INTRODUCTION
This MD&A provides additional information on our businesses, current developments, financial condition, cash flows, and results of operations. It should be read in conjunction with our consolidated financial statements and notes thereto included herein (the "Financial Statements") and with our consolidated financial statements and notes included in our 2019 Annual Report. This MD&A is organized as follows:
• Overview. This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition, and potential future trends. • Strategy. This section provides a description of our strategy and a discussion of recent developments, significant investments, acquisitions, and divestitures. • Results of operations. This section provides an analysis of our results of operations presented on a business segment basis for the three months endedNovember 30, 2019 ("Third Quarter 2020"), andNovember 30, 2018 ("Third Quarter 2019"), and the nine months endedNovember 30, 2019 ("Nine Months 2020"), andNovember 30, 2018 ("Nine Months 2019"). In addition, a brief description of significant transactions and other items that affect the comparability of the results is provided. • Financial liquidity and capital resources. This section provides an analysis of our cash flows, outstanding debt, and a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements. OVERVIEW
We are an international beverage alcohol company with a broad portfolio of
consumer-preferred high-end imported and craft beer brands, and higher-end wine
and spirits brands. Many of our products are recognized as leaders in their
respective categories. We are one of the leading
Through
In the Beer segment, our portfolio consists of high-end imported and craft beer
brands. We have an exclusive perpetual brand license to import, market, and sell
in the
--------------------------------------------------------------------------------
MD&A Table of Contents
evaluation of the operating income (loss) performance of the other reportable segments. The new business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting.
STRATEGY
Our overall strategy is to drive industry-leading growth and shareholder value by building brands that people love when celebrating big moments or enjoying quiet ones. We position our portfolio to benefit from the consumer-led trend towards premiumization, which we believe will continue to result in faster growth rates in the higher-end of the beer, wine, and spirits categories. We focus on developing our expertise in consumer insights and category management, as well as our strong distributor network, which provides an effective route-to-market. Additionally, we leverage our scale across the total beverage alcohol market and our level of diversification hedges our portfolio risk. In addition to growing our existing business, we focus on targeted acquisitions of, and investments in, businesses that are higher-margin, higher-growth, consumer-led, have a low integration risk, and/or fill a gap in our portfolio. We also strive to identify, meet, and stay ahead of evolving consumer trends and market dynamics (see "Investments, Acquisitions, and Divestitures - Canopy Investments").
We strive to strengthen our portfolio of higher-end beer, wine, and spirits brands and differentiate ourselves through:
• leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio and to provide for cross promotional opportunities; • strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights;
• investing in brand building and innovation activities;
• positioning ourselves for success with consumer-led products that identify, meet, and stay ahead of evolving consumer trends and market dynamics; • realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and
• developing employees to enhance performance in the marketplace.
Our business strategy for the Beer segment focuses on leading the high-end
segment of the
In connection with our business strategy for the Beer segment, we have more than
tripled the production capacity of our brewery located in
Our business strategy for the
--------------------------------------------------------------------------------
MD&A Table of Contents
brands through consumer insights, sensory expertise, and innovation; and
refreshing existing brands, as we continue to focus on moving our branded wine
and spirits portfolio towards a higher-margin, higher-growth portfolio of
brands. We dedicate a large share of our sales and marketing resources to
well-known wine and spirits brands sold in the
Wine Portfolio Wine Brands of Brands Spirits Brands ? 7 Moons ? Drylands ? SIMI ? Charles Smith ? Casa Noble ? Auros ? Kim Crawford ? Spoken Barrel ? Prisoner ? High West ? Champagne Palmer & Co ? Meiomi ? Robert Mondavi ? Mi CAMPO ? Nelson's Green ? Cooper & Thief ? Mount Veeder ? Schrader Brier ? Crafters Union ? Nobilo (1) ? SVEDKA ? Cuvée Sauvage ? Ruffino ? The Real McCoy
(1) See "Recent Developments - New Wine and Spirits Transactions" below.
