Earnings Call Transcript - BF-A Q3 2025

Operator, Operator

Hello, and welcome to the Brown-Forman Corporation Third Quarter and Year-to-Date Fiscal 2025 Earnings Conference Call. I would now like to turn the conference over to Sue Perram, Vice President and Director of Investor Relations. You may begin.

Susanne Perram, Vice President, Director, Investor Relations

Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's Third Quarter and Year-to-Date Fiscal 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 third quarter and 9 months ended January 31, 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.

Lawson Whiting, President and CEO

Thank you, Sue, and good morning, everyone. Thank you for joining us today as we share our third quarter and year-to-date results for fiscal 2025. When we shared our first half fiscal 2025 results in December, I ended my prepared remarks with these words. We're still operating in a highly dynamic environment with many uncertainties. Even so, with all we know today, we continue to expect our second half to be stronger than the first. I'm proud to say that we executed our plan and delivered sequentially stronger top and bottom line results as we entered the second half of the year. January was the fifth consecutive month of positive 3-month rolling organic net sales trends. This trend returns our year-to-date fiscal 2025 results to growth, bringing organic net sales in line with and organic operating income ahead of our full year expectations. The operating environment continues to be incredibly dynamic and many uncertainties remain, particularly on the topic of tariffs. Taking everything into consideration as we know it today and based on our year-to-date performance, we're again reaffirming our full year organic net sales and organic operating income outlook for fiscal 2025. Now let me provide a bit of perspective on our year-to-date fiscal 2025 results. I'll start with the performance of our brands, and then Leanne will share more about our geographic performance, other financial highlights and our 2025 outlook. Our reported net sales decreased 4% in the 9 months of fiscal 2025, while organic net sales grew 2% after adjusting for the divestitures of Finlandia and Sonoma-Cutrer in the prior fiscal year, the negative effect of foreign exchange and the business model change for Jack Daniel's Country Cocktails. From a brand perspective, Woodford Reserve and Jack Daniel's Tennessee Whiskey were the two largest drivers of organic net sales growth in the year-to-date period. Based on takeaway results of the top 20 total distilled spirits brands in the United States from the past 13 weeks, Woodford Reserve is one of only four brands that are currently growing. Specifically, Woodford Reserve continued to accelerate with organic net sales growth of 10%, driven by higher volumes as well as positive price mix. Results were once again led by the growth of Woodford Reserve Distiller Select, the number one super premium American whiskey globally. Woodford Reserve Double Oak continued to deliver double-digit growth. If you look at the same top 20 brands from 6 months ago, Woodford Reserve was one of only two brands in growth. So we are seeing some green shoots in the U.S. spirits market. In addition, within U.S. whiskey, the super premium and above price tiers are the only growth contributors, largely driven by innovation. We believe that our strategic approach to innovation with our craft and luxury expressions, for instance, adapting barrel finishes and grain recipes positions us to capitalize on growth opportunities in this category. Our latest introductions, which launched in early February, include Woodford Reserve Batchproof, a limited edition offering, and Woodford Reserve Double Double Oak, both products have a suggested retail price above $100. Similar to Woodford Reserve Double Oaked, Woodford Reserve Double Double Oaked was once a limited edition offering. Consumer demand for the product was consistently strong, and in keeping with our consumer strategy, we have made this expression a permanent member of the Woodford Reserve family of brands. Jack Daniel's Tennessee Whiskey built on its momentum in the first half of fiscal 2025 and once again accelerated sequentially. I'm very pleased to say that organic net sales for Jack Daniel's Tennessee Whiskey increased 2% for the year-to-date period. We're continuing to focus on both short-term acceleration and long-term brand building to engage a new generation of legal drinking age consumers while remaining intently focused on retaining our core consumers. As we have shared previously, we're engaging with consumers through our McLaren Formula 1 sponsorship, music sponsorships, new media campaigns and an evolved on-premise strategy to drive acceleration. In the on-premise, for example, we're increasing investment in all major markets and have dedicated resources to create a team of brand ambassadors called the Jack Pack in key markets across the U.S. The Formula 1 2025 season kicks off in Australia in a few weeks and then it heads to China at the end of March. This season, we will further evolve our approach to our McLaren sponsorship by refining the Jack's Garage experience designed to enhance the brand's cultural relevance through a fusion of racing, music and influencers in key markets around the world. Music has been an important part of Jack Daniel's relevance in pop culture. The brand's connection to music began all the way back in 1892 when Jack Daniel formed the Silver Cornet brand to engage with people in Lynchburg Town Square. Through the decades, many musicians such as Frank Sinatra to most recently Chibuzi have been friends of Jack, and we will continue to focus on building authentic connections like these with each of our consumers. We'll also continue to connect with consumers through music during the busy spring and summer concert and music festival season, which provides ideal venues for consumers to trial and to enjoy the Jack & Coke RTD. RTDs remain a leading growth category within total distilled spirits, driven by consumer trends that favor convenience and flavor with the Jack & Coke RTD continuing to gain global attention. In the United Kingdom, Jack & Coke recently received the 2025 Product of the Year Award in the premixed spirit category. This award is based on consumer votes and is considered the U.K.'s biggest accolade for product innovation. Innovation, particularly flavors and formats, is important in the RTD category. The Jack & Coke Cherry limited time offering in the U.S. performed well and now is available in the United Kingdom. For those of you in the U.S., you should begin to see a variety pack on shelf in the upcoming weeks, featuring Jack & Coke, Jack & Coke Cherry and Jack & Coke Vanilla in time for the seasonally stronger spring and summer months. Also within our RTD portfolio, New Mix continued its impressive growth with a double-digit organic net sales increase in 12 of the past 13 quarters. The brand is well positioned and continues to gain market share in Mexico. In addition, New Mix will launch a new flavor, New Mix Pikosito Tamarindo, in the spring. This launch reflects the culinary richness of Mexico and positions us to capitalize on the growing consumer demand for bolder and more refreshing flavors. It's important to balance tradition and