CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Constellation Brands, Inc. (Constellation) $600 million senior notes offering. The Rating Outlook is Stable. Proceeds will be used for general corporate purposes.
A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
Relatively Stable Leverage Expected
Constellation's ratings reflect the expected continuation of strong operating momentum and Fitch's expectation that leverage will be managed to Constellation's target (net debt to EBITDA) of 3.5x versus previous target of 3x to 4x. Consequently, Fitch anticipates leverage (total debt/EBITDA) will remain in line with the 3.5x range over the longer-term.
The strong beer business operating trends, which support the expected high-single digit growth (Fitch's estimate) in operating income, affords Constellation flexibility around its capital allocation priorities. Constellation's cash priorities are focused on growth investments, a dividend pay-out ratio in the 25% to 30% range, opportunistic M&A and share repurchase strategy within the context of operating within its leverage target. This flexibility will further increase as capital investments scale down after fiscal 2018. Consequently, given Constellation's increasing scale and cash generation, Fitch expects further bolt-on M&A will not materially increase leverage with Constellation remaining relatively measured and opportunistic with the pacing of repurchasing shares.
Constallation's board has authorized a new share repurchase program of up to $1 billion. This new program is in addition to the company's current $1 billion share repurchase program. As of Oct. 5, 2016, Constellation had $642 million of availability under its existing share repurchase program.
Transformative M&A Materially Increases Scale and Profitability
During the past three plus years, Constellation has transformed its asset mix through the 2013 Modelo acquisition ($5.3 billion including additional true-up payment), subsequent bolt-on acquisitions that have totalled in excess of $2.5 billion including additional brewing capacity through the Obregon acquisition and the expected divestiture of its lower growth, lower margin Canadian wine business. Consequently, Constellation has materially increased diversity, scale and exposure to above-average market growth rates in the beer, wine and spirits segments. The recent bolt-on acquisitions present the opportunity for Constellation to better leverage distribution, marketing scale, supply chain and existing beer, wine and spirits assets. Fitch expects Constellation will continue to explore opportunistic bolt-on M&A activity. Constellation has also pursued a venture fund approach for low cost M&A opportunities in early stage start-up companies.
Consolidated EBITDA margins in the 33% to 34% range should continue to strengthen by at least 250 to 300 basis points during the next several years driven by mix/price, independence from the interim beer supply agreement, innovation and improved operating asset utilization. The strong profitability also enables Constellation flexibility with investing behind the brands through increased marketing and sales capabilities. Fitch expects FCF generation (Fitch defined as CFFO less capital spending less dividends) to increase to in excess of $700 million in fiscal 2019 from a projected $300 million in fiscal 2017.
Leading Market Positions Focused On Premium Category
Constellation's ratings consider the company's leading market positions and well-known liquor portfolio. According to the company, Constellation is the third-largest U.S. beer company with approximately 25% share of the high-end U.S. beer market. Its Mexican beer portfolio is anchored by the Corona and Casa Modelo brands, which are the number 1 and 2 imported beer brands in the U.S., respectively. Another strong performer is the quickly growing craft beer brand, Ballast Point, which is now leveraging Constellation's national distribution and marketing scale. The strong position is evident in Constellation's double-digit depletion volume growth rate compared to a relatively flat overall growth rate for the U.S. beer industry. Constellation is also one of the world's largest wine producers, is focused on the faster growing premium and above categories bolstered by recent bolt-on acquisitions, and produces Svedka, the largest imported vodka brand in the U.S.
Multiple Levers Driving Growth
Fitch believes Constellation's premium-positioned beer, wine and spirits portfolio is well placed to capture long-term growth and increase value share during the next couple of years with volume growth in the beer segment in the high-single digits range and wine and spirits segment in the mid-single digits range. Within the beer segment, the Mexican beer portfolio has a strong appeal with Hispanics, who consume 40% of Constellation's total beer volume, and with the millennial consumer base. In addition, long-term ongoing premiumization trends driven by Mexican imports and craft beer likely have significant runway for further penetration. Constellation's strategies to drive growth include increased distribution opportunities across its brand portfolio, innovation including extensions of its Corona and Modelo brands, leveraging favorable consumer demand trends and improved in-store merchandising.
The Ballast Point acquisition allows Constellation to more effectively target different demographic segments that are attracted to craft beer and spirits and should minimize potential cannibalization of its existing Mexican beer and spirits portfolio, thus supporting its growth profile. Risks to Constellation's growth profile would include a material change with the U.S. government's view on North American Free Trade Agreement (NAFTA) or a significant interruption with the beer supply from the Nava brewery that would cause a slowdown in consumption trends.
