Fairport, New York, Jan. 8 - Constellation Brands, Inc., a leading international producer and marketer of beverage alcohol, today reported diluted earnings per share ("EPS") on a reported basis of $0.55 for the quarter ended Nov. 30, 2007 ("third quarter 2008"), compared with $0.45 for the prior year third quarter. On a comparable basis, third quarter 2008 diluted EPS totaled $0.55 versus $0.58 for the prior year.
"The company's third quarter performance was in line with our expectations, and we are especially pleased with the performances from our North American wine business and our spirits business," said Rob Sands, Constellation Brands president and chief executive officer. "We're also delighted with the addition of the Fortune Brands U.S. wine portfolio to Constellation's U.S. wine business and the benefits we expect from our expanded super-premium-plus offerings. Also, we are continuing our efforts in the U.K. to mitigate the impact of the lingering Australian wine surplus in the marketplace and to maximize profitability."
Third Quarter 2008 Net Sales Highlights*
(in millions)
Reported Organic
________________________ _________________________
Constant Constant
Net Currency Net Currency
Sales Change Change Sales Change Change
Consolidated $1,095 -27 % -30 % $1,078 11 % 6 %
Branded Wine $911 12 % 7 % $911 9 % 4 %
Imported Beers - -100 % -100 %
Spirits $117 31 % 31 % $101 12 % 12 %
Wholesale/other $66 -77 % -79 % $66 33 % 24 %
Third Quarter 2008 Profit Highlights*
(in millions, except per share data)
Reported Change Comparable Change
Operating income $198 -16 % $200 -28 %
Equity in earnings of equity
method investees** $74 613 % $75 513 %
Earnings before interest and
taxes (EBIT) - - $275 -5 %
Operating margin 18.1 % +240 bps 18.3 % -30 bps
Net income $120 11 % $121 -13 %
Diluted EPS $0.55 22 % $0.55 -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."
Net Sales Commentary
The reported consolidated net sales decrease of 27 percent primarily reflects the impact of reporting the Crown Imports and Matthew Clark wholesale business joint ventures under the equity method, partially offset by the benefits of favorable foreign currency, branded wine business growth and the SVEDKA Vodka acquisition. Organic net sales increased six percent on a constant currency basis.
Branded wine net sales increased four percent on an organic constant currency basis. For North America, branded wine net sales increased five percent on a constant currency basis, reflecting solid growth in the U.S.
"Our U.S. branded wine business turned in a solid third quarter performance, with wines such as Woodbridge, Robert Mondavi Private Selection, Blackstone, Estancia, Kim Crawford and Simi leading the way with very healthy sales growth," explained Sands. "Growth of these brands is indicative of the trade-up trends we've been seeing for the past several years, and we feel that the growth trajectory for our premium and luxury brands will continue due to consumer preferences for these wines."
Organic net sales for branded wine for Europe increased four percent on a constant currency basis, primarily due to higher sales of popular priced wine in mainland Europe, and a slight increase in net sales for the U.K. On a constant currency basis, net sales for Australia/New Zealand branded wine were even with the prior year. The branded wine market in the U.K. and Australia reflects ongoing competitive challenges and continued pricing pressure.
Total spirits net sales increased 31 percent for the quarter, primarily due to the March 2007 acquisition of SVEDKA Vodka, with 12 percent growth in organic net sales reflecting higher average selling prices and volume gains.
"SVEDKA's double-digit growth continues to prove that this is an exceptional brand," stated Sands. "We anticipate SVEDKA will continue to be a growth engine in our spirits portfolio. Additionally, focus on our premium offerings, including Black Velvet, the 99 Schnapps line and Ridgemont Reserve 1792 has bolstered our spirits portfolio performance."
Operating Income, Net Income, Diluted EPS Commentary
The decrease in operating income and the increase in equity earnings for third quarter 2008 were primarily due to the impact of reporting $62 million of equity earnings from the Crown Imports joint venture under the equity method.
Wines segment operating income decreased $12 million versus the prior year. This was primarily due to the impact of the U.K. and Australia business performance, which was somewhat offset by an increased contribution from the North American business. Spirits segment operating income increased $4 million primarily due to the addition of SVEDKA and from the increase in base business net sales, offset somewhat by higher material costs.
