管理層發言
Good day, and thank you for standing by. Welcome to Brown-Forman Corporation Fourth Quarter and Fiscal Year 2024 Earnings Results Conference Call. Please note that today's conference is being recorded. I will now hand the conference over to your speaker host for today, Sue Perram, Vice President and Director of Investor Relations. Sue, please go ahead.
Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's Fourth Quarter and Fiscal Year 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 fourth quarter and fiscal year 2024.
In addition, we posted 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. Thank you for joining us today as we share Brown-Forman's fiscal 2024 results. Before diving into the details, I wanted to provide a few high-level comments on our performance and my perspectives on the year. Brown-Forman is a 154-year-old company, so we have been through periods of complexity and uncertainty in the past. We understand what it means to be resilient. We know how to navigate short-term challenges while remaining focused on our long-term strategy. Fiscal 2024 has certainly been a challenging year as we're still operating in a highly dynamic environment. While our business is not immune to the impacts of industry and macroeconomic headwinds, Brown-Forman and its people have remained agile, focused and committed to the long-term growth of our brands and of our business. There's certainly a lot of complexity to our results, which we will walk you through momentarily.
However, when you consider our depletion-based results, which we believe represent the true health of our business, we're pleased with our fiscal 2024 performance as it is in line with our long-term growth expectations. While that statement may surprise some of you, this past fiscal year was greatly impacted by changes in consumer, retail and distributor inventories. We believe our brands remain healthy. We're in the right categories and price points and we're confident in the outlook for our business. So let's discuss all of this in greater detail. Throughout the year, we've been using the word normalization as we lapped the impact of the supply chain challenges and the rebuilding of inventory in the prior year as well as consumers getting back to historical consumption patterns. We expected our organic results to moderate in fiscal 2024 after 2-plus years of double-digit growth. However, as we moved through the year, conditions changed; consumers faced higher inflation and increased interest rates that made them as well as distributors and retailers reconsider when and how they made purchases.
In this environment, our fiscal 2024 results were below our expectations with organic net sales declining 1% and organic operating income decreasing 2%. And this is where it gets particularly complex and potentially confusing. So thank you for allowing me to get into the weeds here a bit. As seen in Schedule D, the estimated net change in distributor inventory had a very significant influence on our results this year, reducing our organic net sales by 6% and operating income by 14%. The scale of this impact is significant when compared to any other time prior to the pandemic as the estimated net change in distributor inventory has historically only impacted organic results by 1 or 2 points in any given year. The sizable difference in fiscal 2024 between shipments and depletions was driven by several factors converging at one time. This includes the tough comparison against the rebuilding of distributor inventories in fiscal 2023 related to the glass and supply chain challenges, along with the more recent changes in distributor and retail ordering patterns.
We found that the timing and size of orders has fluctuated from their historical patterns to adjust for higher interest rates and moderating consumer demand. We believe our performance is best captured by factoring in the impact from the estimated net change in distributor inventories, which is what I referred to earlier as our depletion-based results. These depletion-based results, which capture the sale of our brands from distributors to retailers, is the way we manage our business internally within Brown-Forman and the way we incentivize our leaders. From this perspective, our top-line results more closely reflect our longer-term trends, and our bottom-line results were particularly strong. For these reasons, we believe the fundamental health of our brands and our business remains solid. We've also been using the word normalization because if we look back over the past five years, which encompasses the numerous impacts of the pandemic, our five-year organic net sales compound annual growth rate is 6%.
This is in line with our long-term growth algorithm and demonstrates our strong track record of consistent and sustainable results over the long term. I also want to highlight the 150 basis points of reported gross margin expansion that we delivered in fiscal 2024. We've benefited from favorable price mix as we continue to execute our long-term pricing strategy along with our enhanced revenue growth management capabilities. We also benefited from the growth of our super-premium brands. Price mix, along with the absence of the supply chain disruption costs in the prior year period more than offset higher input costs and unfavorable foreign exchange. We're very pleased with our strong reported gross margin expansion and believe we will continue on this path in the coming fiscal year. Now as we dig into the full results of the fiscal year, I'll start with our top-line performance and share some highlights from our portfolio of brands.