innovation as we adapt to changing consumer trends in the country while maintaining our commitment to quality and authenticity. We believe our innovation opportunities will generate interest and attention not only for our portfolio of RTDs but for our portfolio of full strength brands as well. There are a few other brands that I know are of interest to many of you. The two newest brands in our portfolio, Diplomático and Gin Mare, are performing well. Diplomático delivered very strong double-digit organic net sales growth led by France and Czechia, along with the travel retail channel in Germany. Organic net sales for Gin Mare increased double digits, driven by Germany, Spain and the travel retail channel. In fiscal 2023, when we acquired Diplomático and Gin Mare, the brands had a strong European presence that both aligned with our route-to-consumer investments and provided opportunities for growth in the United States. We continue to ensure both Diplomático and Gin Mare have the focus and dedicated resources to drive their growth by placing the brands in our emerging brands portfolio in both Europe and the United States. While our tequila brands, El Jimador and Herradura, improved sequentially, they continue to face challenges in the U.S. and in Mexico, their two largest markets. The environment for the tequila category in the U.S. remains competitive with an increasing number of brands, while Mexico's economy has faced a challenging macro environment. Tequila Herradura is a 155-year-old brand, and we have been celebrating its heritage as the world's first Reposado across consumer communications as well as highlighting its craftsmanship, heritage and authenticity. The launch of Herradura Cristal in Mexico, which builds upon the region's Cristalino trend is off to a strong start. For El Jimador, the softness in the U.S. and Mexico negatively impacted the performance of the brand globally. Even so, we remain optimistic about El Jimador's ability to introduce consumers to the mixability and versatility of 100% agave tequila. We saw very strong double-digit organic net sales growth in Australia, Brazil and France, and we continue to believe that El Jimador can grow the premium tequila category around the world. Despite the performance of our tequila brands in the short term, we believe we have the right brands to capitalize on the growth in the tequila category globally over the long term. Before turning the call over to Leanne, I want to take a moment to discuss the dynamic landscape of the beverage alcohol industry and how we are proactively adapting to an evolving operating environment with a focus on long-term growth. First, our recent route-to-consumer evolution. We continue to be pleased with our route-to-consumer change in Japan and are on schedule to launch our own distribution in Italy on May 1, 2025. And while much of our RTC focus has been on markets outside of the United States, the route-to-market landscape in the U.S. has evolved as well. As we announced last week, after thoughtful consideration, we have selected Reyes Beverage Group as our new distributor in California effective May 1, 2025. As you may recall, Reyes has been our distribution partner for Jack & Coke in California since we launched the product in the U.S. Our decision to expand our relationship with Reyes in California is a bold move that reinforces we are thoughtfully evaluating all aspects of our business in what continues to be a challenging external environment. This change will allow us to unlock new growth capabilities and leverage Reyes' exceptional operational excellence, as demonstrated by their impressive growth in California for their existing beer and spirit suppliers. We believe Reyes Beverage Group will be a tremendous partner in accelerating our California business. It's also important to note that we continue to value the relationship we have built with the Republic National Distributing Company with whom we work in 23 other states across the United States and appreciate their continued collaboration and focus on our shared success. We will continue to review our route to market across the U.S. to ensure our brands are well positioned to win in the highly competitive marketplace. Another important strategic initiative I'd like to touch on are the recent changes we announced with regard to our workforce. In January, we announced a series of strategic initiatives designed to position the company for continued growth in the dynamic global spirits market, including restructuring the executive leadership team, reducing our global workforce by approximately 12% and closing the Louisville-based Brown-Forman Cooperage. We also offered an early retirement benefit to qualifying U.S. employees. This organizational evolution will simplify and streamline our organization, allowing us to become more agile and efficient as well as reinvest in the capabilities, technologies, brands and people that will drive future growth. The closure of the Cooperage in Louisville was a difficult decision, as we've been producing our own barrels for almost 80 years. During this time, the Cooperage industry has evolved and external suppliers are able to provide the same high-quality barrels at scale and at a competitive price. You may recall over the last few years that we have discussed the significant impact of wood costs on our gross margin. In response to that, we've taken strategic steps to optimize our wood supply chain, including the sale of our mills and our Cooperage in Alabama in fiscal 2024. The closure of our Louisville Cooperage represents the final step in our wood supply chain strategy, which we believe will create efficiencies and allow us to further optimize our capital allocation. While we expect to incur approximately $60 million to $70 million in aggregate charges for severance and related costs associated with the workforce reduction and Cooperage closing, collectively, these actions are projected to deliver approximately $70 million to $80 million in annualized savings. In addition, we expect to receive more than $30 million in proceeds in connection with the sale of the Cooper assets. We expect to reinvest a portion of the savings to accelerate growth, and we'll provide more detail on our incremental investments in the near future. I want to express my sincere gratitude to our employees, particularly those impacted by these changes for their dedication and contributions to Brown-Forman. We're a 155-year-old company because we have evolved and changed over the decades. We're confident that these strategic initiatives will ensure the company endures for generations to come. In summary, the year-to-date fiscal 2025 organic net sales and organic operating income are back to growth within the range of our full year outlook and at the top of our industry. While we are still operating in a highly dynamic environment with many unknowns and uncertainties, based on our 9-month results and what we know today, we continue to believe that we're positioned to achieve our full year guidance, which we have reaffirmed. I believe the combination of our strong portfolio of brands, our broad geographic reach and our resilient team of people will enable us to achieve our long-term growth potential. With that, I'll turn the call over to Leanne, and she'll provide more details on our year-to-date results.

