Prepared remarks
Good day, and thank you for joining. Welcome to the Brown-Forman Third Quarter and Year-to-Date Fiscal 2024 Earnings Call. The conference is being recorded. I will now turn the conference over to your speaker today, Susanne Perram, Vice President, Director, Investor Relations.
Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's third quarter and year-to-date fiscal 2024 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer; and Leanne Cunningham, Executive Vice President and Chief Financial Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict. You should not place undue reliance on any forward-looking statements, and except as required by law, the company undertakes no obligation to update any of these statements whether due to new information, future events or otherwise.
This morning, we issued a press release containing our results for the third quarter and nine months ended January 31, 2024, in addition to posting presentation materials that Lawson and Leanne will walk through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events and Presentations. In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures, a reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the company's financial condition and results of operations are contained in the press release and investor presentation. With that, I would like to turn the call over to Lawson.
Thank you, Susanne, and good morning, everyone. Thank you for joining us today as we share our third quarter and year-to-date results for fiscal 2024. Before we get into the specifics of Brown-Forman's performance, I wanted to take a moment to offer a few comments about the dynamics and trends within the broader spirits industry. The last few years have been some of the most volatile and complex in my 26 years in the spirits industry with a variety of factors creating noise within the system. This can make it hard at times to distinguish between short-term headwinds and long-term trends. The last few months have been particularly noisy as demand for spirits has been normalizing after more than two years of outstanding growth. To truly understand the current environment, however, it's important to reflect back on the beginning of the pandemic when the closure of the on-premise, limitations on travel and remote work prompted many consumers to shift their spirits consumption from bars and restaurants and invest in at-home bars for entertaining.
Once restrictions eased and bars, pubs and restaurants reopened, consumers began spending heavily on vacations and other experiences they missed during the lockdowns. In addition, many consumers continue to entertain at home. Many in our industry call this the COVID supercycle. In calendar 2023, after two-plus years of above average spending, consumers were getting back to more normal consumption patterns but were soon faced with high inflation and increased interest rates that made them reconsider when and how they purchase spirits. By the late summer of 2023, the spirits industry across much of the developed world, including the U.S., saw the impact of these changing consumer behaviors in the form of weakening takeaway trends. However, we continue to believe, as we mentioned last quarter, that these trends are a direct result of the volatility consumers experienced since the pandemic and do not imply a longer-term change in the way they consume and enjoy spirits.
At the same time, consumers were adjusting their behavior as a result of the pandemic. Brown-Forman had its own set of pandemic-related challenges to navigate. This included disruptions to supply chain logistics and glass supply constraints that impacted our historical distributor ordering patterns and created unusual comparisons over the past few years. Today, we have a supply chain that is adjusting back to normal levels of consumer demand, and at the same time it's also facing increased inflation, increased interest rates and increased competition. I share all of this to try and bring clarity to the difficult dynamics we've had to navigate and to explain why despite a challenging fiscal year, we continue to remain confident in the long-term health of the spirits consumer and the spirits industry. The other very important topic for Brown-Forman this fiscal year is the improvement in our gross margin.
This too has been a journey we've been on now for several years. We've continued to execute our pricing strategy through our enhanced revenue growth management capabilities and increased price. We've benefited from the growth of our super premium brands in the form of more favorable price mix and these improvements, along with the absence of the supply chain disruption costs in the year-ago period, more than offset higher input costs, and we're pleased with our strong gross margin expansion. Now let me provide a bit of perspective on our fiscal 2024 net sales. Our reported net sales growth increased 1% in the nine months of fiscal 2024 with flat organic net sales growth. These results compare against strong results in the prior year where strong consumer demand, higher pricing and the rebuilding of distributor inventories generated high single-digit reported net sales growth and double-digit organic net sales growth.
I encourage you to reference Schedule D, which illustrates five percentage points of impact to our organic net sales from an estimated net decrease in distributor inventories. If you factor in this impact, our top line results continue to be in the range of our longer-term trends and help support our belief that our business is solid and our brands remain healthy. In the nine months of fiscal 2024, the largest growth contributors to organic net sales growth were Jack Daniel's Tennessee Apple, Jack Daniel's RTD New Mix and Glenglassaugh. As you will recall, the international rollout of Jack Daniel's Tennessee Apple had been slowed by the pandemic-related impacts. However, as supply and logistics challenges were eased we were better able to meet consumer demand, which drove growth for Jack Daniel's Tennessee Apple, particularly in markets such as Brazil and Chile. We've also had a strong launch in South Korea, resulting in very strong double-digit growth for the brand.
