Garth Hankinson
Chief Financial Officer at Constellation Brands
Thank you, Bill, and hello, everyone. Q3 was another quarter of strong execution by our beer business. This continued strength coupled with tax favorability enabled us to deliver 8% comparable basis diluted EPS growth for the quarter excluding Canopy. As a result, we have increased and narrowed our full-year fiscal 2022 comparable basis diluted EPS target to a range of $10.50 to $10.65 versus our previous guidance of $10.15 to $10.45. This range excludes Canopy equity earnings, includes an increase in beer operating income guidance, and reflects a decrease in the tax rate for fiscal 2022. Now let's review our Q3 performance and full-year outlook in more detail where I'll generally focus on comparable basis financial results. Starting with beer, net sales increased 4% driven by shipment growth of 3% and favorable price partially offset by unfavorable mix. As a reminder, we're lapping a significant inventory rebuild in Q3 of the prior year which generated 28% shipment growth.
Depletion growth for the quarter came in above 8% driven by the continued strength of Modelo Especial and explosive growth of Corona Extra as well as the continued return to growth in the on-premise channel. Again keep in mind the difficult volume overlap we encountered during quarter as we faced a 12% depletion growth comparison driven by robust inventory replenishment at the retailer in the prior year. On-premise buying accounted for approximately 12% of the total beer depletions during the quarter and grew strong double digits versus last year. As a reminder, the on-premise accounted for approximately 15% of our beer depletion volume pre-COVID and was only 8% of our depletion volume in Q3 fiscal 2021 as a result of on-premise shutdowns and restrictions due to COVID-19. Selling days in the quarter were flat year-over-year and please note that in Q4, there is one additional selling day.
Cases shipped exceeded cases depleted as distributor inventory levels began to rebuild during the quarter. Inventories are expected to return to normal levels by the end of the fiscal year as shipment volume is expected to continue to exceed cases depleted for the remainder of the fiscal year. Moving on to beer margins, Beer operating margin decreased 130 basis points versus prior year to 41.3%. Benefits from favorable pricing and marketing planning were more than offset by unfavorable costs. The expected increase in COGS was driven by several headwinds that included the following. First, increased material cost due to rising commodity prices and inflationary headwinds that on average are in the mid to high single-digit range predominantly driven by wood pallets, aluminum, steel, and cartons. Please note that this range includes the impact of hedging where possible.
Second, increased brewery cost driven by labor inflation in Mexico, increased headcount, incremental spend related to capacity expansion, and annual brewery maintenance that was performed during the quarter. As a reminder, the annual brewery maintenance took place during the fourth quarter last fiscal year. And third, a step-up in depreciation expense largely due to the incremental 5 million hectoliters at Obregon completed earlier this fiscal year. These COGS headwinds were partially offset by favorable fixed cost absorption driven by increased production levels. Marketing as a percent of net sales decreased 130 basis points to 8% versus prior year as we have returned to our typical spending cadence which is weighted more heavily towards the first half of the fiscal year. In the prior year, a significant amount of marketing spend was shifted from the first half to the second half of the fiscal year due to COVID-19-related sporting and sponsorship event cancellations and/or postponements.
Additionally, we continue to expect full-year spend as a percent of net sales to land in the 9% to 10% range, which is in line with fiscal 2021 spend of 9.7% of net sales. For full-year fiscal 2022, we now expect net sales growth to land in the 10% to 11% range and operating income growth to land in the 6% to 7% range reflecting the continued strength of our core beer portfolio. As previously communicated, we expect price increases within our beer portfolio to land slightly above our typical 1% to 2% range. However, we anticipate this incremental pricing favorability to be partially offset by unfavorable net sales mix primarily driven by a shift in package types and return of on-premise draft SKUs.
We continue to expect our gross margin to be negatively impacted for the fiscal year as benefits from price and cost savings agenda are expected to be more than offset by cost headwinds predominantly driven by significant step-up in depreciation and increased inflation across numerous cost components as the inflationary environment resulting from economic supply chain and other by-products of the pandemic continues to be dynamic and variable. We now anticipate these elevated inflationary pressures to persist well into fiscal year 2023 and expect inflation on the commodity spend component of direct materials to land on average in the high single-digit to low double-digit range next fiscal year. We will continue to maintain our disciplined approach to address these evolving conditions through our commodity hedging program, cost saving initiatives, and balanced price adjustments.
However, due to a persistent and tough inflationary environment and incremental depreciation driven by our capital expansion plans, operating margins could land below our stated 39% to 40% range in fiscal 2023. Let me reiterate that these are still best-in-class operating margins within our industry, which reflects the strength of our core beer portfolio and efficiencies of our operations. We will continue to refine our outlook for fiscal year 2023 and will provide more details and official guidance during our Q4 earnings call in April. Moving to wine and spirits. Q3 fiscal 2022 net sales declined 25% as shipments declined approximately 39%. Excluding the impact of the wine and spirits divestitures, organic net sales increased 3% driven by shipment growth of approximately 3%. Favorable price, incremental sales of crates to Opus One, and smoke-tainted bulk wine sales; all partially offset by unfavorable mix.
Depletions declined approximately 7% during the quarter and continued to be challenged by port delays for our international brands and distributor route-to-market changes in transition markets. Additionally, depletions faced a difficult overlap especially for our premium and luxury brands, which experienced robust growth during Q3 of the prior year. However, we expect depletion growth to accelerate during the fourth quarter driven by the continued strength of our higher-end brands led by The Prisoner Brand family, Meiomi, and Kim Crawford; a robust innovation agenda; and an easier buying overlap versus a year-ago. From a shipment perspective, we expect shipment growth for the fourth quarter to decelerate versus Q3 as we continue to right size distributor inventory levels for our mainstream brands.
