Bill Newlands
President and Chief Executive Officer at Constellation Brands
Thanks Joe, and welcome all to our Q3 fiscal '25 earnings call. As usual, I will start with a few key points regarding the quarter and our outlook for the remainder of the fiscal year.
First, growth in consumer demand for our beer portfolio sequentially expanded in the third quarter, and this in-turn drove a marginal uplift in depletions growth relative to Q2. This acceleration was supported by the incremental marketing investments we deployed across our core brands in Q3 as we responded to the softer macroeconomic backdrop that began affecting consumer spending during the summer. As a reminder, subdued overall spend and prolonged value seeking behavior among consumers have been key near-term limiting factors on-demand growth, not only for our portfolio, but also for the dollar sales growth rate of total beverage alcohol.
That said, beverage alcohol remains relatively unchanged in its share of total consumer expenditures. So we believe its lower rate of growth also reflects the adoption of broader value-seeking behavior across consumer goods. Against that backdrop and given the near-term uncertainty on whether consumers will revert to more normalized spending behaviors in Q4, we have made the decision to adjust the outlook for our fiscal '25 beer business net sales growth to be 4% to 7% and operating income growth to be 9% to 12%, still yielding an operating margin of approximately 39%. Notwithstanding this prudent adjustment to our beer business guidance, our revised fiscal '25 comparable EPS range still yields double-digit growth from the midpoint to the high-end, which includes other adjustments to our outlook that Garth will cover in more detail shortly.
Second, despite softer consumer demand due to macroeconomic headwinds, our beer business continued to outperform the total beverage industry and dollar sales growth in Circana tracked channels over the 12 weeks ended December 1 and at a total company level, we once again achieved dollar sales growth outpacing the total CPG sector as we approach nearly 12 years as a CPG growth leader.
Third, we continue to effectively execute against our key initiatives in our beer business. From a distribution perspective, we have now secured more than half of the incremental 500,000 points of distribution that we identified as the fiscal '24 to fiscal '28 target for our core brands during our Investor Day, with a significant portion of those gains achieved in the current fiscal year.
On the innovation side, the depletion growth contribution of our new liquids and formats released over the last couple of years is within the 20% to 40% range provided at Investor Day. That said, across our high-end light beer offerings, which include Modelo Oro from an innovation perspective and our more tenured Corona Light and premier brands, we are facing headwinds from competitive pricing, particularly in large pack formats. And across our Chelada brands, we are facing consumer demand growth rate headwinds from the convenience channel where our Cheladas have outsized representation given the channel's core consumer base and the predominantly 24-ounce can format that skews more towards C-store retailers.
To that end, we are actively working on levers to address the competitive dynamics in the high-end light beer segment and continue to pursue distribution opportunities for Cheladas, given our ongoing investments in broader marketing for the brands, including English language, linear TV advertising for the first time and recent extensions into the 12-ounce can 12 pack formats. We also continued to drive significant demand in our portfolio from new legal drinking age consumers and are pleased to have had a higher proportion of our dollar sales this year coming from 21 to 24-year-olds as they have made more trips to the store and spent more on each trip across our brands. In fact, the share of spend for this demographic within our dollar sales is nearly twice that of the beer category and that share has grown at more than twice the rate of the category and the high-end segment relative to last year.
Last but not least, we also continued to consistently deliver against our capital allocation priorities. We maintained a 2.9 times net leverage ratio on a comparable basis in the third quarter, still slightly below our three times target. We further advanced our brewery capacity investments and returned nearly $220 million to shareholders through share repurchases and over $180 million in dividends in Q3. This brings our total year-to-date cash returns through share repurchases to approximately $670 million or to more than $1.2 billion, including both repurchases and dividends.
With that, let's turn more fully to our beer businesses performance. During the third quarter of fiscal '25, our beer business grew depletions by 3.2%, which again was an acceleration from last quarter, despite continued consumer economic weakness. Shipments were up 1.6%, which as noted in our prior earnings call, trail depletion growth due to the impact of planned maintenance activities at our breweries during the quarter.
