Completes acquisition of Grupo Modelo's U.S. beer business; drives significant increase in second quarter sales and earnings
Achieves comparable basis diluted EPS of $0.96 and reported basis diluted EPS of $7.74; quarterly results include lower than anticipated tax rate
Updates fiscal 2014 outlook: expects comparable basis diluted EPS of $2.80 - $3.10 reflecting reduced tax rate guidance; expects reported basis diluted EPS of $9.30 - $9.60
Reaffirms free cash flow projection of $475 - $575 million for fiscal 2014
Targets effective tax rate to approximate 32 percent longer term due to beer acquisition
Recognizes $1.6 billion non-cash gain on original 50 percent interest in Crown Imports
Records non-cash impairment charges of $301 million relating to Canadian wine business
| Second Quarter 2014 Financial Highlights*|
(in millions, except per share data)
|Comparable||% Change||Reported||% Change|
|Operating margin||24.1%||+400 bps||NM||NM|
|Equity in earnings of equity method investees**||$4||-95%||$4||-95%|
|Earnings before interest and taxes (EBIT)||$356||68%||NA||NA|
|Diluted earnings per share||$0.96||35%||$7.74||NM|
*Definitions of reported and comparable, as well as reconciliations of non-GAAP financial measures, are contained elsewhere in this news release.
**Hereafter referred to as "equity earnings."
VICTOR, N.Y., OCT. 3, 2013 - Constellation Brands, Inc. (NYSE: STZ and STZ.B), a leading beverage alcohol company, reported today its second quarter 2014 results.
"We began the quarter by closing the beer transaction and starting the process of integrating our newly acquired brewery into our operations. We are very pleased that the employees at the Nava brewery, along with the Crown team, are now fully part of the company," said Rob Sands, president and chief executive officer, Constellation Brands. "Our beer supply chain is operating efficiently and the Crown team continues its superb marketplace execution as they achieved their 14th consecutive quarter of market share gains during the second quarter."
Net Sales Commentary
The significant increase for second quarter consolidated net sales was driven by $763 million of incremental net sales related to the consolidation of Crown. Full quarter net sales for the beer segment were $815 million compared to $788 million for the prior year second quarter, an increase of three percent.
"Crown had a strong summer selling season with seven percent depletion growth for the second quarter," said Sands. "We saw excellent marketplace execution with the 'Live it, Share it and Win it' summer retail promotion and the accompanying TV advertising campaign, which drove improved Corona Extra and Corona Light growth trends. In addition, Modelo Especial continued to demonstrate excellent marketplace momentum posting double-digit depletion growth for the quarter."
Wine and spirits net sales on an organic constant currency basis decreased one percent as wine volume growth was more than offset by higher promotional expense and lower spirits volume. "As previously discussed, we expect most of our growth for the wine and spirits business to be generated during the second half of the year resulting from the timing of product shipments," said Sands. "Our investments in innovation and advertising behind new products and key focus brands position us for strong marketplace execution during the upcoming holiday selling season. Some of our successful new brands were recently honored by key industry publications including The Dreaming Tree which was named 'Best New Wine' by Market Watch and a top 'Hot Prospect' by Impact. We are also excited about the roll-out of our line-up of new brands and line extensions including Milestone, Rosatello, Hidden Crush, V.NO, SAVED and Black Velvet Cinnamon Rush."
Operating Income and Net Income Commentary
The increase in consolidated comparable basis operating income includes an incremental benefit of $221 million of operating income from the consolidation of results for Crown and the new Mexican brewery since completing the beer business acquisition. Second quarter operating results for the beer business were slightly impacted by the realization of less than a full quarter of operating profits due to the timing of the close of the beer transaction. The decrease in wine and spirits operating income primarily reflects higher promotional expense and grape costs and the timing of shipments for the year.
The company's equity earnings from its original 50 percent interest in the Crown joint venture totaled $4 million compared to $71 million for the prior year second quarter. The decrease reflects the timing of the close of the beer acquisition.
As a result of the beer business acquisition, the company recorded a $1.6 billion non-cash gain on the remeasurement to fair value of the company's original 50 percent interest in Crown.
Also, for second quarter, the company recorded $301 million of charges related to non-cash impairments of goodwill and intangible assets associated with the company's acquired Canadian wine business. "Portions of our legacy Canadian portfolio have slowed since the acquisition of Vincor such as wine kits, refreshments and certain value wine brands. Going forward, we expect to concentrate our efforts in the growing higher margin import segment where we have had success with leading brands such as Kim Crawford, Woodbridge and Ruffino. We also plan to continue driving growth of our most important premium domestic wines including Jackson-Triggs and Inniskillin. Canada is a growing, healthy market and continues to be an important business for Constellation," said Sands.
Interest expense totaled $90 million, an increase of 65 percent. The increase was primarily due to higher average borrowings driven by the financing for the beer business acquisition, partially offset by lower average interest rates.
The comparable basis effective tax rate for the second quarter was 29 percent which reflected the benefits from integrating the beer business as well as the favorable outcome of various tax items. This compares to a 16 percent tax rate for the prior year second quarter which included the benefit of higher foreign tax credits. The company now expects its fiscal year 2014 and longer term effective tax rate to approximate 32 percent due to the beer acquisition.
The reported basis effective tax rate for the second quarter was four percent which also reflected the recognition of the $1.6 billion non-taxable gain and the non-deductible goodwill impairment charge.
