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Sands: Beer deal transformed Constellation

Rochester Business Journal
July 18, 2014

President and CEO Robert Sands: "You can see by our results, it’s been a good year for us." (Photo by Kimberly McKinzie)

 Roughly one year after completing the biggest acquisition in the company’s history, Constellation Brands Inc. has nearly doubled its sales, has increased local and worldwide staff and is not ruling out additional acquisitions, such as possibly adding tequila to its spirits offerings.

Last June, the wine, alcohol and spirits company based in Victor, Ontario County, completed a $5.3 billion acquisition of Grupo Modelo S.A.B. de C.V.’s U.S. beer business from Anheuser-Busch InBev S.A.

Robert Sands, president and CEO, told the Rochester Business Journal this week that integrating the acquired business into the firm has gone better than expected.

“We feel good with where we are at with the whole deal,” Sands said.

Sands described 2014 as transformational for Constellation Brands because of its ownership of the Crown Imports beer business. The deal positioned the firm as the largest multicategory supplier for beer, wine and spirits in the United States.

Also under the agreement, Constellation Brands acquired a brewery in Piedras Negras, Mexico. The company is spending roughly $1 billion on an expansion there to double production capacity with a new brew house, packaging area and warehouse. When completed in three years, the brewery will produce all of the Corona beer sold in the United States.

Today, Constellation Brands has an enterprise value of nearly $25 billion, Sands said. Enterprise value is a measure of a company’s ongoing operations, calculating what it would cost to buy the company’s business free of debts and liabilities.

While a primary focus of company leaders is paying down debt—the firm recently reported long-term debt of $6.3 billion—acquisitions that enhance its product line remain something Constellation Brands will consider. Adding tequila, for example, could be a natural fit for Constellation Brands, Sands said.

“We are interested in tequila and have said it is something we want to pursue.”

For fiscal 2014, Constellation Brands reported sales of $5.4 billion, up from nearly $3.2 billion the previous year. Net income was $1.9 billion, or $9.83 a diluted share, versus net income of nearly $388 million, or $2.04 a diluted share, the year before.

On a comparable basis, sales were nearly $4.9 billion, up from nearly $2.8 billion the prior year. Net income was $642 million, or $3.25 a diluted share, versus net income of $416 million, or $2.19 a diluted share.

The acquisition also boosted employment. Locally, the firm has added 33 positions over the past year, going from 628 workers to 661. Worldwide employment has grown to 6,300 from some 4,500 when the beer deal closed last June. Sands expects employment to keep growing.

“You can see by our results, it’s been a good year for us,” he said.

The financial results continue to be favorable.

On July 2, the business reported first-quarter net income of $206.7 million, or $1.03 a diluted share, versus net income of $52.9 million, or 27 cents a diluted share, the previous year. Sales were up 127 percent to $1.53 billion from $673 million a year earlier.

Booming beer
Beer sales have been particularly strong, Sands said, noting that the beer business reported a 14 percent year-over-year increase in sales in its most recent quarter. Driving the growth is the continued popularity of the Corona brand, as well as the increasing Hispanic population in the United States.

Constellation Brands expects full-year earnings per share of $3.90 to $4.05. Sands expects the business to continue to grow, especially on the beer side, which the company expects to grow 10 percent this year.

Shares of Constellation Brands (NYSE: STZ) were trading at midweek around $88.60, on the high end of a 52-week range of $49.32 to $94.77.

R.J. Hottovy, Morningstar Inc. analyst, wrote in a recent note that Constellation Brands’ beer business, which includes three top-20 brands by volume in the United States—Corona Extra, Modelo Especial and Corona Light—will continue to serve the firm well.

“With almost one-third of Hispanic-Americans ranking Corona as their favorite beer, we believe that Constellation is poised to generate stable cash flows and outearn its cost of capital for many years to come,” Hottovy said.

Over the next 10 years, Morningstar expects, Constellation’s revenue will grow organically at roughly 7 percent a year as pricing power and volume growth in its beer business outpace more modest top-line growth in its wine and spirits business.

“We believe the draft beer opportunity remains large for the company, as this category helps to promote trial and eventually drives purchases for at-home consumption,” Hottovy wrote.

In a conference call with investors earlier this month, Sands described the firm’s beer business as “on fire” and added that its wine and spirits business is also on track to meet its goals for the year.

“We have recently celebrated the one-year anniversary of our game-changing beer acquisition, and I believe that our strong financial and operational performance during this time is a living testament to the significant contributions that our beer business is making to our overall sales, profit and cash flow results,” Sands said during the call.

On the wine and spirits side of the business, Constellation Brands focused its efforts this past year on building its brands in the United States.

Internationally, the firm is expanding its wine and spirits opportunities through moves including distribution agreements such as one with VATS Liquor Group in China that will develop its Robert Mondavi wine brand there, in a nation that is now the fifth-largest wine consumption market globally.

The company also signed a distribution agreement with Interfood Importacao Ltda., Brazil’s top imported wine distributor. Additional distribution agreements were signed for Svedka with Lotte Co. Ltd. in South Korea and Mohan Bros. Pvt Ltd. in India.

The firm continues to add new products and product extensions, which traditionally account for roughly 5 percent of annual sales.

New offerings include Modelo Especial Chelada and Corona Light draft on the beer side and, for wine, PopCrush, a roughly $10-a-bottle California brand, and Rosatello, a wine made in Italy and intended for the Hispanic consumer.

Its new line extensions include Arbor Mist Sangria-Rita, Black Box Pinot Noir, new Svedka vodka flavors Strawberry Lemonade and Mango Pineapple, and Paul Masson Grande Amber Peach.

Constellation Brands will also continue its record of giving back to communities, Sands said. New this year is the firm’s Nourishing Neighbors initiative to fight hunger.

Under the initiative, all employees have the opportunity to take paid time off to volunteer at a local food bank during a companywide week of giving in October. Employees who are not able to volunteer during that week will be able to help by donating money or food that will be given to food banks in their areas.

Constellation Brands has scheduled its annual shareholders meeting for July 23 at the Callahan Theater in the Nazareth College Arts Center. Shareholders will be asked to elect directors, ratify the selection of KPMG LLP as the company’s independent registered public accounting firm and approve the compensation of the company’s executive officers.

7/18/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.
 


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