Prepared remarks
Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's First Quarter Fiscal Year 2025 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 first quarter fiscal year 2025, 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, Sue, and good morning, everyone. It's a pleasure to speak to you today about Brown-Forman's first quarter fiscal 2025 results. In June, we shared our outlook for fiscal '25, with the expectation that it would be a year of two halves. As you'll recall, we anticipated the second half of our fiscal year would be stronger than our first half on a year-over-year basis as in the first half, we are comparing against strong shipments in a few emerging international markets related to the replenishment of inventory and also lapping stronger shipments that occurred prior to planned price increases. The first quarter results we're sharing with you today are in line with our expectations, and we're confident in reaffirming our full year growth outlook for fiscal '25. As we move into the details of the quarter, I'll provide an overview of the top line from a brand perspective and share a few insights on gross profit and margin.
Then I'll turn it over to Leanne, who will share additional insights on our geographic performance as well as other financial highlights. Our fiscal 2025 reported net sales declined 8%, with organic net sales decreasing 4% after adjusting for the divestitures of Finlandia and Sonoma-Cutrer in the prior fiscal year, the negative effect of foreign exchange and a change in how we manage our Jack Daniel's Country Cocktail business with Pabst Brewing Company. We haven't talked about Jack Daniel's Country Cocktails for a while, so let me take a few moments to explain that last point. As you may recall, in fiscal '21, we entered into a partnership with the Pabst Brewing Company for the supply, sales and distribution of Jack Daniel's Country Cocktails in the United States. At that time, Brown-Forman continued to produce certain formats of this refreshing ready-to-drink beverage. But during fiscal '24, we transferred production of all Jack Daniel's Country Cocktails products to Pabst Brewing Company, and as a result, our sales related to Brown-Forman produced Jack Daniel's Country Cocktail products are significantly lower compared to the prior year period.
In the quarter, Diplomático Rum, Old Forester and Woodford Reserve, along with Jack Daniel's Tennessee Honey and Jack Daniel's Tennessee Apple, were the largest positive contributors to organic net sales. This growth was more than offset by a decline for Jack Daniel's Tennessee Whiskey. First, to our most recent acquisitions. Diplomático Rum delivered very strong results in the first three months of the year, largely related to the timing of ordering patterns in the prior year period, which created an easier comparison. Gin Mare was also impacted by the timing of ordering patterns in the prior year period, but this created a tougher comparison and led to a slight decrease in organic net sales. Naturally, there is a higher level of volatility in the trends as the trend only reflects three months of data. Importantly, in the first quarter of fiscal '25, shipments are largely in line with depletions, and we continue to believe that we'll benefit from having a full year of growth from these outstanding super premium brands in our portfolio.
Old Forester, our founding brand, delivered strong double-digit organic net sales growth as the brand benefited from increased volume and our pricing strategy. The brand continues to be incredibly popular with whiskey consumers as evidenced by the over 100,000 entries that were received on the first day of the Old Forester Birthday Bourbon Sweepstakes, which gives participants a chance to purchase one bottle at $199.99 at the Old Forester distillery in Louisville, Kentucky. The demand is so high for this special release; we were fortunate to be able to increase the number of bottles available, which is probably welcome news to anyone that has been trying to add a bottle of birthday bourbon to their home bar. For more than 150 years, we have aspired to uphold George Garvin Brown's founding promise that there's nothing better in the market. I want to wish good luck to everyone who entered the sweepstakes, as I think they will announce winners in downtown Louisville today.
I'm also pleased to report that organic net sales growth continued for Woodford Reserve, the number one super-premium American whiskey globally. This performance was driven by higher volume in the United States, even when total distilled spirits trends remained well below historical levels. Of the top 20 total distilled spirits brands in the United States, only two are growing in the past 13-week takeaway results, and Woodford Reserve is one of them. This speaks to the strength of the brand and also the challenges many in our industry are facing in the current environment. Both Jack Daniel's Tennessee Honey and Jack Daniel's Tennessee Apple delivered mid-single-digit organic net sales growth, led by Brazil as well as Türkiye, even as Tennessee Apple was lapping its prior year launch in Korea. In Brazil, we continued our strategic geographic expansion efforts, investing more efficiently with bolder and bigger activities and high engagement content for the consumer.
Turning now to Jack Daniel's Tennessee Whiskey. Organic net sales declined 6%, driven by lower volumes led by the United States, the United Arab Emirates and the United Kingdom, partially offset by an increase in volume in Japan following the transition to own distribution and higher prices in Türkiye. As I mentioned in my opening comment, this decline was expected. In the year ago period, the United States and the United Kingdom experienced a shift in ordering patterns as inventory was purchased ahead of a price increase in the U.S. and an excise tax increase in the U.K. In addition, in the United Arab Emirates, we faced a tough comparison against the strong shipments in the year ago period due to the replenishment of inventory. As you'll recall, with the supply chain disruptions we experienced, the emerging markets were among the last of the markets to be replenished. We continue to believe that Jack Daniel's has a significant runway for long-term growth despite the recent short-term headwinds.
