Constellation Brands, Inc. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended May 31, 2023; comparisons are with the three months ended May 31, 2022. Amounts are in U.S. dollars unless stated otherwise. The company produces and markets beer, wine, and spirits. Effective May 31, 2023, it removed Canopy from reportable segments and now reports Beer, Wine and Spirits, and Corporate Operations and Other; comparative segment information was recast.
Key financial results
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $2,514.9 million | $2,363.2 million | +6% |
| Gross profit | $1,257.8 million | $1,255.0 million | Approximately flat |
| Gross margin | 50.0% | 53.1% | Down 3.1 percentage points |
| Operating income | $764.7 million | $816.4 million | Down 6% |
| Income from unconsolidated investments | Loss of $415.4 million | Loss of $187.9 million | Loss increased $227.5 million |
| Interest expense | $118.2 million | $88.5 million | Up 34% |
| Net income attributable to CBI | $135.9 million | $389.5 million | Down 65% |
| Diluted EPS attributable to CBI | $0.74 | $2.06 | Down 64% |
| Operating cash flow | $665.4 million | $758.2 million | Down $92.8 million |
| Capital expenditures | $277.0 million | $196.6 million | Up $80.4 million |
Net sales growth was led by Beer, up 11% to $2,098.6 million. Wine and Spirits sales fell 10% to $416.3 million, including the effect of the prior wine-brand divestiture. Segment operating income was $797.8 million for Beer, $79.3 million for Wine and Spirits, and a $49.9 million loss for Corporate Operations and Other. Higher Beer volume and pricing supported results, while higher costs, marketing spend, and unfavorable comparable adjustments weighed on operating income.
Cash, debt, and liquidity
Cash and cash equivalents were $192.5 million at May 31, 2023, versus $133.5 million at February 28, 2023. Operating activities generated $665.4 million; investing activities used $291.9 million and financing activities used $314.7 million. Total debt was $12,357.0 million, down $104.3 million from February 28, 2023. Current assets were $3,652.6 million and current liabilities were $3,190.5 million.
The company issued $750 million of 4.90% senior notes due 2033 in May and used the net proceeds primarily to repay August 2022 term-loan borrowings and reduce commercial paper. Commercial paper outstanding was $819.1 million, at a weighted average annual interest rate of 5.6%, with a weighted average remaining term of 12 days. Remaining revolving-credit capacity was $1,418.0 million at May 31. The company said it was in compliance with its debt covenants.
Material changes, outlook, and notable items
- Canopy investment: Results included a $123.5 million impairment of the Canopy equity-method investment, an additional $219.8 million in equity losses and related activities, and $71.8 million in unrealized net losses on securities. The investment carrying value was reduced to $142.7 million. The Canopy promissory note and warrants were also valued at zero at May 31. Canopy had disclosed substantial doubt about its ability to continue as a going concern and identified prior reporting misstatements. The proposed Canopy transaction and any exchange of CBI’s holdings remain conditional; no binding obligation to exchange the note was disclosed.
- Beer: Shipments rose 7.5% and depletions rose 5.5%. Management said it expected depletion volume to exceed shipment volume during the rest of FY2024, with volumes generally aligned for the full year. Beer costs increased, including materials, transportation, and depreciation, while the company reported more than $30 million of cost savings for the quarter.
- Wine and Spirits: Segment sales fell 10%; organic sales declined $28.3 million, with lower shipment volume partly offset by pricing. Management continues to emphasize higher-end brands, margin improvement, and portfolio refinement.
- Guidance: Management expects a reported FY2024 effective tax rate of 19%–21%; the range excludes future equity earnings or losses from Canopy. The filing does not provide a clear numerical full-year sales or EPS forecast in the supplied text.
- Costs and risks: Management expects inflation, supply-chain and transportation challenges, and reduced consumer discretionary income to continue to affect FY2024. Severe weather and climate-related events could affect operations. The company is continuing Mexico brewery expansion and optimization projects and may not recover value from remaining Mexicali Brewery assets.
- Other developments: The company completed the Craft Beer Divestitures in June 2023 and sold the Daleville facility in May. A quarterly dividend of $0.89 per Class A share and $0.80 per Class 1 share was declared for payment in August 2023. Plaintiffs appealed a jury verdict in CBI’s favor in litigation over use of Corona and Modelo brand names on certain products.
Important facts for investors to verify
- Whether Canopy’s proposed transaction proceeds, and how CBI’s ownership, accounting treatment, and potential exposure change.
- Whether Beer shipment growth remains aligned with consumer depletions, and whether cost inflation continues to pressure margins.
- Whether Wine and Spirits shipment declines stabilize after portfolio divestitures and brand-mix changes.
- Debt maturities, commercial-paper refinancing access, capital spending needs, and progress toward management’s leverage objectives.
- Developments in the Canopy-related impairment and going-concern risks, the Mexicali asset recovery effort, and the appeal in the trademark litigation.