Despite a challenging environment in Mexico, New Mix continued to deliver double-digit organic net sales growth as the brand benefits from higher pricing and continues to gain value share in the RTD category. Glenglassaugh continues to be a standout brand as its awareness and prestige among whiskey connoisseurs continues to grow. As we discussed last quarter, the brand continued to benefit from cask sales through its old and rare program. In addition, Glenglassaugh Sandend was named the 2023 Whiskey of the Year by Whiskey Advocate Magazine. This is our second year in a row that a Brown-Forman brand has received powerful and impactful acclaim from whiskey critics across the globe. If you'll recall, Jack Daniel's Bonded captured this most coveted global accolade in the whiskey industry back in 2022. Since I mentioned Jack Daniel's Bonded, I'll also note that collectively, the Jack Daniel's super-premium expressions delivered strong double-digit organic net sales growth in the year-to-date period.
This growth was led by Jack Daniel's Sinatra, Jack Daniel's Single Barrel Rye Barrel Proof and the newest member of the bonded series Jack Daniel's Bonded Rye. This is the result of our purposeful efforts to premiumize the Jack Daniel's family of brands and elevate our whiskey credentials through innovation and special launches. In doing so, we give both long-term friends of Jack Daniel's and new friends the opportunity to explore and discover within the Jack Daniel's family. Also included in this innovation is the Jack Daniel's and Coca-Cola RTD, which just celebrated one year since the national launch in Mexico. While it's still early in the brand's global launch, the Jack & Coke RTD has earned numerous awards, including best canned cocktail and best drink concept by Beverage Digest and was named the Coca-Cola Company's number one innovation in 2023. Jack & Coke is the number one RTD SKU in Great Britain and Poland and remains the number one whiskey-based RTD in the United States.
In less than 12 months, over 100 million cans have been sold in just 13 markets, increasing brand visibility not only for the RTD but also for Jack Daniel's full-strength portfolio. The Jack Daniel's RTD portfolio had minimal impact on the overall organic net sales results in the year-to-date period, largely due to the transition of the Jack and Cola business to Jack & Coke. We believe this transition is building a stronger, more premium and more global foundation that creates value and supports our long-term growth. The benefits from the premiumization trend continue to be evident in the organic net sales growth of Woodford Reserve, which returned to growth in the year-to-date period, driven by the brand's luxury expressions such as Batch Proof and the Masters Collection. Our founding brand, Old Forester, introduced the newest expression in its super premium Whiskey Row series Old Forester 1924, a 10-year-old whiskey with a suggested selling price of $115.
The Whiskey Row series continues to grow but also creates a halo for the parent brand, and I'm proud to say that Old Forester has recently crossed the 0.5 million nine-liter case milestone. And our newest super and ultra premium brands, Gin Mare and Diplomatico, entered our organic results in the third quarter and collectively delivered very strong double-digit organic net sales growth. To wrap up our top line performance, I'll share a few thoughts on Jack Daniel's Tennessee Whiskey, which was the largest offset to growth of our organic net sales. First of all, it is lapping an exceptionally high comp from the prior year period. Also, volume declined in the nine months of the fiscal year, mainly related to our route-to-consumer transition in Japan, the U.S. and the comparison against the inventory rebuild in Sub-Saharan Africa in the year-ago period. We believe these disruptions are circumstantial and temporary and are confident that Jack Daniel's remains in a position of strength with robust medium- and long-term performance and exceptional brand health.
For example, Jack Daniel's Tennessee Whiskey has again been named the most valuable spirits brand in the world by Interbrand, making this the eighth year in a row. In fact, based on our consumer insights research, Jack Daniel's Tennessee Whiskey ranks number one or number two across the measures of brand awareness, penetration and consideration across most markets. And we continue to support the brand's health and growth through the Make It Count global campaign, the Jack & Coke RTD and the McLaren Formula 1 sponsorship. We have strategies and plans in place to return Jack Daniel's Tennessee Whiskey to growth which we will share in more detail during our Investor Day later this month. While the path to normalization in the spirits category impacted our top line results, we continue to be pleased with our gross margin. As I shared previously, we have moved from contraction to expansion in the first nine months of fiscal 2024: our reported and organic gross profit increased 5% and 6%, respectively, both were ahead of the respective top line growth rates.