We continue to invest behind the brand and have strategies and plans in place to engage a new generation of legal drinking age consumers, while retaining our core consumers, including the Make it Count global campaign, the McLaren Formula 1 sponsorship, and the Jack Daniel's and Coca-Cola RTD. We're also investing more in short-term activations within the on and off-premise channels and events such as music festivals and McLaren races globally. Music has been an important part of the Jack Daniel's relevance in pop culture and was recently featured in the mega hit, A Bar Song, also known as Tipsy by singer, Shaboozey. The song was released in April and reached number one on the Billboard Hot 100 in the United States and other countries such as Australia, Canada, Ireland, Norway, and Sweden. Our global sponsorship with McLaren Racing is also on display, with a top three finish for McLaren in 12 of the 15 races held in calendar 2024 with the cars, race suits, and the team garage featuring increased branding for Jack Daniel's. There are two upcoming races in the United States, one in Austin in October and then Las Vegas in November.
We'll be cheering on Team McLaren to victory. In addition, we're continuing the geographic expansion of the Jack Daniel's family of brands and are well positioned to capture the global growth of American Whiskey as evidenced by our share growth in markets such as the United Kingdom, Australia, Poland, Mexico, and Brazil. Before moving on, I'll provide a brief update on the continued expansion of the Jack Daniel's and Coca-Cola RTD. While growth from the Jack Daniel's and Coca-Cola launch continue to be offset by the planned declines in Jack and Cola, which makes it difficult to evaluate the brand from an external perspective, but we are very pleased as we enter our second year. We continue to add new markets, expanding further throughout Europe as well as launching in South Africa and additional Latin American markets. We plan to launch in India in September and expect to be in more than 30 markets by the end of calendar '24.
In addition to geographic growth, we're also innovating. In the U.S., the first displays of Jack & Coke Cherry are beginning to appear. Jack & Coke Cherry will be a limited time offering intended to generate interest and intention for the family of Jack Daniel's RTDs as well as the full-strength family of brands. We'll also be introducing a variety pack as package formats and flavors are vital to the ready-to-drink category and further address the consumer trends of convenience and flavor. The Jack Daniel's and Coca-Cola RTD has been a great addition to our portfolio, which is, as you know, we have been very strategically reshaping over the past couple of decades to focus on premium and super premium brands. Before turning the call over to Leanne, I'd also like to provide some additional perspective on our gross profit and margin. In the first quarter of fiscal '25, our reported gross profit decreased 13% and organic decreased 8%, resulting in a gross margin of 59.4%.
This gross margin contraction is largely due to timing. As we have shared previously, following the divestitures of Finlandia and Sonoma-Cutrer, we entered into a transition service agreement with the buyers to ensure a smooth and orderly transition. These agreements had a negative effect on our overall reported gross margin, as the gross margin for these services agreements was significantly lower than the sale of finished goods. This was the main driver of the 140 basis point negative impact from A&D. Overall costs negatively impacted reported gross margin by 440 basis points, largely influenced by inventory levels and the timing of input cost fluctuations. In the first quarter of fiscal '25, we continued to reduce our finished goods inventories on a year-over-year basis. The finished goods that supported our first quarter sales were at a higher cost compared to the year ago period due to the timing of input cost fluctuations, particularly for our tequila brands, as we work through the higher cost inventory.
Leanne will share more details regarding our outlook, but I'll share now that we do anticipate the headwinds in the first half will become tailwinds in the second half of the year. Favorable product mix with price/mix contributed 200 basis points in the first quarter. There was also a positive impact to reported gross margin of 70 basis points from the recent business model change for Jack Daniel's Country Cocktails. This is an example of how we continually look for efficiencies and opportunities to improve our production and supply chain. These tailwinds though, were more than offset by the headwinds from A&D and the timing of costs. In summary, the start to our fiscal '25 was as we expected, and we believe we're positioned to achieve our full year guidance. We're still operating in a highly dynamic environment, yet our portfolio remains well positioned. Our geographic reach is broad and our team members are immensely talented and highly dedicated to growing our business.
This has enabled us to navigate short-term volatility and uncertainty as we focus on the long-term growth of our business. With that, I'll turn the call over to Leanne, and she'll provide more details on our first quarter results.
