Constellation Brands, Inc. Q2 Conference Call Highlights

Constellation Brands, Inc. STZ reported its second quarter earnings on Thursday. Shares of the company are fairly neutral.

Product Recall:

• We were challenged by a Corona Extra product recall which was caused by defects in glass bottles caused by a production error at a glass plant run by one of our glass suppliers.
• While the recall impacted our financial results slightly for the quarter, we expect a replenished second quarter loss sales in the third quarter
• We are currently working with our glass supplier to recover the cost of the recall.

Financials and Growth:

• SG&A for the quarter increased $48 million.
• At the end of August, our total debt was $7.2 billion.
• For the first half of fiscal 2015, we generated $360 million of free cash flow
• Our second quarter period results are testament to this portfolio momentum, as we achieve depletion growth of 8% and posted the 18th consecutive quarter of market share gains for our U.S. beer business.
• Finally, we will discuss increase capital spending in brewery and glass capacity to support the robust growth we are targeting.
• This level of growth for Constellation beer business represents the most significant contribution to total U.S. beer dollar growth in IRI channels across all suppliers during our second quarter.
• The current California industry estimate is for a total harvest yield of 3.8 million to 4 million tons versus approximately 4.4 million tons last year.
• First off, we continue to deliver beer sales that greatly outpace the industry. And despite the glass recall, we are affirming full-year beer guidance.
• In addition, we are providing medium-term volume guidance that also outpaces our estimate of the total beer industry growth.
• We believe we have good portfolio and demographic evidence to support our projections.
• We're also increasing our medium-term operating target for beer, which indicates considerable margin upside from our fiscal 2015 year-to-date run rate of 32%.
• As a result of these factors, we foresee a continuation of a fast growing top line and an increase to our already healthy beer profit margin.
• Our comparable basis diluted EPS for Q2 came in at $1.11, a 16% increase versus Q2 last year.
• We continue to see robust marketplace momentum for our
beer business, with depletion growth of 8%.
• Both businesses remain on track to reach their full-year profit goals, and we are affirming our fiscal 2015 comparable basis EPS outlook of $4.10 to $4.25 a share.
• As you can see from our earnings news release, consolidated net sales grew 10%.
• This result included $73 million of incremental beer net sales as we consolidated an additional week of sales in Q2 fiscal 2015 versus Q2 fiscal.
• Excluding the benefit of these acquired sales, consolidated organic net sales growth for the quarter was 5%.
• For the full quarter of Q2 fiscal 2015 versus the full quarter of Q2 fiscal 2014, beer segment organic net sales increased 9%.

Guidance:

• We are updating our free cash flow projection and now expect free cash flow to be in the range of $275 million to $350 million versus the previous range of $425 million to $500 million.
• Total CapEx is now projected to be in the range of $725 million to $775 million versus a previous $575 million to $625 million.
• Our new CapEx projection includes $600 million to $650 million for the beer segment.
• We continue to forecast comparable basis diluted EPS to be in the range of $4.10 to $4.25 a share.
• Operating income growth in the range of 25% to 30%
• For wine and spirits, we continue to target net sales and EBIT growth for fiscal 2015 to be on the low to mid-single-digit range.
• Once we move past the heavy fiscal 2016 and 2017 peak CapEx spend years, free cash flow should grow dramatically