- Achieves comparable basis diluted EPS of $0.54 and reported basis diluted EPS of $0.20
- Reaffirms fiscal 2010 comparable basis diluted EPS guidance; lowers comparable basis tax rate projection; updates reported basis diluted EPS guidance
- Continues to benefit from cost reduction efforts
- Targets free cash flow to be at the upper-end of guidance range
- Decreases debt by $336 million for fiscal 2010 year-to-date
Third Quarter 2010 Financial Highlights* (in millions, except per share data) Comparable Change Reported Change Consolidated net sales $988 -4% $988 -4% Operating income $190 -13% $135 -32%
Operating margin 19.3% -190 bps 13.6% NM
Equity in earnings of equity method investees** $60 -21% $35 -55%
Earnings before interest and taxes (EBIT) $250 -15% - - Net income $120 -9% $44 -47%
Diluted earnings per share $0.54 -10% $0.20 -47%
Constellation Brands, Inc. (NYSE: STZ, ASX: CBR), the world's leading wine company, reported today its fiscal 2010 third quarter results. "During the quarter, we continued to execute well against our strategic goals of generating cash, paying down debt and reducing costs," said Rob Sands, president and chief executive officer, Constellation Brands. "U.S. branded wine net sales were impacted by continuing economic challenges, higher levels of promotional spending in advance of the holiday selling season, and the expected shift of sales to the second quarter from the third quarter as part of our U.S. distributor network consolidation activities. But, we began to see improving depletion trends later in the quarter."
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Third Quarter 2010 Net Sales Highlights* (in millions) Reported Organic Constant Constant Currency Net Currency Net Change Sales Change Change Sales Change ------ ----- ------ ------ ----- ------ Consolidated $988 -4% -6% $988 2% - Branded Wine $868 2% - $868 2% - Spirits $51 -54% -54% $51 -2% -2% Other $68 -4% -5% $68 -4% -5% ----- --- --- --- --- --- --- *Definitions of reported, comparable, organic and constant currency, as well as reconciliations of non-GAAP financial measures, are contained elsewhere in this news release. ** Hereafter referred to as "equity earnings." NM= Not Meaningful
Net Sales Commentary
Reported consolidated net sales decreased four percent due primarily to the impact of the value spirits divestiture, partially offset by the favorable impact of year-over-year currency exchange rate fluctuations. Organic constant currency net sales were even with the prior year.
Branded wine organic net sales on a constant currency basis were even versus last year and included a three percent decrease in North America offset by increases of 12 percent in Europe and two percent in Australia/New Zealand. The sales increase in Europe was primarily due to higher volumes of lower priced products.
Total spirits organic net sales decreased two percent for the quarter. The decrease was primarily due to a difficult comparison versus third quarter fiscal 2009. Glass shortages for SVEDKA vodka relating to a new bottle changeover in last year's second quarter resulted in higher shipment levels in last year's third quarter. Spirits organic net sales for the first nine months of fiscal 2010 increased 18 percent with SVEDKA vodka net sales increasing more than 40 percent. The brand continues to experience strong momentum in the marketplace.
Operating Income, Net Income, Diluted EPS Commentary
Wines segment operating income decreased $22 million versus the prior year third quarter. This is primarily due to the decrease in U.S. branded wine sales, divestiture of the value spirits business and a decrease in operating income from the international business.
Constellation's equity earnings from its 50 percent interest in the Crown Imports joint venture totaled $46 million, a decrease of 26 percent from the prior year third quarter. For third quarter 2010, Crown Imports generated net sales of $499 million, a decrease of 10 percent, and operating income of $91 million, a decrease of 26 percent. Net sales for Crown were impacted primarily by volume declines. However, depletion trends outpaced shipments resulting in temporary wholesaler inventory reductions during the quarter. Operating income for Crown decreased due to lower net sales, expense timing related to national media programs for Corona Extra and Corona Light and a contractual cost increase.
"While the on-premise and convenience store channels remain challenging, we are seeing stabilization in the grocery channel as Crown continues to execute on targeted promotional spending, media support and the introduction of new packages for consumers to enjoy at a wide variety of venues, occasions and price points," said Sands. "These actions have helped to improve depletion trends as we have also experienced import category market share gains during the quarter."
