Constellation Brands Inc (STZ) — Q3 2025 Earnings Call Transcript

Thank you, Kevin. Good morning, all. Happy New Year and welcome to Constellation Brands Q3 Fiscal '25 Conference Call. I'm here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO. As a reminder, reconciliations between the most directly comparable GAAP measure and any non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the company's website. Please refer to the news release and Constellation's SEC filings for risk factors, which may impact forward-looking statements made on this call. Following the call, we'll also be making available in the Investors section of our company's website a series of slides with key highlights of the prepared remarks shared by Bill and Garth in today's call. Before turning the call over to Bill, in line with prior quarters and as Kevin just noted, I'd like to ask that we limit everyone to one question per person, which will help us end our call on time. Thanks in advance and now here is Bill.

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 slower 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 in dollar sales growth in 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 pack formats released over the last couple of years is within the 20% to 40% range provided in 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 convenience 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 2.9x net leverage ratio on a comparable basis in the third quarter, still slightly below our 3x 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 business' 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, trailed 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 taken 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 in Q3 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 U.S. tracked channels. We continue to see a long growth runway ahead for Modelo Especial as 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 U.S. 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 #4 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 #3 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 Limón y Sal 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-priced 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 the wine and spirits business to net sales and operating income declines of 5% to 8% and 17% to 19%, respectively. In closing, we continued 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.