Leanne Cunningham, Executive Vice President and CFO

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. As we have shared with you previously, we anticipated 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 distributor inventory trends on a year-over-year basis. From a geographic perspective, we saw sequential organic net sales improvement with growth in each of our geographic clusters as we began the second half. This was in line with our expectations and resulted in a return to growth in the year-to-date period. Our emerging international markets continued to lead our growth and collectively delivered an 8% organic net sales increase in the year-to-date period. This growth was led by strong double-digit growth in Turkey and Brazil, led by Jack Daniel's Tennessee Whiskey. Our business in these markets continued to benefit from the growth of the premium whiskey category. Brazil is also benefiting from our geographic expansion strategy and the launch of an additional package size for Jack Daniel's Tennessee Whiskey. In Mexico, organic net sales were flat as the challenging economic environment is impacting discretionary spending and consumers are trading down. While our RTDs and Jack Daniel's are outperforming competitors and gaining market share, our tequilas continue to underperform. As Lawson mentioned, New Mix delivered double-digit organic net sales growth, driven by a steady pricing and promotional strategy, along with increased distribution. In addition, Jack Daniel's RTDs, which include Jack and Coke, outperformed the RTD category and fueled value growth. While the current operating environment is difficult, we are committed to the development and growth of our portfolio of brands in Mexico. We are further leveraging our own distribution capabilities with William Grant & Sons and have begun distribution of Hendricks, Glenfiddich, Balvenie and Monkey Shoulder brands. William Grant & Sons is a fifth-generation family-owned company, and we believe there are strong synergies between William Grant & Sons brand portfolio and our portfolio of brands. We believe this distribution agreement will provide us additional strength to achieve greater development of the combined portfolio, particularly in the on-trade and the super premium segment. This is yet another example of how we are identifying strategic growth opportunities and moving at pace to execute in a quickly evolving operating environment. Organic net sales in the travel retail channel improved sequentially with a decline of 2% in the first 9 months of the fiscal year. Growth of Diplomático and Jack Daniel's Tennessee Whiskey were more than offset by the decline of our other super premium American whiskeys such as our exclusive global travel retail offerings, Jack Daniel's Bottled in Bond and Jack Daniel's American Single Malt, which compared against its launch in the prior year period and Jack Daniel's Single Barrel, which compared against very strong double-digit growth in the year-ago period. Our developed international markets collectively delivered an organic net sales decline of 1%. As we have shared, Japan continues to benefit from our route-to-consumer change to own distribution on April 1, 2024. In South Korea, while the premium whiskey category is still experiencing growth, Jack Daniel's Tennessee Whiskey faced increased competitive activity and Jack Daniel's Tennessee Apple compared against its launch in the prior year period. The economic outlook in Germany has weakened and consumer confidence has declined in the market. Between October and January, there was a significant deceleration in spirit takeaway trends, including RTDs in Germany, which negatively impacted Jack Daniel's Tennessee Whiskey as well as the Jack Daniel's RTDs. In the United States, which grew sequentially, organic net sales decreased 1%. Double-digit growth from Woodford Reserve, Old Forester and the Jack Daniel's RTDs led by Jack and Coke were the largest growth contributors, while Jack Daniel's Tennessee Whiskey and Korbel California Champagne were the main drivers of the overall decline. Lawson highlighted the growth drivers of Woodford Reserve and the Jack Daniel's RTDs in the U.S. Therefore, I'll focus my comments on Old Forester, Jack Daniel's Tennessee Whiskey and Korbel, as well as distributor inventory levels and the consumer environment. Old Forester again delivered double-digit organic net sales growth, led by strong performance of the super premium expressions. The success of these products has created a halo for the Old Forester trademark as Old Forester 86 Proof, Brown-Forman's founding brand, delivered high single-digit organic net sales growth. For Jack Daniel's Tennessee Whiskey, the brand accelerated sequentially from the first half of our fiscal year and delivered a positive 3-month organic net sales trend. We have made purposeful efforts to highlight our whiskey-making craftsmanship and credentials through innovation and specialty launches. This gives both longtime and new friends of Jack Daniel's the opportunity to explore and discover within the Jack Daniel's family. Last week, we announced the latest release in the age series, Jack Daniel's 14-year-old Tennessee Whiskey. This marks the first time in more than 100 years that Jack Daniel's has offered an expression of this age. This product joins Jack Daniel's 10-year-old and 12-year-old Tennessee Whiskey, which honors the legacy of Jack Daniel's himself and replicates the lineup of age-stated whiskeys available during his time. With the majority of the sparkling category in a downturn, Korbel outperformed its price tier, thanks to promotional efforts, but the brand did decline for the 9 months of the fiscal year. Turning to distributor inventory levels in the U.S. The environment remains unchanged with distributors continuing to target the low end of their normal range. As we shared last quarter, shipments increased for key brands such as Jack Daniel's Tennessee Whiskey and Woodford Reserve in several states ahead of the important holiday selling season. This was done 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. As typical during the holiday selling season, distributors largely sold through the seasonal inventory build and are expected to bring shipments and depletions largely in line for this fiscal year. From a takeaway perspective, 3-month rolling value trends for total distilled spirits are down approximately 1% with recent volatility in the