Constellation Brands, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended May 31, 2022, compared with the three months ended May 31, 2021. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $2,363.2 | $2,026.5 |
| Gross profit / margin | $1,255.0 / 53.1% | $1,119.3 / 55.2% |
| Operating income | $816.4 | $75.1 |
| Income (loss) attributable to CBI | $389.5 | $(908.1) |
| Diluted EPS, Class A / Class B | $2.06 / $1.89 | $(4.74) / $(4.31) |
| Operating cash flow | $758.2 | $716.0 |
| Capital expenditures | $196.6 | $113.9 |
Net sales grew 17%, led by Beer, up 21% to $1,898.2, on shipment growth and pricing. Wine and Spirits sales rose 2% to $465.0; Canopy sales fell 25% to $88.2. Beer segment operating income increased 13% to $762.8, while Wine and Spirits segment operating income declined 13% to $91.0. Gross margin contracted 210 basis points, mainly due to inflation and higher operating, transportation, and logistics costs.
Reported earnings comparisons are substantially affected by prior-year unusual items. Q1 FY2022 included a $665.9 Mexicali brewery construction impairment and $745.1 of unrealized losses on Canopy-related securities, versus $22.4 of such securities losses in Q1 FY2023. Q1 FY2023 also included a $15.3 loss on extinguishment of debt. Canopy equity-method losses were $165.0, versus $155.8 a year earlier.
Cash, debt, and liquidity
Cash and cash equivalents were $101.8 at May 31, 2022, down from $199.4 at February 28, 2022. Total debt was $10,977.3, including $124.0 of commercial paper; debt increased $560.8 from fiscal year-end. Long-term debt, including current maturities, was reported at $10,853.3. Net cash used in investing activities was $226.8 and net cash used in financing activities was $627.2, including $1,007.6 of share repurchases and $149.3 of dividends paid.
The company reported $2,114.0 of remaining revolving-credit capacity at May 31, 2022, net of commercial paper and letters of credit, and said it was in compliance with debt covenants. In May, it issued $1,850.0 of senior notes and used proceeds in part for tender offers on older notes. The remaining $568.0 principal of those notes was redeemed in June, after the reporting date.
Outlook, commentary, and risks
- Management forecast a Fiscal 2023 effective tax rate of 20%–23%. The filing text provides no clear numerical full-year sales or EPS guidance.
- Management expects inflation, reduced consumer discretionary spending, global supply-chain and transportation constraints, and geopolitical developments to continue affecting results. It cautioned that pricing and cost-saving actions may not fully offset higher costs.
- Management said supply constraints contributed to lower product inventories and higher product costs. Severe weather, water availability, and agricultural or packaging-material supply disruptions may also affect operations.
- Mexicali construction remains suspended. The company is evaluating recovery options and exploring additional capacity, including the proposed Veracruz brewery; it reported adequate medium-term capacity at Nava and Obregon under current forecasts.
- The $2.35 billion carrying value of the 36.1% Canopy equity-method investment substantially exceeded its $711.9 fair value at May 31. Management recorded no impairment but warned that an impairment may occur if Canopy’s share price or prospects do not improve.
- On June 30, 2022, the company announced a proposed share-class reclassification. If completed, Class B holders would receive one Class A share plus $64.64 in cash per share; management estimated an aggregate cash payment of $1.5 billion. Completion is subject to approvals and other conditions.
- On June 29, 2022, the company agreed to exchange C$100 million of Canopy debt securities for Canopy shares, expected in July. It also completed acquisitions of Lingua Franca and Austin Cocktails during the quarter.
Most important facts for investors to verify
- How much of the reported earnings improvement reflects underlying operating performance versus the prior-year Mexicali impairment and Canopy fair-value volatility.
- Whether Beer growth, pricing, and shipment trends can offset ongoing cost inflation and margin pressure.
- The Canopy investment’s carrying value, future impairment risk, and effects of the debt-for-shares exchange.
- Debt and liquidity after the June note redemption, continued repurchases, and any cash requirement for the proposed reclassification.
- Progress on supply-chain constraints, Mexico brewery capacity plans, and the company’s ability to deliver its stated tax-rate outlook.