For third quarter 2010, pre-tax restructuring charges, acquisition-related integration costs and unusual items totaled $81 million, including $60 million for impairment and other charges related to the Ruffino joint venture, compared to $21 million for the prior year third quarter.
Interest expense totaled $64 million, a decrease of 18 percent. The decrease was primarily due to lower average borrowings during the quarter.
"Our debt level has decreased $336 million since the beginning of fiscal 2010 and we are estimating full-year free cash flow to be at the upper-end of our guidance range," said Bob Ryder, chief financial officer, Constellation Brands. "We anticipate that proceeds from the pending sale of the U.K. cider business combined with targeted free cash flow generation during the fourth quarter will further advance our deleveraging efforts."
The comparable basis effective tax rate in the third quarter was 35.4 percent which reflects the favorable outcome of various tax items. The company anticipates a full year comparable tax rate of approximately 35 percent which represents a reduction to previous guidance.
Summary
"The industry and our results continue to be impacted by the difficult economic climate. However, we believe we have the right strategies in place to organically grow the business as we continue to experience improving market trends in our U.S. wine and beer businesses," said Sands. "Overall, we remain optimistic for the future and intend to continue to work toward reducing borrowings, improving free cash flow and optimizing return on invested capital. Our comparable basis diluted EPS expectation for the full year remains unchanged."
Outlook
The table below sets forth management's current diluted EPS expectations for fiscal 2010 compared to fiscal 2009 actual results, both on a reported basis and a comparable basis.
Constellation Brands Fiscal 2010 Diluted Earnings Per Share Outlook Reported Basis Comparable Basis -------------- ---------------- FY10 FY09 FY10 FY09 Estimate Actual Estimate Actual -------- ------ -------- ------ Fiscal Year Ending Feb. 28 $0.79 - $0.89 ($1.40) $1.60 - $1.70 $1.60
Full-year fiscal 2010 guidance includes the following current assumptions:
- Interest expense: approximately $260 - $270 million
- Tax rate: approximately 51 percent on a reported basis, as compared to 35 percent on a comparable basis, primarily due to a provision of nine percentage points associated with the March 2009 sale of the value spirits business; five percentage points related to the nondeductible charges associated with the company's Ruffino joint venture; with the remainder primarily related to international restructuring activities which have minimal tax benefits
- Weighted average diluted shares outstanding: approximately 222 million
- Free cash flow: $230 - $270 million
Conference Call
A conference call to discuss third quarter 2010 results and outlook will be hosted by President and Chief Executive Officer Rob Sands and Executive Vice President and Chief Financial Officer Bob Ryder on Thursday, Jan. 7, 2010 at 10:30 a.m. (eastern). The conference call can be accessed by dialing +973-935-8505 beginning 10 minutes prior to the start of the call. A live listen-only webcast of the conference call, together with a copy of this news release (including the attachments) and other financial information that may be discussed in the call will be available on the Internet at Constellation's Web site: www.cbrands.com under "Investors," prior to the call.
Explanations
Reported basis ("reported") operating income, net income and diluted EPS are as reported under generally accepted accounting principles. Operating income, net income and diluted EPS on a comparable basis ("comparable"), exclude restructuring charges, acquisition-related integration costs and unusual items. The company's measure of segment profitability excludes restructuring charges, acquisition-related integration costs and unusual items, which is consistent with the measure used by management to evaluate results.
The company discusses additional non-GAAP measures in this news release, including constant currency net sales, organic net sales, comparable basis EBIT and free cash flow.
Tables reconciling non-GAAP measures, together with definitions of these measures and the reasons management uses these measures, are included in this news release.
About Constellation Brands
Constellation Brands is the world's leading wine company that achieves success through an unmatched knowledge of wine consumers paired with storied brands that suit varied lives and tastes. With a broad portfolio of widely admired premium products across the wine, beer and spirits categories, Constellation's brand portfolio includes Robert Mondavi, Hardys, Clos du Bois, Blackstone, Arbor Mist, Estancia, Ravenswood, Jackson-Triggs, Kim Crawford, Corona Extra, Black Velvet Canadian Whisky and SVEDKA Vodka.