Thank you, Lawson, and good morning, everyone. As Lawson mentioned, I will provide additional details on our geographic performance, other financial highlights as well as our fiscal 2025 outlook. From a geographic perspective, organic net sales for our developed international markets collectively declined 6% in the first quarter, as growth in Japan was more than offset by declines in the United Kingdom and Germany. As expected, Japan returned to growth following our route-to-consumer change to own distribution on April 1, 2024. We are now recognizing the benefits of owning our distribution, including the execution of our pricing strategy. We are very pleased with the transition, and I want to thank all of our dedicated team members for their contribution to this success. For the U.K. and Germany, lower volumes of Jack Daniel's Tennessee Whiskey had the largest impact on performance. In the U.K., the results of this quarter compared against higher volumes in the year ago period related to purchases ahead of the excise tax increase.
And in Germany, annual pricing negotiations lasted longer than is typical, but have now been completed as of the end of June. In the United States, organic net sales decreased 4%, as lower volumes of Jack Daniel's Tennessee Whiskey were partly offset by growth of Woodford Reserve and Old Forester, with both of these brands having takeaway trends that are outperforming the American Whiskey category. As Lawson has already highlighted, the drivers of these brands in his remarks, I will provide a few additional comments on the inventory and consumer environment. Just a quick reminder, from our June call, distributor inventory levels were largely at normal levels throughout fiscal 2024 with movement to the low end or just below the normal range in our fourth quarter. Consistent with our expectations, distributors are continuing to target the low end of their normal range as higher inflation and interest rates are impacting the consumer and trade.
From a takeaway perspective, trends for total distilled spirits as well as Brown-Forman remain below the long-term historical rates of growth. While rates of growth are moderating, the premiumization trend continues to persist, with higher price tiers continuing to grow value and maintain share as value-priced brands are losing share to RTDs. The growth in the $40 and above price tiers are driven largely by the U.S. whiskey and tequila categories. Collectively, organic net sales for our emerging international markets, which lapped a 32% increase in the year ago period declined by 5%, driven by a decline in Mexico, led by New Mix and our tequila portfolio as the economic environment is decelerating and consumers are trading down. Despite the decelerating conditions, we continue to outperform and gained market share across the channels, driven by strong takeaway in RTDs and whiskey. We also had lower volumes of Jack Daniel's Tennessee Whiskey in the United Arab Emirates, as we lap the strong shipments from the replenishment of inventory in the year ago period.
These declines were partially offset by growth in Türkiye, driven by higher prices as well as Brazil, where Jack Daniel's Tennessee Whiskey, Jack Daniel's Tennessee Apple, and Jack Daniel's Tennessee Honey are benefiting from the growth of the premium-plus whiskey category, geographic expansion, and the launch of an additional package size for Jack Daniel's Tennessee Whiskey. And lastly, organic net sales in the Travel Retail channel decreased 8% as the channel compared against the strong growth from our super premium brands, particularly Woodford Reserve and Jack Daniel's Single Barrel in the year ago period. Growth of Diplomático along with our Single Malt Scotches partially offset the decline. Importantly, consumer takeaway remains strong in global Travel Retail accounts. Lawson has shared the details of our gross profit and margin for the quarter, so I will now turn to our operating expenses and operating income.
In the first quarter, organic advertising expenses decreased 1% as we lapped a 14% increase in the year ago period. As a reminder, the increased spend in the first quarter of fiscal 2024 was largely due to the timing of our spend to support the launch of the Jack Daniel's and Coca-Cola RTD, which was skewed to the first few months of the fiscal year. And our organic SG&A investment decreased 5% as we compared against a 12% increase in the year ago period, which reflected higher compensation-related expenses related to organizational changes including our route-to-consumer expansions. In total, reported and organic operating income decreased 14% and 13%, respectively in the first quarter of fiscal 2025. These results led to a 14% diluted earnings per share decrease to $0.41 per share. And finally, to our fiscal 2025 outlook, which we are reaffirming. We anticipate a return to growth for organic net sales and organic operating income in fiscal 2025, driven by gains in international markets and the benefit of normalizing inventory trends on a year-over-year basis.
This outlook is tempered by our belief that the operating environment ahead will remain challenging and volatile with global macroeconomic and geopolitical uncertainties. In this environment, we are not forecasting significant changes in the level of trade inventories, as the impacts from inflation and higher interest rates on the consumer and trade are expected to continue. We also continue to forecast that fiscal 2025 will be a year of two halves. In our first quarter, on a year-over-year basis, we compared against the strong shipments in a few emerging international markets as well as lapping stronger shipments associated with the execution of our pricing strategy. In the second quarter, with the majority of the movements in inventory across the distributor, retailer and consumer supply chain behind us, we believe our results will more closely reflect total distilled spirits trends. We expect the second half of the year to be stronger, as we anticipate that we will benefit from having a full year of growth from our outstanding new brands of Gin Mare and Diplomático, and we will begin to compare against the softening of total distilled spirits trends in the year ago period.
