Constellation Brands Earnings Update

CGC

I’m sitting at my desk, sipping on black coffee and taking notes as my phone is connected to my living room speakers where Constellation Brands earnings call is going on. It’s days like this that working for myself is worth it. I can sit back, eat toast and drink coffee, update the investment spreadsheets with latest updates and think about what decisions to make based on what the management is telling us. But you’re not here to hear how well my morning is going, you’re here to hear about the earnings updates from Constellation Brands, owners of the flagship Corona beer and a bunch of wines and spirits. So without further ado, let’s go:

Corona Brands took additional market share, growing at 8% rather than the 4% recorded last year, mostly driven by the launch of their their premium brand, Corona Premier, last year. The overall Corona brand has gained more market share in the beer market than any other brand both within the Latino market and in the overall population.

corona

The final phase of a 30 m hectaliter plant being built to expand production of beer at Constellation is slated to finish fiscal 2019 which should help them push more volumes in the beer market.

Their wine and spirits sector is not doing too shabbily either but the overall market is slowing, especially at the lower than $11 price points. The company has decided to focus more on it’s above $11 brands in the wines and spirits sector, and reduce it’s focus on the struggling sub-$11 market. They are also expecting a bumper sales going into the holiday season.

The company also spent a good minute justifying their purchase of a significant stake in Canopy Growth, the cannabis company in Canada which we also own. The gist is basically, the cannabis industry will see at least $200bn in sales soon, Canopy is approved for all Canadian provinces and are positioned to capture a significant share of the high growth medical and recreational cannabis industry. Constellation stated its intention to eventually own up to 50% of Canopy, as they see the cannabis industry as complementary to their existing beers, spirits and wines business. In other words, we getting lit people.

Financial Highlights

The company spent more in marketing this year, due to the launch of Corona Premier. This is normal, for a new product. Gross margins from beer are around 39.5% and expected to increase a bit in the next year. Sales grew around 8%, above the overall beer market while wines and spirits grew revenues of around 9%.

Transportation expenses are going up across the board, as fuel prices inch up and drivers are more expensive to get. The company is responding to that by trying to move up market.

The company expects interest expense of around $345 million as they took on more debt to acquire the Canopy growth stake. Their current net debt is at a slightly worrying balance of $9.7bn, although that has come down slightly from a bit north of $8bn earlier this year.

Their effective tax rates was about 18.4% this year, versus 21.8% from last year, primarily due to Trump’s tax reform and they expect their tax rates next year to be around 18% which is a significant amount of savings to their bottom line.

The company expects their year end EPS to be around $9.75 per share, and the company expects to produce around $1.3bn of free cash flow. I like.

Questions and Answers

Wells Fargo: Your beer margins hit 41.3% this year which is super good. Should we expect that going forward? Are margins growing?

CB: We will spend more on marketing in the fall so probably not. However, a lot of the initiatives from our operations teams are also lowering our overall costs so we don’t think margins will deteriorate too much either. (Basically, business is good).

Analyst: you didn’t spend as much on marketing as you expected yet margins have been solid and response to Premier and Familia brands seem to be robust. How do you see that response going forward and how well do you think those brands will continue to do?

CB: Premier and Familia have outpaced our expectations. We frontloaded a bit of our marketing spend in quarter 1, so that has paid off in this response we see now. So we believe by fall quarter once we spend on more marketing, the momentum should increase which helps us project around 9-11% growth in sales. So going premium is helping our beer business even far more than we thought.

Jefferies Analyst: Let’s get back to Canopy. What have you learned more about the cannabis industry that makes you bullish or bearish? What does the investment do to your earnings?

CB: We continue to be very bullish in that industry especially since by Oct 17, we expect recreational cannabis use to become legal in Canada. Canopy owns 35% of the Canadian market and a few strategic positions in other markets outside Canada and we think that’s going to grow. As far as their contributions to our earnings, we are still very much in wait and see mode. We’ll know and address that better in time.

Barclay’s Analyst: what’s happening with wines? We hear the problems in the low end under $11, but tell us what is happening in the category overall.

CB: Wine is doing okay enough, but beer is just blowing it out of the water so that tends to make it overshadow everything else. But other than the problem on the under $11

Analyst: Is the cannabis business going to cannibalize the alcohol business?

CB: No. Aside the legality, we see cannabis as almost entirely incremental business. It’s additional business, it’s not going to take away our own business (aka, people don’t choose drink, or get high, they will do both). We are actually trying to do a joint venture with Canopy to do cannabis-alcohol beverages and we realize we can just do both and also do medical and more. So no, this is all about being lit and the more, the littier.

Goldman Sachs Analyst: you’re enjoying the product innovation with Premier and Familia. How do you see those contributing toward continued growth or do you think you will need to continue to invest in innovation to be able to deliver growth?

CB: Premier is going to be a big brand, and will continue to grow year after year. Doesn’t mean we will stop investing in innovation. The market doesn’t stop and neither will we. We want to continue to build momentum and velocity in bringing products to market.

So there you have it, obviously paraphrased.

The market seems to have received the call well since today was a bloody day in the market, but Constellation Brands is up roughly 6% right now. Canopy Growth is down -1.50% which is slightly worse than our benchmark today which performed -0.98%.

All the same, we kept our position the same in Constellation as we are trying to accumulate a position for another slightly higher entry stock we’ve had our eyes on.

If you would love to be part of the investment club, send an email to rumexxcapital@gmail.com indicating your interest and someone on our team will reach out to you.

SALUTE.

-E

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