trends driven by year-over-year timing comparisons. The premiumization trend continues in the U.S. whiskey and tequila categories, with higher-priced tiers, particularly in the $40 and above tier growing in value and gaining share. Moving on to the rest of the P&L. In the year-to-date fiscal 2025, our reported and organic gross profit decreased 6% and 1%, respectively. This resulted in 150 basis points of gross margin contraction to 59.4%. However, gross margin improved sequentially as expected. We continue to benefit from favorable price mix, the Jack Daniel's Country Cocktail business model change, and the positive impact from our portfolio evolution, which had been obscured by the transition services agreements related to Finlandia and Sonoma-Cutrer. These benefits were more than offset by higher costs and the negative impact of foreign exchange. As we have shared in prior quarters, we expect higher cost in the fiscal year due to the impact of inflation on our input costs and lower production volumes as we work to return our finished goods inventories to more normal levels. Operating expenses in the 9 months of fiscal 2025 were lower compared to the year-ago period, largely due to a 6% decrease in organic advertising expense, which is related to the phasing of our brand-building investments, particularly for Jack Daniel's Tennessee Whiskey and Jack Daniel's Tennessee Apple in the current fiscal year as well as comparison against the launch of Jack Daniel's and Coca-Cola RTD in the United States in the year-ago period and a 4% decrease in organic SG&A investment led by lower compensation and benefit expenses. As Lawson mentioned in his comments, as a result of our recently announced strategic workforce initiatives, we expect to incur approximately $60 million to $70 million of expenses consisting primarily of approximately $27 million to $32 million in severance and other employee-related costs and approximately $33 million to $38 million in other restructuring costs, including costs related to the Cooperage facility closure. Through January 31, 2025, we have incurred $33 million in restructuring and other charges, which also includes $4 million in other charges associated with the early retirement benefit. We expect the initiatives to be substantially implemented in fiscal 2025, with the remainder expected to be completed by the end of fiscal 2026. In total, reported operating income decreased 13% and organic operating income grew 5% in the 9 months of fiscal 2025. In addition, as we have shared with you last quarter, it was announced that the Duckhorn portfolio would be acquired. With completion of the merger on December 24, 2024, we received cash of $350 million in exchange for our 21.4% ownership interest in Duckhorn and recognized a $78 million gain on the sale of our investment in Duckhorn. In summary, the above results collectively led to a 4% diluted earnings per share decrease to $1.53. Now let's turn to our fiscal 2025 outlook. The operating environment is increasingly volatile due to geopolitical uncertainties and the global macroeconomic conditions, particularly with regards to the tariff environment. We continue to expect that the behavior of the consumer and the level of trade inventories will not change significantly during the remainder of this fiscal year. Based on our year-to-date fiscal 2025 results and the currently known factors, we anticipate a return to growth for organic net sales. We continue to expect organic net sales growth in the 2% to 4% range, guiding closer to the lower end of the range. We continue to believe this growth will be driven by our pricing strategy, along with the benefit from price mix through the evolution of our portfolio and our revenue growth management activities, our emerging markets, innovation and sequential improvement of our developed international markets with the breadth of our growth across numerous geographies. Easier comparisons in the second half of fiscal 2025 as we compare against the significant slowdown in total distilled spirits trends as well as trade inventory reductions and the benefit of the full year growth of Gin Mare and Diplomático, which have had very strong results in the year-to-date period. The benefit of price mix will remain a tailwind for reported gross margin, but costs continue to be higher in fiscal 2025, leading to an expectation that full year reported gross margin will be consistent with the year-to-date fiscal 2025. As we have shared, we expected the benefit from lower agave prices to be more than offset by the impact of inflation on our input costs and lower production volumes. Costs have remained higher than planned, 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. Our outlook for organic operating expenses continues to reflect investment behind our brands with an acceleration in our advertising expense in the year-to-go period. We now expect a significant reduction in SG&A related to lower compensation-related expenses, coupled with our recently announced strategic workforce initiatives. Based on the above, we continue to forecast organic operating income growth in the range of 2% to 4%, guiding to the upper end of the 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 being weaker or stronger consumer demand in key markets such as the United States and changes in distributor inventory levels. We continue to expect our estimated capital expenditures outlook to be in the range of $180 million to $190 million, and we are updating our effective tax rate outlook from a range of approximately 21% to 23% to approximately 20% to 22%. In summary, during the 9 months of fiscal 2025, we continue to deliver against our expectations. Our financial performance has sequentially improved with our organic net sales and organic operating income returning to growth in the year-to-date period. These results reflect the strength of our brands and the immense agility of our team members as we have been operating in a highly dynamic environment, which created unusual comparisons. As we near the completion of another fiscal year in our 155-year history, we remain confident in our ability to strategically navigate a highly volatile operating environment to deliver on our near-term goals while remaining focused on executing against our long-term strategy, which is to ensure that Brown-Forman will endure for decades and generations. This concludes our prepared remarks. Please open the line for questions.