We remain confident in the strength of our portfolio, along with our pricing strategy and the further globalization of our entire portfolio across vast geographies. Therefore, we continue to expect organic net sales growth in the 2% to 4% range, driven by our emerging and developed international markets. We also continue to expect reported gross margin expansion in fiscal 2025 with sequential improvement as we believe we will benefit from price/mix through the evolution of our portfolio, which includes the addition of two super premium brands, Gin Mare and Diplomático and the divestiture of lower-margin brands, Finlandia and Sonoma-Cutrer. Price/mix should also continue to benefit from our revenue growth management activities. In addition, transition services agreements typically last approximately 12 months, so they should come to an end in our second half, which will remove the A&D headwind that Lawson highlighted in his remarks.
And while costs were higher in the first quarter of fiscal 2025 compared to the year ago period, this is largely due to the timing of input cost fluctuations, particularly for our tequila brands. For these brands, we still expect to benefit from lower agave prices for the full year as we work through our higher cost inventory. As we previously shared, we continue to expect that the benefit will be more than offset by the impact of inflation on our input costs and lower production volumes. Our outlook for organic operating expenses reflects continued investment behind our brands and our team to unlock future growth, leading to growth generally in line with our top line growth. Based on the above, we continue to forecast organic operating income growth in the 2% to 4% range. We also expect our effective tax rate to be in the range of approximately 21% to 23%, and that our estimated capital expenditures will be in the range of $195 million to $205 million for the full year, as we continue to fully invest behind our business to meet what we believe will be the future consumer demand for our brands over the long term.
And lastly, as a reminder, in the second quarter of fiscal 2025, we will begin to reflect our equity shares of The Duckhorn Portfolio's earnings or losses as a line item below the operating income line of our P&L based on the equity method one quarter in arrears. In summary, our fiscal 2025 started off as we expected. The first quarter results reflect the current consumer demand environment, along with a few remaining unusual comparisons against the very strong shipments in the year ago period. While our short-term organic results in the quarter were below our historical trends, we believe our brands and our business are healthy. Lawson and I would again like to thank all of our team members for their continued dedication and contributions in navigating the dynamic operating environment that continues to normalize from the historic manner in which we started this decade. As we look ahead to our fiscal year, we remain confident in our ability to deliver our near-term goals as we continue to focus on executing our long-term strategy and building Brown-Forman for generations to come. This concludes our prepared remarks. Please open the line for questions.
Questions and answers
Our first question comes from Peter Grom of UBS.
You both mentioned that the first quarter met your expectations, but given the challenging start to the year with organic sales down 4%, could you speak on your confidence in meeting the full-year target? I understand that comparisons will get easier and that you've always anticipated stronger growth in the second half, but I’d like to hear your thoughts on the key factors from a category perspective. Also, Leanne, you mentioned that second-quarter growth will align more closely with category trends, but the available data still seems quite challenging. Should we expect organic sales to decline in the second quarter with a return to growth in the second half, or might we see better performance in the second half than what I just described?
Thank you, Peter. I want to emphasize a few points. We anticipate this year will unfold in two distinct halves, with a progressive improvement expected throughout the remainder of the fiscal year. Our first quarter results met our expectations. As for the second quarter, we believe it reflects the overall trends in the distilled spirits market, particularly within the U.S. For the second half, we expect to benefit from the full-year impact of Gin Mare and Diplomático. Additionally, we will have to compare against the notable decline in total distilled spirits from the previous year, which had a significant effect during the second half. From a cost perspective, we expect to manage through higher-cost inventory early in the year, primarily due to our tequila business, where the cost of agave is decreasing faster than we can deplete our inventory. However, we will eventually realize the benefits of this situation.
It's also important to keep in mind the absence of specific one-time events that negatively impacted fiscal '24, including the shift of Jack & Cola production to the Coca-Cola system in the U.K. and the transition of Jack Daniel's Country Cocktails production. As for fiscal '25, we anticipate a resurgence of organic growth in Japan and improvements in emerging international markets like the UAE, where inventories are stabilizing. Looking ahead, we believe our growth will heavily stem from international markets, although these markets currently fall short of our long-term growth expectations.
Our next question comes from the line of Andrea Teixeira of JPMorgan.
I just want to follow up in terms of like the cadence and how the inventory levels have been flowing through. I guess you mentioned on the press release and now also the fact that some of your wholesalers have been more cautious in keeping inventory levels low. What are you seeing on the trade? And also what are you seeing from an on-premise and off-premise perspective, right? So part of the inventory buildup is also on the pantry. So can you talk about how you felt the quarter evolved as you get into the fiscal second quarter and the balance of the year, how we should be thinking of those dynamics from a consumer takeaway standpoint?
