Leanne Cunningham
Executive Vice President and Chief Financial Officer at Brown-Forman
Thank you, Lawson, and good morning, everyone. As Lawson mentioned, I will provide additional details on our geographic performance, other financial highlights and our fiscal 2025 outlook. From a geographic perspective, as expected, we saw sequential organic net sales improvement in each of our geographic clusters as we move through the first half. Our emerging international markets returned to growth, and collectively delivered 6% organic net sales growth in the first half. This growth was fueled by the very strong double-digit growth of Jack Daniels Tennessee Whiskey, Jack Daniels Tennessee Honey and Jack Daniels Tennessee Apple in Turkiye and Brazil. Our business in Turkiye benefited from the continued growth of the premium whiskey category. In Brazil, the economy has remained resilient as our results were driven by the growth of the premium plus whiskey category where we are gaining share, our geographic expansion strategy and the launch of an additional package size for Jack Daniels Tennessee Whiskey.
Brazil has consistently grown nine-liter depletions for the full strength Jack Daniels family of brands at a double digit rate over the past four years, and has joined the U.S., the U.K. and Germany as a million case market where the trailing 12 month depletions exceeded 1 million nine-liter cases. In Mexico, organic net sales of el Jimador and Herradura declined as the challenging economic environment is impacting discretionary spending and consumers are trading down. Despite the decelerating conditions in Mexico, we continued to outperform and gained market share across the channels driven by strong takeaway in RTDs and whiskey. In addition, Herradura is driving innovation in tequilas with the launch of Herradura Crystal in Mexico, which builds upon the region's Cristalino trend, and addresses the consumers need for a versatile tequila across occasions.
Organic net sales in the Travel retail channel declined 3% in the first half. Growth of Jack Daniels Tennessee Whiskey and Diplomatico were more than offset by the decline of our super premium American whiskeys, as Woodford Reserve compared against very strong double-digit growth and the launch of our exclusive global travel retail offering Jack Daniel's American Single Malt in the year ago period. We are continuing to innovate in this channel with the timing phase to the second half of the fiscal year.
For our developed international markets, organic net sales collectively was down 3% for the first half as growth in Japan was more than offset by declines in the United Kingdom and South Korea. As we shared last quarter, Japan continued to provide growth following our route to consumer change to owned distribution on April 1, 2024. While the U.K. returned to growth in the later months of the first half, the market continued to compare against higher volumes in the year ago period related to purchases ahead of the excise tax increase in August 2023. In South Korea, the premium whiskey category is still experiencing growth, though Jack Daniel's Tennessee Whiskey experienced increased competitive activity while also lapping the prior year launch of Jack Daniel's Tennessee Apple.
And in the United States, organic net sales decreased 3%. Double digit growth from Woodford Reserve, Old Forester and the Jack Daniels RTDs led by Jack and Coke were more than offset by declines in Jack Daniels Tennessee Whiskey and KORBEL California Champagne. Lawson highlighted the growth drivers of Woodford Reserve, Old Forester and the Jack Daniels RTDs in the U.S., therefore, I'll move to additional comments on Jack Daniels Tennessee Whiskey and KORBEL as well as on inventory and the consumer environment.
As a reminder, in the year ago period, Jack Daniel's Tennessee Whiskey experienced a shift in ordering patterns as inventory was purchased ahead of price increases. While the brand declined in the first half of this fiscal year, the brand's three-month organic net sales trend is ahead of the fiscal year to date trend, ended October 2024. There's also improvement in the three-month rolling takeaway trends. For KORBEL, the declines in the first half were largely timing related as we are focusing our promotional efforts on the seasonally stronger second half.
Turning to distributor inventory levels in the U.S., at the end of our first quarter, we shared that distributors were continuing to target the low end of their normal range, which is where they remain. As the important selling months of October, November and December approached, distributors began preparing for the important holiday selling season, and we noted increased shipments for key brands such as Jack Daniels Tennessee Whiskey and Woodford Reserve. This was done in a few key markets to ensure supply would meet consumer demand and to mitigate the risk of an out-of-stock situation at the retail level as some retailers are continuing to target the low end of their inventory range.
From a takeaway perspective, three-month rolling value trends for total distilled spirits are down approximately 1% and have remained steady in the first half. The premiumization trend continues with higher priced tiers growing in value and gaining share. The growth in the $40 and above price tiers are driven largely by the U.S. whiskey and tequila categories.
Moving on to the rest of the P&L, in the first half of fiscal 2025, our reported and organic gross profit decreased 8% and 4% respectively. This resulted in 240 basis points of gross margin contraction which improved sequentially as we progressed through the first half. We continue to benefit from favorable price mix and the Jack Daniels country cocktail business model change. These were more than offset by higher costs, largely driven by the timing of input cost fluctuations coupled with high inventory levels, foreign exchange as well as the impact of the transition services agreements related to the divestitures of Finlandia and Sonoma-Cutrer that we shared during our first quarter earnings call. As a reminder, these agreements had a negative impact on our overall reported gross margin as the gross margin for these services agreements were significantly below the sales of finished goods.
I will note that as of October 31, 2024, the transition services agreement related to Sonoma-Cutrer has concluded. As expected, operating expenses in the first half of fiscal 2025 were lower compared to the year ago period, largely due to seasonality of both fiscal years. Organic advertising expense decreased 4% as we compared against the phasing of our brand building investments in the year ago period.