Moving on to wine and spirits margins. Operating margin increased 140 basis points to 25.4% as decreased COGS, mix benefits from divestitures, and favorable price were partially offset by increased marketing and SG&A as a percent of net sales and unfavorable mix from the existing portfolio. As expected, lower COGS were driven by net favorable fixed cost absorption, lower rate raw materials, and cost savings initiatives partially offset by increased transportation cost. The net favorable fixed cost absorption resulted from lapping the unfavorable impact of $20 million in the prior year, which was a result of decreased production levels due to the 2020 US wildfires. This benefit for the quarter was partially offset by unfavorable fixed cost absorption resulting from decreased production levels in New Zealand due to a late frost during their harvest season earlier this year. Marketing and SG&A as a percent of net sales increased versus the prior year due to the loss of topline leverage resulting from the divestitures.
In the prior year, a significant amount of marketing spend was shifted from the first half to the second half of the fiscal year due to COVID-19 related cancellations and/or postponements. As a result, marketing as a percent of net sales for Q4 is expected to be lower than the prior year. For the full year, we expect marketing as a percent of net sales to be in the 10% range. For full-year fiscal 2022, we now expect net sales and operating income to decline 21% to 22% and 23% to 25%, respectively. Excluding the impact of the wine and spirits divestitures, organic net sales is now expected to grow in the 4% to 6% range versus our previous guidance of 2% to 4%. It is important to note that the increase in our topline guidance is mainly due to incremental shipments to support our route-to-market transition earlier this fiscal year and revenues associated with sales of smoke-tainted bulk wine. Both are one-time in nature and thus we do not expect them to be repeated in future years.
As such, going forward we remain confident in our medium-term topline growth algorithm for the wine and spirits business 2% to 4%. Looking ahead to fiscal year 2023, we expect significant cost increases for the business including supply chain disruptions, inflationary cost pressures on product, freight, and warehousing cost. However, in order to mitigate some of these cost headwinds, we intend to take incremental price that will be staggered throughout the first half of calendar year 2022. We will continue to work through the puts and takes of our fiscal -- of our full-year fiscal 2023 outlook and will provide more details and official guidance during our Q4 earnings call in April. Now let's proceed with the rest of the P&L. Fiscal year-to-date corporate expenses came in at approximately $162 million, down 6% versus Q3 year-to-date last fiscal year.
The decrease was predominantly driven by compensation and benefits due to the reversal of an accrual for performance share units, which will not be earned due to not achieving the threshold level of earnings performance from our Canopy investment, and a favorable foreign currency event. These tailwinds were partially offset by an increase in consulting services and T&E spend. We now expect full-year corporate expenses to approximate $230 million reflecting the year-to-date compensation and benefits favorability. Comparable basis interest expense for the quarter decreased 8% to $88 million versus prior year primarily due to lower average borrowings. We expect fiscal 2022 interest expense to land towards the midpoint of our previous guidance range of $355 million to $365 million.
Our Q3 comparable basis effective tax rate, excluding Canopy equity earnings, came in at 14% versus 17.7% in Q3 last year primarily driven by the timing and magnitude of stock-based compensation benefits partially offset by higher effective tax rates on our foreign businesses. We now expect our full-year fiscal 2022 comparable tax rate excluding Canopy equity earnings to approximate 19.5% versus our previous guidance of 20%. This 0.5 point decrease primarily reflects the impact of increased stock-based compensation tax benefits received during the quarter. Additionally, stock-based compensation tax benefits were weighted toward Q3 versus our previous expectation of Q4 resulting in a sequential rate increase to our implied Q4 tax rate which is now expected to approximate 23%. Moving to free cash flow, which we define as net cash provided by operating activities less CapEx.
We generated free cash flow of $1.8 billion for the first nine months of fiscal 2022 reflecting a 3% increase in operating cash flow offset by an increase in CapEx spending. CapEx spend totaled approximately $600 million, which included approximately $500 million of beer CapEx primarily driven by expansion initiatives at our Mexico facilities. Our full-year CapEx guidance of $1 billion to $1.1 billion, which includes approximately $900 million targeted for Mexico beer operations expansions, remains unchanged. Furthermore, we continue to expect fiscal 2022 free cash flow to be in the range of $1.4 billion to $1.5 billion. This reflects operating cash flow in the range of $2.4 billion to $2.6 billion and the CapEx spend previously outlined. As Bill mentioned, our beer business continues to significantly outperform the US beer industry driven by robust consumer demand and it is essential that we invest appropriately to support the expected ongoing growth momentum for our exceptional beer brands.
As such, we have updated and increased our brewery expansion investment plans in Mexico. Total capital expenditures for the beer business are now expected to be $5 billion to $5.5 billion over the fiscal 2023 to fiscal 2026 time frame with the majority of spend expected to occur in the first three years. In total, this investment will support an incremental 25 million to 30 million hectoliters of additional capacity and includes construction of a new brewery in Southeast Mexico in the state of Veracruz as well as continued expansion and optimization of our existing sites in Nava and Obregon. Please note that this investment includes the previously disclosed beer CapEx guidance of $700 million to $900 million annually during the fiscal 2023 to fiscal 2025 time line to support a 15 million hectoliter buildout between our Nava and Obregon facilities. As a reminder, our existing brewery footprint currently supports 39 million hectoliters between Nava and Obregon.
In closing, I'd like to reiterate our medium-term growth expectations for our beer business. As Bill and I outlined, we expect continued momentum and thus continue to target topline growth in the 7% to 9% range over the next three to five years, which includes 1 point to 2 points of price and implied volume growth in the mid to high single-digit range. This expectation provides us with the conviction to support incremental capital investments in Mexico.
With that, Bill and I are happy to take your questions.