Yes, I'll begin by addressing the first part of your question, Andrea. We believe that our distributors are generally focusing on the lower end of their typical inventory range, and retailers have adjusted their stock levels in response to consumer purchases remaining below historical averages, especially given the current high-interest rate situation. Our Schedule B indicates that our depletions align with our shipments. At this stage, it's primarily about consumer demand as inventory moves from supplier to distributor to retailer. In the U.S., we are actively collaborating with our distributor partners and do not anticipate any significant changes in trade inventory levels, as we expect the consumer and trade effects to persist. Regarding inventory, in Europe, we own a large portion of our distribution, so our stock levels are normal, and we are also satisfied with our situation in Latin America. From Brown-Forman's internal viewpoint, we have made year-over-year progress in reducing our finished goods, work-in-progress, and raw material inventory levels.
Yes, I want to elaborate a bit because inventory levels, especially at the consumer level, have been fluctuating, and we discussed this extensively last quarter. I know many of you have reported on it. As for our current position, it’s quite noteworthy. I’ll start with the U.S. and then we can discuss Europe if needed. Total distilled spirits in the U.S. are currently flat according to both Nielsen and NABCA. This time last year, Nielsen was showing a growth of 5.7 percent. It quickly dropped to zero, which significantly impacted the weak Christmas season that both the industry and Brown-Forman experienced last year. The speed of this decline is remarkable. In our previous call, we explored the reasons behind this and addressed the influences of cannabis, GLP-1s, and Gen Z, which we believe are not the main drivers. Instead, the key factors are consumer spending and inventories. We still think these two aspects have most heavily influenced the changes over the past year.
Regarding Brown-Forman’s performance in the U.S., it’s a quarter filled with unusual circumstances. As I mentioned, the industry is flat per Nielsen and NABCA. Brown-Forman is essentially flat to down 1 percent in NABCA, though Nielsen shows a steeper decline, more like down mid-single digits. The main reason for this discrepancy is the previous year's launch of Jack & Coke. Its introduction was significant, particularly in control states represented by NABCA, which saw slower growth. The launch at the start of Q1 accounted for roughly half the difference between Nielsen and NABCA. The other half, which is much more encouraging, pertains to NABCA data that reflect on-premise sales. Woodford and Old Forester are performing exceptionally well in on-premise settings, surpassing the overall weak trend in total distilled spirits, which is down between 1 and 2 percent. We are defying this trend with two of our strongest brands making a substantial impact.
Our next question comes from the line of Eric Serotta of Morgan Stanley.
Leanne and Lawson, could you provide more details about Leanne's earlier comment regarding the progress made in reducing finished goods and raw material inventories year-on-year? Does this indicate that further reductions are expected in the second half? Additionally, how do you anticipate this will affect gross margins? As a follow-up related to inventories but with a longer-term perspective, Lawson, do you have any updates on your thoughts regarding inventory levels and maturing stocks in the industry? Specifically, I'm referring to the approximately 12 million barrels aging in Kentucky and likely many more in Tennessee. What are your thoughts on how the market will absorb these as they reach maturity in the coming years?
Yes. So Eric, I'll start with the first part of your question. So from barrel whiskey, like we always talk about, that's about our future growth expectation of our aged product. So as we look out, we continue to see demand in the future, we should always expect that to grow. But to my comment on finished goods WIP and raw material on a year-over-year basis, with the volatility that was created by the COVID cycle and strong demand and the supply chain constraints, we've been working intentional and we shared that on our last call to reduce our finished good WIP and raw material inventory levels on a year-over-year basis, we have accomplished that. There is one piece that, if you look at from April 30, our year-end, our finished goods is up a bit, and that is all about us proactively preparing for a variety of tariff-related scenarios. And then to your point on how it related to gross margin, again, we talked about that as we think about our cost for the full year and where we kind of expect it to be, what's happening in the first couple of quarters of the year is more related to timing as we move through some inventory.
But that we were specific to say that we would still have, and that would be offset by the impact of inflation on our input costs and our lower production volumes as we are continuing to focus on returning to more normal levels of our working capital. So I hope that is all factored into our gross margin guidance for the year.
