(Reuters) – Constellation Brands Inc on Thursday said that it was expanding capacity at its brewery in Mexico to increase its share of the market for import beers in the United States.
The company will acquire from Anheuser-Busch InBev. a glass production plant in Nava, Mexico for $300 million, pending approval from regulators. Constellation is entering into a 50-50 joint venture with Owens-Illinois Inc to operate the glass plant. The venture will provide bottles for Constellation’s adjacent Nava Brewery, where capacity will increase to 25 million hectoliters from 20 million.
Constellation previously announced that it had entered into a long-term supply agreement with Vitro, a Mexico-based glass manufacturer, which will supply about 25 percent of the glass needed for Constellation’s beer business for seven years beginning in October.
For Constellation, which also sells the Svedka vodka and Robert Mondavi wine brands, the plan represents an effort to capitalize on its growing, high-margin beer business. Last year, as part of ABInBev’s acquisition of Grupo Modelo, the beer giant sold all of Modelo’s U.S. business to Constellation, giving it the rights to import, market and sell the Corona and Modelo brands, as well as ownership of the Nava brewery.
Import brands have been outperforming domestic brands in the United States, thanks to strong demand for premium beers and a growing Hispanic population.
“Our additional investments in production capacity and glass sourcing are designed to ensure that we are well-positioned to capture the continued momentum and growth opportunities,” said Constellation Chief Executive Rob Sands, on the company’s second-quarter earnings conference call.
The expansion will give Constellation more control over the quality of its beer bottles at the Nava facility. Its second-quarter results include a $9 million charge resulting from a voluntary recall of select bottles of Corona Extra. The defective bottles came from a glass plant operated by a third party manufacturer that supplies the Nava brewery with bottles.
Constellation lowered its free cash flow projection for the year to reflect capital expenses from the brewery expansion and joint venture. It now expects $275 million to $350 million for fiscal 2015, down from its previous estimate of $425 million to $500 million.
Constellation said net income fell to $196 million, or 98 cents per share, in the second quarter ended Aug. 31 from $1.5 billion, or $7.74 per share, a year earlier.
The year-earlier quarter included a $1.6 billion non-cash gain from the acquisition of Grupo Modelo’s U.S. beer business.
Excluding the charge for recalling defective bottles and other items, Constellation’s earnings were $1.11 per share. Analysts on average were expecting $1.15, according to Thomson Reuters I/B/E/S.
Net sales rose 10 percent to $1.61 billion on an increase in Constellation’s beer business, but fell short of analyst estimates of $1.64 billion.
Shares of Constellation were down 27 cents at $84.99 in Thursday afternoon trading. (Reporting by Anjali Athavaley; Editing by Lisa Von Ahn, Jilian Mincer and Bernard Orr)