Constellation Brands Q4 Profit Slips
11 Apr 2013 --- Constellation Brands, Inc., the world's leading premium wine company, reported today its fiscal 2013 results. "This has been an exciting year for Constellation," said Rob Sands, president and chief executive officer, Constellation Brands.
"From an operational perspective, we outperformed the growth of the U.S. wine and spirits industry gaining market share collectively across all channels. For the third consecutive year, Crown achieved share gains as it outperformed the U.S. beer industry and the import category in both on and off premise channels. Additionally, we anticipate achieving a significant milestone by completing the most transformational acquisition in the history of our company, making Constellation the producer and brand owner under a perpetual license of the Modelo portfolio of iconic beer brands in the U.S. including Corona Extra, the best selling imported beer, Corona Light, the leading imported light beer and Modelo Especial, the third largest and one of the fastest growing major imported beer brands."
Wine and spirits net sales on an organic constant currency basis increased three percent primarily due to an increase in volume and favorable product mix, partially offset by higher promotional costs. The acquisition of Mark West and Ruffino complemented the organic growth as total net sales increased five percent.
"Our U.S. wine and spirits business sustained positive momentum throughout the year, posting depletion growth of nearly four percent driven by our ongoing commitment to brand building, innovation and marketplace execution," said Sands. "We experienced double-digit depletion growth for some of our award-winning Focus Brands including Kim Crawford, Robert Mondavi, Simi, Ruffino, Mark West, Black Box and Rex Goliath. Our new brands, including Simply Naked, Primal Roots and The Dreaming Tree, also posted robust sales and depletion trends and gained significant distribution at retail. These brands, along with SVEDKA Vodka, Nobilo and Clos du Bois, captured industry growth awards for calendar 2012."
The increase in consolidated comparable basis operating income was driven primarily by the favorable organic net sales growth combined with the benefits from Mark West and Ruffino, partially offset by higher SG&A costs.
The company's comparable basis equity earnings from its 50 percent interest in the Crown joint venture totaled $221 million compared to $215 million for the prior year. For fiscal 2013, Crown generated net sales of $2.6 billion, an increase of five percent, and operating income of $448 million, an increase of four percent. The increase in net sales for Crown was largely driven by volume growth but was tempered by the loss of the St. Pauli Girl brand volume. The increase in operating income primarily reflects the volume growth.
"Crown's strong marketplace performance was driven by excellent sales and retail execution with Modelo Especial, Corona Light, Negra Modelo and Pacifico achieving record sales for the year," said Sands.
Interest expense totaled $227 million, an increase of 25 percent. The increase was primarily due to higher average borrowings.
The comparable basis effective tax rate for fiscal 2013 was 26 percent, which included the benefit of higher foreign tax credits, and compares to a 17 percent rate for the prior year which reflected the favorable outcome of various tax items.
Free cash flow for fiscal 2013 totaled $494 million as compared to $716 million for the prior year. The decrease was primarily due to higher U.S. grape and bulk wine purchases in fiscal 2013 and the receipt of tax refunds in the prior year period.
During fiscal 2013, the company repurchased 18 million shares of common stock at a cost of $383 million.
"Our strong free cash flow generation, improved credit profile and diligent capital structure management enabled stock repurchases, the Mark West acquisition and the reduction of our net debt position in fiscal 2013. This has effectively positioned us to fund the pending acquisition of the remaining interest in Crown Imports, as well as the Piedras Negras brewery in Mexico and the perpetual brand rights for the Modelo brands in the U.S.," said Bob Ryder, chief financial officer, Constellation Brands.
Wine and spirits net sales on an organic constant currency basis increased eight percent primarily due to an increase in volume and favorable product mix. The organic net sales growth combined with benefits from the Mark West acquisition drove the total net sales increase.
The increase in consolidated comparable basis operating income was driven primarily by the favorable net sales growth.
The company's comparable basis equity earnings from its 50 percent interest in the Crown joint venture totaled $50 million compared to $49 million from the prior year fourth quarter. For fourth quarter 2013, Crown generated net sales of $528 million, an increase of one percent, and operating income of $103 million, an increase of four percent. Net sales growth was tempered by fewer selling days during the quarter and the loss of the St. Pauli Girl brand volume.
Interest expense totaled $60 million, an increase of 26 percent. The increase was primarily due to higher average borrowings.
The comparable basis effective tax rate for fourth quarter 2013 was 27 percent, which included the benefit of higher foreign tax credits, and compares to a negative 11 percent rate for the prior year fourth quarter which reflected the favorable outcome of various tax items.
In February 2013, Constellation announced that in addition to its previous agreement with AB InBev to acquire the remaining 50 percent interest in Crown Imports, it had also entered into an agreement to purchase the Piedras Negras brewery in Mexico and the perpetual brand rights for Corona and all other Modelo brands in the U.S.
The purchase price for the combined transaction is $4.75 billion. This includes $1.85 billion for the remaining interest in Crown, and $2.9 billion for the brewery and perpetual brand rights which is based on an initial assumed EBITDA of $310 million representing the profit stream from Modelo's sales of beer to Crown Imports for calendar 2012. The $2.9 billion purchase price is subject to a post-closing adjustment. Constellation has fully committed bridge financing in place for acquisition activities. Permanent financing is expected to consist of a combination of senior notes and term loans, with the remainder of the funding coming from the company's revolving credit facility, accounts receivable securitization facility and available cash.
"Constellation will become a fully independent beer competitor in the U.S. and will have perpetual rights for all Modelo brands with autonomous control of distribution, marketing, promotion and pricing. In addition, Constellation will have full control of its production and supply chain," Sands added. "Overall, this transaction will nearly double the sales of our company, significantly enhance our earnings and free cash flow, diversify our profit stream and provide new avenues for growth."
The company has reached two key milestones for regulatory approvals for the transaction including an agreement in principle with the U.S. Department of Justice and approval by the Mexican Antitrust Commission.
At this time, the closing of the transaction is expected to occur around the end of Constellation's first quarter fiscal 2014 or shortly thereafter.
For fiscal 2014, the company is projecting free cash flow of $475 - $575 million.
The diluted EPS and free cash flow projections assume the beer business acquisition closes at the end of the first quarter fiscal 2014 and exclude acquisition accounting impacts.
"For the beer business in fiscal 2014, Crown is targeting depletions and net sales growth in the low-to-mid single digit range," said Sands. "Operating income growth for Crown before brewery profits is expected to exceed sales growth. Although a final amount is not yet available, we currently project that the EBITDA associated with the profit stream from Modelo's sales of beer to Crown Imports in calendar 2012 was approximately $370 million."
"For the wine and spirits business, we believe our positive marketplace momentum and continuing focus on innovation, brand building and sales execution positions us to grow volume at least in-line with the U.S. wine and spirits category and generate favorable product mix in fiscal 2014," Sands added. "The anticipated impact of higher grape costs and additional marketing investments for key Focus Brands are expected to result in operating income growth for the wine and spirits business that is below net sales growth. Overall, we expect to gain market share across our beer, wine and spirits businesses for fiscal 2014."