Operator, Operator

Our first question comes from Lauren Lieberman with Barclays.

Lauren Lieberman, Analyst

We reviewed several transcripts and discussions from the craft boom period between 2014 and 2019. During that time, Jack Daniel's performed well in the U.S. despite the increased activity in the craft sector. Many people are curious about the potential influx of smaller companies entering the market in the next year or two, especially with the current surplus of whiskey. I would like Lawson to reflect on how the company is preparing for a market populated by numerous small brands, an increase in competition, and celebrity-endorsed whiskey products. Additionally, I am interested in your thoughts on the current state of the Jack Daniel's and Woodford Reserve brands compared to their position from 2015 to 2017.

Lawson Whiting, President and CEO

That's a great question, Lauren. I can’t recall what I mentioned last week, not to mention ten years ago, but I'll give it a try. You’re correct that there was a surge of smaller, entrepreneurial-led brands that flourished during that period, especially as some bulk suppliers expanded significantly. Looking back before that timeframe, particularly pre-2010, entering the American whiskey market was challenging due to a few dominant companies, including us, that weren't selling any surplus whiskey. This situation has changed. Today, regarding the supply in the industry, the market share for craft brands is still around 3% or 4%. I’ve noticed there are currently more closures than openings. I don’t view the supply issue as a conflict with craft brands; rather, it involves the major players you know well, both public and private companies in the sector. Also, these are rational operators, mainly large companies that are reducing their supply. They are either postponing new plant openings or slowing down operations and making workforce adjustments. The industry is adjusting naturally by cutting back on supply to restore balance. It doesn’t take long to realign when everyone initiates this process. If I recall, two years ago at your conference, we were reaffirming our guidance, which we ultimately missed. Back then, we were more concerned about being short on supply rather than having too much. This situation is fluid, and it can change rapidly, so we’ll see how it develops.

Leanne Cunningham, Executive Vice President and CFO

And then to your point on Jack Daniel's performance in health, what we would say is the trend as we've been in this fiscal year, they've definitely been improving sequentially as we've gone through the year from down 6% in Q1, flat in the first half and now to organic growth of plus 2% in the year-to-date period. We see our positive 3-month rolling organic net sales trend. Some of this, yes, is driven by our Japan investment in our own distribution as well as markets like Turkey, where the premium whiskey category continues to grow. And then in the U.S., and I'm sure we'll talk about this more, it continues to accelerate sequentially also in the U.S. And then if there's anything else you want to add, Lawson on brand health.

Lawson Whiting, President and CEO

The Jack Daniel's brand has faced a lot of competition in recent years, which has been challenging. We've made several changes to enhance the brand and are currently focusing more on music. This includes participation in global music festivals and hosting songwriters in Lynchburg, Tennessee, several times a year. We believe this has contributed to the increase in song mentions of Jack Daniel's over the past couple of years, helping us maintain relevance with a significant part of our audience. Regarding the McLaren, we are redefining the Jack's Garage experience to blend music culture with racing. These initiatives have been quite successful, and we are also implementing new on-premise strategies. Although trends in the U.S. haven't progressed as we hoped, we are seeing strong growth in emerging markets, which is benefiting the company and the brand.

