstrate that our wine and spirits premiumization strategy is working.
Constellation Brands was affected by a slowdown in the wine industry, but the division still expanded by 5% for the year. Operating margin rose to 27.4% of sales from 25.8% because of management's progress at shifting the portfolio toward higher-margin products. Newly acquired Schrader Cellars, for example, has popular wines that sell for $225 per bottle, and a new brand called Deranged is being marketed at $100 per bottle.
We plan to increase our Nava [brewery] footprint to 30 million hectoliters and expand Obregon [capacity] by an additional 5 million hectoliters, while also continuing the buildout of Mexicali to 5 million hectoliters. Collectively, these projects will provide about 44 million hectoliters of capacity by fiscal 2023.
The company achieved its beer capacity expansion plans for the year, and its main Mexican breweries can produce 31.5 million hectoliters per year today. Yet as demand kept rising in 2017, it became clear that more growth was needed. Thus, executives plan to spend $900 million on capacity projects in 2018 to help bring output up to 34 million hectoliters by 2020, and 44 million hectoliters by 2023.
Raising marketing spending
We expect gross margin benefits to be mostly offset by incremental marketing investments in support of our innovation and other growth initiatives. These investments include $35 million for the national launch of Corona Premier, as well as a regional expansion of the 12 ounce format of Corona Familiar.
Constellation Brands is forecasting more modest profitability growth this year as the company ramps up marketing spending to support its best franchises. While both the beer and wine and spirits businesses should boost profit margins, overall operating income is projected to grow at the same rate as sales, or roughly 10%.
We expect fiscal '19 [which ends in February 2019] to be another year of strong financial performance, as we are targeting healthy net sales, [adjusted earnings], comparable basis diluted EPS, and operating cash flow growth, while we continue to invest in our Mexican beer operations, our brands, and in other areas in order to capture future growth opportunities.
-- CFO David Klein
The 10% earnings increase Constellation Brands forecast in fiscal 2019 will mark the first time in six years that the company hasn't improved profits by at least 20%. That growth slowdown is partly a consequence of its huge gains since 2013, but also a result of investments into the business.
The company plans to aggressively expand its distribution footprint this year while making big portfolio expansions, like taking Corona Premier national, the first national Corona extension in over 25 years.