Leanne will then provide additional details for fiscal '24 before providing our outlook for fiscal '25. The main growth drivers of organic net sales for Jack Daniel's Tennessee Apple, the Jack Daniel's super-premium expressions, New Mix and Glenglassaugh. We haven't talked much about these brands in the past, but they are examples of how the consumer trends of premiumization, convenience and flavor continue to drive our business. They also illustrate the value and importance of our portfolio evolution and innovation strategy as well as our continued geographic expansion and route-to-market strategy. The work we have done to build a diversified global portfolio focused on premium and super-premium brands provides us with many opportunities for growth even in dynamic and challenging times. Jack Daniel's Tennessee Apple was a top performer as the brand delivered very strong double-digit organic net sales growth and is now almost 900,000 nine-liter cases.
The brand was launched in 2019, just prior to the beginning of the pandemic when the closure of the on-premise and supply chain disruption significantly impacted our ability to build brand awareness. However, as supply and logistic challenges eased we were better able to meet consumer demand for the product. Today, we're seeing strong growth in markets such as Brazil and Chile, and we've also continued to introduce the brand into new markets and had a strong launch in South Korea in fiscal '24. Collectively, the Jack Daniel's super-premium expressions also delivered strong double-digit organic net sales growth in fiscal '24. 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. Our exclusive global Travel Retail offering, Jack Daniel's American Single Malt also contributed to the strong results.
Over the last several years, to meet consumer preferences, we have purposely premiumized the Jack Daniel's family of brands and elevated our whiskey credentials through innovation and specialty launches. This allowed us to offer both long-term friends of Jack Daniel's and new friends the opportunity to explore and discover within the Jack Daniel's family. Of course, another trend in beverage alcohol is the continued growth of ready-to-drink beverages, specifically spirit-based RTDs. This trend is evident in our fiscal '24 results, with New Mix serving as the second largest positive contributor to organic net sales, growing to more than 10 million nine-liter cases in fiscal '24. The brand continued to deliver double-digit organic net sales growth, benefiting from higher pricing and value share gains in the RTD category despite a challenging environment in Mexico. The third largest positive contributor to overall organic net sales was Glenglassaugh, as the brand's awareness and prestige among whiskey connoisseurs continue to grow.
Most notably, Glenglassaugh Sandend was named the 2023 Whiskey of the Year by Whiskey Advocate Magazine. And as we've shared over the last couple of quarters, the brand continued to benefit from cask sales, particularly in Asia through its old and rare program. The growth from these brands was almost entirely offset by declines in organic net sales from Jack Daniel's Tennessee Whiskey. Jack Daniel's Tennessee Whiskey declined 5%, led by lower volumes in Japan as we transition to own distribution, the United States due to slowing consumer demand and the United Arab Emirates and Sub-Saharan Africa, both of which had strong comparisons given the significant rebuilding of inventory last year. As we shared during our Investor Day in March, despite recent short-term headwinds in our industry, we believe Jack Daniel's has a significant runway for growth and are confident in achieving our long-term ambitions.
Jack Daniel's remains one of the most iconic brands in the world with solid brand health and a long-term performance track record with the Jack Daniel's family of brands growing volume at a 5% compound annual growth rate over the past five-, ten- and thirty-year periods. The fact that the brand's five-year growth rate is the same as its thirty-year growth rate means that it is not slowing down. That is impressive for a brand of its size. The Jack Daniel's family of brands is a robust portfolio that expands across multiple occasions, price points and geographies, and we believe we have strategies and plans in place to engage a new generation of legal drinking age consumers while retaining our core consumers. In addition, we are positioned to capture the global growth of American whiskey as we accelerate the geographic expansion of the Jack Daniel's family of brands. We continue to support the brand's health and growth through the Make It Count global campaign, the McLaren Formula 1 sponsorship and the Jack Daniel's & Coca-Cola RTD.