Thank you, Bill, and good morning, everyone. As usual, my discussion will focus primarily on comparable enterprise results accompanied by business segment details. Let's get started with our enterprise results. For the third quarter of fiscal '25, enterprise net sales were relatively unchanged year-over-year as moderated growth from our beer business was offset by the decline in our wine and spirits business. Enterprise operating income on a reported basis was in line with the prior year and on a comparable basis declined by 2%, reflecting growth from our beer business and favorability in corporate expense being more than offset by the decline in our wine and spirits business. Comparable EPS was $3.25 for the quarter and was relatively flat year-over-year as the decline in comparable operating income was offset by favorability in unconsolidated investments from the transition in our Canopy ownership to exchangeable shares and the impact of a more favorable comparable effective tax rate. Before I get into the segment details, I would like to provide an update on our enterprise guidance for fiscal '25. We now expect enterprise net sales growth of 2% to 5%, comparable operating income growth of 6% to 9%, and comparable EPS to be between $13.40 and $13.80. These new enterprise guidance targets reflect changes to the net sales and operating income growth targets for both business segments that Bill referenced earlier as well as a few additional updates that I will cover in more detail shortly. Now diving into the business segment details for the quarter. Starting with our beer business. Net sales grew by 3%, a $64 million increase, driven by beer shipment volume growth of 1.6%, a price uplift of 2% or $39 million from targeted actions taken during the fall, and a 30 basis point headwind from unfavorable mix as consumers continued to shift to value-oriented larger pack sizes, particularly in cans. Beer depletions grew 3.2%, an acceleration from Q2 but reflected the ongoing consumer dynamics that Bill discussed. Regarding selling days, they were flat in the third quarter. And as a reminder, for the full year, there will be one less selling day, which already transpired in Q2. Our on-premise depletions grew nearly 5% and accounted for over 11% of our total volumes, supported by Modelo Especial and Pacifico as the top 2 dollar share gainers in draft, and Corona Extra maintaining its top spot in packaged on-premise. Off-premise depletions grew nearly 3% and accounted for approximately 89% of our total volumes. Within the off-premise channels, independent retailers not captured in data achieved a lower growth rate, mainly driven by convenience and liquor store channels in most of our top 10 markets as well as independent grocers in our top state of California. Across these key states, unemployment rates for both total and Hispanic consumers remained elevated relative to the national average, which we continue to believe is a fundamental near-term driver for the relatively lower depletion growth rates we have seen in these markets over our last couple of fiscal quarters. However, as Bill noted, while it is uncertain whether consumers in these states and channels will revert to more normalized purchase behaviors in the near term, we do not anticipate these trends to be a structural headwind over the longer term. On that note, shifting to our full-year expectations for top line drivers. While the third quarter beer shipments were outpaced by depletions due to normal seasonality and planned maintenance at our breweries, we continue to expect full-year absolute shipment and depletion volumes to be closely aligned. And also from a full-year perspective, as Bill noted, we now expect net sales for our beer business to be 4% to 7%, inclusive of 1% to 2% pricing. Moving to beer operating income and margins. Operating income grew by 2%, and we had a 60 basis point year-over-year decline in operating margin to 37.9%. The increase in operating income was driven by higher gross profit, partially offset by increased marketing investments. Improvement in gross profit was largely a result of the previously mentioned net sales drivers and a $40 million benefit from ongoing cost savings and efficiency initiatives, partially offset by an absolute COGS increase of nearly 1%, excluding these savings. Marketing expense as a percent of net sales was just over 10% for the quarter, driven by the incremental marketing actions that Bill discussed. Our full-year expectation for marketing expense as a percent of net sales remains approximately 8.5%. Other SG&A expense was 5% as a percentage of net sales in line with our unchanged full-year expectation. From a fiscal '25 full year perspective, in terms of operating income, we now expect our beer business to grow between 9% to 12%, while our operating margin expectation remains unchanged at approximately 39%. Shifting to our wine and spirits business. Net sales declined just over 14% in the third quarter, largely driven by shipment volume decline of over 16%. The volume decline was largely a result of the ongoing category headwinds in the wine category, particularly in the U.S. wholesale market from weaker consumer demand, as well as continued inventory destocking by retailers. Despite these persistent challenges, we continue to expect improved organic shipment volume growth performance in our wine and spirits business in the fourth quarter as we anticipate more fully realizing the benefits of the pricing, marketing, and distributor initiatives we launched at the beginning of this fiscal year, while also benefiting from the historical seasonal trends of the business. Additionally, retailer inventory destocking has broadly started to stabilize, which we expect will result in additional tailwinds to support demand growth moving forward. As Bill noted, for fiscal '25, we now expect wine shipments organic net sales to decline 5% to 8%, reflecting persistent volume headwinds in the wine category and excluding $23 million of net sales following the recently closed divestiture of SVEDKA. Operating income for the wine and spirits business declined by $32 million, resulting in an operating margin of 22.1%. This decline was primarily driven by a decline in overall shipment volumes. Marketing expense for the wine and spirits segment as a percentage of net sales was just over 11% and remained elevated above our medium-term target as increased investments in our largest brands continue, the vast majority of which are for our higher-end brands. Other SG&A as a percentage of net sales was over 14%, consistent with our medium-term targets. In line with the adjustments to our net sales expectations, we are now expecting fiscal '25 operating income for our wine and spirits business to decline 17% to 19%, excluding $10 million of gross profit less marketing of the SVEDKA brands that are no longer part of the business following their divestiture. Shifting to the balance of the P&L. Corporate expense for the third quarter was $63 million, a 3% decrease driven by lower compensation and benefits, partially offset by higher consulting services and increased depreciation expense as a result of our corporate headquarters relocation. Following this decrease, we have updated our fiscal '25 corporate expense outlook to be $250 million. Interest expense remained flat year-over-year and for the quarter was $104 million. For the full year, given continued favorability from lower average borrowings and adjustments related to capitalized interest, we now expect our fiscal '25 interest expense to be $410 million. Comparable effective tax rate was 16.3% compared to 18% for the corresponding quarter last year and we continue to expect our full-year comparable tax rate to be approximately 18.5%. Wrapping up with free cash flow, which we define as net cash provided by operating activities less capital expenditures. We generated year-to-date free cash flow of $1.6 billion for fiscal '25, a 13% year-over-year increase. This strong cash flow generation has enabled us to reach and maintain a net leverage ratio below our stated target, return over $1.2 billion to shareholders in dividends and share repurchases through November of 2024 and continue to advance our brewery investments in a disciplined and agile manner. As we look to the remainder of fiscal '25, we now expect to deliver annual operating cash flow of $2.9 billion to $3.1 billion and free cash flow of $1.6 billion to $1.8 billion, both above our initial targets and to continue to deploy that cash with a balanced and thoughtful approach to capital allocation. With regards to our brewery expansions and given our agile modular approach to these projects, we have shifted the completion and planned start-up of our latest addition at our existing breweries in Mexico from the end of fiscal '25 to fiscal '26. The timing of our new brewery in Veracruz remains on track, with the completion of the initial phase of that facility anticipated by late fiscal '26 or early fiscal '27. While the timing adjustment of the existing breweries expansion has shifted some of our beer CapEx, we previously anticipated for fiscal '25 into fiscal '26, we continue to expect to deploy approximately $3 billion in CapEx between fiscal '25 and fiscal '28. In closing, we made strong progress against our strategic initiatives this quarter and maintain a solid growth trajectory for the enterprise. We continue to invest behind the momentum of our brands, drive operational efficiencies, and maintain cost discipline and provide strong cash generation while still executing against our capital allocation priorities as we have done for the last several years. We will continue to closely monitor the subdued spend and value-seeking trends we have seen develop across our consumer base and the economic drivers influencing that behavior as well as other possible macro shifts, particularly any changes arising from potential tariff policies. As always, we will seek to balance our consumer obsession and our value creation commitment to our stakeholders as we focus on executing against our strategy and stated priorities. Thank you all for your continued support as we approach the close of fiscal '25. With that, Bill and I will now be happy to take your questions.

