STZ
#So first of all, as it relates to pricing, it is pretty much what we have said all along throughout the year, which is that we've expected to take in the 1% to 2% pricing range, and that's what we're doing.
So the strategy really hasn't changed.
Like every other business, we've got costs to cover.
And our brands are strong enough to bear that kind of pricing.
If there's any change in our strategy, I would say that the marketplace is changing somewhat in terms of the makeup of the types of products that are out there.
The market ---+ I mean, the industry ---+ is definitively premiumizing, while volume remains sort of flat.
So there's a shift internally towards more premium products.
And I would say that that probably has given us the opportunity to be less focused on what's going on with competitive products and to be more focused on what do we think is good for our brand and what do we think will work and won't work.
So we continue to be very strategic in our pricing.
We're doing it on a market by market, brand by brand basis.
Our guidance, nevertheless, hasn't changed.
We're still looking at the 1% to 2% range.
And you can call it leading or not leading.
We're sort of, I'll say, marching to our own beat as opposed to too worried about what some of our competitors are doing overall.
And that's up to them.
And we'll do what we think the market will bear for our brands and what's good for the health of our brands.
So in some cases, that will mean that we will lead pricing.
But as I said, the market's changed.
It's premiumizing.
10% of the industry now is craft, selling at very high prices.
And the other 10% of the market is basically us.
And those are the two segments, that 20% is obviously taking share from the other 80%.
So things are a little different out there than they have been in the past.
I would say in general, we're not overly focused on the pricing gap with the domestic premiums.
The domestic premiums have taken on a life of their own.
I'm not sure how relevant it is, at this stage.
Yes.
We're less concerned about that gap today than we were several years ago.
Thank you.
So we have, in terms of supply chain procurement, not finished good procurement, we have largely separated ourselves from reliance on ABI.
And then separately, we will continue to procure finished goods from AVI's breweries until June of next year, of 2016.
So I don't think we see any issues with pinot noir sourcing, which we're doing quite a bit of it, between <UNK> West, <UNK> Mondavi, the various tiers, and Meiomi.
But I would say that our supply chain is very well nailed down.
And then I think to your question on the pricing in the marketplace, I think that pricing ---+ I think the answer to your question is maybe yes, yes.
I think that even in the higher end, I certainly don't see pricing going the other way.
It hasn't been a very robust market over a number of years in terms of pricing.
But if you listen to the talk out there in industry-type circles, I think everybody's ---+ the market in general is probably more favorable to some pricing than it has been in quite a number of years.
So it probably bodes well.
Yes, so clearly implied in a guidance that brings us back into the 34% range, margins will compress a little bit in the back half of the year as a result of several headwinds, if you will, those being bringing assets into service, so our depreciation number will go up, line commissioning costs, incremental employees for training, as well as throughput lowering as we go into the back half of the year at Nava, just based on the seasonality of our production.
So I would say that built into the 34% is our current estimate of FX and commodity rates for the rest of the year.
It's a little bit of both.
And so from a hedging perspective, we run a three-year layering program, and so we are ---+ we kind of stabilize our returns a little bit, which means you leave some money on the table when commodity prices and FX values are falling and you gain on the other side.
So I would say that we will get ---+ assuming commodity rates were to stay where they are today, and primarily for us, we're talking about benefiting from diesel rates, as well as aluminum ---+ but assuming those rates were to stay as they are today, there would be some benefit that we would experience next year.
It's just far too early to call what that is, at this point.
The first thing I would say that from a consumer experience standpoint, our research and the feedback that we receive is that as more people in the US become exposed to Modelo Especial, they tend to continue to drink it.
So it's a very high quality, well respected, authentic brand from Mexico.
To address the can versus bottle component, we had depletions year-to-date on cans that are 12-ish % on the can part of the portfolio; and then bottles, we were in the high 20% growth rate, from a depletion standpoint.
So we're seeing growth coming across the spectrum of offerings on Modelo Especial.
And I would say that as far as the consumer goes, I'm not sure that we agree with you that it's two completely different consumer bases.