The strength and health of our brands, along with our continued brand building investments enabled us to increase price across many brands in our portfolio, which helped drive the 290 basis points of price/mix contribution to gross margin. Gross margin also benefited from the absence of supply chain mitigation costs, which more than offset higher input costs. As a reminder, in the prior year-to-date period, we incurred increased transportation and logistics costs in order to satisfy the demand from our distributors and retailers for the important holiday season. In total, favorable price mix, the absence of supply chain mitigation costs and lower tariff-related costs due to the removal of the U.K. tariffs on American whiskey more than offset higher input costs and the negative effects of foreign exchange and acquisitions and divestitures. This resulted in 250 basis points of reported gross margin expansion in the year-to-date period.
In summary, we continue to operate in a very dynamic operating environment that has impacted our short-term results. We believe that we will benefit from the evolution of our brand portfolio, long-term pricing and revenue growth management strategies as well as a moderating cost environment even as consumer demand normalizes. The spirits category offers attractive growth, healthy margins and high returns on capital, and we're well positioned globally with the premium and super premium brands in growing categories. We also have an organization of highly talented people who are committed to our strategic priorities and company values. I'd like to thank all of our Brown-Forman employees across the world for their focus on growing our brands and achieving our long-term ambitions. With that, I'll turn the call over to Leanne and she'll provide additional details on our geographic performance, other financial highlights as well as our updated fiscal 2024 outlook.
Thank you, Lawson, and good morning, everyone. From a geographic perspective, our emerging international markets collectively delivered 11% organic net sales growth and continue to lead the company's growth in the year-to-date period. Jack Daniel's Tennessee Apple, particularly in Brazil and Chile, once again led the growth due to our ability to meet strong consumer demand with the return of normal levels of supply. Jack Daniel's Tennessee Whiskey growth was led by Türkiye as momentum in the premium whiskey category continued. In Mexico, New Mix continued to deliver strong double-digit growth as the brand continued to benefit from our pricing strategy and gained share of the RTD category. In the travel retail channel, organic net sales grew 1% in the nine months of the fiscal year, which is impressive as it lapped 52% growth in the year-ago period when international airline travel and the cruise industry rebounded and nearly returned to pre-COVID levels.
Strong double-digit growth of our super premium American whiskeys such as Woodford Reserve, Jack Daniel's American Single Malt, our exclusive global travel retail offering, and Jack Daniel's Single Barrel was partially offset by declines in Jack Daniel's Tennessee Whiskey and Jack Daniel's Tennessee Honey. Turning to the United States, organic net sales decreased 2% driven by lower volumes, partially reflecting an estimated net decrease in distributor inventories of 2%. The impact on our year-to-date results due to the comparison against the significant inventory rebuilding during the first half of fiscal 2023 moderated as we believe distributor inventories normalized in the third quarter of fiscal 2023 and have remained at normal levels. Our pricing strategy, which led to higher prices across much of our portfolio, led by Jack Daniel's Tennessee Whiskey and El Jimador, helped to limit the decline.
Consumer demand for U.S. whiskey, particularly super premium, remains strong as U.S. whiskey is the second largest contributor to total distilled spirits value growth in Nielsen. The demand for our super premium Jack Daniel's products, Jack Daniel's Sinatra, Jack Daniel's Single Barrel Rye Barrel Proof and Jack Daniel's Bonded Rye along with our limited releases of Jack Daniel's 10- and 12-year old delivered strong growth and partially offset the decline in Jack Daniel's Tennessee Whiskey volume. The fastest-growing category in the U.S. remains the ready-to-drink category. It has been nearly one year since the launch of the Jack Daniel's and Coca-Cola RTD in the United States, and the brand continues to grow and gain share. Jack Daniel's RTD, led by Jack & Coke, remains a top 10 brand family by value in Nielsen. We continue to believe that our portfolio is well positioned to benefit from the consumer trends of premiumization and convenience.