Bill, just wanted to take a bit of a step back on the drivers behind the softness you're seeing on the beer depletion front. If you had to separate that out between the short-term consumer weakness you focused on with the subdued spend and the value-seeking behavior that you mentioned on the call versus some of the longer-term concerns in terms of health and wellness, whether GLP or demographics, maturation of the beer brands in your portfolio, cannabis, et cetera, what are your sort of thoughts on if you're seeing any pressure from some of those more enduring longer-term points versus the short-term dynamics that you mentioned? And just putting it all together, how might that impact the way you think about long-term beer revenue growth guidance?

Our perspective is that the duration of the recent fluctuations has been slightly longer than we expected, but we don’t consider this to be a structural issue. We don’t perceive any long-term challenges impacting the business. There has been an increase in unemployment in 31 states, even though the overall rate has remained stable, and this always has an effect. Additionally, a recent article highlighted consumer spending trends for those earning $50,000 or less, which represents a segment of our market. It’s important to note that while the overall consumer spending basket has declined, the proportion of alcohol within that basket has stayed consistent. We anticipate emerging from this downturn, and we are optimistic that this will occur in the near future.

I think maybe just to talk a bit on capital allocation. How do you maybe think about the right amount of CapEx that you're deploying into new capacity given that we've got this slowdown? And if it's macro, we don't really know how long it will be, maybe delaying Veracruz or pushing out some of this CapEx. And then also, when you think about the returns on those investments and maybe the risk to the returns on those investments, how do you think about that capital deployment versus just buying back a much larger amount of shares?

Yes. I think a couple of things. I'll start and see if Garth wants to add anything into that. One of the things we've said consistently is that all of our expansions at this point are modular, which gives us the opportunity to advance them or delay them depending on any particular effects that we see in the marketplace. I think Garth has been really clear that our capital allocation priorities have been very consistently driven over the last several years. You've noted that we continue to buy a significant amount of shares in this quarter, $220 million. We still have $1.9 billion in authorization to buy back shares from our Board of Directors. So I think it's pretty clear what our focus of attention is, and you would expect that that's going to continue. Garth, anything you want to add to that?

No, just a couple of minor points, Kaumil. Our approach has been and remains very agile and modular. In my earlier comments, I mentioned that we are deferring some capacity coming online this year to next year. This illustrates the actions we have taken and will continue to take. As Bill noted, we still have $1.9 billion authorized under our existing share repurchase program. We've discussed the cash flow inflection we expect over the next couple of years, and we're excited about its implications. We will adopt a disciplined approach in deciding how to deploy that capital. It's worth mentioning that we are committed to our capital allocation priorities. We're close to completing our significant investments related to brewery expansion in Mexico. As we indicated earlier, we've now experienced two quarters at or below our targeted leverage ratio and have scaled back on M&A activities. Looking ahead, our capital deployment strategy will likely continue to focus on returning capital to shareholders.

