Constellation Brands, Inc. reported its fiscal 2010 results and fiscal 2011 outlook.
"Given the lingering economic challenges throughout our key markets, I am pleased with our results for the year. We generated strong free cash flow, significantly reduced our debt and greatly improved our cost structure. Fiscal 2010 results reflect continued execution against key strategic goals, the most important of which is our U.S. distributor consolidation effort," said Rob Sands, president and chief executive officer, Constellation Brands. "As our fiscal year came to a close, we worked with our distributors to reduce their fourth quarter inventory levels while securing incremental distributor investments behind our brands. This action reduced fourth quarter sales and profits for our U.S. wine business. Overall, we believe this effort better positions the company and our distributors to drive profitable, organic growth into the future."
Fiscal 2010 Net Sales Commentary
Reported consolidated net sales decreased 8%, due primarily to the impact of the value spirits divestiture and the unfavorable impact of year-over-year currency exchange rate fluctuations. Organic constant currency net sales increased 1%.
Branded wine organic net sales on a constant currency basis decreased 1%, which included a 3% decrease in North America, partially offset by increases of 7% in Europe and 4% in Australia/New Zealand. The sales increase in Europe was primarily due to volume growth of lower priced products.
Total spirits organic net sales increased 19% for the year, led by a 38% gain for SVEDKA vodka. "Sales of SVEDKA vodka continue to experience strong momentum," said Sands. "The brand recently launched the first-ever SVEDKA television advertising campaign which marks an exciting milestone and serves as another example of how SVEDKA is setting itself apart in its quest to bring future fun to vodka lovers everywhere."
Fiscal 2010 Operating Income, Net Income, Diluted EPS Commentary
Wines segment operating income decreased $37 million versus the prior year. This is primarily due to the divestiture of the value spirits business, the decrease in U.S. branded wine sales and a decrease in operating income from the U.K. and Australian businesses, partially offset by savings from cost reduction initiatives.
Constellation's equity earnings from its 50% interest in the Crown Imports joint venture totaled $222 million, a decrease of 12% from the prior year. For fiscal 2010, Crown Imports generated net sales of $2.3 billion, a decrease of 6%, and operating income of $444 million, a decrease of 12%. Net sales for Crown were impacted primarily by volume declines. Operating income for Crown decreased mainly due to lower volumes, negative mix, and a contractual cost increase.
"While the on-premise and convenience store channels were impacted by a challenging economic environment throughout the year, Crown experienced import category market share gains for the year in the grocery channel as they executed targeted promotional and media support programs and introduced new packages for consumers to enjoy at a wide variety of venues and price points," said Sands.
For fiscal 2010, pre-tax restructuring charges, acquisition-related integration costs, and unusual items totaled $275 million, compared to $658 million for the prior year.
Interest expense totaled $265 million, a decrease of 18%. The decrease was primarily due to lower average borrowings during the year.
"We continue to reduce leverage and improve our credit profile as strong free cash flow generation and proceeds from asset sales drove a $600 million decrease in our debt level for fiscal 2010," said Bob Ryder, chief financial officer, Constellation Brands. "Additionally, in the fourth quarter we successfully amended our senior credit facility, extended a portion of our term loan obligations and prepaid a $250 million 8 1/8% senior subordinated note."
Free cash flow for the year totaled $295 million compared to $378 million in the prior year. The decrease was due in part to a $65 million tax payment related to the sale of the value spirits business. For fiscal 2011, the company is targeting free cash flow in the range of $350–$400 million.
The comparable basis effective tax rate for the year was 30%, which reflects the favorable outcome of various tax items, and compares to a 36% rate for the prior year.
Fourth Quarter 2010 Net Sales Commentary
Reported consolidated net sales decreased 4% due primarily to the impact of the value spirits divestiture, partially offset by the favorable impact of year-over-year currency exchange rate fluctuations. Organic constant currency net sales decreased 2%.
Branded wine organic net sales on a constant currency basis decreased 6% versus last year, which included a 12% decrease in North America and a 23% increase in Europe. Net sales for Australia/New Zealand were even with the prior year quarter.
The fourth quarter net sales decrease in North America primarily reflects the impact of decreasing inventory positions at U.S. distributors. The sales increase in Europe was primarily due to volume growth and a favorable comparison versus fourth quarter fiscal 2009. Total spirits organic net sales increased 19% for the quarter.
Fourth Quarter 2010 Operating Income, Net Income, Diluted EPS Commentary
Wines segment operating income decreased $22 million versus the prior year fourth quarter. This is primarily due to the decrease in U.S. branded wine sales.
Constellation's equity earnings from its 50% interest in the Crown Imports joint venture totaled $41 million, a decrease of 11% from the prior year fourth quarter. For fourth quarter 2010, Crown Imports generated net sales of $419 million, a decrease of 4%, and operating income of $82 million, a decrease of 12%. Net sales for Crown were impacted primarily by volume declines driven by the challenging economic conditions. Operating income for Crown decreased due to lower volume, negative mix, and a contractual cost increase.
For fourth quarter 2010, pre-tax restructuring charges, acquisition-related integration costs, and unusual items totaled $125 million, compared to $468 million for the prior year fourth quarter. During the fourth quarter, the company recorded $103 million of non-cash impairment charges related to intangible assets in connection with the company's annual impairment testing, primarily related to its Australian business.
Interest expense totaled $63 million, a decrease of 13%. The decrease was primarily due to lower average borrowings during the quarter.
The comparable basis effective tax rate for the fourth quarter was negative 11%, which reflects the favorable outcome of various tax items, and compares to a 41% rate for the prior year quarter.
Common Share Repurchase Authorization
Constellation Brands' Board of Directors has authorized the repurchase of up to $300 million of the company's common stock. It is the company's intent to implement an accelerated stock buyback transaction when appropriate. "We believe repurchasing Constellation shares represents good value and is an appropriate investment for us at this time. Due to our continued strong cash flow generation and successful deleveraging and refinancing efforts, we believe we can redeploy a portion of free cash flow to repurchase stock while we continue to reduce debt," said Ryder.
"We have accomplished a great deal throughout the last year and remain focused on executing a strategy based on achieving profitable, organic growth, generating strong free cash flow and improving return on invested capital. Our guidance for fiscal 2011 reflects a number of factors including an uncertain economic environment, continuing pressures on the Crown joint venture and the Australian and U.K. operations and incremental investments in marketing and a new technology platform," said Sands. "We believe we are well positioned to execute on our business strategy for fiscal 2011."
The table below sets forth management's current diluted EPS expectations for fiscal 2011 compared to fiscal 2010 actual results, both on a reported basis and a comparable basis.
Constellation Brands Fiscal 2011 Diluted Earnings Per Share Outlook
Fiscal Year Ending Feb. 28
$1.36 - $1.51
$1.53 - $1.68
Full-year fiscal 2011 guidance includes the following current assumptions but excludes any impact from any repurchases of the company's common stock:
- Interest expense: approximately $210–$220 million
- Tax rate: approximately 35%
- Weighted average diluted shares outstanding: approximately 224 million
- Free cash flow: $350–$400 million