Moving on to our developed international markets, collectively, organic net sales declined 6% for the nine months of fiscal 2024, driven by lower volumes, primarily reflecting an estimated net decrease in distributor inventories of 6%. The growth of Jack Daniel's Tennessee Apple, led by the continuing successful launch in South Korea, and Glenglassaugh's old and rare cask sales in Singapore was more than offset by declines in Jack Daniel's Tennessee Whiskey in Japan related to the estimated net decrease in distributor inventory due to the fulfillment of backlog orders in the second half of last year when supply was available to meet this demand coupled with the transition activities to our own distribution. We continue to progress as planned with our launch just a few weeks away on April 1. In addition, as we continue to drive and build our business in Europe, we are pleased to announce that we will establish our own distribution organization in Italy effective May 1, 2025.
Italy is one of the top five spirits markets in the European Union, making it an important market for driving the growth of our Jack Daniel's family of brands globally and in particular for our latest portfolio additions. Italy is the largest market for Gin Mare and the fifth largest market for Diplomatico rum globally. This market holds significant potential for future growth, and we believe this change will enable us to strengthen our commercial and brand-building capabilities while increasing consumer focus and prioritization of our portfolio. As Lawson has shared the details of our strong gross margin expansion for the nine months of fiscal 2024, I will now turn to our operating expenses and income. As we have shared with you in prior quarters, we allocated more brand-building investment in the early months of fiscal 2024 to support the launch of the Jack Daniel's and Coca-Cola RTD in the United States.
We also increased investment for Jack Daniel's Tennessee Whiskey due to the phasing of our investments. Our operating expenses continued to moderate through the nine months of fiscal 2024, which resulted in organic advertising expense growth of 7% in the year-to-date period. Similarly, organic SG&A investment also moderated through the nine months of fiscal 2024 as we continue to invest behind our people, primarily led by higher compensation and benefit expenses, resulting in an increase of 8% for the year-to-date period. Our year-to-date reported operating expenses, which decreased 11%, were impacted by three items: the absence of the prior year noncash impairment charge for the Finlandia brand name, the current year gain on the sale of Finlandia and the absence of the prior year post-closing costs and expenses related to the acquisition of Diplomatico and Gin Mare. In total, reported operating income increased 25% and organic operating income grew 2% in the nine months of fiscal 2024.
These results led to a 32% diluted earnings per share increase to $1.58 per share. Before moving to our outlook, I'd like to take the opportunity to provide you with an update on our share repurchase program that we announced on October 2, 2023. As you may recall, the Brown-Forman Board of Directors authorized the repurchase of up to $400 million of our outstanding shares of Class A and Class B common stock. I am pleased to announce that as of December 31, 2023, we have completed the program. Now turning to our updated fiscal 2024 outlook. As Lawson highlighted, global trends are normalizing after two years of very strong organic net sales growth in what has been a challenging and dynamic operating environment. We experienced softer-than-expected consumer trends during the important holiday selling season globally, which limited our expected top line acceleration. While we have to lap stronger shipments associated with the launch of Jack Daniel's and Coca-Cola RTD in the U.S. in the fourth quarter of fiscal 2023, the year-ago period is in line with longer-term historic trends.
We also expect to continue to benefit from our long-term pricing and revenue growth management strategies as well as the contribution from our recent super premium brand acquisitions, Gin Mare and Diplomatico. We now expect our organic net sales growth to be flat for fiscal 2024. Also in this fiscal year, we continue to believe our gross margin will expand as higher input costs driven by inflation will be more than offset by price mix and the absence of supply chain disruption. Our outlook for organic operating expenses to increase remains the same and assumes incremental advertising spend will be above our top line growth rate. Our expectation is that SG&A growth will remain higher than historical averages as we continue to expect higher compensation and benefit-related expenses and costs related to our transition to own distribution in Japan. Based on these expectations, we anticipate organic operating income growth to be in the range of 0% to 2% for the full fiscal year.
We have revised our expectation for the effective tax rate for fiscal 2024 to now be in the range of approximately 20% to 22%, and we now anticipate capital expenditures to be in the range of $230 million to $240 million for the full year. Before opening the call up to Q&A, I would also like to add a few comments on our recent capital allocation actions, in particular, the sale of our cooperage in Alabama, the pending divestiture of Sonoma-Cutrer and our long-standing commitment to our community and the environment. During the third quarter, we announced the sale of our cooperage in Trinity, Alabama to Independent Stave Company. In our continuing efforts to optimize our wood supply chain, we have committed to a long-term strategic relationship with Independent Stave Company to ensure a stable supply of high-quality barrels to meet our demand at a competitive price while creating efficiencies and optimizing capital allocation in our supply chain.
