Constellation Brands Inc. will continue to grow in fiscal 2009, focusing on its global wine business, imported-beer market and North American premium spirits sales, top leaders recently told analysts.
Those areas are the Perinton-based firm’s sweet spots, said Robert Sands, president and CEO, adding Constellation is focused on improving profitability in core markets, paying down its debt and generating cash.
Sands told analysts at a meeting in New York City May 29, the firm has “the right strategy, right products and right management for growth.”
The company plans to continue to keep its global leadership position in the wine industry and Sands expects double-digit increases in sales of wine cases for U.S. wines in 2009.
Jose Fernandez, CEO of Constellation Wines North America, said the company would focus on organic growth this fiscal year, emphasizing the continued premiumization of brands and new product development.
Constellation also will extend its wine lines, Fernandez said. For example, a lightly oaked chardonnay will be released in fiscal 2009 under the Woodbridge by Robert Mondavi label.
Revenue continues to outpace volume as consumers trade up for higher-quality brands, Fernandez said. He pointed to industry numbers that show U.S. retail consumers spent $28.1 billion on wine in 2007, up from $26.1 billion in 2006 and
$24.3 billion in 2005.
Sands said the recent economic downturn has had little impact on Constellation’s sales, noting the brands seem to be “affordable luxuries that provide good value.”
Net sales for fiscal 2008 decreased 28 percent to $3.8 billion from $5.2 million in fiscal 2007. This decrease resulted primarily from a drop of $1 billion in sales for the Crown Imports business and $759.8 million at Matthew Clark, chiefly reflecting the company’s reporting those wholesale business joint ventures under the equity method, along with U.S. distributor wine inventory reduction.
Those decreases partially were offset by net sales of products acquired in the acquisitions of Vincor International Inc., Svedka vodka and BWE Inc. of $202.7 million and a favorable foreign currency impact of $133.5 million.
Alexander Berk, president and CEO of Constellation’s beers and spirits division, said its vodka, bourbon and rum business will continue to grow in 2009. Constellation’s acquisition in fiscal 2007 of Svedka vodka has helped boost sales, Berk said. In 2007, 1.5 million cases of the vodka were sold-a 48 percent increase over 2006.
In the beer market, Constellation plans to pump up its marketing efforts and on-premise distribution, particularly in the Eastern United States, as well as offer new product lines and packaging.
Constellation will pursue acquisitions, Sands said. The deals likely would be smaller acquisitions in the global wine and beer markets that would complement Constellation’s existing brands.
He does not expect a takeover of brands similar to the size of Vincor and Mondavi, which Constellation previously acquired, because there are limited numbers of wineries that size anymore.
Acquisitions on the spirits side of the business are unlikely because many of the brands are overpriced, he said.
Constellation expects earnings per share of $1.68 to $1.76 for the 2009 fiscal year. Analysts expect earnings per share of $1.67, up 18 percent.
Judy Hong, an analyst with Goldman Sachs Group Inc., said Constellation’s cash flow is in a good position. The firm generated record free cash flow of $376 million in fiscal 2008.
Long-term debt in fiscal 2008 was $4.9 billion, up from $4 billion the previous year.
In a recent analyst note, Ann Gilpin, of Morningstar Inc., said Constellation is poised for a better year in fiscal 2009.
“First, the drought in Australia seems to have corrected the grape oversupply that wreaked havoc on U.K. margins for the past few years,” Gilpin wrote. “It appears that this may finally be in Constellation’s past, and margins will likely recover.”
Constellation’s portfolio is much better positioned than it was just a few years ago, Gilpin said.
“With the acquisitions of Svedka and the Fortune Brands FO premium wines portfolio, Constellation has much more scale and a portfolio that is more weighted toward premium and faster-growth brands,” Gilpin wrote. “With strong tail winds in consumer preference for premium spirits and wines and import beers, we think Constellation’s portfolio is well positioned.”
Constellation has been making changes to streamline its operations and focus on a more specific market.
Last week, Constellation said it had sold certain U.S. wine assets to Eight Estates Fine Wines LLC, a Sonoma, Calif.-based private firm that does business as Ascentia Wine Estates, for $209 million in cash.
The company expects to record a pretax loss of roughly $23 million, or 8 cents a diluted share on a reported basis.
Under terms of the agreement, Constellation could receive up to an additional $25 million in payments if certain objectives are achieved by the buyer.
Constellation will use the proceeds from the sale to reduce borrowings, officials said, adding that the move will streamline its U.S. wine portfolio and eliminate brand duplication and excess production capacity.
Last month, Constellation announced it had reached an agreement to sell its Valleyfield, Quebec, distillery and bottling facility to London-based Diageo PLC, a leading spirits provider, whose brands include Smirnoff, Guinness and Tanqueray. The move will allow Constellation to eliminate excess capacity and consolidate its operations, leaders said.
In April, Constellation reported a fourth-quarter loss of $831.9 million, or $3.90 a share, after paying preferred dividends for the quarter compared with a year-ago profit of $70.2 million, or 29 cents a share. Excluding an $807.1 million impairment charge on its wine business in Australia and Britain, the company earned 34 cents a share in the quarter.
On a reported basis, the company incurred a net loss of $610 million, or $2.82 diluted loss a share for the fiscal year, which ended Feb. 29, compared with net income of $332 million, or $1.38 a share for the prior year. The net loss was driven by an estimated $822 million of impairment charges primarily related to goodwill and intangible assets associated with the company’s Australia and U.K. businesses and a $52 million deferred tax asset valuation allowance, Constellation reported.
Fiscal 2008 net income on a comparable basis-which excludes acquisition- related integration costs, restructuring charges and unusual items-totaled $321 million, or $1.44 a diluted share, versus comparable basis net income of $403 million, or $1.68 a diluted share, for the prior year.
[email protected] / 585-546-8303
06/20/2008 (C) Rochester Business Journal