Constellation Brands, Inc., a leading beverage alcohol company, reported today its third quarter 2014 results. "I am very pleased with the overall performance of our newly consolidated beer business, which is the highlight of the third quarter and the primary driver of the upward revision to our EPS guidance for fiscal 2014," said Rob Sands, president and chief executive officer, Constellation Brands.
"The strong marketplace momentum we experienced this summer for our beer portfolio, especially Corona and Modelo Especial, continued throughout the fall and into the holiday selling season. New marketing campaigns along with superior sales and distributor execution at retail helped drive these outstanding results. From an operational perspective, the Nava brewery in Mexico is executing successfully in all key performance areas and expansion activities continue to proceed."
The significant increase for third quarter consolidated net sales was driven by $662 million of incremental net sales related to the consolidation of Crown. For the quarter, net sales for the beer segment increased 21 percent primarily due to volume growth driven by strong consumer demand, the return of distributor inventories to more normal levels and a favorable comparison versus last year's third quarter.
"Crown experienced exceptional results for the third quarter posting double-digit sales and depletion growth. All core beer brands demonstrated year-over-year volume increases, with the overall portfolio continuing to significantly outperform the growth of the U.S. beer market," said Sands. "From an innovation perspective, the draft format is growing in all key markets and the new Modelo Especial Chelada rollout is exceeding expectations in the states where it has already been introduced. Due to strong year-to-date performance, we now expect Crown's underlying profit growth to be in the low to mid-teens range for the year."
Wine and spirits net sales on an organic constant currency basis increased three percent as wine volume growth was partially offset by higher promotional spend and lower bulk spirits sales. "As expected, throughout the quarter we began to see the acceleration of our U.S. wine depletion trends during the key holiday selling season," Sands added. "Year-to-date, we are outperforming the U.S. wine market across all channels on a volume basis driven by investments behind our portfolio and strong performance of some of our most popular Focus Brands including Rex Goliath, Mark West, Kim Crawford, Estancia, Ruffino, Black Box and Woodbridge by Robert Mondavi. However, this year's financial performance has been tracking below our expectations and we now expect operating profit for the wine and spirits business to be flat to down slightly for the year."
The increase in consolidated comparable basis operating income includes an incremental benefit of $213 million of operating income from the consolidation of results for Crown and the Mexican brewery as a result of the beer business acquisition. The decrease in wine and spirits operating income primarily reflects higher promotion, product and marketing costs, partially offset by volume growth.
Due to the timing of the close of the beer acquisition, the company did not recognize equity earnings from its original 50 percent interest in the Crown joint venture during the third quarter. For the prior year third quarter, the company recorded $39 million of equity earnings for the Crown joint venture. Equity earnings for the wine and spirits segment in the third quarter increased $4 million driven by strong results for Opus One.
Interest expense totaled $90 million, an increase of 46 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 third quarter was 28 percent which reflected the benefits from integrating the beer business as well as higher than anticipated foreign tax credits. This compares to a 28 percent tax rate for the prior year third quarter which also included the benefit of foreign tax credits. The company now expects the comparable basis effective tax rate to approximate 31 percent for fiscal year 2014.
Free cash flow for the first nine months of fiscal 2014 totaled $543 million as compared to $337 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 payments.
"We are pleased with our strong free cash flow results through the third quarter, but we expect brewery capital expansion investments to significantly increase in the fourth quarter of this fiscal year," said Bob Ryder, chief financial officer, Constellation Brands. "We have updated our free cash flow projection to reflect better than anticipated beer business results and now expect to generate free cash flow in the range of $525 million to $575 million for fiscal 2014."
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.