From a financial perspective, the business delivered net sales and operating income growth of approximately 3% and 2% respectively, which included disciplined incremental pricing taking in the fall, which is in-line with the 1% to 2% pricing expectations we provided for fiscal '25, another $40 million in cost-savings achieved in Q3 as the persistent focus on driving savings and efficiency from our end-to-end supply-chain team continues to deliver significant benefits to the business and incremental marketing spend for the third quarter that we announced in early September.
Now moving on to the performance of our largest brands. Modelo Especial grew depletions by over 3% and upheld its position as the top share gainer in US tracked channels. We continue to see a long growth runway ahead for Modelo Especial. A significant opportunity remains across key metrics like awareness, distribution and household penetration relative to competitive brands. While Corona Extra depletions declined approximately 1%, it continued to increase its dollar share as a top-10 gainer in the category. We remain positive about the outlook for Corona Extra's growth as it continues to be the most beloved beer brand in the US and has responded well to the incremental marketing spend deployed in Q3, particularly around the World Series. Pacifico delivered another quarter of very strong depletion growth of nearly 20% and remained the number four dollar share gainer across the total beer category.
We continue to build-on the momentum of this brand in its core Southern California market where it is already the number three beer brand, but still growing double-digits. At the same time, we are strategically expanding Pacifico into key metro markets across the country using the same thoughtful approach we applied to Modelo Especial, seeking to balance rising awareness and demand with the appropriate increases in distribution to support sustainable long-term growth. Our Modelo Chelada brands delivered an increase of approximately 4% in depletions and [Indecipherable] remained a top 15 share gainer in the category. As noted earlier, our Chelada brands are facing a challenging consumer backdrop in the convenience channel, but we expect this to only be a near-term headwind and for the brands to return to the growth profile more in line with expectations provided at Investor Day.
All in, looking ahead, we aim to build on the sequential acceleration we have seen in volume growth across our core brands by continuing to make progress across the key volume growth drivers for the business, increased distribution, consumer led innovation and attracting new legal drinking age consumers across our brands, as well as by deploying continued incremental marketing investments in Q4.
Moving on to Wine and Spirits. As announced last month, our decision to divest SVEDKA builds on the actions we have taken over the past several years to align our Wine and Spirits portfolio with evolving consumer preferences and growing market sectors, focusing on higher-end brands. To that end, we are pleased to announce this morning the closing of that transaction, and we look forward to continuing to drive the growth of our higher end craft spirits portfolio, which in the third quarter delivered depletion increase of approximately 9%. Conversely, the impact of ongoing consumer demand headwinds in the wine category, particularly in the lower price segments and of retailer inventory destocking remain the main drivers of a decline in Wine and Spirits shipments of 16% year-over-year, which in turn was the primary driver of the respective 14% and 25% declines in net sales and operating income for that business.
Our Fine Wine portfolio, however, achieved depletion growth of 6%. And our largest premium wine brands, Meiomi and Kim Crawford, delivered depletion increases of over 7%. This is aligned with our focus on delivering growth and improving margins by driving our higher-end brands and operating efficiencies while also seeking to deliver value from our mainstream brands.
Against that backdrop, the business remains focused on continuing to advance in several areas. First, the tactical pricing and marketing support actions we are taking in selected markets to accelerate our Top 10 largest brands; second, with better alignment with our distributor partners to help improve performance in our largest markets and channels; and third, cost savings and operational efficiency initiatives to drive leverage to the bottom line. In light of continued consumer demand headwinds previously noted, we have updated our fiscal '25 outlook for wine and spirits business to net sales and operating income declines of 5% to 8% and 17% to 19%, respectively.
In closing, we continue to manage a softer consumer backdrop due to macroeconomic headwinds and expect to deliver a very solid fiscal year underpinned by our continued progress against the key growth drivers of our beer business and our proactive actions to improve the performance of our wine and spirits business.
And with that, I'll turn the call over to Garth, will give you more details on our financial results and outlook. Garth?