The relationship also allows for the expansion and diversification of our supply chain network. Brown-Forman will continue to own and fully leverage the Brown-Forman Cooperage in Louisville, Kentucky. This allows us to produce approximately half of the barrels required to support our needs while enabling us to continue developing and innovating for our brands and new expressions. Moving to Sonoma-Cutrer, the divestiture to The Duckhorn Portfolio and the assumption of an equity ownership position in the company, subject to certain customary closing adjustments and conditions, is still expected to close in the fourth quarter of fiscal year 2024. We continue to believe in the strength of the Sonoma-Cutrer brand and its future growth opportunities and that this transaction reflects our portfolio evolution strategy as well as our commitment to long-term value creation. And lastly, I would like to share that we have recently announced that in fiscal 2024, we have committed to a $22.5 million investment benefiting the Brown-Forman Foundation and DendriFund.
Brown-Forman Foundation was created in fiscal 2018 with the goal of helping fund our ongoing philanthropic endeavors with a focus on our corporate hometown of Louisville, Kentucky. The DendriFund, a nonprofit seed fund created by Brown-Forman and the Brown family in 2012, helps to promote a more sustainable whiskey industry with a focus on the three natural resources most important for the distillation and aging of whiskeys: wood, water and grain. As you know, at Brown-Forman, we take an integrated approach to value creation, where all aspects of our company contribute to and are fundamental to our strategy, including our commitment to environmental sustainability, alcohol and marketing responsibility, diversity and inclusion and contributing to the vitality of the communities in which we live and work. These investments are just two examples of how we are living our spirit of commitment.
In summary, we are adjusting to more normalized levels of consumer demand and a challenging and dynamic operating environment. As we look to the end of fiscal 2024, we believe that we have moved beyond the most difficult comparisons and disruptions of our fiscal year and will benefit from our long-term strategies as well as our portfolio evolution. We believe our portfolio of brands is strong as they are participating in growing categories and price segments and are driven by the consumer trends of premiumization and the desire for convenience and flavor. While we have more modest near-term expectations, we believe our long-term perspective will enable us to navigate the current environment and its short-term impacts as we have many times since our founding in 1870 and to deliver consistent and reliable performance and returns over the long term. We look forward to seeing many of you in person soon and sharing more about the confidence we have in our long-term ambitions at our Investor Day on March 20. This concludes our prepared remarks. Please open the line for questions.
Questions and answers
Operator provides instructions to participants. Our first question comes from Lauren Lieberman with Barclays.
Great. So I'm still, honestly, a bit confused around where the shortfall really stemmed from both in the quarter and going into Q4, because you talked about sequential improvement in the second half with what was expected. Third quarter looks like it decelerated sequentially despite the easier comp. I know you mentioned softer holiday demand globally, but again, that doesn't really help me with Q4. So could you maybe rank order where the areas were of short-term negative surprise? I think that would be really helpful.
Thanks, Lauren. I'll step back a bit broader first, then I'll narrow and specifically address your question. First, we think about our business in decades and generations, and I'd like to point you to Slide 5. When we think about the 2020 decade and the first three full fiscal years, our compounded annual growth rate for that period on an organic net sales basis is 9%, which is above our long-term growth algorithm. Moving closer into the period we're in now, we have lapped the first half of fiscal 2023, which was our strongest first half growth rate in the last decade. We discussed that in our last call and that was largely about rebuilding our inventories. If you look at last year through the nine months year-to-date and this year, the CAGR is 6%, which is in line with our longer-term growth algorithm. So stepping back, for this decade so far, we believe we're off to a good start, and we have confidence that our business is sound with a strong gross margin expansion and strong cash flow.
To your point about the holiday selling season, we did not expect the softness of consumer trends that we did see during that important holiday season, and that limited our top line acceleration. From a market perspective, it was the U.S. and key developed markets of the U.K. and France. In the U.K., part of the impact is our transition of the Jack Daniel's and Cola to the Jack & Coke business, but we also saw a slowing consumer and a very strong promotional environment during the holiday selling season. In France, we saw slowing consumer trends, even declining more than expected, with softness in the whiskey category and some trading down in that market. Additionally, the slowdown across many of our emerging international markets was more than we had expected in our guidance. One signal: in Schedule B when we reported last time, our shipments and depletions for our full-strength portfolio were in line.