The U.S. wine and spirits categories, with industry sales growth in the mid-single digit range the past year, are among the fastest growing consumer packaged goods categories with steadily increasing per capita consumption rates over the past decade. The luxury/ super luxury wine segments have experienced strong volume and dollar sales growth as consumers continue to trade up to wine priced $20 and above. Constellation's recent acquisitions of wine and spirits brands Meomi, Prisoner, High West and Charles Smith along with the divestiture of its Canadian wine business highlights the company's focus on above premium products by improving the growth/margin profile including price/mix and asset utilization within the wine and spirits portfolio.
KEY ASSUMPTIONS
Key assumptions within Fitch's rating case in FY2017 for Constellation include:
--Consolidated revenue growth of approximately 12% supported by growth from the beer segment in the mid 16% range;
--Operating income margin for the beer segment in the low 35% range; operating income margin for the wine and spirits segment in the mid 25% range;
--Operating cash flow of almost $1.6 billion;
--Capital spending of around $1 billion;
--FCF of approximately $300 million;
--Leverage (Total debt to EBITDA) of approximately 3.5x.
In FY2018, Fitch's assumptions for Constellation include:
--Consolidated revenue growth in the 2% to 3% range after divestiture of the Canadian wine business including beer segment growth in the high-single digit range and organic wine and spirits growth in the mid-single digit range;
--Operating income margin for the beer segment in the 35% to 36% range; operating income margin for the wine and spirits segment of at least 27%;
--Operating cash flow greater than $1.8 billion;
--FCF of less than $100 million;
--Bolt-on sized acquisitions;
--Leverage (Total debt to EBITDA) of approximately 3.5x.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a positive rating action include:
--Change in financial policy with commitment to sustain leverage (total debt-to-operating EBITDA) at 3.0x or below;
--Sustained FCF margin above 5%;
--Growing volume trends for Constellation's primary brands.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Increased leverage such that total debt-to-operating EBITDA is above the mid 3x range on a sustained basis;
--Deterioration in volume trends leading to market share losses;
--Significant and ongoing deterioration in profitability due to competitive activity;
--A prolonged operating issue that affects shipment of beer from the Nava Brewery;
--An adverse change with U.S. participation in NAFTA that could include the institution of tariffs between U.S. and Mexico;
--A change in financial policy toward more aggressive shareholder-based initiatives.
LIQUIDITY
Constellation had a cash position of $177 million as of Aug. 31, 2016 with nearly full availability ($1.13 billion) under its $1.15 billion senior secured revolving credit facility that matures in 2020. Constellation's LTM FCF was $414 million. For fiscal 2017, Fitch expects FCF of approximately $300 million given increased capital investment requirements of around $1 billion driven by Mexican beer capacity expansion.
Constellation has two accounts receivable securitization facilities that provide additional borrowing capacity from $235 million up to $340 million and from $120 million up to $210 million structured to account for the seasonality of the company's business. Constellation had availability on the facilities of $300 million and $105 million, respectively as of Aug. 31, 2016 with $70 million outstanding. In September 2016, Constellation amended the accounts receivable securitization facilities extending each facility for an additional 364-day term. Constellation also had additional credit arrangements totaling $807 million, with $462 million outstanding. These arrangements primarily support the financing needs of Constellation's domestic and foreign operations including the glass production plant joint venture.
Upcoming debt maturities include $700 million of 7.25% notes due in fiscal 2018, which Fitch expects will be refinanced. Annual amortization requirements for the term loans over the next three fiscal years is approximately $86 million remaining in FY2017, $173 million in FY2018 and $173 million in FY2019.
Fitch rates the following:
Constellation Brands, Inc.
--$600 million senior notes offering 'BBB-'.
Fitch currently rates Constellation as follows:
Constellation Brands, Inc.
--Long-term IDR 'BBB-';
--Senior secured revolver 'BBB-';
--Senior secured term loan A 'BBB-';
--Senior secured term loan A-1 'BBB-';
--Senior unsecured notes 'BBB-'.
CIH International S.a.r.l.
--Long-term IDR 'BBB-';
--European term loan A 'BBB-'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Nov. 16, 2016.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Adjustments to include associate dividends with EBITDA for leverage and coverage ratios.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015484
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https://www.fitchratings.com/regulatory
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