Constellation Brands Posts Lower-Than-Expected Results, Expands in Mexico

03 Oct 2014 --- Constellation Brands, Inc., a leading beverage alcohol company, reported today its second quarter 2015 results. The 10 percent increase in consolidated net sales was driven by $73 million of incremental net sales which represents the consolidation of one additional week of beer business net sales in the second quarter 2015 due to the timing of the beer business acquisition. In addition, the company posted consolidated organic growth of five percent.

For the quarter, net sales for the beer segment increased nine percent primarily due to volume growth driven by strong consumer demand. This result includes the reversal of approximately two million case shipments to wholesalers as part of the recall actions which translates to a reduction of approximately $37 million of net sales for the second quarter. The company expects to replenish this volume with shipments to wholesalers primarily during the third quarter.

"I am pleased with our results which reflect another quarter of excellent performance from our beer business. This was driven by the outstanding efforts of our wholesalers, retailers and employees in executing our plans in the marketplace during the key summer selling season as we achieved eight percent depletion growth during the quarter. I'm also grateful for the dedication and diligence of this group who acted swiftly and thoroughly during our previously announced recall efforts. Our wine and spirits performance for the quarter was solid," said Rob Sands, president and chief executive officer, Constellation Brands. "While we expect to see some shift in beer sales from the second quarter into the third quarter as a result of the recall, we remain on track to achieve our comparable basis EPS goal for fiscal 2015."

Wine and spirits net sales on a constant currency basis increased three percent. This primarily reflects higher shipment volume and lower promotion expense. "During the second quarter, we experienced improving depletion trends and favorable product mix driven by some of our fastest-growing wine and spirits brands, including Kim Crawford, SVEDKA Vodka, Mark West, Ruffino, Black Box and The Dreaming Tree," said Sands.

The increase in consolidated comparable basis operating income includes an incremental benefit of $22 million due to the timing of the beer business acquisition and excellent volume growth for the base beer business. These benefits were partially offset by higher marketing and general and administrative expenses. The increase in wine and spirits operating income primarily reflects higher volume and lower promotion expense.

For the second quarter 2015, pre-tax unusual items totaled $39 million. This included an estimated $9 million reduction, net of recoveries, to operating income as a result of the company's previously announced voluntary recall of select packages containing 12-ounce bottles of Corona Extra where certain glass bottles contained defects. The affected bottles came from a glass plant operated by a third-party manufacturer which supplies the Nava brewery with bottles.

The second quarter of fiscal 2014 included a $1.6 billion non-cash gain on the remeasurement to fair value of the company's original 50 percent interest in the Crown Imports joint venture as a result of the beer business acquisition and $301 million of charges related to non-cash impairments of goodwill and intangible assets associated with the company's acquired Canadian wine business.

Interest expense for the second quarter totaled $85 million, a decrease of six percent. The decrease was primarily due to lower average interest rates.

The comparable basis effective tax rate for the second quarter 2015 was 32 percent compared to a 29 percent tax rate for the prior year second quarter, which reflected the favorable outcome of various tax items.

The reported basis effective tax rate for the second quarter 2015 was 32 percent compared to a four percent tax rate for the prior year second quarter, which reflected the recognition of the $1.6 billion non-taxable gain and the non-deductible goodwill impairment charge.

Free cash flow for the first six months of fiscal 2015 totaled $360 million as compared to $440 million for the same period last year. Incremental benefits from the beer business acquisition were more than offset by higher capital expenditures related primarily to the expansion of the Nava brewery in Mexico.

"Earlier today we announced our new glass sourcing strategy and plans to add an incremental five million hectoliters of production capacity to our brewery in Nava, Mexico, which will take our total capacity to 25 million hectoliters at this facility. In addition, we outlined the additional capital investments needed for these initiatives which are designed to support the strong growth of the beer business over the long-term. As a result of these activities, we are increasing our total capital expenditure estimate for fiscal 2015 to a range of $725 - $775 million versus our previous range of $575 - $625 million. Due to this higher capital expenditure estimate, we are now targeting free cash flow for fiscal 2015 to be in the range of $275 - $350 million versus our previous range of $425 - $500 million," said Bob Ryder, chief financial officer, Constellation Brands. "We still expect to generate operating cash flow of at least $1 billion for fiscal 2015 and despite the higher capital expenditure investments, we continue to expect our debt-to-comparable basis EBITDA ratio to be below 4 times during fiscal 2016."

The company completed its acquisition of Grupo Modelo's U.S. beer business from Anheuser-Busch InBev on June 7, 2013 for approximately $5.3 billion, including $558 million that was paid as a post-closing purchase price adjustment in June 2014. The transaction includes full ownership of Crown, which provides Constellation with complete, independent control of its U.S. commercial business; a state-of-the-art brewery in Nava, 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.