The firm has also signed a 50:50 JV with glass giant Owens-Illinois to buy a glass manufacturing plant adjacent to the brewery in Nava from AB InBev for $300m to meet 50% of its glass requirements.
Constellation reported its Q2 results for fiscal year 2015 yesterday. Net sales rose 10% to $1.604bn, while net income fell 87% to $195.8m, principally due to a $1.6bn non-cash gain for the company in Q2 2014 ending August 31, due to a ‘re-measurement to fair value’ of its original 50% interest in Crown Imports.
The brewer also lost an estimated $9m in operating income due to a recall of faulty Corona Extra 12oz (340ml) bottles produced in Mexico.
Discussing the company’s results with analysts, Sands said growth in volume sales of beer called for a shift in the packaging mix towards cans and kegs.
ANALYST TAKEAWAY: "We like the company's outsized exposure to imported beer, a category we expect will continue to take share from non-craft domestics. As well, while the wine category remains challenging, Constellation Brands is competing from a strong No.2 position [behind E&J Gallo]." (Vivien Azer, Cowen and Company)
“Cans would be a positive mix…that’s because aluminum is cheaper than glass and cans cube out better with freight. You can fit more on a freight car than bottles because you don’t have to insulate them,” he said.
‘Big can upside’ for Corona Extra
“For Modelo Especial specifically right now bottles are growing faster than cans. Probably the big can upside is on Corona Extra where we expect to have the same price as bottles,” he added.
Sands said Constellation will start running a new canning line shortly and that this would support growth for Corona, Modelo Especial Chelada and ultra-premium Vienna-style lager Victoria, which until now has only been available in cans, and is another brand the firm insists has momentum.
CFO Robert Ryder added: “Also on Corona Extra specifically we actually already have a media campaign describing the activities you would do with a can that you wouldn’t do with the bottle.
“Same great Corona liquid, right, but you can do certain things with cans that you can’t with bottles, and shots of the beach, boats, sporting events, things like that just to get peoples’ heads around ‘Hey, Corona is great. Let me try a can!’” Ryder said.
“Right now for Corona Extra probably less than 2% of the mix is cans. So we think that’s a pretty big opportunity to drive growth.”
Sands said Constellation saw a “huge opportunity in cans because it’s such a low percentage of our business and there is so much momentum from an industry perspective against cans, period”.
“So we’re pretty excited about the can potential of our business.”
Constellation will spend $175m+ expanding glass plant
Constellation announced yesterday that it will expand capacity in Mexico by 5m to 25m hectolitres by the end of calendar 2017 – beer sales grew 9% in Q2 2015 and the company predicts mid-single digit growth for its beer business from FY 2016-2018.
“This project is being driven by the exceptional portfolio momentum of our beer business, which has significantly outperformed the US beer market and our own expectations," Sands said. Constellation expects beer business operating profit margins of 32% for FY 2015.
Through the JV with O-I both partners will buy the glass production plant from AB InBev and increase the number of furnaces from one to four – with Constellation alone spending $175-225m on the expansion – with the deal is subject to regulatory approval in the US and Mexico.
Constellation already contracts with O-I to supply its wine business, and the plant (which O-I will operate) will supply 50% of its beer glass needs, while Vitro in Mexico has supplied another 25-35% from October 1.