We focus our innovation and investment dollars on those brands within our
portfolio which position us to benefit from the consumer-led trend towards
premiumization. Additionally, in connection with the New Wine and Spirits
Transactions, Other Wine and Spirits Transactions, and the Black Velvet
Divestiture, we expect to optimize the value of our wine and spirits portfolio
by driving increased focus on our higher-end Power Brands to accelerate growth
and improve overall operating margins. In markets where it is feasible, we
entered into contractual arrangements to consolidate our
Marketing, sales, and distribution of our products are managed on a geographic
basis in order to fully leverage leading market positions. In addition, market
dynamics and consumer trends vary across each of our markets. Within our primary
market in the
We complemented our total beverage alcohol strategy in an adjacent category by making investments in Canopy, a world-leading, diversified cannabis company. These investments are consistent with our long-term strategy to identify, meet, and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property, and retailing.
We remain committed to our long-term financial model of: growing sales, expanding margins, and increasing cash flow in order to achieve earnings per share growth, maintain our targeted leverage ratio, and deliver returns to shareholders through the payment of quarterly cash dividends and periodic share repurchases.
Recent Developments
New Wine and Spirits Transactions
In
--------------------------------------------------------------------------------
MD&A Table of Contents
and spirits brands, wineries, vineyards, offices, and facilities, for
approximately
In
Selected financial information included in our results of operations for the portion of the business that we expect will no longer be part of our consolidated results after the closing of the New Wine and Spirits Transactions is as follows:
Net Sales Gross Profit Marketing (in millions) Third Quarter 2020 Wine and Spirits segment results$ 164 $ 59$ 5 Nine Months 2020 Wine and Spirits segment results$ 614 $ 237$ 13
Other Wine and Spirits Transactions We are pursuing other opportunities to divest the brands and concentrate business excluded from the Revised Wine and Spirits Transaction to companies whose business strategies better align to the brands. We do not expect to recognize a loss in connection with the Other Wine and Spirits Transactions.
For additional information regarding the New Wine and Spirits Transactions and the Other Wine and Spirits Transactions, refer to Note 4 of the Financial Statements.
In connection with the New Wine and Spirits Transactions and the Other Wine and
Spirits Transactions, we have wine and spirits net assets of
Ballast Point Transaction
In
--------------------------------------------------------------------------------
MD&A Table of Contents
Primarily in connection with the Ballast Point Transaction, we have beer net
assets of
Investments, Acquisitions, and Divestitures
Canopy Segment Canopy Investments Our investments in Canopy, and the method of accounting for these investments, consist of the following: Date of Investment Purchase Method of Investment Acquired Price Accounting (in millions) Fair value / equity Nov 2017 Common shares$ 130.1 method (1) Nov 2017 Warrants 61.2 Fair value$ 191.3 June 2018 Convertible debt securities$ 150.5 Fair value Nov 2018 Common shares$ 2,740.3 Equity method Nov 2018 Warrants (3) 1,146.8 Fair value$ 3,887.1 (2)
We recognized an unrealized net gain (loss) from the changes in fair value of these investments accounted for at fair value in income (loss) from unconsolidated investments as follows:
Third Third Nine Nine Date of Quarter Quarter Months Months Investment Investment 2020 2019 2020 2019
(in millions)
Nov 2017 Common shares (1) $ -$ (168.5 ) $ -$ 292.5 Nov 2017 Warrants (91.9 ) (212.4 ) (542.7 ) 223.5 June 2018 Convertible debt securities (15.6 ) (40.6 ) (97.0 ) 12.9 Nov 2018 Warrants (3) (426.8 ) 257.6 (1,561.2 ) 257.6$ (534.3 ) $ (163.9 ) $ (2,200.9 ) $ 786.5 (1) Accounted for at fair value from the date of investment in November 2017 throughOctober 31, 2018 . Accounted for under the equity method fromNovember 1, 2018 (see Note 9 of the Financial Statements). (2) Includes$17.2 million of direct acquisition costs capitalized under the equity method cost accumulation model. Excludes$7.3 million of direct acquisition costs associated with the investment in warrants which are expensed as incurred in selling, general, and administrative expenses. (3) In June 2019, the Canopy Shareholders approved the modification of the terms of theNovember 2018 Canopy Warrants. For additional information refer to Note 9 of the Financial Statements. Nine Months 2020 includes a$1,176.0 million unrealized gain resulting from theJune 2019 Warrant Modification.
We expect the value of the Canopy investments accounted for at fair value to be
volatile in future periods. We evaluated the Canopy investments as of
--------------------------------------------------------------------------------
MD&A Table of Contents
recognized our share of Canopy's fourth quarter fiscal 2019, first quarter
fiscal 2020, and second quarter fiscal 2020 earnings (losses) and related
activities from January through
As of
As previously noted, these investments are consistent with our long-term strategy to identify, meet, and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property, and retailing.
