Garth Hankinson
Chief Financial Officer at Constellation Brands
Thank you, Bill, and good morning, everyone. As usual, my discussion of our Q2 fiscal '25 performance will focus mainly on our comparable enterprise results, accompanied by business segment details. Let's get started with our enterprise results. For the quarter, enterprise net sales grew 3% while enterprise operating income decreased 226% on a reported basis, and increased 13% on a comparable basis. The increases in enterprise net sales and enterprise comparable operating income were driven by strong results from our beer business, which were partially offset by ongoing category headwinds affecting the performance of our wine and spirits business, both of which I will address in more detail shortly.
The decline in reported enterprise operating income reflects a non-cash, goodwill impairment loss for the wine and spirits business of $2.25 billion. As noted in our updated guidance last month, we now expect enterprise net sales to grow between 4% to 6% for fiscal '25 and for enterprise comparable operating income to grow 8% to 9% for the full year.
At an enterprise level, we remained confident in our ability to deliver against our initial double digit comparable EPS growth expectations as demonstrated by our decision to raise the lower end of our full-year comparable EPS outlook during our recent guidance update. With that range now set at $13.60 to $13.80.
Now I'll turn to a more detailed review of our Q2 fiscal '25 results. To start, our beer business net sales grew by 6%, representing an uplift of $137.5 million. This was driven by beer shipment volume growth of 4.6% in favorable pricing, which added $50.2 million to the overall net beer net sales increase. For the full fiscal year, we continue to expect pricing to account for 1% to 2% of our net sales growth, reflecting both the muted pricing from the first half of this year, which was driven by lapping outsized pricing from last year, as well as targeted price actions we are taking in the second half of fiscal '25.
Beer depletions grew 2.4%, marking our 58th consecutive quarter of growth. As a reminder, in the second quarter, we had one less selling day and the impact of a selling day variance to our volume growth performance has historically been between 0.5 percentage points to 1.5 percentage points, depending on the day or week lost or gained. Also, as Bill noted, beer depletions for the quarter were impacted by the recent challenging macroeconomic backdrop where rising unemployment rates have impacted consumer behavior. That said, we are pleased to have had our beer business once again outperform the category and sector in dollar sales in the second quarter, and in particular to have once more won the 4th of July holiday as the top share gaining supplier in Circana dollar sales, growing 5.1% and gaining 1.2 share points of total beer and 1.3 share points of high-end beer.
Our on-premise depletions grew 5% and accounted for approximately 11% of our total volumes. Corona Extra remains the number one packaged beer by dollar sales in the on-premise, while Modelo Especial continues to hold its number four beer position on draft in the U.S., up from the number five spot last fiscal year.
For the second quarter, beer shipment growth outpaced depletion growth as distributors proactively managed inventory levels to supply the higher volume summer season. For the full fiscal year, we expect absolute shipment and depletion volumes to be closely aligned with each other and for the quarterly share of full year volumes across both of those metrics to be in line with those of fiscal '24.
As we look ahead to the balance of the fiscal year for the beer business, I'd like to take a moment to reiterate our updated outlook announced last month. Beer net sales are now expected to grow between 6% to 8% for fiscal '25, reflecting the incremental macroeconomic headwinds we have seen this year affecting the consumer as noted earlier. We believe these headwinds are transitory in nature, and while our consumers are cautious, they also remain very loyal to our brands, as they seek more value-oriented packs and channels to manage their spend in this environment.
We are focused on managing the levers that we can control and continue to advance our cost savings and efficiency initiatives that allow us to accelerate incremental marketing investments toward our beer business to drive top line growth. We remain confident in our overall growth profile, which again continues to outperform our sector and industry, as we pursue further incremental points of distribution in the U.S. and push forward with our focused and disciplined innovation agenda, while building on the broader demographic tailwinds from our loyal Hispanic consumers.
I'll now turn to beer operating income and margins. The beer segment grew operating income by 13% and had a 270-basis point increase in operating margin to 42.6%. The strong performance in our beer operating income is largely the result of an over $65 million benefit from our ongoing cost savings and efficiency initiatives, partially offsetting an increase in COGS of 4%, excluding these savings, but inclusive of the impact of volume and foreign currency. As a reminder, approximately 25% of our total COGS are exposed to the Mexican peso, and we are approximately 90% hedged against that exposure for the fiscal year.
For the remainder of fiscal '25, we anticipate incremental cogs relative to net sales due to lower fixed cost absorption from normal volume seasonality. That said, it is important to recall that in Q4 we will lap the VAT write off from the same period last year, which will provide some favorability year-over-year, but will not offset the sequential impact of lesser fixed cost absorption due to seasonally lower volumes.