For the third quarter, acquisition-related integration costs, restructuring and related charges and unusual items totaled $3 million, compared with $45 million for the prior year. Net income and diluted EPS were also impacted by interest expense, which increased 13 percent to $82 million for third quarter 2008, primarily due to the financing of the SVEDKA acquisition and $500 million of share repurchases completed earlier this year.
On a year-to-date basis through November the company generated free cash flow of $173 million versus a usage of $22 million in the prior year. The increase in free cash flow was primarily driven by improved working capital, reduced tax payments and lower capital spending. As a result of the strong free cash flow generated through the first three quarters of the fiscal year, the company has increased its free cash flow guidance for fiscal 2008 to a range of $280 - $300 million.
Acquisition and integration of Fortune Brands U.S. wine business
Constellation Brands completed the acquisition of the Fortune Brands U.S. wine portfolio on Dec. 17, 2007, for a purchase price of $885 million, subject to closing adjustments. Today, the company announced its plan for the integration of the acquired business into the Constellation Wines U.S. business. The company intends to consolidate activities wherever it makes business sense to do so, while maintaining an appropriate level of expertise to maintain and grow the acquired business.
"This acquisition significantly advances our strategy for expanding our presence in the growing high-end U.S. wine business," stated Sands. "To fully leverage the acquisition we will realign the sales and marketing organization supporting our U.S. wine business. The sales and marketing teams will focus on specific consumer segments that include luxury/fine wine, premium wine and value/specialty wine. In connection with these actions, we are also rationalizing our U.S. wine product portfolio, primarily related to our value products, which we believe will generate efficiencies and enhance our focus on higher growth, higher margin brands," Sands concluded.
Constellation expects the integration of the acquired wine business, realignment of the U.S. wine sales and marketing teams and portfolio rationalization to produce net cost savings of approximately $30 million annually by the end of fiscal 2010, with approximately $20 million anticipated as savings in fiscal 2009. The company expects to incur one-time cash charges of $22 million and one-time non-cash charges of $23 million, for a total of $45 million in one-time charges. The expected timing of the charges is as follows:
$ in millions FY08 FY09 Total
Restructuring costs - employee termination
and other $6 $1 $7
Acquisition-related integration costs 8 5 13
Other one-time costs 2 - 2
Total cash costs 16 6 22
Non-cash costs - asset write-offs and
accelerated depreciation 21 2 23
Total one-time costs to be recorded in the
company's results of operations $37 $8 $45
The company also expects to incur one-time cash costs of approximately $28 million that will be recorded in the company's allocation of purchase price in connection with the acquired wine business, including $19 million for employee termination costs and $9 million for contract termination and other costs that will be paid primarily in fiscal 2009.
Outlook
The table below sets forth management's current diluted earnings per share expectations for fiscal year 2008 compared to fiscal year 2007 actual results, both on a reported basis and a comparable basis. The company's comparable basis diluted EPS range includes an estimated $0.04 dilutive impact related to the acquisition of the Fortune Brands U.S. wine business.