Beer Segment Four Corners Acquisition InJuly 2018 , we acquired Four Corners, which primarily included the acquisition of operations, goodwill, property, plant, and equipment, and trademarks. This acquisition included a portfolio of high-quality, dynamic, and bicultural,Texas -based craft beers which further strengthened our position in the high-end segment of theU.S. beer market. The results of operations of Four Corners are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition. Wine and Spirits Segment Black Velvet Divestiture OnNovember 1, 2019 , we sold the Black Velvet Canadian Whisky business and the brand's associated production facility, along with a subset of Canadian whisky brands produced at that facility, and related inventory at a transaction value of$266.3 million . Accordingly, our consolidated results of operations include the results of operations of our Canadian whisky business through the date of divestiture. We received cash proceeds of$269.7 million . This divestiture is consistent with our strategic focus on higher-margin, higher-growth brands. We recognized a net gain of$76.0 million on the sale of the business in Third Quarter 2020.
Nelson's Green Brier Acquisition
In
For additional information on these recent developments, investments, acquisitions, and divestitures refer to Notes 4, 6, 7, 9, and 19 of the Financial Statements.
--------------------------------------------------------------------------------
MD&A Table of Contents RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS
References to organic throughout the following discussion exclude the impact of divested brand activity in connection with the Black Velvet Divestiture (wine and spirits), as appropriate.
For Third Quarter 2020 compared with Third Quarter 2019:
• Our results of operations were negatively impacted by an unrealized net loss from the changes in fair value of our investments in Canopy and an impairment of long-lived assets held for sale primarily in connection with the New Wine and Spirits Transactions, partially offset by the continued improvements within the Beer segment and a net gain related to the Black Velvet Divestiture. • Net sales increased 1% due to an increase in Beer net sales driven predominantly by volume growth and a favorable impact from pricing within our Mexican beer portfolio, partially offset by a decrease inWine and Spirits net sales led by branded volume decline largely from brands to be divested. • Operating income (loss) decreased 52% largely due to an impairment of long-lived assets held for sale primarily in connection with the New Wine and Spirits Transactions, partially offset by a net gain related to the Black Velvet Divestiture and the net sales volume growth and favorable impact from pricing within our Mexican beer portfolio. • Net income (loss) attributable to CBI and diluted net income (loss) per common share attributable to CBI increased largely from a net income tax benefit recognized as a result of tax reform enacted inSwitzerland .
For Nine Months 2020 compared with Nine Months 2019:
• Our results of operations were negatively impacted by (i) an unrealized net loss from the changes in fair value of our investments in Canopy, (ii) equity in losses from Canopy's results of operations and related activities, and (iii) an impairment of long-lived assets held for sale primarily in connection with the New Wine and Spirits Transactions, partially offset by (i) an unrealized gain resulting from theJune 2019 modification of the terms of theNovember 2018 Canopy Warrants and (ii) the continued improvements within the Beer segment. • Net sales increased 2% primarily due to an increase in Beer net sales driven predominantly by volume growth and a favorable impact from pricing within our Mexican beer portfolio, partially offset by a decrease inWine and Spirits net sales led by branded volume decline largely from brands to be divested. • Operating income (loss) decreased 17% largely due to an impairment of long-lived assets held for sale primarily in connection with the New Wine and Spirits Transactions and restructuring and other strategic business development costs incurred in connection with ongoing efforts to gain efficiencies and reduce our cost structure primarily within theWine and Spirits segment, partially offset by the net sales volume growth and favorable impact from pricing within our Mexican beer portfolio and a net gain related to the Black Velvet Divestiture.
--------------------------------------------------------------------------------
MD&A Table of Contents • Net income (loss) attributable to CBI and diluted net income (loss) per common share attributable to CBI decreased significantly primarily due to an unrealized net loss on our investments in Canopy for Nine Months 2020, as compared with an unrealized net gain from the changes in fair value on our investments for Nine Months 2019, partially offset by a net income tax benefit recognized as a result of tax reform enacted inSwitzerland . COMPARABLE ADJUSTMENTS
Management excludes items that affect comparability from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and segment management compensation are evaluated based on core segment operating income (loss). As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these Comparable Adjustments.
