Garth Hankinson
Chief Financial Officer at Constellation Brands
Thank you, Bill, and good morning, everyone. As usual, my discussion will focus mainly on our comparable P&L results, starting at an enterprise level followed by business segment detail for fiscal '24. I will then discuss our fiscal '25 outlook and expectations in the same manner.
Starting with net sales. As an enterprise, we delivered growth of over 5%, slightly exceeding our fiscal '24 guidance range of 4% to 5%. This was driven by the strong performance of our Beer Business, which grew net sales over 9%, exceeding our guidance of 8% to 9%. As Bill mentioned, our Beer Business had another strong year of depletion growth, a 7.5% increase as the strength of our portfolio carried throughout the entire year.
Off-premise depletions grew by over 8%, which represent nearly 89% of our total depletion volume. The on-premise accounts for the balance of our depletions and grew by over 1%. We expect to build on our momentum in off-premise channels supported by the low-double-digit incremental shelf space that we captured this spring, which we foreshadow at our Investor Day last November. And we continue to see opportunity to drive growth in the on-premise with new draft handles, particularly for Modelo Especial and Pacifico in the coming fiscal year. I will elaborate on fiscal '25 shortly.
Shipment volumes for our Beer Business in fiscal '24 grew 7.4% and we achieved favorable pricing of 2%. These volume and pricing increases were partially offset by the divestiture of our craft beer business and an unfavorable shift in product mix. In aggregate, the volume, price and mix changes amounted to a nearly $700 million increase in beer net sales for fiscal '24.
In regards to selling days, we had one extra sell day in the year, which occurred in Q4. This had a minimal impact on our volumes as shipments and depletions, on an absolute basis, were over 99% aligned for the year.
For our Wine & Spirits business, net sales declined 9% and 8% on a reported and organic basis, respectively. The change in organic net sales for our Wine & Spirits business was within our lowered guidance range of a 7% to 9% decline. This decline was largely driven by unfavorable U.S. wholesale performance, particularly across our mainstream and premium brands. As Bill noted, we are working with our U.S. wholesale distributor partners to enhance performance in our largest markets and channels in fiscal '25.
Additionally, in our international markets, net sales for fiscal '24 were down 7% by destocking, particularly in Canada, our largest export market. More recently, in Q4, net sales from our international markets grew 14%, largely driven by the Canadian market, where inventory levels have begun to normalize. The net sales declines in our U.S. wholesale and international markets were partially offset by 10% net sales growth in our direct-to-consumer channel.
Moving on to our operating income and margin. At an enterprise-wide level, we delivered a 7% increase in comparable operating income at the upper end of our 6% to 7% guidance, resulting in a 50-basis-point increase in comparable operating margin to 32.6%. This was driven by the strong performance of our Beer Business, which grew operating income by just over 8% and delivered an operating margin of 37.9%.
Enterprise-wide operating margins also benefited from an 11% reduction or $30 million decrease in corporate expense driven mainly by reduced third-party consulting fees related to our DBA project spend. This solid performance was partially offset by our Wine & Spirits results as operating income excluding the gross profit, less marketing of the brands that are no longer part of the business following their divestiture declined by 8%. This decline was within our lowered guidance range of a 6% to 8% decline, resulting in a flat year-over-year operating margin of 22.2%.
Elaborating on the margin puts and takes in more detail, starting with the Beer Business. The increase in operating income and slight 40-basis-point decrease in operating margin were reflective of an absolute increase of approximately 12% in overall cost. This increase in COGS includes the impact of increased volume and the nearly $205 million from cost savings initiatives realized in fiscal '24.
By COGS component and on an absolute basis, inclusive of both volume growth and cost savings, year-over-year changes were as follows. Raw materials and packaging represented the midpoint of 55% to 60% of total COGS and had an absolute increase of 16%. Logistics making up just over 20% of total COGS increased 3% as a large portion of the benefits from our cost savings agenda came from this area. Labor and overhead landed at just under 15% of total COGS and increased 19% attributable to the construction activities at our Veracruz Brewery. And the remaining portion of total COGS depreciation increased approximately $37 million, representing the incremental capacity that was brought online in fiscal '24.