All right. I actually had, I guess, a couple of questions on your updated guidance. First, while you lowered your full year beer net sales growth guidance, which makes sense, you actually widened the range, and there are only two months left in the year. And I certainly understand there's a lot of uncertainty, but I'm just curious why you might not have better visibility on your shipments, especially thinking about the upcoming spring reset. Then second, what will be the key drivers that will put you at the bottom end of this range maybe versus the top end? I guess, Bill, based on all your comments, I assume if unemployment for your core demographic weakens, this will certainly put you at the bottom end. But have you factored in the impact from the awful California fires?

Certainly. When we established this range, it reflects the risks we foresee, such as unemployment and potential tariffs. On the other hand, the upper end of the range indicates potential improvements if macroeconomic challenges lessen, which could lead to a broader range of positive outcomes. There has been significant volatility recently compared to historical patterns, so we deemed it wise to expand the range at this time. Regarding the fires, our thoughts are with everyone impacted in Los Angeles. We are focused on ensuring the safety of our people and are in the process of making donations to support the victims and those helping on the ground. The situation remains uncertain, but we have already started addressing it, and our guidance takes this unfortunate event into account.

Shifting to wine and spirits, I think it's fair to say we are currently experiencing a negative revision cycle in that business. You mentioned some positives, so could you elaborate on what hasn't gone as planned? What aspects of the turnaround plan may need adjustments, considering the situation continues to worsen and there aren't many indications from an external perspective that stabilization is occurring?

Sure. Well, as we said at the beginning of the year, it was going to take us nine to twelve months, and that's about what we're heading into at this point. I think you saw some firm shoots in Q3. Meiomi and Kim Crawford were up 7%. Our craft depletions, our craft spirits portfolio was up 9%. We continue to be hit very hard at the lower end of the business. The lower end of the business is not healthy. But I think the move that we made relative to SVEDKA is an important example of where we continue to be focusing our business toward the higher end, where we believe there's better growth potential and better margin and profit potential than the lower end of the business. That process is continuing. And we remain optimistic that we're going to continue to see some of these critical brands, those top 10 brands that we're focusing our attention on, continue to see improvement, as you saw with Meiomi and Kim Crawford as an example.

My question is about the beer category overall. If I’m interpreting the numbers correctly, we are set to ship in calendar 2024 close to what we shipped in 1990, indicating that the category is certainly struggling. I have a couple of related questions: First, do you agree with this assessment? Second, what changes do you think are necessary to turn this around? Seltzers have provided a temporary boost, but that trend seems to have diminished. What do you believe is required from a category standpoint to make a turnaround happen? Lastly, could you remind us of the volume growth rate in the U.S. beer category that supports your medium-term sales targets?

Sure. So obviously, the beer category hasn't been particularly healthy, as you point out. I think the differentiating points that need to be reflected relative to our business, is that we have consistently outperformed that category. Modelo, we continue to believe has a lot of runway for growth. Its awareness, household penetration, and so on remain tremendous opportunities. And as you saw from the distribution perspective, we're already halfway plus to the distribution growth that we had presented at Investor Day. So I think all that's positive. You then add on the growth potential that you see on brands like Pacifico and Victoria; frankly, they both have seen strong double-digit growth profiles for those businesses. The demographic profile of those businesses is slightly different. So those present some good opportunities. And then you look at things like Corona Sunbrew or Corona Non-Alcoholic, which again, put us into slightly different opportunities and situations than what we have been in before. Keeping in mind, when you sum all that up, Bryan, we continue to grow ahead of CPG and have for over one decade. So certainly, while there have been some challenges in the overall category, we have consistently outperformed not only the category but the CPG sector for literally over one decade, and we continue to expect to be able to do so going forward.

