Business context and reporting period
Constellation Brands, Inc. filed this unaudited Form 10-Q for the first quarter of fiscal 2021, the three months ended May 31, 2020. The company’s principal businesses are beer and wine and spirits; results also reflect its investment in Canopy Growth. Comparisons are with the three months ended May 31, 2019.
Financial performance and position
| Metric | Q1 FY2021 | Prior period |
|---|---|---|
| Net sales | $1,963.4 million | $2,097.2 million |
| Gross profit / margin | $988.3 million / 50.3% | $1,028.7 million / 49.1% |
| Operating income | $610.0 million | $622.7 million |
| Net loss attributable to Constellation Brands | $177.9 million; diluted loss per share was $0.94 for Class A and $0.86 for Class B | $245.4 million; diluted loss per share was $1.30 for Class A and $1.19 for Class B |
| Operating cash flow | $686.5 million | $593.1 million |
| Cash and cash equivalents, at period end | $302.8 million | $81.4 million at February 29, 2020 |
| Total debt, at period end | $12,174.0 million | $11,945.7 million at February 29, 2020 |
Net loss for the quarter was $172.6 million, versus $237.1 million a year earlier. The company recorded $571.2 million of losses from unconsolidated investments, including $197.3 million of unrealized losses on Canopy securities and $377.6 million of equity-method losses and related items. Interest expense was $100.0 million, down from $114.6 million. Dividends declared were $0.75 per Class A share and $0.68 per Class B share.
Investing cash outflow was $299.1 million, including $173.9 million used to exercise Canopy warrants; financing cash outflow was $169.0 million. The company reported $1,988.2 million of available capacity under its $2.0 billion revolving credit facility and said it was compliant with debt covenants at May 31, 2020.
Material changes versus the prior comparable period
- Net sales declined 6%, chiefly from lower beer volumes and reduced wine and spirits shipments. Beer sales fell 6% to $1,384.1 million; Wine and Spirits sales fell 7% to $579.3 million.
- COVID-19 containment measures reduced on-premise demand and curtailed production at the company’s major Mexican breweries. Beer shipment volume declined 7.2%; depletion volume increased 5.6%, reflecting a gap between distributor shipments and consumer sell-through.
- Wine and Spirits shipment volume fell 12.9% overall. U.S. Power Brand shipment volume increased 11.1%, while the segment also faced tasting-room closures and distributor transition activity related to planned divestitures.
- Operating income declined 2%. Lower volumes and a $25.0 million impairment of assets held for sale were partly offset by pricing and lower marketing expense.
- Loss from unconsolidated investments improved from $930.6 million to $571.2 million, primarily because Canopy-related fair-value losses were lower than in the prior year; this was partly offset by higher equity-method losses from Canopy.
- Operating cash flow increased by $93.4 million, which management attributed mainly to lower inventory and accounts receivable, partly offset by higher income-tax payments.
Outlook, management commentary, risks and unusual items
- Management said it could not estimate COVID-19’s long-term effects and did not provide fiscal 2021 capital expenditure guidance. It expected Mexico production impacts to extend into Q2, with distributor inventories returning toward normal in Q3. Beer shipments were expected to begin aligning with depletions in Q3 as supply rebuilt and on-premise activity recovered.
- Management stated that liquidity was adequate and expected operating cash flow and financing availability to support operations, debt service, dividends, and planned capital needs. Net proceeds from announced wine and spirits sales are intended primarily for debt reduction.
- The revised sale of wine and spirits assets to Gallo was expected to close in Q2 FY2021 for approximately $783 million, with up to $250 million of contingent consideration tied to brand performance. The related Nobilo sale was agreed at $130 million. Both transactions required FTC review and clearance; Nobilo’s closing was also conditional on completion of the main transaction.
- In June 2020, the company agreed to sell the Paul Masson brand for an estimated $255 million, subject to adjustments and regulatory clearance, and separately agreed to sell its concentrate business. These transactions were expected to close in Q2 FY2021. The company also acquired Empathy Wines in June.
- Construction at the Mexicali Brewery was paused after a negative public consultation in Mexico. Approximately $740 million of construction in progress had been capitalized, with an estimated additional $200 million of committed expenditures. Management had not concluded that the assets should be abandoned or sold; future impairment was possible if amounts were not recoverable.
- Canopy’s operating results and security values remained volatile. The Canopy equity-method investment’s market value was below its carrying value by $168.3 million at May 31, but the company concluded there was no other-than-temporary impairment. A future impairment remained possible.
- Unusual items included the $25.0 million held-for-sale impairment, a $7.0 million debt-extinguishment loss, COVID-19-related incremental costs, and substantial Canopy-related losses. The effective tax rate was 153.1% of tax expense, affected notably by valuation allowances related to Canopy losses and capital-loss carryforwards.
- The company issued $1.2 billion of senior notes in April 2020, including 2.875% notes due 2030 and 3.75% notes due 2050, and used proceeds in part to refinance debt. In July, after quarter-end, it prepaid $317.5 million on a term facility and made a further $25.0 million partial prepayment.
Important facts for investors to verify
- Whether COVID-19-driven demand, production disruption, and shipment-to-depletion differences resolve as management expected, particularly in Q2 and Q3.
- Closing timing, regulatory clearance, final proceeds, and contingent consideration for the wine and spirits divestitures, Nobilo, Paul Masson, and concentrate business transactions.
- Recoverability of the $740 million Mexicali construction-in-progress balance and the status of the project’s remaining commitments.
- Canopy’s operating performance, investment fair value, and the potential for impairment or additional volatility in reported earnings.
- Debt repayment progress, liquidity and covenant headroom, and the company’s ability to sustain dividends and fund capital spending amid uncertain conditions.