Marketing expense as a percentage of net sales was 7.6% for the quarter. For fiscal '25, we are still on track to be in line with our full year expectation of approximately 8.5%, as we continue to ramp up investments to support our core brands and during the NFL and college football season, particularly in Q3.
Other SG&A expense was 3.8% as a percentage of net sales, and we expect this ratio to increase in the second half of the year largely due to lower volumes yielding less cost absorption. This is in line with our expectation, and we can continue to anticipate our full year SG&A expense to be approximately 5% of net sales. Overall, for beer operating margins, we continue to expect to be at approximately 39% for fiscal '25. As just noted, we expect lower fixed cost absorption and incremental marketing investments to drive sequentially lower operating margins in the second half.
Moving on to the wine and spirits business, net sales for the segment declined 12% in the second quarter, driven largely by a 9.8% decrease in shipments. The decline was largely driven by ongoing challenges in the wine category, particularly in the U.S. wholesale marketplace, due to both weaker consumer demand and retailer inventory destocking. Accordingly, we remain focused on the ongoing tactical pricing and marketing actions shared at the beginning of this fiscal year, to help drive net sales improvement in the performance of our largest brands. As Bill noted, we are seeing some encouraging early results from these actions, and as a reminder, we continue to see the back half of the fiscal year is the higher volume period for our wine and spirits business due to historical seasonality related to vintage releases from our higher-end brands and incremental demand over the holiday season, as well as incremental benefits from the initiatives just referenced.
Operating income for wine and spirits business remained relatively flat with a decline of approximately $10 million, resulting in an 18.1% operating margin. Altogether, the decline in operating income and relatively stable margin performance were primarily impacted by unfavorable product mix and overall lower shipment volumes partially offset by higher contractual distributor payments.
Our marketing expense as a percent of net sales was 9.3%, which is slightly above our medium-term targets, as we continue to make near-term investments in our largest brands to help support our top line. An SG&A as a percentage of net sales was 14.8%, coming in line with our medium-term outlook. Looking forward to the remainder of the year for the wine and spirits business, we expect operating margins to benefit from mixed benefits due to the previously noted seasonally driven increase in volumes for our higher end brands, incremental volume benefits from the commercial execution initiatives also previously referenced to further support demand for our core brands and operational efficiency and cost savings actions similar to those being executed in our beer business.
As we face ongoing operating deleverage due to larger top line headwinds, we anticipate a full year 16% to 18% decline in operating income for our recently revised fiscal '25 guidance. Capping off the rest of the P&L, corporate expense for the quarter was approximately $58 million, reflecting a year-over-year decrease of $8 million or 13%, driven by a one-off real estate tax benefit in the second quarter. In the back half of fiscal '25, we expect a marginal increase, mainly due to the increase in compensation and benefits and digital capabilities investments, and for the full year, we continue to expect $260 million.
Interest expense for the quarter was $104 million, a 6% decrease from the prior year due to lower average borrowings, and an increase in capitalized interest from our investments in our breweries. As noted in our previously updated guidance, interest expense for the fiscal year is now expected to be approximately $430 million, as we see favorability from lower cost of borrowing and adjustments related to capitalized interest. Our comparable effective tax rate was 18.7% compared to 17.8% for the corresponding quarter last year, and we continue to expect our full year tax rate to be 18.5%. And finally, free cash flow, which we define as net cash provided by operating activities, less capital expenditures. For the first half of fiscal '25, we generated free cash flow of $1.2 billion, a 12% increase from the prior period.
As a reminder, we expect free cash flow to be between $1.4 billion and $1.5 billion for the fiscal year, as we reach the high watermark year of capital expenditures in our beer business, medium term outlook provided at our Investor Day. Beyond fiscal '25, we continue to expect an uplift in free cash flow generation, particularly as we complete the initial phase of our new Veracruz brewery by late fiscal '26 or early fiscal '27.
To conclude, we continue to make solid progress in delivering growth from our strong portfolio of brands, margin expansion from our relentless pursuit of operational efficiency and cost discipline, and against our disciplined and balanced capital allocation priorities. That said, in light of constantly evolving macroeconomic and geopolitical dynamics, we continue to closely monitor for any signs of ongoing pressures on the consumer, and we plan to continue to take proactive actions to mitigate these possible headwinds and maintain the momentum of our brands with consumers, such as reinvesting incremental cost savings into high return marketing opportunities and advancing our price pack architecture efforts. And as we've always done, we will continue to provide timely updates to our stakeholders as we develop any additional relevant insights on our consumers or should there be any material changes to our expectations, both favorable or unfavorable.
As I wrap up, I want to thank all of you for your support, as we continue to execute against our stated initiatives. And with that, Bill and I are happy to take your questions. Thank you.