Moving on to marketing. Our dollar spend increased by approximately 2% year-over-year. As a percent of fiscal '24 net sales, marketing was approximately 8.5%, coming in slightly below our medium-term 9% algorithm, partly driven by the divestiture of our craft beer brands and efficiencies from the transition to our new media agency. Lastly, SG&A, which represented approximately 5% of net sales, increased approximately 8%, driven by the unfavorable impact of foreign currency and increased compensation and benefits. These increases were partially offset by benefits from the craft beer divestiture and lower legal fees.
Moving on. Our Wine & Spirits business operating income margin, excluding the gross profit, less marketing of the brands that are no longer part of the business following last year's divestiture, remained flat year-over-year as the volume decline and unfavorable channel mix were offset by favorability in our COGS driven by nearly $40 million coming from our cost savings initiatives, favorable pricing, reduced other SG&A expenses, and a reduction in marketing expense.
Interest expense for fiscal '24 was about $435 million, a 9% increase from prior year driven by higher average borrowings and weighted average interest rates. We ended fiscal '24 with a comparable net leverage ratio, excluding Canopy equity and earnings, of 3.2 times, leaving us well-positioned to achieve our target of approximately 3 times in fiscal '25.
Our comparable effective tax rate, excluding Canopy equity and earnings, was 18.5% versus 19.2% last year. Comparable EPS for fiscal '24, excluding Canopy equity and earnings, grew nearly 9% year-over-year to $12.38 and came in above our guidance range of $12 to $12.20.
Moving to fiscal '24 free cash flow, which we define as net cash provided by operating activities less capex. We generated free cash flow slightly over $1.5 billion, exceeding our $1.4 billion to $1.5 billion guidance range. Free cash flow decreased 12% year-over-year, driven by a 23% increase in capex investments attributable to our expansions at our existing facilities and the ongoing construction of our new brewery in Veracruz.
In fiscal '24, we increased our total nominal capacity from our Mexico brewery operations from 42 million hectoliters to approximately 48 million hectoliters as a result of the modular expansions brought online over the summer that were fully ramped by year end, along with unlocked incremental capacity through our optimization initiatives.
Consistent with our capital allocation priorities, we, once again, delivered cash returns to our shareholders with over $900 million of expenditures in dividends and share repurchases. In addition, we executed portfolio gap-filling transactions encompassing both a tuck-in acquisition of a female- and Black-founded luxury wine brand with a successful track record and a venture investment in the high-growth non-alcoholic space in fiscal '24.
With that, let me now step through our outlook for fiscal '25, starting with net sales. We are targeting our enterprise-wide net sales to grow up 6% to 7%, inclusive of a 7% to 9% growth target for our Beer Business, and a 0.5% decline to 0.5% growth in net sales for our Wine & Spirits business. The beer top line outlook is expected to be primarily achieved by continued strong volume growth of our portfolio. Again, we expect this to come from distribution of our largest brands bolstered by spring shelf reset gains, the health and continued support of our consumers, and innovation in the form of brand extensions, new to world products, and new pack sizes.
Regarding beer volumes, we anticipate fiscal '25 shipments and depletions to track closely on an absolute basis, consistent with prior years. Similarly, we expect the cadence of our shipments and depletions, in terms of share of annual volumes from a quarter and a half year perspective, to be fairly in line with fiscal '24.
For Wine & Spirits net sales, we expect to largely offset ongoing category headwinds as we drive the sales and marketing execution initiatives described by Bill earlier. Additionally, we expect mix-related benefits due to the better performance in our higher-end brands. That said, we continue to anticipate overall volume growth to remain challenged, particularly due to demand headwinds in the mainstream and premium price segments, which account for a major part of our volumes.
Furthermore, from a net sales perspective, we're expecting unfavorable lapping of bulk sales in fiscal '24. From a cadence perspective, we also expect quarterly and half yearly shipments and depletion shares of the full year total to be fairly aligned with fiscal '24.
For fiscal '25 operating income, we expect comparable enterprise-wide growth between 8% and 10%, reflecting 10% to 12% operating income growth for our Beer Business, a 9% to 11% operating income decline for our Wine & Spirits business, and a slight increase in corporate expense to approximately $260 million.
For our Beer Business, we anticipate operating income tailwinds from volume growth and favorable pricing. We expect these tailwinds will be partially offset by continued input cost inflation with an absolute increase in COGS, inclusive of volume growth, cost savings initiatives, and our multi-year hedging actions in the high-single-digits.
