Constellation Brands: strong free cash flow reducing leverage ratio

By Jennifer Lanning Drey

Savannah, Ga., June 30 - Constellation Brands, Inc. is on track to meet its free cash flow target for fiscal 2012, which would put the company's comparable basis EBITDA leverage ratio at around 3 times by fiscal year-end, Bob Ryder, Constellation's chief financial officer, said Thursday during its earnings conference call for the first quarter of fiscal 2012.

"This provides us flexibility in our capital-structure management," Ryder said.

Constellation is aiming to generate $600 million to $650 million of free cash flow in 2012. The company generated $220 million of free cash flow in the first quarter, versus free cash flow of $35 million in the same period of 2011.

The first-quarter improvement reflected a cash benefit for taxes and reduced use of cash to fund receivables, Ryder said.

Constellation also reduced its debt by $244 million during the first quarter, driven by the strong free cash flow generation. Debt totaled $3 billion at the end of May, he said.

During the first quarter, Constellation prepaid $400 million of term loan debt using a combination of cash and revolver proceeds, Ryder reported.

The company's debt to comparable basis EBITDA ratio decreased to 3.2 times at the end of May, versus 3.6 times at the Feb. 28 close of fiscal 2011.

"We continued to generate very strong free cash flow, delever the balance sheet and reduce interest expense during the quarter," Ryder said.

Seeks organic growth

Constellation's strengthening of its financial profile is one of a series of strategic imperatives all aimed at achieving profitable organic growth, Rob Sands, the company's chief executive officer, said during the call.

For the first quarter, Constellation reported consolidated net sales of $635 million, representing a 19% decrease from the prior-year period. The company said the decrease was due primarily to the divestiture of its Australian and U.K. wine businesses.

North American net sales on an organic constant-currency basis increased 2% primarily due to favorable product mix and lower promotion expense in the U.S., partially offset by a decrease in volume, the company reported.

First-quarter net income was $75 million.

"We're off to a good start to the year, with results that were generally in line with our expectations," Sands said.

Constellation Brands is a Fairport, N.Y.-based producer and marketer of beverage alcohol brands in wine, spirits and imported beer categories.

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