I do want to acknowledge that the impact of Jack & Coke RTD is difficult to see in our fiscal '24 results, primarily due to the transition to Jack & Coke RTD from our preexisting Jack & Cola RTD business. Even so, we continue to believe Jack & Coke is an iconic brand and a fabulous product and can build a stronger and more global foundation for the Jack Daniel's family of brands. Consider, for example, the Jack & Coke RTD grew to 4.5 million nine-liter depletions in over 25 markets around the world in fiscal '24, of which 2 million of the cases were incremental, leading to more than 120 million cans in consumer hands. Brand investment increased significantly in markets where we transitioned from & Cola to & Coke with more than half of the increase contributed by Coca-Cola. And very positive consumer volumes with greater than 86% of consumers indicating strong intent to repurchase Jack & Coke RTD.
Jack & Coke was a significant portfolio enhancement for us as were the additions of Gin Mare and Diplomático. In fiscal '24, Gin Mare and Diplomático were integrated into the Brown-Forman portfolio of brands, and I'm pleased to say that both brands delivered strong double-digit organic net sales growth. These brands have given us scale in Europe and enabled route-to-consumer changes such as our recent announcement for Italy's own distribution transition. And with these brands, Brown-Forman owns at least one of the top five brands globally in four strong growth categories: super-premium American whiskey, super-premium tequila, ultra-premium gin and ultra-premium rum. We believe this portfolio evolution alongside product innovation gives us the best opportunity for long-term growth and value creation. As I close, I want to thank my Brown-Forman colleagues around the world for their commitment to our company values and their daily efforts to deliver our long-term ambitions.
Throughout our 154-year history, it has been the strength of our people, the health of our portfolio and the breadth of our geographic reach that has enabled us to navigate short-term uncertainty and volatility. While we experienced a very dynamic operating in fiscal '24, we still believe the spirits category and Brown-Forman offer attractive growth. We delivered over 60% gross margin and 30% operating margin, while generating strong cash flows with high returns on capital, and are well positioned to benefit over the long term from the evolution of our brand portfolio and the investments behind our brands and people. Leanne, I'll now turn the call over to you to provide more detail on our fiscal '24 performance and our outlook for fiscal 2025.
Thank you, Lawson, and good morning, everyone. As Lawson has thoroughly reviewed our top-line growth and the performance of our brands for the fiscal year, I will share details on our geographic performance, other business results and our outlook for fiscal 2025. First, from a geographic perspective, emerging international markets and the Travel Retail channel delivered mid- to high single-digit organic net sales growth, respectively, which was more than offset by organic net sales declines in the United States and the developed international markets. In the United States, organic net sales declined 4%, largely reflecting lower volumes due to a negative 4% impact from an estimated net change in distributor inventory. First, I'll speak to the significant amount of noise, if you will, created by changes in distributor inventories in the U.S. market for our business this fiscal year. We have been sharing this throughout the fiscal year.
In our first half, we cycled against the significant inventory rebuild during the same period last year. As we entered our second half, takeaway trends for total distilled spirits and also for our business moved below the historical mid-single-digit range as consumer demand slowed. As consumer takeaway remains below its historical range, retailers have adjusted their inventory levels in response to the slower demand and the higher interest rate environment. 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. While we are on this topic, I will add here that in our outlook, the expectation is that distributor inventory levels will remain consistent with their current levels. Now to turn to what we believe are the more important indicators of the health of our business in this market.
While total distilled spirits trends continue to be below their historic norms in the low single-digit range, our portfolio of brands is holding share. Consumer demand for U.S. whiskey, particularly super-premium, is strong as U.S. whiskey remains one of the largest contributors to total distilled spirits value growth in Nielsen. In the whiskey category, consumers continue to seek premium-ness, which drove the growth in our super-premium Jack Daniel's offerings, such as Jack Daniel's Single Barrel Rye Barrel Proof, Jack Daniel's Sinatra and Jack Daniel's Bonded Rye. All of which delivered strong growth. This growth partially offset the decline in Jack Daniel's Tennessee Whiskey volume. In addition, our founding brand, Old Forester, delivered another year of double-digit organic net sales growth driven by strong consumer demand. Woodford Reserve was negatively impacted by an estimated net change in distributor inventory levels; from a depletion-based and takeaway perspective, the brand remains healthy with strong consumer demand.