We expect the following percent of total COGS and absolute increases across each component, for packaging and raw materials to account for 55% to 60% and increase mid- to high-single-digits, logistics to make up approximately 20% and increase mid-single-digits, labor and overhead to be approximately 15% and increase in the high teens, primarily driven by merit salary increases, given the strong operational performance from the business and incremental headcount, primarily at our Veracruz Brewery, as we continue with construction, and the remainder of COGS depreciation with a mid-single-digit increase, which approximately equates to a $20 million step-up, which is slightly lower than recent years, given prior depreciation of the packaging line of the ABA facility that was operational throughout all of fiscal '24.
Outside of COGS, we expect marketing expense as a percent of net sales to be approximately 8.5%, which is lower than our unchanged medium-term algorithm of 9%. The change of marketing expense as a percent of net sales for fiscal '25 is driven by a shift in our marketing investment allocation with an overall focus on maximizing value. The investment shift is geared towards prioritizing our largest brands to support their continued momentum, followed by our high growth potential next wave brands and then thoughtful and deliberate investments to support our innovation pipeline. And savings driven by efficiencies from our new media agency partnership announced in Q3 of fiscal '24.
Rounding out beer operating margin drivers, we anticipate SG&A as a percent of net sales to be approximately 5%, in line with the medium-term algorithm we provided during our Investor Day. All in, this implies beer operating margins of approximately 39% as our Beer Business continues to generate best-in-class operating margins and year-over-year improvement as we close in on our medium-term targets.
For our Wine & Spirits business operating income, we anticipate an overall COGS increase of mid- to high-single-digits driven by less favorable fixed cost absorption as a result of lower volumes and higher seller overhead and blend costs, partially offset by favorability in logistics and packaging costs as part of our cost savings initiatives. For marketing and other SG&A expense as a percent of net sales, we anticipate 9% and 10%, respectively, each slightly above our medium-term outlook driven by the adjustments to our marketing, pricing, and sales investments to drive top line growth and partially offset by organizational structure changes, both points previously referenced by Bill.
In addition, we expect to face headwinds from unfavorable lapping of contractual distributor payments and lower compensation and benefits in FY '24. That said, this implies Wine & Spirits operating margins to contract to approximately 20% in fiscal '25 as we continue to navigate category headwinds and reset investments in certain marketing and sales activities. We believe our enhanced focus on execution and planned cost savings can provide margin improvement over the medium-term toward the targets outlined at our Investor Day in November.
Corporate expense is anticipated to increase slightly as we continue to invest in the business while reducing third-party fees more broadly. We expect interest expense to be approximately $445 million to $455 million driven by higher weighted average interest rates, and we expect our comparable effective tax rate to remain unchanged coming in at approximately 18.5%.
We expect noncontrolling interest to be about $35 million and anticipated weighted average diluted shares outstanding for fiscal '25 to be around 183 million, inclusive of share repurchase activity. Based on these assumptions, we expect our reported EPS to be between $13.40 and $13.70 and our comparable EPS to be between $13.50 and $13.80, representing a 10% midpoint increase year-over-year.
From a cash flow perspective, we expect our free cash flow in fiscal '25 to be between $1.4 billion and $1.5 billion, reflective of $2.8 billion to $3 billion of operating cash flow net of capex spend of $1.4 to billion to $1.5 billion, driven primarily by the expansions of our existing breweries and the ongoing construction in Veracruz. We anticipate approximately $3 billion of remaining capex spend from fiscal '25 to fiscal '28, with fiscal '25 expected to be the peak spend year as we progress with the construction of our greenfield site in Veracruz. And consistent with our Investor Day messaging, we expect a step-up in free cash flow that should yield cumulatively between $7 billion to $9 billion from fiscal '26 to fiscal '28.
To conclude, we ended fiscal '24 with strong results, driven by continued outstanding growth in our Beer Business, as its core brands reach new milestones in cases sold and market share. Our Wine & Spirits business faced difficult marketing conditions in FY '24, but we've identified key actions to improve execution and performance. As we look ahead to fiscal '25, we are confident that we can deliver against our plan with strong enterprise results aligned with our medium-term targets, execute our capital allocation priorities, and seek to create value for our shareholders. We thank you for your ongoing support throughout fiscal '24 and look forward to updating you on our progress and success in fiscal '25.
With that, Bill and I are happy to answer your questions.