Constellation Brands Fiscal Year 2008
Diluted Earnings Per Share Outlook
Reported Basis Comparable Basis
FY08 FY07 FY08 FY07
Estimate Actual Estimate Actual
Fiscal Year
Ending Feb. 29
or Feb. 28 $1.06 - $1.11 $1.38 $1.33 - $1.38 $1.68
Full-year fiscal 2008 guidance includes the following current assumptions, including the impact of the acquisition and integration of the Fortune Brands U.S. wine business discussed above:
-- Net sales: low single-digit growth in organic net sales and low single-digit incremental benefit from the acquisitions of Vincor International Inc., the SVEDKA Vodka brand and related business, and the U.S. wine business from Fortune Brands. As a result of these increases, and the impact of reporting the Crown Imports joint venture and the joint venture for the Matthew Clark wholesale business under the equity method, reported net sales are expected to decrease 29 to 31 percent from net sales for fiscal year 2007
-- Interest expense: approximately $340 - $350 million
-- Stock compensation expense: approximately $30 million
-- Tax rate: approximately 39 percent on a reported basis, which includes a provision of approximately two percentage points related to the loss on disposal in connection with the company's contribution of its U.K. wholesale business to the Matthew Clark joint venture and the repatriation of proceeds associated with this transaction, or approximately 37 percent on a comparable basis
-- Weighted average diluted shares outstanding: approximately 225 million
-- Free cash flow: $280 - $300 million
Explanations
Reported basis ("reported") operating income, equity in earnings of equity method investees, net income and diluted earnings per share are as reported under generally accepted accounting principles. Operating income, equity in earnings of equity method investees, net income and diluted earnings per share on a comparable basis ("comparable"), exclude acquisition-related integration costs, restructuring and related charges and unusual items. The company's measure of segment profitability excludes acquisition-related integration costs, restructuring and related 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 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, Inc. is a leading international producer and marketer of beverage alcohol in the wine, spirits and imported beer categories, with significant market presence in the U.S., Canada, U.K., Australia and New Zealand. Based in Fairport, N.Y., the company has more than 250 brands in its portfolio, sales in approximately 150 countries and operates approximately 60 wineries, distilleries and distribution facilities. It is the largest wine producer in the world; the largest wine company in the U.S. based upon sales dollar value, the largest wine company in the U.K., Australia and Canada; the second largest wine company in New Zealand; the largest beer importer and marketer in the U.S. through its
Crown Imports joint venture with Mexico's Grupo Modelo; and the third largest spirits company in the U.S. Constellation Brands is an S&P 500 Index and Fortune 500(R) company. Major brands in the company's portfolio include Corona Extra, Black Velvet Canadian Whisky, the SVEDKA vodka line, Robert Mondavi wines, Ravenswood, Blackstone, Hardys, Banrock Station, Nobilo, Kim Crawford, Inniskillin, Jackson-Triggs and Arbor Mist.
Constellation Brands, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions)
November 30, February 28,
2007 2007
Assets
Current Assets:
Cash and cash investments $24.9 $33.5
Accounts receivable, net 938.5 881.0
Inventories 2,041.4 1,948.1
Prepaid expenses and other 142.7 160.7
Total current assets 3,147.5 3,023.3
Property, plant and equipment, net 1,791.9 1,750.2
Goodwill 3,427.9 3,083.9
Intangible assets, net 1,252.7 1,135.4
Other assets, net 573.6 445.4
Total assets $10,193.6 $9,438.2
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable to banks $101.7 $153.3
Current maturities of long-term debt 366.9 317.3
Accounts payable 350.8 376.1
Accrued excise taxes 107.9 73.7
Other accrued expenses and liabilities 667.3 670.7
Total current liabilities 1,594.6 1,591.1
Long-term debt, less current maturities 4,235.2 3,714.9
Deferred income taxes 498.2 474.1
Other liabilities 352.9 240.6
Total liabilities 6,680.9 6,020.7
Total stockholders' equity 3,512.7 3,417.5
Total liabilities and
stockholders' equity $10,193.6 $9,438.2
Constellation Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
Three Months Ended Nine Months Ended
