Constellation Brands, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended November 30, 2020. The interim financial statements are unaudited. Amounts are U.S. dollars unless noted.
Business context
Constellation sells premium beer, wine, and spirits, and holds a significant equity-method investment in Canopy Growth. Its reported results are affected by Canopy investment fair-value changes and equity-method results, as well as portfolio divestitures and COVID-19 impacts.
Financial performance
| Metric | Three months ended Nov. 30, 2020 | Three months ended Nov. 30, 2019 | Nine months ended Nov. 30, 2020 | Nine months ended Nov. 30, 2019 |
|---|---|---|---|---|
| Net sales | $2,438.1 million | $1,999.4 million | $6,661.9 million | $6,440.6 million |
| Gross profit | $1,268.2 million | $987.5 million | $3,472.3 million | $3,202.1 million |
| Operating income | $783.1 million | $267.2 million | $2,231.8 million | $1,609.4 million |
| Net income attributable to CBI | $1,280.9 million | $360.4 million | $1,615.1 million | $(410.2) million |
| Diluted EPS, Class A | $6.55 | $1.85 | $8.28 | $(2.17) |
- Quarterly net sales rose 22%; nine-month net sales rose 3%. Beer was the main operating growth driver: segment sales increased 28% in the quarter and 6% year to date, led by Mexican beer volume.
- Wine and Spirits sales rose 10% in the quarter but declined 2% for nine months. The quarter benefited from volume, mix, and pricing; year-to-date results were weighed down by brands subsequently divested and COVID-related closures and transition activity.
- Gross margin was 52.0% for the quarter and 52.1% for nine months, compared with 49.4% and 49.7%, respectively. Operating income increased 193% in the quarter and 39% year to date.
- Net income comparisons are heavily affected by Canopy securities’ fair-value swings: the company recorded a $769.6 million unrealized gain in the quarter and $524.7 million for nine months, versus losses of $534.3 million and $2.2 billion in the prior-year periods. The prior-year comparisons also include substantial held-for-sale impairments and a Swiss tax-reform benefit.
- Nine-month operating cash flow was $2,363.6 million, versus $2,076.3 million. Investing cash outflow was $643.2 million; financing cash outflow was $1,654.7 million. Cash increased $71.5 million to $152.9 million.
- At November 30, 2020, total debt was $10,984.5 million, down $1,200.1 million from February 29, 2020. Cash was $152.9 million; reported remaining revolving-credit capacity was $1,948.2 million. The company said it was in compliance with debt covenants.
- Current assets were $3,447.1 million and current liabilities $2,041.4 million. Dividends declared per quarter were $0.75 per Class A share and $0.68 per Class B share.
Material changes and significant items
- In January 2021, the company completed sales of a portion of Wine and Spirits and the Nobilo brand, receiving $559.5 million and $129.1 million, respectively, subject to post-closing adjustments. The first transaction carries up to $250 million of contingent consideration tied to brand performance. Proceeds were intended partly to repay the 3.75% May 2013 notes.
- The Paul Masson sale had received FTC clearance, with approximately $265 million of proceeds expected in fiscal Q4 2021, subject to adjustments. The Concentrate Business sale closed in December 2020.
- Canopy’s nine-month results included $251.5 million of costs for restructuring and strategic review activities; Constellation recorded a $421.0 million equity-method loss from Canopy and related activities for the period. Canopy fair-value investments remain volatile.
- Wildfires led to a $26.5 million grape write-down in Q3 and $20.0 million of unfavorable fixed-cost absorption in Wine and Spirits. The company reported no facility damage and expected no material effect on its ability to meet customer demand, but noted possible further inventory write-downs if smoke damage emerges.
- Mexicali Brewery construction remains paused after a negative public consultation in Mexico. Approximately $710 million of capitalized fixed assets remained at the site; future impairment is possible if the assets are not recoverable.
Outlook, commentary, and risks
- Management expected a fiscal 2021 effective tax rate of 20%–22%, capital expenditures of $800–$900 million, and Beer segment capital expenditures of $650–$750 million. The Obregon expansion was expected to finish in early fiscal 2022, subject to further COVID-related disruption.
- Management expected beer distribution inventories to return to more normal levels by fiscal year-end. Marketing spend was expected to increase from the unusually low levels earlier in the year: 9%–9.5% of Beer net sales and 8%–10% of Wine and Spirits net sales for fiscal 2021.
- The company said it could not estimate COVID-19’s long-term impact. Risks cited include changes in consumer demand and on-premise activity, production and supply disruption, wildfire-related grape quality and costs, and access to capital on favorable terms.
- Canopy’s December 2020 announced facility closures were expected by Constellation to generate a proportional pre-tax loss of approximately C$130–C$155 million in fiscal Q4 2021 and Q1 2022. Canopy investments’ valuation, future losses, and ownership effects from warrants or the Acreage arrangement are uncertain.
- The company said liquidity was adequate and expected operating cash flow and financing capacity to fund operations and commitments, while noting its forecasts depend on market conditions and business performance.
Important facts for investors to verify
- How much of reported earnings and EPS reflects Canopy fair-value gains, and what performance looks like excluding those volatile items.
- Final proceeds, post-closing adjustments, any contingent consideration, and the resulting gain or loss from the completed and pending divestitures.
- Whether Canopy’s announced restructuring losses and the Mexicali project lead to additional charges or cash requirements.
- Whether beer and wine shipment/depletion trends, distributor inventories, and COVID-related operating conditions evolve as management expected.
- Debt repayment, liquidity, capital spending, and dividend plans relative to operating cash flow and the company’s stated leverage objectives.