Constellation Brands Management Discusses Q1 2013 Results - Earnings Call Transcript

Constellation Brands (STZ)

Q1 2013 Earnings Call

June 29, 2012 10:30 am ET

Executives

Patty Yahn-Urlaub - Vice President of Investor Relations

Robert S. Sands - Chief Executive Officer, President and Director

Robert P. Ryder - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Kaumil S. Gajrawala - UBS Investment Bank, Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Vivien Azer - Citigroup Inc, Research Division

Mark Swartzberg - Stifel, Nicolaus & Co., Inc., Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Jamie Robins

Kevin V. Dreyer - Gabelli & Company, Inc.

Kevin V. Dreyer - GAMCO Investors, Inc.

Carla Casella - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Constellation Brands First Quarter and Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Patty Yahn-Urlaub, Vice President of Investor Relations. Please go ahead.

Patty Yahn-Urlaub

Thank you, Jackie. Good morning, everyone, and welcome to Constellation's first quarter fiscal 2013 conference call. 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 news release, which has 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 under the Investors section in Financial History.

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 affect the company's estimates, please refer to the news release and Constellation's SEC filings.

And now, I'd like to turn the call over to Rob.

Robert S. Sands

Thanks, Patty. And good morning, and welcome to our call. This has certainly been an exciting week for us. First and foremost, by announcing earlier today that we intend to purchase the remaining 50% of Crown from ABI, we are enhancing our participation in the U.S. beer market, which is one of the most attractive sectors of the beverage alcohol industry. The structure of this transaction will solidify our place in this market for the long-term and most importantly will remove the uncertainty that, we believe, has created a significant overhang related to the valuation of our stock. Crown is the #1 beer importer in the U.S. where it has the exclusive right to import, market and sell the Modelo brands, which include Corona Extra, Corona Light, Modelo Especial, Pacifico, Negra Modelo and Victoria.

This transaction represents a significant milestone in the history of the company and the next transformational step in the evolution of our business as it will give Constellation 100% ownership of the import, sales and marketing business for the Modelo brands currently being sold in the U.S. This will also solidify Constellation's position as the largest multi-category supplier for beer, wine and spirits and the third-largest total beverage alcohol company in the U.S. on a volume basis.

Crown will have complete, independent control as a brand owner with respect to distribution, marketing, promotion and pricing. ABI will be responsible for ensuring the continuity of supply and quality of products as well as providing the ability to introduce innovation, although they will have no visibility or future influence on marketing, distribution or pricing.

Bill Hackett and the Crown team have built an absolutely phenomenal business driven by their strength in brand building and the strong relationships they have established with distributors and retailers in the marketplace. This is a perpetual agreement that has an initial term of 10 years and renews automatically for subsequent 10-year terms. In addition, ABI has the right, but not the obligation, to exercise a call option at a multiple of 13x EBIT for the Grupo Modelo brands, approximately one year prior to the expiration of any 10-year term subject to regulatory approval.

This arrangement will dramatically enhance Constellation's financial profile as it will result in the full consolidation of Crown's financial results within Constellation's existing business model upon closing. Bob will have specifics related to the funding of the deal and the high-level financial implications for Constellation in just a few moments.

In the wine business, we are also pleased to announce today that we are purchasing the Mark West brand, which represents a synergistic, high-growth, complementary tuck-in to our existing portfolio of wine brands.

Mark West is primarily a California pinot noir that is priced in the $10 to $12 price range at retail. In 2011, Mark West sold nearly 600,000 cases in the U.S. marketplace. It is currently the top-selling pinot noir brand experiencing nearly 35% volume growth in the SymphonyIRI channel.

As you know, we have successful -- we have a successful track record of integrating high-growth, strong-momentum brands, and I am excited by the prospect of adding Mark West to our brand family.

And now I'd like to just -- to focus our discussion on our first quarter operational results. We are off to a good start for the year with results that were generally in line with our expectations. Highlights for the first quarter include: the purchase of almost 70% of our targeted share buybacks for the year; great momentum for the Crown beer business; strong consumer takeaway trends for our U.S. wine and spirits business; the completion of the next phase of our U.S. distribution consolidation effort with the signing of exclusive multiyear agreements with additional U.S. distributors, covering almost 10% of our U.S. wine and spirits volume. Collectively, we now have almost 70% of our U.S. wine and spirits business covered by exclusive distributor arrangements.

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