Yes. The discussion about industry supplies, particularly regarding Brown-Forman, has shifted significantly over the past year; previously, we were concerned about having enough supply. Now, the conversation has drastically changed. I prefer not to overreact to these fluctuations because they are closely tied to demand, and even minor changes can greatly affect supply levels. Currently, we are mainly discussing American Whiskey, and we are feeling positive about the situation. The major suppliers maintain control over most American Whiskey sales. While they have been increasing their inventories, they are doing so in anticipation of reasonable sales growth, which we believe will ultimately balance out. We have levers to adjust when supply is tight or excessive, and with our lengthy experience in supply management, we’ve become quite adept at navigating these challenges. Consequently, I do not view whiskey supply as a significant risk, and we are not witnessing any adverse effects on pricing or promotions in the U.S. overall. Therefore, we feel optimistic about the supply situation.
Great. I have one more quick follow-up. Last year, you mentioned that Christmas was disappointing, so it seems a bit odd to ask about the holiday season with Labor Day weekend coming up. However, the holiday sell-in is approaching. How are you planning for demand this holiday season, especially considering the various comparisons and inventory movements?
That’s a challenging question. The comparisons will definitely be more favorable this Christmas than they were last year. Last year was quite unexpected for everyone, including us and the entire industry, as things took a downturn very quickly. We’ve indicated that the second half of the year is likely to perform better, with Q2 expected to outpace Q1. This suggests a more promising Christmas compared to last year, but I'm hesitant to make specific predictions about how successful it will actually be.
And I think one thing we can build on that is one thing that we know is while we do continue to see a stretched consumer that is seeking to stretch their discretionary income, premiumization trends are continuing. And we feel like our portfolio is incredibly well positioned for that premiumization trend to continue, which I think you can see about the strong performance of Woodford Reserve and Old Forester during the first quarter.
Our next question comes from the line of Nadine Sarwat of Bernstein.
Lawson, maybe if I ask my first question, putting the lumpiness of the distributor inventories to one side that we've had over many quarters now. And I look at what the implied underlying net sales growth was, I think it's the weakest now that we've seen in probably about 4 years. So well below that medium-term growth algo, I fully appreciate your comment on sort of this being a year of two halves. But could you help us understand what you believe are the underlying drivers of that weakness? And how you expect that to develop over the remainder of the fiscal year, again, focusing on that underlying number rather than inventory? And then second question related to that, what are you assuming in terms of the health of the American consumer in your guidance versus perhaps what are you observing today in terms of the health of that consumer?
If we look at the factors in Q1, I'll skip the inventory. One element that stands out is the price increases from last August, which led to buying in June and July before that. This isn't insignificant. The same goes for the U.K., where there were tax increases around the same time that prompted similar purchasing behavior. Therefore, some of this affects depletions due to timing. When it comes to the U.S. consumer, it's clear that consumer strength has weakened. We see that total distilled spirits are down to zero across various reports, which is a significant decline. However, I believe we will see improvements. This business has historically faced cycles of decline followed by quick recoveries. While we are not predicting a rapid turnaround in our guidance, we do expect sequential improvement in each quarter moving forward.
Looking ahead to the first quarter, we observed that France and Germany were affected by prolonged price negotiations, which have now been resolved. In the short term, we faced a decline in market share there. However, we believe that we will become more competitive moving forward with these negotiations concluded. In the U.K., we are working to increase our market share compared to last year, even as consumers prioritize value and wait for promotions or online deals. In markets like Brazil, we are successfully gaining share, achieving strong double-digit growth driven by Jack Daniel's Tennessee Whiskey and our other brands through geographic expansion. We are strategically transitioning from grocery to cash and carry to better meet consumer needs, and we've introduced a new pack size to connect with them. While Mexico’s market is slowing, we are still gaining value share in whiskeys and ready-to-drinks despite lower consumer confidence. Additionally, in Australia, we continue to see growth with Jack Daniel's Tennessee Whiskey. Overall, in many international markets, we are finding opportunities for growth, which is why we are optimistic about seeking growth from these markets in the coming year.
Yes. Let me add on to what Leanne just said about France and Germany, too, because those are two very large markets for Brown-Forman. We haven't been in that proverbial penalty box in a while. But it's a sign that we continue to be persistent in our goal of getting low and slow price increases, and Europe's always been the challenge with the big retailers in pricing. But through different revenue growth management techniques and different negotiations, you stick it out, it hurt the quarter. But the nice thing is that stuff should come back in Q2 and beyond. And so that's just one more reason to believe that we can accelerate from this point forward.
Got it. And just on what you're assuming in terms of the health of the American consumer in your guidance? Are you expecting that to pick up in the second half of the year? Or is your guidance assuming the status quo from here?
Yes. Overall, for the U.S. consumer specifically, we are not expecting a significant change in consumer trends or behavior.
Our next question comes from the line of Filippo Falorni of Citi.
I wanted to ask a few follow-ups on the gross margin. Maybe we had first, can you break down the cost impact of 4.4 points on gross margin from commodities versus the impact from an inventory revaluation with the kind of higher-cost inventory flowing through? And then looking forward, should we expect that inventory impact to continue in Q2 and then the margin expansion to be really weighted to the second half for the full year? Or can we see some improvement already in the second quarter?