Constellation Brands (NYSE: STZ and STZ.B; ASX: CBR) is an S&P 500 Index and Fortune 1000(R) company with more than 100 total brands in our portfolio, sales in about 150 countries and operations in approximately 45 facilities. The company believes that industry leadership involves a commitment to our brands, to the trade, to the land, to investors and to different people around the world who turn to our products when celebrating big moments or enjoying quiet ones. We express this commitment through our vision: to elevate life with every glass raised. To learn more about Constellation Brands and its product portfolio visit the company's web site at http://www.cbrands.com/.
Forward-Looking Statements
The statements made under the heading Outlook, and all statements other than statements of historical facts set forth in this news release regarding Constellation's business strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management, as well as information concerning expected actions of third parties, are forward-looking statements (collectively, the "Projections") that involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by the Projections.
During the current quarter, Constellation may reiterate the Projections. Prior to the start of the company's quiet period, which will begin at the close of business on Feb. 19, 2010, the public can continue to rely on the Projections as still being Constellation's current expectations on the matters covered, unless Constellation publishes a notice stating otherwise. During Constellation's "quiet period," the Projections should not be considered to constitute the company's expectations and should be considered historical, speaking as of prior to the quiet period only and not subject to update by the company.
The Projections are based on management's current expectations and, unless otherwise noted, do not take into account the impact of any future acquisition, merger or any other business combination, divestiture, restructuring or other strategic business realignments, or financing that may be completed after the date of this release. The Projections should not be construed in any manner as a guarantee that such results will in fact occur.
In addition to the risks and uncertainties of ordinary business operations, the Projections of the company contained in this news release are subject to a number of risks and uncertainties, including:
- realization of expected synergies from acquired businesses;
- completion of various portfolio actions; implementation of consolidation activities
and actual U.S. distributor transition experience; - achievement of all expected cost savings from the company's various restructuring plans,
realization of expected asset sale proceeds from the sale of inventory and other assets,
including the sale of the company's U.K. cider business, and receipt of all consideration
from the divestiture of the value spirits business; - completion of any transactions regarding the company's Australian or United Kingdom
businesses; - accuracy of the bases for forecasts relating to joint ventures and associated costs and
capital investment requirements; - restructuring charges, acquisition-related integration costs and other one-time costs
associated with integration and restructuring plans may vary materially from
management's current estimates due to variations in one or more of anticipated headcount
reductions, contract terminations, costs or timing of plan implementation; - raw material supply, production or shipment difficulties could adversely affect the company's
ability to supply its customers; - increased competitive activities in the form of pricing, advertising and promotions could
adversely impact consumer demand for the company's products and/or result
in lower than expected sales or higher than expected expenses; - general economic, geo-political and regulatory conditions, prolonged downturn in the economic
markets in the U.S. and in the company's major markets outside of the U.S.,
continuing instability in world financial markets, or unanticipated environmental
liabilities and costs; - changes to accounting rules and tax laws, and other factors which could impact the company's
reported financial position or effective tax rate; - changes in interest rates and the inherent unpredictability of currency fluctuations,
commodity prices and raw material costs; and - other factors and uncertainties disclosed in the company's filings with the Securities and
Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended
Feb. 28, 2009, which could cause actual future performance to differ from
current expectations.
Constellation Brands, Inc. and Subsidiaries
RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES (continued)
NOTES
(1) The company reports its financial results in accordance with generally accepted accounting principles in the U.S. ("GAAP"). However, non-GAAP financial measures, as defined in the reconciliation tables above, are provided because management uses this information in evaluating the results of the continuing operations of the company and/or internal goal setting. In addition, the company believes this information provides investors better insight on underlying business trends and results in order to evaluate year over year financial performance. See the tables above for supplemental financial data and corresponding reconciliations of these non-GAAP financial measures to GAAP financial measures for the three months and nine months ended November 30, 2009, and November 30, 2008. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the company's reported results prepared in accordance with GAAP. Please refer to the company's Web site at http://www.cbrands.com/CBI/investors.htm for more detailed description and further discussion of these non-GAAP financial measures.