As a reminder, our spend was significantly skewed to the first half of our fiscal year 2024 for Jack Daniels Tennessee Whiskey, particularly the Super Premium Expressions and to support the launch of the Jack Daniels and Coca Cola RTD in the United States. Organic SG&A investment decreased 3% for the first half driven by lower compensation and benefit expenses, as we lapped a 9% increase in the year ago period. In total, reported and organic operating income decreased 7% and 3% respectively in the first half of fiscal 2025. These results led to a 3% diluted earnings per share decrease to $0.96 per share.
Before moving on to our outlook, I would like to share two additional updates since our last quarter related to Sonoma-Cutrer and our capital allocation philosophy. In the second quarter we recorded income of $2 million related to our equity share of the Duckhorn Portfolio's earnings as a line item below the operating income line on our P&L based on the equity method one-quarter in arrears. On October 6, 2024, it was announced that the Duckhorn Portfolio would be acquired by private equity funds. Under the terms of the agreement, upon completion of the proposed merger, Brown-Foreman will receive cash of $350 million in exchange for our 21.4% ownership interest in Duckhorn. The completion of the merger, which is expected to occur in the second half of our fiscal year, is subject to customary closing conditions including approval by Duckhorn's stockholders.
We will continue to report our equity share of the Duckhorn Portfolio's earnings one-quarter and arrears until the merger is complete. Once our investment is sold, we will recognize the equity method earnings only up to the date of Duckhorn's most recently available financial statements and recognize a gain on the disposal when the investment is sold, not on a lag.
Secondly, Brown-Forman believes deeply in and remains committed to building an enduring business. As a testament to this belief, our long-term perspective and our enduring commitment to our valued shareholders, our Board of Directors recently approved a 4% increase in the quarterly cash dividend marking 41 consecutive years of dividend increases. Brown-Forman continues to be a proud member of the Prestigious S&P 500 Dividend Aristocrats Index and has paid regular quarterly cash dividends for 81 consecutive years. And lastly, turning to our fiscal 2025 outlook, we continue to 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 the global macroeconomic and geopolitical conditions that are creating volatility and uncertainty in the operating environment.
We are not forecasting significant changes in the behavior of the consumer or the level of trade inventory as the impact from inflation and higher interest rates on the consumer and trade still remain. As our first half results aligned with our expectations, we continue to believe that fiscal 2025 will be a year of two halves. We have moved beyond the comparison against strong shipments in a few emerging international markets as well as lapping stronger shipments associated with the execution of our pricing strategy on a year-over-year basis. In the second half, with the majority of the movements in inventories across the distributor, retailer and consumer supply chain behind us, we believe our results will more closely reflect consumer demand. This expectation though, is dependent on the behavior of the supply chain which is not within our control.
Also, we will begin to compare against the significant slowdown in total distilled spirits trends as well as trade inventory reductions. And finally, we believe that we will benefit from having a full year of growth from Gin Mare and Diplomatico, which had very strong results in the first half of fiscal 2025. With our pricing strategy in place, we remain confident in the strength of our brands and the breadth of our growth across numerous 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 believe that we will benefit from price mix through the evolution of our portfolio which includes the addition of the two super premium brands, Gin Mare and Diplomatico, 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, the transition services agreement for Sonoma-Cutrer has ended, and we expect the transition services agreement for Finlandia to come to an end in our second half which will reduce the A&D headwind.
And while costs were higher in the first half 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, though based on their current performance, it will take longer than expected to work through our higher cost inventory. We have shared that the benefit from the lower agave prices would be more than offset by the impact of inflation on our input costs and lower production volumes.
With the benefit now being lower, we are forecasting that cost will be higher than planned for fiscal 2025, leading to a slight contraction in our reported gross margin on a year-over-year basis. Our outlook for organic operating expenses continues to reflect investment behind our brands and our people, though we will continue to be highly diligent with our SG&A spend to balance the impact of these shorter-term pressures on our gross margin. Based on the above, we continue to forecast organic operating income growth in the 2% to 4% range.
The low and high end of our organic net sales and organic operating income ranges are based on numerous scenarios, with the greatest influence from weaker or stronger consumer demand in key markets such as the United States, and changes in distributor inventory levels. We are operating in a volatile and quickly evolving environment, and our third quarter is seasonally significant to our full year results. We will continue to closely monitor performance indicators and provide you with those updates in our third quarter call.
We continue to expect our effective tax rate to be in the range of approximately 21% to 23%, guiding closer to the lower end of the range, and we are updating our estimated capital expenditures outlook from a range of $195 million to $205 million dollars to a range of $180 million to $190 million dollars for the full year, as the phasing of a few of our projects will now extend into the next fiscal year.
In summary, the first half of our fiscal 2025 delivered against our expectations. The first half 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 first half were below our historical trends and our full year outlook, we believe we will continue to see sequential improvement and growth in the second half. As we look ahead to our full 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.
I would like to add my thanks to and deep appreciation for my Brown-Forman colleagues around the world for their resilience and agility as they continue to identify opportunities for our outstanding portfolio of brands with a dedicated focus on the long-term growth of the company. This concludes our prepared remarks. Please open the line for questions.