I think that we've seen a shift, somewhat, at least, in the growth from cans to bottles.
The can is only slightly priced less than the bottle.
It's really almost irrelevant, the pricing difference.
Interestingly enough, cans have, in general, taken on a very premium image, since it's becoming the package of choice in the craft segment of the market.
So the whole view towards cans in general, I would say, is shifting quite significantly from a consumer perspective.
So we don't see any difficulties in marketing the cans and the bottles together, like everybody else does, markets cans and bottles.
So that's not a particularly unique aspect of our Modelo Especial business, which, as we said earlier, is actually growing more than it ever has on an incredibly large base.
So the strength of that brand is phenomenal at this stage, without it really having fully transitioned to a general market product.
And it is transitioning to a general market product, again, with our own help, as we've turned on general market TV advertising, which has been very successful.
And we know that there is huge room for distribution growth in that brand.
And you will see it.
You will see it as we continue to move forward and execute with that brand.
You'll see the ACV continue to go up.
That's simply going to be the case, as we believe quite strongly at the current time.
So cans are strong.
The bottles are strong.
It's following the same pattern as many brands that have become major brands.
And Corona's probably the best example of that.
So there is some overlap of wholesalers that carry the Femsa brands, or the Heineken/Femsa brands, and ourselves.
Quite a bit of overlap, in fact.
I would say that that is totally irrelevant to us.
The Femsa brands are small.
And in terms of growth, they have some growth in their Dos Equis brand, which is less than half the size, for instance, of Modelo Especial, and the growth has slowed down.
And Tecate, I think, is in negative territory, and they've had some growth in Tecate Light, which basically sells at the domestic premium price point.
So we don't really view that as particularly strong competition.
And we don't really care whether they're in Miller Coors or ABI or, frankly, where they go, because we don't focus on that portfolio very much.
And Heineken's a whole different animal, obviously, that I think is competing with a different consumer base, in general, than our Mexican portfolio.
So again, it's not something that we really focus on.
And in general, our modus operandi is to worry more about our portfolio and the opportunities there.
And execution is going to be the key on our portfolio in the future, which is going to be about taking advantage of distribution opportunities and basically increasing the number of SKUs per account.
That's really what we ---+ where the opportunity lies for us.
Because we actually generate a huge amount of growth for ourselves and our retailers with a relatively small amount of shelf presence.
And we're under-SKUed, given our velocity and our dollar volume at retail.
So there's just a big opportunity there for us and our retailers.
Our retailers are and should be interested in increasing their sales and margin per unit space of shelf space.
That's what they're all about.
And probably their biggest opportunity to do that and to get dollar sales, turns and, even more importantly, margin is through increased SKU and shelf space for our portfolio.
And when we talk to retailers about that, I think they realized it, because the statistics are just overwhelming for them as a way to increase their profitability.
So building our SKU count per retail account is going to be one of our primary focuses going forward.
I think in terms of capacity, it's like high single digits is what we have said in the past, or you can infer that from our comments about doubling the business over a long period of time, 10 years, that's just sort of simple math.
Our real guidance for the year continues to be high single digits for the beer business in general.
And then your second question was.
Oh, a lot.
We just introduced it, really, and made it a priority over the last relatively short period of time.
So I think that there's a big opportunity for more distribution on that, right.
It's only about 5% of our volume at the current time.
And we should be growing that more like 15% or 20%.
So that will be achieved through continuing to build distribution and doing what I said, focusing on SKUs per account.
Okay.
Well, thanks, everybody, for joining our call today.
As we close the discussion of our second quarter results for FY16, I am very, very pleased with what our business has achieved so far.
Though the year is far from complete, our new guidance reflects the confidence we have in our ability to execute in the second half and achieve our goals for the full year.
We look forward to the next time we speak with you in early January, when we will share the results of our third quarter.
Until then, we wish you a safe and happy holiday season.
This time of the year is a great opportunity to share our fine beer, wine and spirits products with friends and family, and we encourage you to make Constellation Brands a part of your celebrations this holiday.
So thanks again, everybody, and have a great day.