Great. Just two quick follow-ups. First, can you provide an overview of your internal beer inventories and those of your distributors, and how they compare to typical levels for this time of year? Secondly, what are your expectations for shelf space increases in 2025 relative to previous years? Any percentage would be appreciated.

Sure. Inventories are quite consistent with our historical levels. We've maintained a slightly higher inventory on this side of the border as a precaution against potential order disruptions, and we expect to continue this approach until we have a clearer understanding of the situation. This is simply a smart business strategy and doesn't affect our ongoing inventory levels. Given the significant double-digit gains we achieved in shelf positions last year, we anticipate that this coming year will likely be more normalized, where we consistently outperform and expand our shelf presence due to our success in the category, both in the premium segment and the overall beer market. While we haven't specified an exact percentage at this moment, we do expect to continue gaining shelf space because we've earned it.

I have a follow-up question on the volume. And also the real question is more how to think about the tariff risk? I understand, obviously, you're lobbying with some of the raw materials that you buy from the farmers in the U.S. But based on your long-term algorithm, if a tariff were to be implemented, would you prioritize volumes? In other words, take less pricing given the elasticity? Or would you say that 39% to 40% is our operating margin goal and that's going to be a hit for the beginning, but you want to stand behind it? And then from a follow-up perspective, I was just like, the range for volumes, I know Bonnie tried to ask that question, the range for volumes were very wide, given that you only have about 45 days left, it was like between minus 5% and plus 9%, if my math is correct. So I understand the puts and takes and the lack of visibility. But really, what would take you to the minus 5% given that you're still seeing volume growth from our understanding in the track channel.

Sure. Well, let's start with a minor correction on the last point, which is beer volume growth projection was 4% to 7%. It was not negative. It's 4% to 7% plus. So, just so we're clear on that particular point. Relative to the tariff situation, we have a number of what-ifs, as you would expect, and it's really too early to hypothesize about what might or might not happen. As you would expect, we have a lot of permutations that we have considered, and certainly, we'll adjust our approach depending on what plays out as we go forward.

And Andrea, I'll just follow up quickly on your question regarding Q4, right? So, as Bill alluded to in his prior answer to Bonnie's question, we acknowledge that the range right now is a little bit wider than we typically are given where we are in the calendar year. But this really is to acknowledge that there's potential for continued risk on the lower end, given macroeconomic conditions and whether or not they improve, stay where they are, or get worse, but also opportunity on the upper end as well. As we think about those macroeconomic risks potentially, obviously, as we've been talking about in this call, we're most concerned around unemployment, but there are others as well. Fortunately, the print today from unemployment seems positive. So hopefully, that continues and is a tailwind for us as we go through Q4.

I wanted to ask on beer margins. Obviously, this quarter, they were down year-over-year, but given the increase in advertising that you called out, as you look a little bit ahead in terms of the beer margin opportunity, can you talk a little bit about the opportunities from pricing, commodities, and also some of the FX considerations given the pace of weakness in recent months?

Yes. I mean, as it relates to beer margins. Look, I mean, the way we feel about beer margins really hasn't changed over the last several years. We think that the right way to think about our beer margin profile is in that 39% to 40% range. In any given year, we're going to have the tailwinds of incremental volume, more throughput through our footprint, obviously, very aggressive cost savings initiatives that we have every year, as well as the pricing actions we take. Offsetting those in any given year will be normal inflationary impacts. Obviously, as we build out our portfolio and our production footprint, we have more, the depreciation that comes on. And then obviously, there can be drags as it relates to fixed overhead absorption as you're growing into that capacity. So all up, all in, we continue to think that 39% to 40% is the right range for our beer margin, acknowledging that in any given year, we might have more headwinds, and we could fall below 39% like we did in '23 and '24, where we had outsized inflation. But there could be years where we have more tailwinds, like we did in '22, and we can deliver above 40%. So those are the puts and takes, and that's why we think 39% to 40% is the right range.

I understand you mentioned that price competitiveness is increasing in the light beer segment. I'm curious if you have a strategy in place to respond to this. Are you planning to be more aggressive with your promotions? Additionally, considering that industry volumes are generally weak, will the industry still be able to maintain pricing as usual, or is there a possibility that greater discounts will be necessary?