Year-to-date, our depletions are ahead of shipments, which we believe indicates we are moving beyond what we had to lap. Regarding the second half, we have to lap the launch of Jack Daniel's and Coca-Cola RTD in the U.S. But when you look at the half as a whole, we have a comp of plus 5%, and where we believe we'll achieve that is with contributions from our newly acquired brands Gin Mare and Diplomatico, continued benefits from pricing and revenue growth management, and the resulting gross margin expansion. Our operating expense outlook remains the same, assuming incremental advertising spend above our top line growth rate. SG&A growth is expected to remain higher than historical averages due to higher compensation and benefit-related expenses and costs related to the transition to own distribution in Japan, which is set to go live on April 1. All of this is built into our guidance.
Let me give you a shorter version, Lauren. Christmas was weak around the world for us — we had a lot of markets that disappointed during the holiday season this year, which we did not expect when assessing our year-to-go period three months ago. It was surprisingly weak.
Okay. Then just one quick follow-up because that was a very full answer, both versions. What does that mean for inventory levels in Q4? I know, Leanne, you called out the shifts versus depletes and that the big picture laps are getting to a better — we're moving along. But shipments were also weak for Christmas, right? I'm trying to put the two pieces together, because if you expected Christmas to do better, usually the shipments have kind of happened, and it's the depletions that are the problem. So it's surprising to me if shipments were weak as well. Does that make sense?
Yes. I think what we saw was that we didn't see orders come in for the important holiday selling season at the level we traditionally see and at the level we had expected in late November and December. So those orders did not come in the way we expected during that timeframe. We continue to believe that our inventories through the supplier to the distributor to the retailers and the consumer are in line. This is about consumer takeaway at this point for us. That fluctuation in consumer takeaway being lower than expected really drove the results. For the U.S. specifically, you can see the net change in distributor inventory come back in line when you look from the first half to the third quarter to the nine months ended; that is coming much more back in line, which we expected it to moderate.
One moment for questions. Our next question comes from Bonnie Herzog with Goldman Sachs.
I actually have a follow-on on the conversation you were just having regarding inventory levels, but more at the consumer level. Do you have a sense of where consumer inventories are and how much you think consumer pantry destocking is impacting the category? And then your thoughts on when that might reverse? Lawson, do you still believe the category growth will get back to the mid-single-digit range? And then if so, how quickly could this occur?
Yes, Bonnie, it's a good question because we have talked a lot about consumer inventory over the last few weeks. There's really no exact way to measure consumer pantry levels, but my view looking at the last three to five years is that elevated growth rates during and after the pandemic mean some of that demand has been pulled forward and is sitting in pantry inventories. Spirits are not as fast-moving as food; they sit in the middle. It takes time to clear those consumer cabinets. We've said before that about 80% of our consumer base buys only two bottles a year, so many consumers have a bottle in their cabinet that is partially full. The deferred consumption should largely be over, and if you do the math around it, that should largely be behind us. That's why Leanne said we expect sales rates, particularly in the U.S., to be much closer to current consumer takeaway. On the timing to return to the historical mid-single-digit category growth, I've seen competitor commentary ranging from six to 18 months. For us, we believe next year we'll start to return to those normal levels as the inventory situation largely resolves. I can't be more precise than that, but overall I think the inventory issue will abate and the category will normalize over the next 12 to 24 months.
One moment for questions. Our next question comes from Andrea Teixeira with JPMorgan. You may proceed. This question is being asked by Drew Levine on behalf of Andrea.
This is Drew Levine on for Andrea. Following up on the U.S., you talked about some changes in consumer behavior internationally and in France, where there is some trade down. Can you talk about what you're seeing in the U.S.? Any value-seeking challenges or trade down? And what are you seeing from an on-premise perspective — any incremental softness there?