(2) For the three months ended November 30, 2009, strategic business realignment items primarily include costs recognized by the company in connection with the Global Initiative of $9.1 million, net of a tax benefit of $4.1 million, and the Australian Initiative of $3.3 million, net of a tax benefit of $0.0 million. For the three months ended November 30, 2008, strategic business realignment items consist primarily of costs recognized by the company in connection with its Australian Initiative of $6.1 million, net of a tax benefit of $0.0 million, and its Fiscal 2007 Wine Plan of $5.0 million, net of a tax benefit of $1.8 million.
(3) For the three months ended November 30, 2009, other consists of a loss of $34.3 million, net of a tax benefit of $0.0 million, on the contractual obligation created by the notification by the 9.9% shareholder of Ruffino S.r.l. ("Ruffino") to exercise the option to put its entire equity interest in Ruffino to the Company for a specified minimum value, and $25.4 million, net of a tax benefit of $0.0 million, associated with the impairment of the Company's investment in Ruffino. For the three months ended November 30, 2008, other consists of $32.4 million associated with the recognition of income tax expense in connection with the gain on settlement of certain foreign currency economic hedges.
(4) For the nine months ended November 30, 2009, strategic business realignment items primarily include (i) costs recognized by the company in connection with the Global Initiative of $42.7 million, net of a tax benefit of $20.5 million; (ii) tax expense associated with the March 2009 divestiture of the value spirits business of $37.5 million; and (iii) costs recognized by the company in connection with the Fiscal 2007 Wine Plan and Australian Initiative of $8.6 million, net of a tax benefit of $1.9 million, and $8.1 million, net of a tax benefit of $0.0 million, respectively. For the nine months ended November 30, 2008, strategic business realignment items consist primarily of (i) costs recognized by the company in connection with the Australian Initiative of $110.1 million, net of a tax benefit of $0.6 million, the Fiscal 2007 Wine Plan of $9.2 million, net of a tax benefit of $3.6 million, and the Fiscal 2008 Plan of $8.9 million, net of a tax benefit of $3.2 million; and (ii) the loss in connection with the disposal of the Pacific Northwest wine brands of $17.1 million, net of a tax benefit of $6.1 million.
(5) For the nine months ended November 30, 2009, other consists of a loss of $34.3 million, net of a tax benefit of $0.0 million, on the contractual obligation created by the notification by the 9.9% shareholder of Ruffino S.r.l. ("Ruffino") to exercise the option to put its entire equity interest in Ruffino to the Company for a specified minimum value, and $25.4 million, net of a tax benefit of $0.0 million, associated with the impairment of the Company's investment in Ruffino. For the nine months ended November 30, 2008, other consists primarily of $32.4 million associated with the recognition of income tax expense in connection with the gain on settlement of certain foreign currency economic hedges, and $4.1 million, net of a tax benefit of $0.0 million, associated with the impairment of an Australian equity method investment.
DEFINITIONS
Global Initiative
The company's plan announced in April 2009 to simplify its business, increase efficiencies and reduce its cost structure on a global basis (the "Global Initiative").
Australian Initiative
The company's plan announced in August 2008 to sell certain assets and implement operational changes designed to improve the efficiencies and returns associated with its Australian business (the "Australian Initiative").
Fiscal 2008 Plan
The company's plan announced in November 2007 to streamline certain of its international operations, primarily in Australia; certain other restructuring charges incurred during the third quarter of fiscal 2008 in connection with the consolidation of certain spirits production processes in the U.S.; and its plan announced in January 2008 to streamline certain of its operations in the U.S., primarily in connection with the restructuring and integration of the operations of Beam Wine Estates, Inc. ("BWE") (collectively, the "Fiscal 2008 Plan").
Fiscal 2007 Wine Plan
The company's plan announced in August 2006 to invest in new distribution and bottling facilities in the U.K. and to streamline certain Australian wine operations (collectively, the "Fiscal 2007 Wine Plan").