In our developed international markets collectively, organic net sales declined 5% in the fiscal year and was negatively impacted by 6% due to an estimated net change in distributor inventories. In Germany, our largest developed international market, we have been continuously gaining value share, which drove 7% organic net sales growth. Growth from Glenglassaugh cask sales in Singapore, the continued launch of Jack Daniel's Tennessee Apple in South Korea and the integration of Diplomático were more than offset by the decline in Jack Daniel's Tennessee Whiskey largely related to the route-to-consumer transition in Japan. Japan is one of the world's largest spirits markets with a significant footprint and a leading position in premium-plus whiskey and we have now transitioned successfully to own distribution on April 1, 2024, representing the 16th market where we own and operate the distribution of our portfolio.
Though there are short-term impacts to our P&L as we increase the ownership of our route-to-market, we believe these investments will lead to unlocking growth for our broader portfolio of brands. The Travel Retail channel, which has returned to its pre-COVID level of 4% of our organic net sales, delivered 6% growth driven by strong double-digit growth from our super-premium brands, particularly our exclusive Global Travel Retail offering, Jack Daniel's American Single Malt along with Woodford Reserve and Glenglassaugh. This growth was partially offset by a decline in Jack Daniel's Tennessee Honey. Wrapping up our geographic commentary with emerging international markets that collectively increased organic net sales by 8% for the fiscal year despite a 12% headwind from an estimated net change in distributor inventories, which was largely driven by the lumpiness of how the supply chains were refilled in these markets in the second half of the prior year.
Jack Daniel's Tennessee Apple drove the organic net sales growth, most notably in Brazil and Chile due to our ability to meet the strong consumer demand with the return of consistent supply. In Mexico, as Lawson mentioned, New Mix continued to deliver strong double-digit growth as the brand continued to benefit from our pricing strategy and gain share of the RTD category. This growth was partially offset by declines in el Jimador and Herradura, particularly Herradura Ultra, largely due to the challenging macro environment. Jack Daniel's Tennessee Whiskey growth was led by Türkiye, as momentum in the premium whiskey category continues. Moving to our gross profit growth and gross margin expansion of 150 basis points. For the full fiscal year, reported gross profit increased 1%, with organic growth of 2%. The successful efforts of executing our pricing strategy and reducing cost led to reported gross margin expansion of 150 basis points which was in line with our expectations.
In total, our favorable price mix and the absence of supply chain mitigation costs more than offset higher input costs and the negative effects of foreign exchange. Now to operating expenses. Our total reported operating expenses increased 1%, with organic increasing 7%, which again was in line with our expectations. The increase in reported operating expenses was driven by increased SG&A expense, advertising expense growth and the negative effect of foreign exchange. The increase was largely offset by the absence of a noncash impairment charge for the Finlandia brand name in the prior year as well as the absence of post-closing costs and expenses in connection with the acquisitions of Diplomático and Gin Mare in the prior year. Our advertising expenses, as we have shared with you throughout the year, had abnormal seasonality due to the phasing of our investments behind the launch of Jack Daniel's & Coca-Cola RTD in the first half of the fiscal year; that moderated through the year, which reported an organic advertising expense growth of 4% and 2%, respectively, for the fiscal year.