We're currently evaluating the situation in the light beer sector. As you know, we analyze it on a SKU by market basis, generally observing a 1% to 2% range. I believe the response remains positive because opportunities are still emerging, albeit selectively. It's not a sweeping market change; we are focusing on specific markets, analyzing their sales rates and growth patterns to see where potential exists. This approach also extends to different pack sizes, where we may find opportunities in single serves compared to larger packs or the other way around. We believe maintaining a 1% to 2% increase, which has been our consistent strategy, is still the best approach since larger fluctuations can be detrimental. We successfully avoided such drastic changes during COVID, sticking to our 1% to 2% strategy, which we believe is more favorable for consumers.

I was just hoping to ask on beer guidance for the fourth quarter but just maybe a couple of modeling considerations. Maybe just to start, shipments versus depletions. Garth, I think you mentioned that you still expect them to be closely aligned on a full-year basis. So I just want to make sure I heard that right, which would mean you would expect shipments to be a bit below depletions in the fourth quarter. And then just relative to the tracked data, you kind of saw a return to the low single-digit gap this quarter. You touched on the weakness in the non-tracked channels that might be driving that. So is this gap something we should expect as we move forward here?

Yes. So just on shipments and the depletions. On a full-year basis, we expect shipments and depletions to be largely aligned; you heard that correctly. As it relates to the gap between tracked and our depletions, look, I'll tell you what we say sort of every time we have this call, which is we don't use the tracked data to track our depletions. Obviously, we know that that's the data point that you have to use, but there are certainly limitations to that tracked data. Certainly, it only captures about 50% of our sales activity. And so that's something that you have to take into account. And there's been a lot of volatility, obviously, over the course of the last several years regarding that gap and how wide it has gotten. And for those questions as to what drives that gap, those are best suited for the data and not necessarily answered by us.

I wanted to revisit the topic of capital expenditures that Kaumil introduced earlier in the call. In your response, you emphasized the modular aspect of the ongoing expansions, suggesting you have discretion over capital expenditures. This seems clear regarding the expansions in Northern Mexico. However, I perceive that the commitments in Veracruz are somewhat more rigid. Can you clarify if this is accurate? Additionally, generally speaking, how much of the beer capital expenditures you've mentioned going forward would you consider truly discretionary through fiscal year '28?

Let me address the first part of your question. Yes, we are planning to open Veracruz in about 18 months, which aligns with our expectations. This timeline has been incorporated into our projected supply needs. My point about modularity is that if we need to increase capacity at Veracruz or Obregon in the future, we have the flexibility to accelerate or decelerate expansions as necessary. This is a significant improvement compared to several years ago when we were simply trying to meet demand. Today, we are in a much stronger position that allows for capital investments to enhance our facilities based on expected business growth.

I think the only thing I'd add to that, Bill, is just as you think about Veracruz and the fact that it will come online in the time frame in which we were previously discussing, it's important to note that the first module that comes online at Veracruz is only 3 million hectoliters. So it's a relatively small piece of the overall production footprint.

Great. Thank you, operator, and thank you all for joining today's call. In closing, while in the third quarter, we continued to manage a softer consumer backdrop due to macroeconomic headwinds, the growth of our beer business still outperformed that of the total beverage industry. And as a company, we also outpaced the total CPG sector, both on a dollar sales basis. Furthermore, we also continued to consistently deliver against our capital allocation priorities, including returning another $220 million to shareholders in buybacks in Q3, which brings our total year-to-date cash returns through share repurchases to approximately $670 million. Looking ahead, we have prudently lowered our growth outlook for fiscal '25 given the near-term uncertainty on when consumers will revert to more normalized spending. However, we continue to expect another solid year with our revised comparable EPS range still delivering double-digit growth from the midpoint and above, underpinned by our continued progress against the key growth drivers of our beer business and our proactive actions to improve the performance in wine and spirits. And with that, we wish you all a happy New Year, and thank you again for joining the call.