Constellation Brands, Inc. and Subsidiaries RECONCILIATIONS OF GAAP TO NON-GAAP FINANCIAL MEASURES (continued) GUIDANCE - DILUTED EARNINGS PER SHARE AND FREE CASH FLOW (in millions, except per share data) Diluted Earnings Per Share Guidance Range for the Year Ending February 28, 2010 ------------------------ Forecasted diluted earnings per share - reported basis (GAAP) $0.79 $0.89 Inventory step-up 0.03 0.03 Strategic business realignment (1) 0.51 0.51 Other (2) 0.27 0.27 ---- ---- Forecasted diluted earnings per share - comparable basis (Non-GAAP) (3) $1.60 $1.70 ===== ===== Actual for the Year Ended February 28, 2009 ---- Diluted earnings per share -reported basis (GAAP) $(1.40) Inventory step-up 0.06 Strategic business realignment (1) 0.97 Other (2) 1.94 Impact of anti-dilutive potential common shares (4) 0.03 ---- Diluted earnings per share - comparable basis (Non-GAAP) (3) $1.60 ===== (1) Includes $0.24, $0.17, $0.04, $0.04 and $0.01 diluted earnings per share for the year ending February 28, 2010, associated with the Global Initiative; tax expense associated with the March 2009 divestiture of the value spirits business; the Australian Initiative; the Fiscal 2007 Wine Plan; and other previously announced restructuring plans, respectively. Includes $0.63, $0.09, $0.08, $0.08, $0.05, $0.02 and $0.02 diluted earnings per share for the year ended February 28, 2009, associated with the Australian Initiative; a loss, primarily on assets held for sale, in connection with the March 2009 divestiture of the value spirits business; a loss in connection with the June 2008 divestiture of the Pacific Northwest wine brands; the Fiscal 2007 Wine Plan; the Fiscal 2008 Plan; a loss in connection with the sale of a Canadian distilling facility; and other previously announced restructuring plans, respectively.(3) (2) Includes $0.15 and $0.11 diluted earnings per share for the year ending February 28, 2010, associated with the loss on the contractual obligation created by the notification by the 9.9% shareholder of Ruffino to exercise the option to put its entire equity interest in Ruffino to the Company for a specified minimum value, and the impairment of the Company's investment in Ruffino, respectively. Includes $1.23, $0.38, $0.18 and $0.15 diluted earnings per share for the year ended February 28, 2009, associated with impairments of certain goodwill and intangible assets; impairments of certain equity method investments; the recognition of income tax expense in connection with the gain on settlement of certain foreign currency economic hedges; and a loss on the adjustment of certain inventory, primarily Australian, related to prior years; respectively. (3) (3) May not sum due to rounding as each item is computed independently. (4) In accordance with the FASB guidance for earnings per share, the dilutive impact of potential common shares is excluded from the company's reported diluted loss per share calculation for the year ended February 28, 2009, as the inclusion of these potential common shares would be antidilutive. As a result of the company having net income on a comparable basis for the year ended February 28, 2009, the dilutive impact of potential common shares is included in the company's comparable diluted earnings per share calculation. Free Cash Flow Guidance Free cash flow, as defined in the reconciliation below, is considered a liquidity measure and is considered to provide useful information to investors about the amount of cash generated, which can then be used, after required debt service and dividend payments, for other general corporate purposes. A limitation of free cash flow is that it does not represent the total increase or decrease in the cash balance for the period. Free cash flow should be considered in addition to, not as a substitute for, or superior to, cash flow from operating activities prepared in accordance with GAAP. Range for the Year Ending February 28, 2010 ------------------------ Net cash provided by operating activities (GAAP) $360.0 $420.0 Purchases of property, plant and equipment (130.0) (150.0) ------ ------ Free cash flow (Non-GAAP) $230.0 $270.0 ====== ====== Actual for the Actual for the Nine Months Nine Months Ended November Ended November 30, 2009 30, 2008 -------------- -------------- Net cash provided by operating activities (GAAP) $188.7 $330.9 Purchases of property, plant and equipment (89.2) (95.6) ----- ----- Free cash flow (Non-GAAP) $99.5 $235.3 ===== ======
SOURCE Constellation Brands, Inc.