Q2 was the 10th consecutive quarter that Constellation's Crown business outperformed the U.S. beer industry and the import category. When Constellation becomes the 100 percent owner of Crown, Constellation will be the largest, multi-category supplier for beer, wine and spirits and the third largest total beverage alcohol company in the United States on a volume basis. The Crown deal is expected to close by the end of the first quarter of calendar year 2013.
In the wine and spirits business, Constellation has been focusing on brand building, innovation and new product development. The wine and spirits business is one of the key contributors to growth in the U.S. market.
Constellation's promotion and marketing efforts caused many of its wine brands to perform well in Q2. The advertising campaigns resulted in strong gains for Robert Mondavi and Black Box. New line extensions of Rex Goliath resulted in double digit growth for that brand. During Q2, Constellation launched 5 varietals for its new Thorny Rose brand, which is targeted to the millennial generation. Nobilo and Kim Crawford performed very well in New Zealand. The Mark West pinot noir brand that Constellation added its portfolio posted quarterly double-digit SymphonyIRI growth. Overall, Constellation's focus brands posted depletions of 11.5 percent during Q2. Constellations $5 to $8 wines are growing faster than its $8 to $12 wines.
In the spirits business, SVEDKA vodka and Black Velvet whiskey performed very well.
In the beer business, Crown Imports had favorable demand over the summer due to advertising for the Corona brand. There was some benefit from distributor buy-in of the product prior to some price adjustments this fall. Constellation expects Crown to grow both depletions and operating income in the mid single digits for fiscal year 2013, which is an increase from previous guidance. Crown plans more promotions and advertising for the Corona brand, such as the Find Your Beach for the Game Facebook promotion again this year. Modelo Especial, a beer from the Crown portfolio, recently received Market Watch magazine's Leaders Choice "Beer Brand of the Year" award and became the number 2 import beer in the United States in the convenience store channel based on volume.
Constellation is launching Somersby Hard Apple Cider in test markets in the United States. Somersby will be imported into the United States through Crown.
Constellation's promotions were equally distributed throughout the year this year, which is different than last year when its promotions were in the second half, mostly around the holiday season. Since the demand for wine is elastic, Constellation plans to continue with its promotions. It does not plan to be a price leader.
For the second half of fiscal year 2013, Constellation expects sales and earnings in wine and spirits to growth, but sales and earnings for beer to fall.
Evaluation of markets.
The grape harvest is complete on the east coast and 60 percent complete on the West Coast. Constellation anticipates high single digit growth in the harvest versus last year. Grape pricing overall should increase in the mid single digits. By category, Constellation expects moderate price increases in the less than $5 wines, promotion activity in wines greater than $15, and no price changes in wines between $5 and $15, which is the majority of Constellation's market. The price changes in wine from the harvest typically trial 12 to 16 months for white wine and 6 months for red wine.
Financials.
Wine and spirit sales on constant currency were flat, with higher volumes offset by increased promotional spending. Crown net sales increased by 8 percent due to volume growth in Corona Extra and Modelo Especial and a wholesaler buy-in that pulled Q3 sales into Q2.
EBIT in Q2 declined by 1 percent.
Operating income in wine and spirits decreased by 6 percent, primarily due to an increase in SG&A expenses. Operating income for Crown increased by 14 percent. An early termination payment related to the St. Pauli Girl distribution agreement benefited operating income for Crown for Q2, but it will negatively impact the second half when Crown loses the St. Pauli volume.
Gross margin in Q2 was 41 percent, which was flat with last year.
EPS in Q2 was $.71/share. Constellation is raising its full year 2013 guidance to a range of $1.93 to $2.03.
During Q2, Constellation secured permanent financing for the Crown Import deal. Part of this financing was the issuance of $650 million, 4.6 percent senior notes due in 2023.
In Q2, Constellation generated $333 million of net free cash flow versus $478 million a year ago. The difference was due to a change in tax refund receipts in the U.K. Constellation expects free cash flow for fiscal year 2013 to be $450 to $500 million, which is an increase of $25 million from prior guidance. It plans to use free cash flow to pay down debt, although it has not ruled out share repurchases and a dividend in the future.
The transcript of the earnings conference call can found on Seeking Alpha at the following link:
http://seekingalpha.com/article/907411-constellation-brands-management-discusses-q2-2013-results-earnings-call-transcript?part=single
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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