Operator, Operator

Next question comes from the line of Nadine Sarwat with Bernstein.

Nadine Sarwat, Analyst

And two questions from me. I think in your prepared remarks, you called out the competitive environment for tequila in the U.S. at the moment. In light of some of the price movements we've seen from your competitors, can you talk to your approach on pricing when it comes to your tequila portfolio in the U.S.? And how do you think about that balance of volume versus price when it comes to driving sales growth? And the second question, you called out U.S. spirits market value growth, I think, minus 1 sort of bumping along in the same range versus the last time we spoke. Are you seeing any changes in consumer behavior under meet that headline number that's worth calling out, thinking about it by product, price point or channel, any additional consumer insights would be helpful?

Lawson Whiting, President and CEO

Yes. If we focus on the U.S. for a moment, using TDS as a measure of consumer health, it appears to be relatively flat or slightly declining, which is disappointing. We had hoped for a quicker recovery and some growth. However, that hasn't materialized. Interestingly, we've observed that smaller sizes are generating momentum and gaining market share in the U.S. This seems to indicate that the current situation is more cyclical rather than structural. The success of smaller sizes can be attributed to cyclical inflation, as consumers are feeling the pinch, particularly with food inflation. Regarding tequila, pricing has become more challenging over the past year, with some leading brands like Herradura and El Jimador experiencing declines. We're making significant efforts to address this. On pricing, tequila as a whole has seen a decrease of 1.7%. While some larger brands have adopted a more aggressive pricing strategy, 1.7% isn't overly aggressive. We were initially concerned that the situation would be worse. When looking at TDF, not just for tequila but across U.S. spirits, pricing has only fallen by 0.5 points. This suggests that our competitors are still behaving reasonably, and while tequila pricing has become slightly more competitive, the changes are minimal.

Leanne Cunningham, Executive Vice President and CFO

And I'll just add on a little bit as it relates to our pricing as it relates to tequila is still a bit ahead of TDS. That's all about moving Herradura into that faster-growing price segment of that $20 to $30 range. We have been working on that price, as you heard us say for some time. Soon, we're going to be relaunching the brand with a new premium package, new communications and with some new innovations around it to support that new price positioning and that faster growing price tier.

Operator, Operator

Our next question comes from the line of Peter Grom with UBS.

Peter Grom, Analyst

I would like to gain some insight into distributor inventories in relation to organic sales growth. It's encouraging to see growth returning in the third quarter, but it appears there is still a positive impact from changes in distributor inventories. I believe it added around 300 basis points for the quarter and year-to-date. Leanne, how should we approach this looking forward? Is this simply a return to normal, and should we not expect any unwinding as we consider the fourth quarter of '26? I understand you've made some comments about the U.S. that might imply some unwinding there, so it would be helpful if you could elaborate on that. Additionally, regarding the 6% organic sales growth, if we examine the core component that you previously reported at 3% for this quarter, do you expect this underlying growth to continue improving as we move forward?

Leanne Cunningham, Executive Vice President and CFO

Certainly. I'll begin by addressing your question about inventory. It's important to look back at how we finished fiscal '24. We ended that fiscal year with depletions exceeding shipments by 6 points. This year, we believe distributors are mainly maintaining their inventory at the lower end of their typical range. Retailers have adjusted their stock in response to consumer purchasing trends and rising inflation. As shown in our earnings release, our year-to-date shipments are mostly aligned with our depletions, with depletions slightly ahead of shipments. Specifically in the U.S., we previously mentioned that to ensure a successful holiday selling season, we needed to have some core products like Jack Daniel's, Woodford Reserve, and Korbel stocked with distributors before the holidays. Since retailers are keeping lower inventory levels, we managed to avoid any out-of-stock issues. Distributors have primarily sold through the seasonal inventory we built up, and we expect that by the end of this fiscal year, shipments and depletions will be closely aligned. Therefore, we do not anticipate any significant shifts in trade inventory levels. Regarding depletion-based results, we expect to continue operating in a dynamic environment. We believe consumer behavior will remain stable, and we look forward to benefiting from a full year of Gin Mare and Diplomático, as well as growth in emerging markets. This year has seen our innovation focus shifted towards the latter half of the year, and we've recently launched Woodford Double Double Oak with successful shipments and expect depletions to follow. Additionally, our Jack Daniel's 14-year-old product has also been well-received.

Operator, Operator

Our next question comes from the line of Filippo Falorni with Citi.

Filippo Falorni, Analyst

I wanted to follow up on Peter's question regarding the amount of shipments exceeding depletions. I understand there was an inventory impact in the same period the previous year. Looking ahead to fiscal '26, do you see any risks of a negative impact, or do you believe you'll end the year on a more normal basis? Additionally, I'd like to ask about your thoughts on tariffs. There's a lot of uncertainty surrounding this issue, especially with the EU and the potential for tariffs being introduced, which could affect demand. How are you managing the situation from an inventory perspective? Also, what are your thoughts on pricing in response to these tariffs?