Reported SG&A expenses increased 11% in fiscal 2024, led by higher compensation and benefit-related expenses and our commitment to the Brown-Forman Foundation to support the vision of transformative community impact. Our organic SG&A expenses grew 7%, as we continue to invest behind our people and strategic route-to-consumer initiatives. Again, we anticipate that these investments, which have short-term impacts on our P&L, will unlock future growth. In total, reported operating income increased 25% and organic operating income declined 2% in fiscal 2024. These results led to a 32% diluted earnings per share increase to $2.14 per share. And lastly, to our fiscal 2025 outlook, we believe our business is continuing its path back towards our longer-term norms following the significant multi-year disruption related to our supply chain, two years of exceptionally high demand and the current impact of higher inflation and interest rates on the consumer and trade.
We remain confident in the strength of our portfolio that is well positioned to capitalize on the consumer trend of premiumization that excites existing consumers and convenience and flavor that provides access points to new consumers along with our pricing strategy and the further globalization of our entire portfolio across vast geographies. We expect that the operating environment ahead will remain volatile with global macroeconomic and geopolitical uncertainties. In this environment, we are not forecasting significant changes in trade inventories as the impacts from inflation and higher interest rates on the behavior of the consumer and trade are expected to continue. We do believe we have now experienced the majority of the movements in inventories across the distributor, retailer and consumer supply chain and that we will benefit from having a full year of growth from our outstanding new brands of Gin Mare and Diplomático.
Therefore, we expect organic net sales growth in the 2% to 4% range, driven by our emerging and developed international markets. Similar to fiscal 2024, we expect fiscal 2025 to be a year of two halves. In our first half, on a year-over-year basis, we will still be comparing against the strong shipments in a few emerging international markets as well as lapping stronger shipments associated with the execution of our pricing strategy. We expect the second half of the year to be stronger, which is reflected in our guidance. We believe we will benefit from price mix through the evolution of our portfolio and our revenue growth management activities. And while costs will continue to benefit from lower agave prices, we expect 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 people leading to the growth generally in line with our top-line growth.
Based on the above, we anticipate 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%. We will 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. Therefore, in fiscal 2025, we estimate our capital expenditures will be in the range of $195 million to $205 million for the full year. And lastly, as a reminder, in fiscal 2025, we will begin to reflect our equity share 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. In summary, we believe we have navigated the highly dynamic operating environment in fiscal 2024, maintaining our growing market share in some of our largest markets, including the U.S. And from a depletion-based perspective, our full year results came in in line with our expectations and consistent with our long-term growth algorithm.
It was great to see many of you in person during our Investor Day in March. From there, you may recall that we shared that we believe our business is healthy and the issues impacting our top-line growth are temporary and not structural, which we hope we have clearly shared are largely related to changes in inventory levels. We are confident with the support of our 5,700 employees who are incredibly committed to Brown-Forman and the opportunities we see for our portfolio of brands and our ability to achieve our fiscal 2025 outlook as well as our long-term ambitions. This concludes our prepared remarks. Please open the line for questions.
分析師問答
Our first question comes from Bryan Spillane with Bank of America.
I guess just a couple of quick questions, probably more clarifications. But the first one, can you give me — you mentioned ingredient costs as inflationary for next year. Is that like corn? I know we have obsessed so much about agave and barrels, but I just wanted to clarify what it is that's moving against you.
Yes. So Bryan, it's Leanne. The tailwinds for us will be agave, which we've discussed many times. It moved from around MXN 28 to MXN 30 per kilo at the high and we've now seen as low as about MXN 9 per kilo in June, depending on the quality. Grain prices are expected to be lower in the shorter term, but still above pre-pandemic averages. Where we're seeing increases are related to our glass, even though we have lower natural gas and diesel prices that are slowing the rate of inflation, we're still expecting that in the U.S., where the vast majority of our glass comes from, there will be a 2% to 3% increase. Transportation will be in the low single digits. Also, as we discussed in our prepared remarks, we expect higher costs associated with lower production volumes. That's about our work to return to more normal levels of working capital on our balance sheet. Wood costs have been elevated for some time. We've made adjustments in our infrastructure that we believe will help to offset some of that commodity cost, but we still expect it to remain high.
