Constellation Brands Reports Second Quarter Fiscal 2014 Results

4 Oct 2013 --- Constellation Brands, Inc., 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."

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."

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 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."

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.