As more fully described herein and in the related Notes to the Financial Statements, the Comparable Adjustments that impacted comparability in our segment results for each period are as follows:
Third Third Nine Nine Quarter Quarter Months Months 2020 2019 2020 2019 (in millions) Cost of product sold Strategic business development costs$ (61.7 ) $ -$ (124.2 ) $ - Accelerated depreciation (1.8 ) (1.5 ) (7.1 ) (6.5 )
Flow through of inventory step-up (0.3 ) (2.2 ) (1.5 ) (3.6 ) Net gain (loss) on undesignated commodity derivative contracts
3.1 (14.7 ) (23.7 ) (5.1 ) Settlements of undesignated commodity derivative contracts 2.3 (2.2 ) 7.5 (7.3 ) Recovery of (loss on) inventory write-down - (1.3 ) 8.6 (2.8 ) Total cost of product sold (58.4 ) (21.9 ) (140.4 ) (25.3 ) Selling, general, and administrative expenses Restructuring and other strategic business development costs (2.4 ) (2.3 ) (25.5 ) (10.9 ) Transaction, integration, and other acquisition-related costs (1.2 ) (8.1 ) (6.7 ) (9.1 ) Impairment of intangible assets - - (11.0 ) - Net gain (loss) on foreign currency derivative contracts associated with acquisition of investment - (25.5 ) - (32.6 ) Deferred compensation - - - (16.3 ) Other gains (losses) (0.8 ) 2.4 0.3 10.9 Total selling, general, and administrative expenses (4.4 ) (33.5 ) (42.9 ) (58.0 ) Impairment of assets held for sale (390.0 ) - (417.0 ) - Gain (loss) on sale of business 76.0 - 76.0 - Comparable Adjustments, Operating income (loss)$ (376.8 ) $ (55.4 ) $ (524.3 ) $ (83.3 ) Income (loss) from unconsolidated investments$ (416.5 ) $ (163.9 ) $ (2,564.4 ) $ 886.3
--------------------------------------------------------------------------------
MD&A Table of Contents Cost of Product Sold Strategic Business Development Costs We recognized costs primarily in connection with losses on write-downs of excess inventory, bulk wine sales, and contract terminations resulting from our ongoing efforts to optimize our portfolio, gain efficiencies, and reduce our cost structure within theWine and Spirits segment.
Undesignated Commodity Derivative Contracts Net gain (loss) on undesignated commodity derivative contracts represents a net gain (loss) from the changes in fair value of undesignated commodity derivative contracts. The net gain (loss) is reported outside of segment operating results until such time that the underlying exposure is recognized in the segment operating results. At settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing the results of our operating segments to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility.
Recovery of (Loss on) Inventory Write-Down Reimbursement from our insurance carriers for losses recognized on the write-down of certain bulk wine inventory as a result of smoke damage sustained during the Fall 2017 California wildfires (Nine Months 2020).
Selling, General, and Administrative Expenses
Restructuring and Other Strategic Business Development Costs
We recognized costs primarily in connection with (i) costs from our ongoing
efforts to gain efficiencies and reduce our cost structure in connection with a
program intended to optimize the
Transaction, Integration, and Other Acquisition-Related Costs We recognized transaction, integration, and other acquisition-related costs in connection with our acquisitions, divestitures, and investments.
Impairment of Intangible Assets
We recognized a trademark impairment loss related to our Beer segment's
Deferred Compensation We recognized an adjustment related to prior periods to correct for previously unrecognized deferred compensation costs associated with certain employment agreements.
Other Gains (Losses) We recognized other gains (losses) primarily in connection with (i) a gain on the remeasurement of our previously held equity interest in Nelson's Green Brier to the acquisition-date fair value (Nine Months 2020), (ii) an increase in estimated fair value of a contingent liability associated with a prior period acquisition (Nine Months 2020), and (iii) a gain primarily in connection with the sale of certain non-core assets (Nine Months 2019).
--------------------------------------------------------------------------------
MD&A Table of Contents
Impairment of Assets Held for Sale We recognized an impairment of long-lived assets held for sale in connection with the New Wine and Spirits Transactions and the Ballast Point Transaction.
Gain (Loss) on Sale of Business We recognized a net gain on sale of the Black Velvet Canadian Whisky business.
Income (Loss) From Unconsolidated Investments
We recognized an unrealized gain (loss) primarily from (i) the changes in fair
value of our securities measured at fair value, (ii) the increase in fair value
resulting from the
© Edgar Online, source