Constellation Brands’ (STZ) CEO Robert Sands on Q2 2015 Results – Earnings Call Transcript

October 5, 2014 5:32 pm | By More

Source: Seeking Alpha

Constellation Brands’ (STZ) CEO Robert Sands discusses Q2 2015 results on a conference call held on October 2, 2014…

 

Constellation Brands’ (STZ) Q2 2015 Results – Earnings Call Webcast Audio

 

Constellation Brands, Inc. (NYSE:STZ)

Q2 2015 Earnings Conference Call

October 02, 2014, 10:30 AM ET

Executives

Patty Yahn-Urlaub – VP, IR

Robert Sands – President and CEO

Robert Ryder – EVP and CFO

Analysts

Bryan Spillane – Bank of America/Merrill Lynch

Judy Hong – Goldman Sachs

Nik Modi – RBC Capital Markets

Caroline Levy – CLSA

Alice Longley – Buckingham Research

Mark Swartzberg – Stifel Nicolaus

Bill Chappell – SunTrust

Rob Ottenstein – ISI Group

Tim Ramey – Pivotal Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Constellation Brands’ Second Quarter Fiscal Year 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now turn the call over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead.

Patty Yahn-Urlaub – VP, IR

Thank you, Jackie. Good morning, everyone, and welcome to Constellation’s conference call. In addition to our second quarter fiscal 2015 results and outlook, we will also discuss our glass sourcing strategy and incremental brewery expansion. I’m here this morning with Rob Sands, our President and Chief Executive Officer; and Bob Ryder, our Chief Financial Officer.

This call complements our two news releases, which have also been furnished to the SEC. During this call, we may discuss financial information on a GAAP comparable, organic and constant-currency basis. However, discussions will generally focus on comparable financial results. Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP financial measures are included in the news release or otherwise available on the company’s website at www.cbrands.com.

Please also be aware that we may make forward-looking statements during this call. While those statements represent our best estimates and expectations, actual results could differ materially from our estimates and expectations. For a detailed list of risk factors that may impact the company’s estimates, please refer to the news releases and Constellation’s SEC filings.

Now, I’d like to turn the call over to Rob.

Robert Sands – President and CEO

Thanks, Patty and good morning to everyone. Welcome to our discussion of our second quarter financial results, as well as other important events that will shape the strategic direction of our company going forward.

It has certainly been an exciting few months at Constellation. Since last quarter, we announced the acquisition of the Casa Noble tequila brand, an award-winning handcrafted super premium tequila which will be a great addition to our portfolio. Adding Casa Noble to our portfolio is important because tequila and Mexican beer share similar target consumers and drinking occasions both on and off premise. This fast growing tequila brand naturally complements our Mexican beer brands and fits well into our existing wine and spirits distribution infrastructure.

Now during the quarter, we were challenged by a Corona Extra product recall, which was caused by defects in glass models caused by a production error at a glass plant run by one of our glass suppliers. I’m very proud of the dedication and hard work of our employees, distributors and retailers who have worked tirelessly and diligently to remove potentially affected product from our retail and distribution system. While the recall impacted our financial results slightly for the quarter, we expect to replenish second quarter loss sales in the third quarter and we are currently working with our glass supplier to recover the costs of the recall.

We announced this morning that we have begun a new 5 million hectoliter expansion at our Nava brewery in Mexico that will expand production capacity of that facility to 25 million hectoliters by the end of calendar year 2017. This project is being driven by the exceptional portfolio momentum of our beer business, which has significantly outperformed the U.S. beer market and our own expectations. Lastly, we are pleased to announce that we are in the process of finalizing the long-term glass strategy for our beer business under favorable terms with key industry players.

The multi-faceted approach of this strategy includes the following components. We have agreed to purchase from ABI their state-of-the-art glass plant in Nava, Mexico, which is located adjacent to our brewery in that location. While this facility currently has one operational furnace, we plan to initially scale it to four furnaces, which will ultimately be able to supply us with more than 50% of our glass requirements. This transaction also includes the purchase of a high-density warehouse, land and well infrastructure and is subject to U.S. Department of Justice and Mexican regulatory approvals both of which we expect to receive by the end of this calendar year.

We have also agreed to enter into a 50/50 joint venture with Owens-Illinois to own and operate the glass plant that we are purchasing from ABI. As the world’s leading glass producer, O-I has more than a 100 years of experience in producing glass containers. They have built and expanded dozens of plants and participate in joint ventures in several different countries throughout the world. We also currently use O-I as a glass supplier for our wine business. O-I will primarily have responsibilities for plant operations including purchasing, technical services and the plant expansion. O-I is also expected to become a secondary glass supplier outside of the joint venture arrangement.

The final piece of the strategy, we have entered into a long-term seven-year supply agreement with Vitro who is a well [established] (ph) leader in glass manufacturing in Mexico and we will expect – we’ll ultimately supply 25% to 30% of the glass needs for our beer business. Overall, this sourcing strategy provides the best outcome in terms of quality, flexibility, cost effectiveness and control for this critical area of our beer production.

Now because it will take some time for the glass plant to become fully operational at optimal capacity, we will continue to work with ABI to purchase glass supply needed for production at the Nava brewery under our existing Transition Services Agreement through mid calendar year 2015. In addition, we plan to continue to procure finished product from ABI under our Interim Supply Agreement until the initial Nava expansion to 20 million hectoliters is complete in calendar 2016.

Overall, our additional investments in production capacity and glass sourcing are designed to ensure that we are well positioned to capture the continued momentum and growth opportunities we see in the marketplace for our beer portfolio well into the future. Our second quarter beer results are a testament to this portfolio momentum, as we achieved depletion growth of 8% and posted the 18th consecutive quarter of market share gains for our U.S. beer business.

This level of growth for Constellation’s beer business represents the most significant contribution to total U.S. beer dollar growth in IRI channels across all suppliers during our second quarter. These results were driven by Corona Extra’s momentum of increased media support during the summer as well as the success of our Fill your Summer advertising campaign that was our first-ever multicultural, bilingual summer program.

In IRI metric channels, Corona Extra continues to gain share and is currently the number five beer brand in the U.S. market. In addition, Corona Extra and Modelo Especial teamed up this year a broadcast sponsorship of World Cup games on Spanish language TV. Modelo Especial Hispanic Real World campaign helped to propel the continued growth of this brand, which posted consumer retail dollar takeaway trends in IRI channels of more than 30% during the quarter. In addition, Modelo Especial’s summer soccer sweepstakes promotion surpassed all sales and consumer engagement targets set for this initiative.

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