• Gaining share in US wine sector
  • Analysts cautious on wine market outlook
  • Europe, Australia drag on results
Constellation Brands upbeat on wine market trends

Constellation Brands upbeat on wine market trends

Constellation Brands has said it increased its share of the US wine market in the first half of 2010, but the world's largest winemaker still faces a tough operating environment and may sell wine assets in its Europe and Australia division.

Cut-price deals on high-end wine has enticed consumers out of the sub-$5-a-bottle sector in the US, Constellation said today (6 October). The trend has helped to reverse some of the trading down in the wine sector at the height of the US recession, although market conditions remain tough, particularly for the on-trade.

Sales of wine priced below $5 have seen little growth in 2010, while demand for wines priced between $10 and up to $25 has been growing in double-digits, said the Robert Mondavi wine producer.

"We believe we are gaining market share against the total category pretty much across the board," group CFO Bob Ryder told analysts during a conference call to mark the firm's half-year results.

Constellation's share price rose by 4% on the New York Stock Exchange after profits beat expectations, having risen by 32% to $140m for the six months to the end of August. Sales were broadly flat against the first half of last year, at $1.65bn, although wine sales in the US rose by 3% in value for the six months. 

While Constellation's view of the US wine market appeared to be more upbeat than at the start of its fiscal year, it predicted that heavy discounting on premium wine is likely to continue into the key holiday trading season. Ryder said that the group would maintain a high level of promotion spend on wine in the second-half; a level that, it has previously warned, could impact profit margins.

Some analysts remained cautious on the US wine market outlook. "We stick with our Hold [rating] because EBIT continues to decline and we remain concerned about long-term wine trends for reasons including distributor levels," analyst group Stifel Nicolaus said of Constellation today.

The country's on-trade remains a particular cause for concern and was the main drag on wine sales in the first half of the year. "The on-premise isn't changing very much right now, it continues to be weak," said Constellation's CEO, Rob Sands, adding that US wine sales growth will likely moderate towards the end of the firm's fiscal year.

Further afield, Constellation said that it continued to grapple with tough market conditions in both the UK and Australia during the half-year. Wine sales across Europe and Australia fell by 10% in the half-year and by 14% in the second quarter. Operating losses also worsened for the division over the six months, to $54m from $41.6m.

Sands said that the Hardys wine owner would continue to "aggressively restructure our business in these markets". He warned of more cost cutting and possible asset sales. 

Constellation will continue with its inward focus of cutting debt and building distributor relationships in the second half of the year, Sands and Ryder said. The group hopes to use better-than-expected free cashflow of up to $425m to help reduce its debt to EBITDA ratio from 4.3 to 4 times by the end of the year.

The firm maintained its profits guidance for the year. Comparable EPS is expected to hit between $1.63 to $1.78 for the current year, up from the company's earlier prediction of $1.53 to $1.68. EPS was $1.69 on a comparable basis last year.

For the results at-a-glance, click here.