If you look at the Nielsen data over the last three months, we're not seeing trade down in the U.S. — $30 and above is growing materially faster than $30 and below, excluding RTDs. So we are not seeing trade down in our portfolio or across the industry yet. On the pricing environment, while there have been anecdotal reports of increased promotions, it isn't showing up in the aggregate data. Total distilled spirits (TDS) pricing across spirits is still positive, around plus one to one-and-a-half percent. Notably, tequila and U.S. whiskey in the U.S. have shown improved pricing over the last 13 weeks, which covers the holiday period. So despite anecdotes about deep discounts, the broader data indicate pricing is holding up, which I view as positive.
On-premise, we continue to see acceleration compared to October 2023. Brown-Forman is now growing low single digits in the on-premise channel.
One moment for questions. Our next question comes from Chris Pitcher with Redburn Atlantic.
Just a question on buying patterns. In the current environment, have you seen any structural changes in how retailers or wholesalers are buying given the interest rate environment and uncertainty? Is that making it harder for you to plan? And then a follow-up on Japan: you flagged that as being hit hard by destocking. With sales down significantly, it's hard to gauge the underlying revenue with the route-to-market changes. Could you give an idea of what scale the Japanese business is running at despite these distortions?
Regarding buying patterns, the cadence and timing of distributor orders have changed somewhat as we rebuilt inventories, which has made planning a bit harder. We're still lapping the timing of the prior inventory rebuilds, particularly in emerging international markets. The largest effect for us was the holiday selling season and consumers stretching discretionary spend due to rates and inflation. For Japan, this year involved two factors: we had backlog orders waiting for supply, which we fulfilled in the second half of last year, and we executed our route-to-consumer change. Coupled together, we haven't needed to make shipments to Japan this year. From a depletion basis, we remain excited about the health of our brands in the market. We continue to progress toward the own distribution model launching on April 1, and we view Japan as a long-term growth driver based on our investments.
Normally a market would drop out if it's not in the top 10 in a period. Can we assume the fact that you've still included Japan means it would be a top 10 market on a normalized basis?
Yes. How we set our top 10 is based on April 30 of our prior year results, which is why Japan is included.
One moment for questions. Our next question comes from Nadine Sarwat with Bernstein.
Two quick items. First, can you clarify whether the view that the U.S. market could get back to historical 4% to 5% value growth is referring to fiscal next year or calendar next year? Second, many investors are discussing moderation in consumption among younger consumers, GLP-1s, and other factors as potential reasons for weakness in U.S. spirits. Do you see these as structural changes with permanent implications, or are they more likely to be near-term headwinds?
Good question, Nadine. We've spent a lot of time studying these topics. If TDS had steadily declined over five years from 5% to 1%, that would suggest structural change. But what we saw was a sharp deceleration starting last summer, which looks more like volatility than a long-term structural decline. Trends like wellness, cannabis and GLP-1s could be headwinds over a long timeframe, but they haven't shown up as structural declines in the data to date. Cannabis legalization historically has not led to reduced alcohol consumption in a measurable way. My view is that the current macro factors are more likely short-term challenges. Predicting the turnaround timing — six months versus a year — is uncertain, but I believe these are largely short-term and that the market can return to normal levels.
Got it. Just to confirm: when you say returning to 4% to 5%, is that fiscal next year or calendar next year?
I'm not being that precise. It's more a return to normal over the next 12 to 24 months from our perspective.
We looked at prior periods when consumers were really stretched, such as 2000–2001 and 2008–2009. Those were followed by strong years of growth and the negative impacts were relatively short. While history isn't a perfect predictor, that pattern suggests a 12- to 18-month window for recovery in similar past circumstances.
One moment for questions. Our next question comes from Eric Serotta with Morgan Stanley.
First, could you expand on your comments about pricing and promotions? As a housekeeping item, when did your pricing actions in the U.S., particularly on Jack Daniel's, take effect? And given anecdotal reports and competitor commentary about increased promotions, what are you seeing in the data more broadly? Second, could you comment on barrel whiskey inventories industry-wide relative to future demand?
On pricing, our U.S. pricing actions began about three years ago. We've taken a low-and-slow approach compared to some competitors. That approach also applies across much of the rest of the world and is a main reason for our gross margin improvement. I have little interest in giving that pricing back. Regarding anecdotal reports of discounting, it's not showing up in aggregate data. We're not seeing widespread trade down, and pricing is holding up. A few brands may have gone aggressive in pricing, but we haven't seen meaningful rebounds for those brands that went deep, which suggests that aggressive discounting isn't the core problem. On barrel whiskey inventories, we have a robust semiannual planning process where we adjust our inventory levels based on long-term demand outlooks. Our work-in-process and aging inventories reflect our future growth expectations, and with the acquisition of Diplomatico, that increased as well. Many in the industry undertake similar long-term planning approaches. We constantly adjust our barrel inventories to reflect anticipated future demand.