Yes. So specifically on the 440 basis points of cost, again, it's like we said, it's largely timing hitting largely in the first quarter. If you remember last year, our gross margin started higher and we kept trying to guide others down to where we inevitably landed at 60.5%. This year is going to kind of be the inverse, as we have higher cost in this period due to those inventory cost fluctuations, again, related largely to our tequila brands. As we kind of work through that higher-cost inventory, we do think that was largely in the first quarter, we'll get some of that in the second quarter as well. So it's really the second half which will see the absence of that impact or will be to the benefit of our lower cost inventory. Impact from inflation on our input costs and our lower production volumes will, for the full year, still when we're thinking about cost in total, and we're kind of in that low single-digit range, low to low mid-single-digit range for our full year.
I wanted to follow up on the transition service agreement. Should we anticipate a negative impact in the second quarter from these agreements, and will they either cease or potentially shift to a positive impact in the second half?
Correct. They are planned to end as we go into our second half. So again, that's part of our tail of two halves from a gross margin perspective. We expect those to be absent as we go into the second half.
Our next question comes from the line of Robert Moskow of TD Cowen.
I wanted to ask about just the marketing efforts on Jack Daniel's in general. You talked at your Investor Day about a lot of plans to improve trends, boost the image of the brand. How do you think it's going? Because you look at the tracking data and it indicates continued declines. Do you feel like these efforts are strong enough to reacquaint the brand or strengthen the brand in a mainstream manner and offset what I think is happening, which is more shifts to premium offerings?
Yes, the Jack Daniel's brand remains one of the largest and strongest brands globally. We believe we have been creative, particularly with our partnership in McLaren racing and our ongoing efforts in pop culture, which are crucial for us. We've mentioned our work with Shaboozey and how the brand is resonating within country music. Staying relevant in pop culture and attracting new consumers annually is what we strive for. Despite the challenges, if we look at a longer timeframe, the Jack Daniel's brand has been very healthy, with the trademark delivering around 4% to 5% sales growth over the past five years. If we can maintain that growth over the next 5 to 10 years, the company is well-positioned for future success, especially as our overall portfolio has shown significant strength. We believe the math supports our growth trajectory, and we will continue to expand the Jack Daniel's brand as we have for years. Last quarter, we discussed the super premium Jack Daniel's extensions, which significantly contributed to our sales growth last year. We will keep unveiling these unique offerings, which appeal to the whiskey market and support the entire trademark. We recognize the trends from the past year may deviate from the norm, but we anticipate improvements are on the horizon. Notably, U.S. numbers indicate Jack Daniel's is beginning to recover, showing slow but positive progress.
Can I ask a follow-up, Lawson? You mentioned that the key is to get younger consumers to engage with the Jack Daniel's brand and attract new consumers. What metrics do you track to determine if younger consumers are watching these ads, if the message resonates with them, and if it's beginning to change their perception of the brand?
We have a comprehensive collection of consumer insights and data that we monitor on a monthly basis. We can analyze this data by age and spend significant time discussing the balance between attracting new customers and retaining existing ones, which is a challenge faced by all major brands. Our new campaign, which we internally refer to as Back in Black, features a more relevant song that many people are familiar with. We believe it shows promise, and our statistics reflect that. An important point to mention is that among the 20 largest brands in the U.S., only two are experiencing growth, and Woodford is one of those. The largest brands are showing the worst performance according to Nielsen trends, which supports our previous argument that these brands were the ones most popular during COVID and the post-COVID boom; they're the ones lingering in consumers' cabinets and have taken time to be consumed. This situation further highlights why we're witnessing a slowdown in trends for the biggest brands, although the exact extent of the issue is difficult to quantify.
Our next question comes from the line of Nik Modi of RBC.
Lawson, I was hoping you can just share your perspective. I mean, feedback from the trade in August would suggest a pretty steep drop off at the industry level. And just curious kind of what you guys are observing just broadly why there could have been such a precipitous drop from July to August? And then just kind of piggybacking on that. I mean, the more we hear about the delta-9 on cannabis beverages and how fast they're selling out when they're on display. And I know you kind of dismissed it last quarter, but I'm just curious, like have you seen some traction for some of those products and maybe infringing on some of the beverage alcohol occasions?