All right. Leanne. And then, Lawson, maybe can you just give us a perspective as you're looking forward this year, the category has been soft. Is your expectation in terms of American whiskey that the current trends hold for next year? Do you expect the category to accelerate? And just to tie to that, Lawson, can you talk a little bit about the amount of industry inventory sitting aging at this point and whether we're at risk of an oversupply situation? We've had that question a couple of times, so it would be great to get your perspective.
Yes. Bryan, a few points. U.S. whiskey and tequila, which are our two biggest categories, continue to be the healthiest parts of total distilled spirits. That is positive. Total distilled spirits (TDS) has been moving around the low single-digit range for several months. One important issue is whether the slowdown is structural or driven by timing, difficult comparables and inventory issues. I view the current environment as largely driven by inflation and the pull-forward of demand during COVID, which left some consumers with extra bottles at home. Those consumer inventories have taken time to work through. While longer-term headwinds such as weight-loss drugs, cannabis and generational shifts are relevant, they do not appear to be the primary drivers of the current weakness. Regarding industry whiskey supply, we track this closely. For many years, whiskey did not grow in the U.S., and the growth over the last decade-plus has been significant. Whether there is an oversupply depends on your expectation for forward demand. From our perspective, the supply-demand balance does not seem far out of line. Much of the inventory that has been discussed in public commentary is held by the larger suppliers, and we do not see a substantial disconnect between supply and demand.
And our next question coming from the line in Nadine Sarwat with Bernstein.
One short-term and one long-term question. On the short term, coming back to inventories, obviously a large headwind this quarter. Could you talk about how this compares versus your expectations on the last conference call? What would have been the cause for any difference there? And a little bit more color on where your inventories are today. I understand the moving parts, but do you feel they're fully at the right level, rightsized going forward? And then my long-term question: what's your best assessment of where underlying spirits net sales growth for the U.S. today is for the industry? Nielsen and NABCA cover different channels. What would you need to see for the industry to get back to mid-single digits? Is it a more favorable macro environment for the consumer or something else?
Nadine, I'll take the inventory question. Our depletion-based results came in in line with our expectations. Please refer to Schedule B; fiscal 2024 depletions are ahead of shipments on our full-strength portfolio and even to a greater extent than we reported in our third quarter call. In the U.S., retailers have adjusted their inventory levels in response to consumer takeaway trends being below the historic mid-single-digit range and a higher interest rate environment. Throughout most of the fiscal year, distributor inventories have been within their normal targeted range. However, in the fourth quarter in the U.S., distributor levels unexpectedly dropped to the low end or just below their normal targeted range. We are continuing to partner closely with distributors. We do believe we've experienced the majority of the movement in inventories across the distributor, retailer and consumer supply chain. Our outlook incorporates this view and the guidance we provided reflects our expectation that distributor inventories will remain consistent with where they are today.
On the long-term industry question, it's difficult to predict consumer spending. One certainty is that comparables will get easier, including the Nielsen numbers that showed the late-summer, early-fall deterioration. Given that our depletion-based results have been stronger than shipments, this largely appears to be an inventory correction issue, including consumer inventories. We previously estimated it could take about a year to work through some of the consumer inventory effects, and we are approaching that anniversary. Consumer spending will need to improve across consumer packaged goods, not just spirits. If you press me for a view, I believe trends should improve sometime in the fall or into the winter.
And our next question coming from the line of Robert Moskow with TD Cowen.
This is Seamus Cassidy on for Rob Moskow. Given the target you reiterated at your March Investor Day to double fiscal 2022 operating income by fiscal 2032, with fiscal 2025 expected to be another below-algorithm year, how do you see this trending beyond fiscal 2025 and what do you expect to drive operating leverage in the out years given you will need to invest more this year in terms of advertising and promotion?
We always knew that ambition was not easy. 2032 is still a fair distance away. We continue to believe in the portfolio and the growth characteristics required to deliver on those goals, and we are not changing our long-term growth algorithm. We are working to get gross margin leverage through continued efforts, and our approach remains a 'low and slow' pricing and margin strategy. The model is modest gross margin improvement combined with expense discipline so operating expenses do not grow faster than sales. We're only two years into this 10-year plan, so there is time to accelerate.
