Inflation: ‘We’re very judicious on how we look at pricing,’ Constellation Brands CEO says

Constellation Brands CEO Bill Newlands joins Yahoo Finance Live to discuss company earnings, inflation, consumer demand, stake in Canopy Growth, and the outlook for growth.

Video transcript

BRIAN SOZZI: All right, we are focused on Constellation Brand shares after the company reported quarterly beer sales jumped 21% on the back of strength in brands Corona, Modelo, and Pacifico. The company also revealed a plan to eliminate its class B shares as it's potentially eyeing more deals.

Joining us now to discuss is Constellation Brands CEO Bill Newlands. Bill, always nice to see you. Talk to us a little bit about what you saw in the business in June, because there's a lot of focus right now on consumers having to pay more with gas, and perhaps pulling a little bit back on beer and other items like that. Bill, I think you're muted.

BILL NEWLANDS: Sorry, Brian, I was on mute.

JULIE HYMAN: There he is.

BRIAN SOZZI: All good.

BILL NEWLANDS: All right, let's try that answer again. We think June is going to be very solid and consistent with our annual algorithm. So one of the things that's important to recognize about beer is, it's a staple for many, many people. And therefore, when choices get made, often, beer still ends up in the basket, so which works out very well for our advantage, as you can imagine.

BRIAN SOZZI: Yeah, I imagine when you're paying that much for gas, you need something to cool your mind. Why not have a few beers? Talk to me a little bit about pricing. You and I talked, I believe it was Cinco de Mayo when you told me you're staying disciplined on raising prices in this inflationary environment. Any pullback in that thinking, given, well, we haven't seen inflation come down much?

BILL NEWLANDS: We watch this on a weekly basis, as you would expect. But our belief is our long-term algorithm of raising prices 1% to 2% has done very well for us over time. We, frankly, recall in 2008, we got a little carried away with the pricing. And it took us a long time to recover from that. So we're very judicious on how we look at pricing. We certainly try to do everything we can in that area. But we look at it on a SKU by SKU, market by market basis, and are trying to understand that our consumer at the moment has some challenges. And we don't want to lose those consumers.

JULIE HYMAN: Bill, clearly, you had muted yourself because you were saying, ooh, ahh, during the fireworks segment. People see beer as a staple, as you said a few moments ago. But I am curious-- and I know that you were asked a little bit about this on your conference call-- if people are trading down, if they're getting a cheaper brand in their basket, instead of a more premium one. And it wasn't clear to me if you are seeing any of that. Can you talk to us about that?

BILL NEWLANDS: We're not seeing that with our brands, although you are seeing a little bit of that where some of the lower priced brands are going even further down into subpremium brands. So some of those subpremium brands are doing a bit better than they had been, but it really hasn't affected our business up to this point.

You still see, if you look year on year, there's about-- there continues to be a greater proportion of business at the high end of the beer business. It's up to 59 and 1/2% of the total beer business and continues to grow month on month, so. And that works, again, to our advantage because that's where we play.

BRAD SMITH: Bill, as a rewards member of one of my local shops, I'm very much cognizant of when certain items go on allocation, and they're unavailable for an extended period of time. How have you been able to navigate that in this environment right now?

BILL NEWLANDS: As you know, we had a little trouble last year because we had a couple of big weather events early in our fiscal year. But our brands are all back in stock. We've worked very hard to make sure we have access to both aluminum and glass for cans and bottles, which are the critical elements that we have.

Our biggest challenge, frankly, at the end of last year, was brown glass. And as you saw with Pacifica, we were up 21% in the first quarter because we got ourselves back in order on the brown glass side. So, fortunately, we're not seeing any issues with supply and demand, although, clearly, as you saw from our results, demand is up.

BRIAN SOZZI: Bill, so you are retiring or getting rid of the class B shares. And I understand that might help bring in new investors who are very focused on corporate governance. But does it also send a signal to investors that Constellation Brands might be back out there on the hunt for a deal?

BILL NEWLANDS: No, that's not the reason for it at all. It really is the former. Our view was and the Sands' view is, this was a perfect time to go to a single class of stock. We had a special committee formed of our board, which analyzed what the precedent transactions were and had outside advisors, both on a financial and legal basis. Our belief is this brings a lot of opportunity to the table. A single class of stock is more attractive to many people. It reduces voting control of the Sands. While they'll still be the biggest shareholder at roughly 16%, they no longer would have voting control. And I think a lot of investors will really appreciate this.

As you note, it adds a lot of value in the governance area. And frankly, it also gives us some big savings because they're both planning to retire from their executive capacities. And that will save us $15 to $20 million a year. At our PE ratio, that will save us, basically, on value, about $300 million. So we think, all in, this is a very good option for shareholders.

JULIE HYMAN: On a sort of related note, because of the announcement of Canopy Growth's debt equity swap that it announced yesterday, your stake in the company is going up closer to majority control. Now, Canopy, if you look at the shares, has been going in pretty much in a straight line down. Why are you guys still so confident in this business?

BILL NEWLANDS: Well, I think it would be fair to say that we're very frustrated by the time it's taken to get to legalization in the United States. We still believe it's going to be a big business. But the time that it's taking is way beyond what our original expectations were.

But if you think about a business that's probably $50 billion in the US today, most of it through the black market, and probably will double upon legalization, Canopy's set up to win. They've got deals in place with Acreage and TerrAscend and Warner and Jetty and other things that would put them in a wonderful position to be a winner in the United States, if we can get it over the hump on the legalization front.

BRAD SMITH: Bill, what are you drinking, going into the holiday weekend?

BILL NEWLANDS: I must say, I have a couple of things that I particularly like. On our beer side, Negra Modelo has been one of my favorites for a long, long time. So I'll be fully ready with some cold ones of that. And I'm really a big fan of the Prisoner on our wine side, whether it's their chardonnay or whether it's the red blend, which is a big favorite in our household. And then if I'm going to have a little whiskey, I'd have a little High West. So I've got to be flexible and be ready across all those sectors.

BRIAN SOZZI: Sounds like a busy weekend of drinking, Bill. Well, good for you.

BILL NEWLANDS: And it will be. It's going to be a tough one.

BRIAN SOZZI: You do run Constellation Brands. I get it.

BILL NEWLANDS: We're going to see some of those fireworks today.