I'll add that when you look at our balance sheet increases in aging inventories, those represent our long-term expectations and planning. We continually adjust based on our future demand outlook and the semiannual process captures changes in trends. The acquisition of Diplomatico contributed to increases in aging inventory as well, which is consistent with our multi-decade planning for barrel whiskey.
One moment for questions. Our next question comes from Peter Grom with UBS.
Thanks. I'm a bit confused by the commentary on top-line trajectory. On one hand, you're talking about normalization of category growth back to mid-single digits over 12 to 18 months. On the other hand, if you back out the distributor inventory headwind, you seem to already be at mid-single-digit growth. How should we think about the building blocks for your organic growth outlook over the next 12 to 18 months — should we focus on category growth or on lapping the distributor inventory headwind?
We look forward to providing full detail on the next fiscal year in our next call. We're not providing a detailed breakdown here beyond our current guidance.
You picked up on an important point. If you look at Schedule D and assume the distributor inventory issue is largely resolved, depletions are stronger than shipments this year. There's light at the end of the tunnel; we're getting there and getting comps under control.
That's helpful. Quick follow-up on gross margin: from a quarterly perspective, the sequential step down in the third quarter versus the second quarter is unusual. Was that simply a function of weaker volume performance, or was there something else driving that sequential step down?
When we think about gross margin, a couple of factors are at play. We lapped supply chain disruption costs; the majority of those costs were in our second quarter last year, so the benefit moderates as we move through the year. We also had inventory costing benefits in our fourth quarter last year that we have to comp this year. All of these items are built into our full-year guidance. Overall, we're pleased to have returned to gross margin expansion year-to-date, but the quarter-to-quarter fluctuations reflect those timing differences and the comps.
One moment for questions. Our next question comes from Filippo Falorni with Citi.
I have a question on the ready-to-drink (RTD) spirits category, particularly in the U.S. If you strip out RTDs from total spirits, trends look much more negative. Do you think RTD growth is more structural? Have you modeled the impact on your volumes given you sell less liquid in an RTD compared to a full bottle if RTDs continue to grow? Also, you mentioned RTDs can be gross margin dilutive; any thoughts on margin implications would be helpful.
RTDs are certainly boosting total distilled spirits (TDS) growth. Remove them, and TDS is closer to flat, which is as weak as we've seen in decades. RTDs meet many consumer trends, and I believe they are a powerful category. But over the long term, the industry has seen many booms and busts in new categories. Some RTD segments may be more structural than others. Jack & Coke is a special case because Jack & Coke is an extremely established consumer preference. We see RTDs as a volatile but important space. They do present structural implications for liquid volumes because RTDs contain less liquid than full bottles, but RTD growth also expands reach and can bring new consumers into the brand family.
From a liquid perspective, yes, RTDs have less liquid per SKU than full-strength bottles, and we plan to supply liquid across a broader geographic reach with these products. That is built into our planning. From a margin perspective, gross margins for RTDs are lower than our company average. Jack & Coke should be higher than the rest of our RTD portfolio because advertising support will be jointly funded between Brown-Forman and The Coca-Cola Company. Also consider that when we increase our RTD business, we are adding super- and ultra-premium brands like Gin Mare and Diplomatico, which have higher gross margins than the company average. You have to take all those factors into account when assessing margin implications.
Thank you. I would now like to turn the call back over to Susanne Perram for any closing remarks.
Thank you. And thank you, Lawson and Leanne, and thank you to everyone for joining us today for Brown-Forman's Third Quarter and Year-to-Date Fiscal 2024 Earnings Call. If you have any additional questions, please contact us. We look forward to seeing many of you in Louisville on Wednesday, March 20, for our 2024 Investor Day. Presentations by the company's executive leaders will focus on Brown-Forman's strategic priorities and long-term ambitions. Details regarding the live webcast of the presentation along with a question-and-answer session can be found in the March 4 press release about the event. With that, this concludes today's call.
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