That's helpful. Quick follow-up: you've talked about a return to annual pricing in the spirits industry, but you also called out inflation as a headwind for consumers. How are you thinking about that in fiscal 2025?
We have seen normalization in consumer demand after the exceptional multi-year growth period. Pricing remains a lever and is coming through in the numbers. We expected to normalize after the prior extraordinary growth and while the timing has taken longer than we initially thought, we remain confident the long-term outlook for spirits in the U.S. is excellent and nothing structural has fundamentally changed in our view.
And our next question coming from the line of Lauren Lieberman with Barclays.
Completely hounding on inventories here. You say the inventory cleanup across distributor, retailer and consumer is complete. That's a different view than some others in the industry. What are you seeing that gives you confidence that the inventory correction across distributor, retailer and consumer is complete?
Lauren, this ties back to the multi-year disruption that started with the pandemic and the glass supply challenges and logistics. We were in a different position than many competitors because of how we prioritized brands and markets to rebuild and refill supply. In fiscal '24 there was lumpiness to compare against, especially in the fourth quarter when we were reloading emerging international markets. We have worked closely with our distribution partners in the U.S., and for most of the year distributor levels were in their normal targeted range. The unexpected event was the drop in distributor inventory levels in the fourth quarter to the low end or just below their targeted range. Given our ongoing work with partners and the inventory movement we have seen throughout the year, we believe the vast majority of that movement is now behind us. We're not saying all of it is behind us as it relates to the U.S., but the expectation that inventories will remain consistent with current levels is embedded in our guidance.
To be clear, the distributor and retailer sides are fairly clear and we have data to support that. The biggest remaining question is the health of the consumer and when consumer spending returns. Everyone will have different opinions on consumer timing; we do not have a perfect crystal ball. Our view is that pantries are less full than they were a year ago, and on-premise has weakened over the last year, which also affects overall trends. We believe on-premise will start to come back over the next year.
To emphasize, our outlook assumes distributor inventories remain consistent with current levels. That assumption is embedded in our guidance.
Leanne, to clarify: should we think about current inventory comments as the absolute level of inventories? From a growth standpoint there might still be a headwind for the next quarter or two, but at an absolute level, inventories are at the right point?
Yes. In the U.S., distributor inventories are at the low end or just below their normal targeted levels and our guidance assumes they will stay consistent with current levels. That is the baseline in our outlook. The first half will be impacted by comps against strong shipments in the prior year and the second half is expected to improve.
Our next question coming from the line of Nik Modi with RBC.
Lawson, two questions. First on Jack Daniel's: given the line extensions and different flavor expressions, have you figured out how to spend behind the Jack Daniel's equity to provide a halo for all the expressions? There's a lot of innovation from competitors and potential cannibalization. How do you think about brand building long term? Second, on the Jack Daniel's mainline brand: we're hearing promotional activity from competitors, some not tracked in Nielsen. How are you thinking about promotional activity in your guidance?
On Jack Daniel's, note that Jack Daniel's Tennessee Whiskey (Black Label) was down 5% in organic net sales but there was an 8% impact from the estimated net change in distributor inventories. The brand is not in long-term decline; on a multi-year basis it has maintained a roughly 5% compound annual growth rate. The premium extensions provide both incremental profit and a halo effect for the franchise. Health metrics for the brand remain stable. We continue to invest behind the brand and its communications, including through McLaren Racing. Brand spend is expected to grow roughly in line with the brand's top-line sales. Regarding promotional activity and pricing, TDS pricing on a 52-week basis is about 1.2% and 0.8% on a 13-week basis, which is still positive. American whiskey pricing remains among the strongest across major categories. We are observing rational pricing behavior in many of the strength brands and have not seen a broad promotional environment emerge. Some tequila brands are struggling more and may discount more, but the large, stronger tequila brands are maintaining pricing. We remain comfortable with our pricing strategy.