Leanne Cunningham, Executive Vice President and CFO

So I'll start with inventory, just to conclude then I'll turn it over to Lawson for tariffs. For F '26 of course, we'll be talking about that in our June call. But again, as we think about where our inventory levels are, they continue to be at the low end of their normal range. We expect that shipments and depletions largely are going to come back into line for this fiscal year. So depending on where the year ends, we'll guide more on '26 when we get to June. But right now, everything remains stable in the inventory arena.

Lawson Whiting, President and CEO

Okay. Let's talk about tariffs. I didn't expect to bring them up this early in the call, but here we are. The issue of tariffs is not just about Brown-Forman or our industry; it's evolving every day, making it hard to predict what's next. I can report that our competitors and partners are focused on achieving reciprocal zero-for-zero tariffs. That is our main goal, which is perhaps clear, as we aim to keep this industry out of trade conflicts. We are preparing for potential scenarios. Unfortunately, this is not our first experience with such situations, and we have learned valuable lessons. We are dedicated to doing our best for both consumers and stakeholders, and we believe we have the necessary strategies in place. Regarding the EU, the situation is uncertain with the upcoming tariffs. They might automatically take effect on March 31, but we still lack clarity on the outcome. The 25% tariff could remain, be reduced to 0%, or increase to 50%. Currently, the EU is attempting to engage with our administration, and no retaliation has been announced yet. This reciprocity matter is crucial, and we will continue to advocate for it alongside our competitors. However, if reciprocity does not occur and American whiskey is targeted again, it could significantly distort the spirits market, putting us at a disadvantage. Still, we are hopeful that American whiskey will not be caught up in this larger dispute. In terms of our preparations, it's a sensitive topic competitively, so we won't disclose too much. Rest assured, we have measures in place and are monitoring the situation as closely as possible.

Leanne Cunningham, Executive Vice President and CFO

And then the only thing that I'll add to that is, as you know, this is a highly volatile situation that we can't predict what's going to happen. So just from a financial perspective, as Lawson said, we've been executing on multiple risk mitigation plans for most of this fiscal year. And with the situation as fluid as it is, we can say that any impact on any type of tariff would be included in our F '25 guidance, and we just believe it's prudent to wait until June to share any other thoughts on the potential impact going forward.

Operator, Operator

Our next question comes from the line of Andrea Teixeira with JPM.

Drew Levine, Analyst

This is Drew on for Andrea. So just following up on that thread, Leanne and Lawson the tariffs on Mexico and Canada. I think Canada is removing some products from the LCBO. So can you maybe quantify the impact that you're building in on the fourth quarter? And then separately, maybe you could shed some light on how holiday performed versus your expectations in the U.S.

Lawson Whiting, President and CEO

I'll discuss the situation in Canada while you address the holidays briefly. Canada, Mexico, and the EU each have unique circumstances, particularly Canada, which stands out from the others. Recently, they removed not only beverage alcohol but a variety of American-made products from their shelves, which is quite challenging. This situation is more severe than a tariff, as it effectively eliminates our sales by taking our products off the shelves completely. This is a significantly disproportionate action compared to a 25% tariff. It’s frustrating, and we are committed to advocating for a shift towards reciprocal zero-for-zero tariffs, which would benefit our entire industry. We'll monitor how this unfolds. Canada represents about 1% of Brown-Forman’s sales, so we can manage this impact. It's disappointing that some consumers in Canada won't have access to our Jack Daniel's bottles, which are quite popular, but we will observe how the situation develops along with ongoing rumors. As for Mexico, we will need to see what occurs there since they haven't issued any specific announcements about what is to come. We will have to wait until that information becomes public.

Leanne Cunningham, Executive Vice President and CFO

Yes. So then to your other part of your question, I would say, in general, the holiday selling season at the enterprise level was as we expected. Not a lot of change in consumer behavior, though, the consumer does continue to be more mindful of their spending. Many shoppers are prioritizing deals and promotion because they continue to be stretched. And this year, kind of what was different for us, and we've already talked about that is last year during kind of the end of the holiday selling season. That's when distributors began to move from the midpoint of their normal range down to the low end of their normal inventory range. But all in all, we continue to see it was a bit more of a promotional operating environment during the holiday season. We personally, we increased our price competitiveness, but we didn't see any of our suppliers. And I would say the percentage of the volume sold on promotion for us was at the midpoint of our competitive set. So again, as our theme is our results continue to be in line with our expectations in the holiday season kind of unfolded as we expected.