Free Cash Flow Commentary
Free cash flow for the first six months of fiscal 2014 totaled $440 million as compared to $333 million for the same period last year. The increase was primarily due to incremental benefits from the beer business acquisition, partially offset by higher interest expense payments and lower contributions from the wine business.
"I am quite pleased with our strong free cash flow results through the second quarter. We continue to expect some acquisition related integration costs and brewery capital expansion investments to occur in the second half of this year," said Bob Ryder, chief financial officer, Constellation Brands. "Therefore, our free cash flow guidance of $475 million to $575 million for fiscal 2014 remains unchanged."
Beer Business Acquisition
The company completed its acquisition of Grupo Modelo's U.S. beer business from Anheuser-Busch InBev for approximately $4.75 billion on June 7, 2013. The transaction includes full ownership of Crown which provides Constellation with complete, independent control of the U.S. commercial business; a state-of-the-art brewery in Nava (Piedras Negras), Mexico; and an exclusive perpetual brand license in the U.S. to import, market and sell Corona and the other Modelo brands Crown currently sells in the U.S. market. The perpetual brand license also includes certain brands and brand extensions not currently marketed in the U.S. by Crown and the freedom to develop new brand extensions and innovations.
The table below sets forth management's current diluted EPS expectations for fiscal 2014 compared to fiscal 2013 actual results, both on a reported basis and a comparable basis.
|Reported Basis||Comparable Basis|
| Fiscal Year Ending|
$9.30 - $9.60
$2.80 - $3.10
Full-year fiscal 2014 guidance also includes the following current assumptions:
Interest expense: approximately $325 - $335 million
Tax rate: approximately 11 percent on a reported basis as compared to 32 percent on a comparable basis, primarily due to the non-taxable gain on the remeasurement to fair value of the company's original 50 percent interest in Crown and the non-deductible goodwill impairment charge
Weighted average diluted shares outstanding: approximately 199 million
Free cash flow: approximately $475 - $575 million
Capital expenditures: approximately $200 - $230 million
A conference call to discuss second quarter 2014 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 Thurs., Oct. 3, 2013 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 during the call will be available on the Internet at the company's website: www.cbrands.com under "Investors," prior to the call.
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 and unusual items. The company's measure of segment profitability excludes restructuring charges 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, comparable basis effective tax rate and free cash flow.
Supplemental Financial Information
Tables reconciling non-GAAP measures, together with definitions of these measures and the reasons management uses these measures, are attached to and are part of this news release. Please see the link below.
About Constellation Brands
Constellation Brands (NYSE: STZ and STZ.B) is an S&P 500 Index and Fortune 1000® wine, beer and spirits company with more than 100 brands in its portfolio, sales in approximately 100 countries, operations in about 40 facilities and approximately 6,000 talented employees. Founded in 1945, Constellation has grown to become the world's leader in premium wine, the number one beer importer, and the number three beer company in the U.S. with brands that people love, including: Arbor Mist, Black Box, Blackstone, Clos du Bois, Estancia, Franciscan Estate, Inniskillin, Kim Crawford, Mark West, Mount Veeder, Nobilo, Ravenswood, Rex Goliath, Robert Mondavi, Ruffino, SIMI, Toasted Head, Wild Horse, Corona Extra, Corona Light, Modelo Especial, Negra Modelo, Pacifico, Tsingtao, Victoria, Black Velvet Canadian Whisky and SVEDKA Vodka.
Based in Victor, N.Y., the company believes that industry leadership involves a commitment to its brands, to the trade, to the land, to investors and to 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, visit www.cbrands.com.
The statements made under the heading Outlook, and all statements other than statements of historical fact set forth in this news release regarding Constellation Brands' 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 Brands may reiterate the Projections. Prior to the start of the company's quiet period, which will begin at the close of business on Nov. 29, 2013, the public can continue to rely on the Projections as still being Constellation Brands' current expectations on the matters covered, unless the company publishes a notice stating otherwise. During Constellation Brands' "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, financing or share repurchase 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:
brewery expansion activities take place on expected terms and timetable and receipt of any necessary regulatory approvals;
accuracy of supply projections, including those relating to brewery expansion;
timeframe and actual costs associated with the brewery expansion may vary from management's current expectations due to market conditions, the company's cash and debt position, and other factors as determined by management;
the impact of and the ability to realize the anticipated benefits of acquisitions, including as a result of difficulty in integrating the businesses of the companies involved;
final management determinations and independent appraisals, including those relating to purchase price allocation, may vary materially from current management estimates of the fair value of assets acquired and liabilities assumed in the beer business acquisition;
the actual amount of cash payment for any beer business acquisition purchase price adjustment and certain working capital adjustments relating to the beer business acquisition may vary from management's current expectations;
the exact duration of the share repurchase implementation and the amount and timing of any additional share repurchases;
achievement of all expected cost savings from the company's various restructuring plans and realization of expected asset sale proceeds from the sale of inventory and other assets;
restructuring charges and other one-time costs associated with 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 and water 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, results of operations or effective tax rate;
changes in interest rates and the inherent unpredictability of currency fluctuations, commodity prices and raw material costs;
accuracy of the bases for forecasts relating to joint ventures and associated costs, losses, purchase obligations and capital investment requirements; 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, 2013, which could cause actual future performance to differ from current expectations.
| Angela Howland Blackwell: 585-678-7141|
Cheryl Gossin: 585-678-7191
| Patty Yahn-Urlaub: 585-678-7483|
Bob Czudak: 585-678-7170