To add on tequila and el Jimador specifically, Brown-Forman's pricing in tequila is higher than the TDS average, reflecting our move to reposition el Jimador into the $20 to $29.99 price tier where we see the fastest growth. We will be introducing a new package that supports this price repositioning and we're excited about the brand's prospects as we continue that work.
Our next question coming from the line of Filippo Falorni with Citi.
Can you give an update on developed international and emerging market performance? In prior calls you mentioned weaknesses in some European markets. Also on Mexico. For the second half of the year, Leanne, you mentioned improvement. What gives you confidence in the second-half improvement? Is it mainly comps on the inventory side or are you assuming an acceleration in category growth in the U.S. and international markets?
I'll start with the second-half drivers. The comp profile is a key factor: we will be comping against strong shipments in the first half of the prior year and we expect the second half of fiscal 2025 to look better. On developed international markets and emerging markets: in the U.K., we continue to hold value share in both on- and off-trade, though consumers have reduced spending and downtrading is present. Germany remains strong with continuing value share gains and an improving consumer climate. Poland is growing nicely while consumers remain cautious. France remains challenging with downtrading and promotional activity. In Mexico, consumer spending has slowed, which is shown in the el Jimador and Herradura performance. Brazil is delivering low single-digit growth overall, driven strongly by Jack Daniel's Tennessee Apple which has been very well received and is driving market share gains.
To add on the U.K.: Schedule C makes the U.K. look down 14% but much of that is due to the transition from Jack & Cola to Jack & Coke where Coca-Cola now sells concentrate in that market, which reduces reported sales but does not reflect true consumer demand decline for the brand.
On gross margin, was Q4 decline in performance mainly driven by lower inventories than expected? Have you already started to see some of the cost inflation headwinds for next year playing out in Q4? For 2025, you noted puts and takes with agave favorable and other commodities inflationary, but overall do you still expect some gross margin expansion in 2025?
The large change in the fourth quarter was driven by inventory-related accounting, specifically LIFO, which reflects the year-over-year change from Q4 '23 to Q4 '24. As for gross margin expansion in fiscal 2025, the change in our portfolio — the additions of Gin Mare and Diplomático and the divestiture of Finlandia and Sonoma-Cutrer — will provide reported gross margin expansion. Additionally, we expect favorable price mix driven by pricing in fiscal 2025. Those benefits will be partially offset by inflationary costs and the working capital normalization on our balance sheet, but overall we expect reported gross margin expansion driven by portfolio mix and pricing.
And our next question coming from the line of Peter Grom with UBS.
Leanne, you noted a tale of two halves with a more subdued first half. Can you provide parameters for how you're thinking about first half versus second half growth rates? What assumption on category performance is embedded into your guidance?
We expect fiscal 2025 growth to be driven more by emerging and developed international markets. The first half will be impacted by comparisons against the strong shipments in the first half of the prior year and the execution of our pricing strategy, while the second half is expected to be stronger. Our guidance assumes distributor inventories remain at their current levels. We are on a path back to our long-term growth algorithm and fiscal 2025 is another step in that normalization path. We remain consistent with current consumer and trade behavior assumptions until we observe indicators of change.
And ladies and gentlemen, that's all the time we have for our Q&A session. I'll now turn the call back over to Sue for any closing comments.
Thank you, and thank you to Lawson and Leanne and to everyone for joining us today for Brown-Forman's Fourth Quarter and Fiscal Year 2024 Earnings Call. If you have any additional questions, please contact us. As we close, I want to acknowledge an anniversary that the company just celebrated yesterday. On June 4, 1924, in the midst of Prohibition, Brown-Forman relocated to its headquarters in the location that we're sitting in today. Marking a century is another milestone in our 154-year history and a reminder of the agility and resilience of this company and its people as we work every day to ensure that there is nothing better in the market. With that, this concludes today's call.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.