Lawson Whiting, President and CEO

One thing worth revisiting is the discussion about structural versus cyclical changes in our industry. I want to emphasize a point that seems to be overlooked. If we look back 20 years, the U.S. spirits market averaged growth between 4% and 5% for decades, supported by premiumization, market share gains from wine and beer, and population growth, leading to sustained growth. The COVID period caused a significant spike in demand, and from the summer to fall of 2020, the global spirits market experienced immense growth rates, to the extent that supply couldn't keep pace with demand. Fast forward to the last 18 months, and by the summer and early fall of 2023, I noted optimism with market growth around 5% to 6%. However, from September to December 2023, the market suddenly dropped to zero growth and continued to decline into 2024. I believe that the significant structural factors many attribute this downturn to, such as GLP-1s, cannabis, and Gen Z, cannot account for such a swift drop in the spirits market. The primary factor remains inflation, which is impacting consumers' disposable income. While these structural changes may pose long-term challenges, they are not the main drivers affecting the current spirits market. Gen Z faces a different set of challenges; they are just starting their careers or are fresh graduates and typically have limited financial resources. I think the media may be overemphasizing Gen Z's impact on the market. I believe they will return to the category over time, and internal studies indicate that per capita consumption is actually rising among individuals aged 35 and older, which may not be widely recognized. Spirits will continue to gain market share from beer and wine, and while premiumization is challenging now, we remain optimistic about it in the medium to long term. Additionally, there is a demographic increase of people reaching legal drinking age in the U.S., which is encouraging. We are navigating a mix of challenges and positive factors.

Operator, Operator

Our next question comes from the line of Eric Serotta with Morgan Stanley.

Eric Serotta, Analyst

A couple of cleanup questions. First, in terms of California and the distributor transition there, are you expecting anything unusual or visible in fourth quarter results from RNDC, I guess, selling down inventories, Sazerac building inventories? Or do they just sort of wash out or net out to something not material in the quarter? Then in terms of your finished goods inventories, I believe you spoke coming out of last fiscal year, starting this fiscal year that your finished goods were on the high side and you'd be throttling back production a little bit. Just wondering, is that done? Are your finished goods inventories now in place that you'd like? And then lastly, emerging markets, you are putting up some pretty nice org sales growth there. Just wondering how much of that is coming from pricing versus volumes? Are you seeing some pretty big inflationary pricing in markets like Turkiye? Or is a lot of this growth coming from volumes? I'm sorry for multiple questions.

Leanne Cunningham, Executive Vice President and CFO

Okay. Great. Well, I'll start with California. We have all of our teams through RNDC, Brown-Forman and Reyes all working to have a seamless transition. Again, we believe that as we go through kind of the rest of this fiscal year that we will see a seamless transition and not a negative impact as we go through this transition. Again, we have been with Reyes, and we've expanded our relationship with them, but we continue to be a huge partner with RNDC across the other 23 states. So we're all working together to ensure that seamless transition. From a Brown-Forman finished goods question perspective, we have been working over this fiscal year, as we've talked about with lower production to adjust our finished goods raw material inventories back down to more historic levels. We've made significant progress in that. I would like to believe we definitely have more to go. You'll see that impact somewhat muted because of our continued execution against our tariff mitigation strategies. So that will become more visible over time. And then in emerging markets, it's dependent on the market because Brazil, we have geographic expansion. For Turkiye, again, you talked about with the inflationary market there, we are taking pricing, but then it continues to be a market where the premium whiskey category continues to grow. So we have a mix, and it's just on a country-by-country basis. But I think probably one thing I will add to that is we have said over time and it came out of our Investor Day that Brown-Forman's opportunity in emerging markets was an opportunity that I think we heard from a lot of you all that we said was underappreciated. And this is a moment where we're seeing that growth come through in those markets.

Operator, Operator

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

Bonnie Herzog, Analyst

I was hoping to get more insight on your marketing and advertising spending for the quarter, which was somewhat reduced. I think about this in relation to the improvement in your margins and earnings per share in the short term. Could you help us understand your strategy for spending in the future, particularly regarding brand building and supporting the recovery you mentioned?

Leanne Cunningham, Executive Vice President and CFO

Sure, I can let Lawson discuss brand building. At a high level, our brand spending typically aligns with our top line growth. Importantly, this assumes there is no impact from changes in distributor inventories, meaning it corresponds more closely with our depletion-based top line growth. We continue to invest, particularly in Jack Daniel's Tennessee Whiskey, as we aim to maintain and grow their share of voice, which is crucial for long-term brand equity. Lawson, would you like to add anything?

Lawson Whiting, President and CEO

Yes, as Leanne mentioned, our branding expenses usually align with our sales growth. Currently, the overall trend in the industry isn't particularly strong. However, we remain committed to making significant investments in our brand. Recently, we underwent a substantial reorganization, and some of that funding will be allocated to increased brand expenses, investments, and advertising initiatives. We're in the process of working through these changes now. This won't be a concern for fiscal '25, and we'll assess the situation for fiscal '26. We will likely have more details to share on our next conference call, but there will be additional investments made to support brand growth.

Operator, Operator

Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Sue for closing remarks.

Susanne Perram, Vice President, Director, Investor Relations

Well, thank you. And thank you, Lawson and Leanne, and thank you to everyone for joining us today for Brown-Forman's third quarter and year-to-date fiscal year 2025 earnings call. If you have any additional questions, please contact us. We look forward to participating in the UBS Global Consumer and Retail Conference in New York 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. With that, this concludes today's call.

Operator, Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.