Nov. 30 Nov. 30 Nov. 30 Nov. 30
2007 2006 2007 2006
Sales $1,406.4 $1,834.2 $3,749.7 $4,979.3
Excise taxes (311.6) (333.4) (861.1) (905.1)
Net sales 1,094.8 1,500.8 2,888.6 4,074.2
Cost of product sold (702.9) (1,055.6) (1,918.8) (2,895.6)
Gross profit 391.9 445.2 969.8 1,178.6
Selling, general and
administrative expenses (192.1) (197.8) (580.2) (574.8)
Acquisition-related
integration costs (1.6) (9.5) (5.2) (17.6)
Restructuring and related charges 0.1 (2.1) (0.7) (26.1)
Operating income 198.3 235.8 383.7 560.1
Equity in earnings of equity
method investees 74.2 10.4 230.1 10.7
Interest expense, net (82.4) (73.1) (248.8) (194.3)
Gain on change in fair value of
derivative instrument - - - 55.1
Income before income taxes 190.1 173.1 365.0 431.6
Provision for income taxes (70.5) (65.3) (143.5) (169.9)
Net income 119.6 107.8 221.5 261.7
Dividends on preferred stock - - - (4.9)
Income available to common
stockholders $119.6 $107.8 $221.5 $256.8
Earnings Per Common Share:
Basic - Class A Common Stock $0.56 $0.47 $1.02 $1.14
Basic - Class B Common Stock $0.51 $0.42 $0.92 $1.04
Diluted - Class A Common Stock $0.55 $0.45 $0.99 $1.09
Diluted - Class B Common Stock $0.50 $0.41 $0.91 $1.00
Weighted Average Common Shares
Outstanding:
Basic - Class A Common Stock 191.578 209.524 196.191 203.113
Basic - Class B Common Stock 23.809 23.837 23.817 23.845
Diluted - Class A Common Stock 219.432 239.396 224.093 239.889
Diluted - Class B Common Stock 23.809 23.837 23.817 23.845
Constellation Brands, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Nine Months Ended
November 30, November 30,
2007 2006
Cash Flows From Operating Activities
Net income $221.5 $261.7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property, plant
and equipment 109.3 92.2
Deferred tax provision 29.9 31.5
Stock-based compensation expense 24.1 12.1
Equity in earnings of equity method
investees, net of distributed earnings 10.5 (7.2)
Amortization of intangible and
other assets 8.2 6.0
Loss on disposal of business 6.8 16.9
(Gain) loss on disposal or impairment of
long-lived assets, net (4.9) 10.7
Gain on change in fair value of
derivative instrument - (55.1)
Non-cash portion of loss on
extinguishment of debt - 11.8
Change in operating assets and liabilities,
net of effects from purchases and sales
of businesses:
Accounts receivable, net (200.2) (275.7)
Inventories (58.5) (147.7)
Prepaid expenses and other current
assets 10.7 (45.1)
Accounts payable 48.7 172.0
Accrued excise taxes 46.9 13.3
Other accrued expenses and liabilities 54.8 19.5
Other, net (55.5) (3.7)
Total adjustments 30.8 (148.5)
Net cash provided by operating
activities 252.3 113.2
Cash Flows From Investing Activities
Purchase of business, net of cash acquired (389.7) (1,093.7)
Purchases of property, plant and equipment (79.5) (135.6)
Payment of accrued earn-out amount (4.0) (3.7)
Investment in equity method investee (1.5) -
Proceeds from formation of joint venture 185.6 -
Proceeds from sales of assets 8.7 8.8
Proceeds from sales of businesses 3.0 28.4
Proceeds from maturity of derivative
instrument - 55.1
Other investing activities - (0.4)
Net cash used in investing activities (277.4) (1,141.1)
Cash Flows From Financing Activities
Proceeds from issuance of long-term debt 716.1 3,695.0
Exercise of employee stock options 17.7 51.3
Excess tax benefits from stock-based
payment awards 11.4 16.9
Proceeds from employee stock purchases 3.0 3.3
Purchases of treasury stock (500.0) (100.0)
Principal payments of long-term debt (168.6) (2,780.3)
Net (repayment of) proceeds from
notes payable (57.6) 210.5
Payment of financing costs of long-
term debt (6.1) (20.2)
Payment of preferred stock dividends - (7.3)
Net cash provided by financing
activities 15.9 1,069.2
Effect of exchange rate changes on
cash and cash investments 0.6 (17.5)
Net (decrease) increase in cash and
cash equivalents (8.6) 23.8
Cash and cash investments, beginning
of period 33.5 10.9
Cash and cash investments, end of
period $24.9 $34.7
Constellation Brands, Inc. and Subsidiaries
SEGMENT INFORMATION
(in millions)
Three Months Ended
November 30, November 30, Percent
2007 2006 Change
Segment Net Sales and Operating Income
Constellation Wines
Branded wine net sales $911.3 $815.9 12%
Wholesale and other net sales 66.1 291.3 (77%)
Segment net sales $977.4 $1,107.2 (12%)
Operating income $201.9 $214.3 (6%)
% Net sales 20.7% 19.4%
Equity in earnings of equity
method investees $12.5 $10.4 NM
Constellation Beers
Segment net sales&