All right. Regarding the drop from July to August, I honestly don't have any information on that. I haven't heard anything from our teams either, so I can't provide any insights. As for cannabis, particularly beverages, I've mentioned before that cannabis has existed for a long time. The transition from illegal to legal status has led to growth in products like gummies, but I don't think this significantly impacts current trends. I don't see any overlap between cannabis beverages and spirits. Studies suggest that if there's any cannibalization, it might affect beer more than spirits, which makes sense to me. Personally, I find it hard to envision cannabis beverages becoming a major market. There are simply too many alternatives, and it's not something people typically consume in large quantities. I believe there's a limited business opportunity in this area.
From our consumer research, we found that spirits are the preferred alcoholic beverage among individuals who have used cannabis in the past month. This is what our consumers are indicating.
Our next question comes from the line of Steve Powers of Deutsche Bank.
So in the quarter, we saw distributor inventories tick up 3 points in the U.S. and 4 points in developed international. And just relative to your comments that you're not really expecting much improvement in the consumption run rate, especially in the U.S., I mean, is there a risk there, that, that kind of one-quarter build unwinds as we go into Q2 or the remainder of the year? How are you thinking about that?
Our comments really is about a year-over-year perspective, and it's about lapping the softening of the total distilled spirits trends that we saw in the year ago period. So when we think about our year to go, and again, we'll have the largest benefit of that lapping in our second half. That was really a year-over-year comment. Because, again, with distributors and our outlook of their inventory levels, it continues to be that we are not forecasting an outlook that has significant change. We're continuing to believe that the trade and consumer behavior will be similar to what it is now.
Consumption is down compared to last year, and inventory levels have decreased to reflect declining consumption. Currently, consumption isn't improving, and inventory levels are rising, which introduces some risk. I can provide more details later. Regarding your second question, you mentioned that France and Germany had challenges this quarter but are normalizing as you progress, especially following retailer negotiations that will benefit the rest of the year. You also highlighted the significant contributions of Gin Mare and Diplomático to growth, particularly in improving your outlook for the second half. Can you quantify the effects of these factors as you transition from the first quarter to the second quarter and into the second half?
I mean, I think what we can say that they are all implied in our guidance and what we've said first half, second half. From an organic perspective, again, with the shipment base for Gin Mare and Diplomático compared to where we were last year, we believe we're going to have a benefit in this year. We are not quantifying that specifically or quantifying the benefit that we believe that's in our year-to-go period now that we have concluded our pricing negotiations in Germany and France. But again, we believe that we had the biggest impact from those negotiations, specifically with Germany and France in the first quarter that now will not be present as we go forward.
I would like to ask about tequila, which was notably weak this quarter and also soft last quarter. Can you elaborate on why that has been the case? Previously, we discussed the ambition to triple tequila as we look ahead. I am trying to understand the reasons for the softness in these past couple of quarters and how we should view this moving forward.
Yes, I'll address that. First, I find it interesting that tequila is projected to surpass vodka as the largest value category in the United States in 2024. For those of us in the industry, this rapid growth is remarkable. Additionally, consumption patterns show that 22 to 24-year-olds are now just as likely to drink tequila as beer, which is surprising given the recent trends. A significant part of our tequila challenges stem from Mexico, where we are aggressively pushing prices. We're also doing the same in the U.S. market, as it is a competitive strategy we are currently implementing. While overall distilled spirits pricing remains stable with low single-digit growth, tequila has seen a slight decline, around 1 percent. Our brand, however, has increased roughly 3 percent. We're remaining cautious yet continuing to adjust prices while others may not be doing the same. The tequila category is still one of the strongest in spirits, and although we have not matched the performance of some leading brands like Herradura, our growth rates over recent years have largely been in the double-digit or high single-digit range.
Despite some concerns about current tequila trends, they have not hindered our company's overall growth; in fact, they have contributed positively. The competition in this category is intense, but we believe we have one of the leading brands and will keep pushing forward. There's also been important conversation about the international expansion of tequila, and our brand el Jimador is well-positioned in markets like the U.K., Australia, and Brazil, representing a significant growth opportunity for us that many may not be aware of.
This concludes the question-and-answer session. I would now like to turn it back to Sue Perram for closing remarks.
Thank you, Marvin, and thank you, Lawson and Leanne, and thank you to everyone for joining us today for Brown-Forman's First Quarter Fiscal Year 2025 Earnings Call. If you have any additional questions, please contact us. We look forward to participating in the Barclays Global Consumer Staples Conference next week, and hope to see many of you. For those of you unable to attend, our fireside chat will be made available as a webcast accessible via the Brown-Forman corporate website under the section titled Investors, Events and Presentations. We wish everyone an enjoyable weekend, particularly those in the United States that are celebrating the Labor Day holiday. And on Monday, September 2, we hope you will join us in raising a glass as we say happy birthday to our founder, George Garvin Brown, and good luck, again, to those of you who entered into the Birthday Bourbon Sweepstakes. With that, this concludes our call.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.