Lawson Whiting
President and Chief Executive Officer at Brown-Forman
Thank you, Sue, and good morning, everyone. Thank you for joining us today as we share our second quarter and first half results for fiscal 2024.
As anticipated, the key drivers behind our first quarter results continued into the second quarter. First, consumer demand for our brands continues to reflect a normalization back to our more historical trends. Second, as we've shared, we continue to grow on top of a very strong first half in the prior year, driven by the rebuilding of distributor inventories in the prior year period. To help put this into better context, I encourage you to reference Schedule D in today's earnings release. Third, we're starting to see beneficial contributions from both Diplomatico and Gin Mare, while also continuing our portfolio reshaping with the announced sale of Sonoma-Cutrer. Fourth, while higher input costs were persistent in the first half, these costs were more than offset by favorable price and mix and the lapping of the supply chain disruption costs in the year ago period. And finally, while our operating expense growth rate moderated in the second quarter, the timing and phasing of these expenses had an unfavorable impact on our first half operating income.
Now let's turn our attention to how these drivers influenced our first half fiscal 2024 results. Our reported net sales growth increased 2% in the first half with organic net sales growth increasing 1% after adjusting for the recent acquisitions. Notably, this growth was delivered against an 11% reported and 17% organic net sales increase in the same period last year. If you were to simply add the organic growth rate in the first half of fiscal '24 with the organic growth rate in the first half of fiscal '23 and divide by two, the average in the first half over these periods has been 9%.
Fundamentally, our brands remain in very strong shape. However, over the last couple of months, we have seen a slowdown in consumer spending, similar to the trends we're seeing across total distilled spirits and other consumer packaged goods. After two years of strong growth, which was above our long-term historical trends, consumer demand for our brands is normalizing on this elevated base.
In addition, as we have highlighted in past earnings calls, our glass supply significantly improved in the spring and summer of 2022, which allowed us to rebuild distributor inventories. Historically, the estimated net change in distributor inventories would have had a minimal impact on our organic results, typically in the range of plus or minus 1 percentage point in any given year. However, the pandemic-related supply chain disruptions created changes in our historical distributor ordering patterns, which has created unusual comparisons and larger impacts over the past few years.
If you were to factor in the 5 percentage points of impact to our organic net sales from the estimated net change in distributor inventories, as seen in Schedule D, our top-line results more closely reflect our longer term trends and help support our belief that the fundamental health of our brands and our business remains solid. Our first half results reflect our ability to consistently deliver growth even in a dynamic and challenging times. This is largely attributable to our broad geographic reach and our portfolio reshaping strategy over the past decade as we built a diversified global portfolio focused on premium and super-premium brands.
In the first half, organic net sales growth was driven by Jack Daniel's Tennessee Apple, New Mix and Glenglassaugh. These gains were partially offset by volume declines associated with our significant inventory rebuild in the first half of last fiscal year, particularly for brands such as Jack Daniel's Tennessee Whiskey, Jack Daniel's Tennessee Honey, Herradura and Woodford Reserve. Jack Daniel's Tennessee Apple grew organic net sales more than 50%, led by a strong launch in South Korea. We're also better able to meet consumer demand, particularly in markets such as Brazil and Chile as supply chain and logistic challenges eased.
New Mix was the second largest contributor to the company's organic net sales growth, increasing 22% as the brand continues to gain value share in the RTD category in Mexico. Glenglassaugh, a fabulous brand we haven't had yet much opportunity to discuss, we've primarily talked about this brand as part of the trio of single malt scotches that we acquired back in 2016, along with Benriach and GlenDronach. Glenglassaugh was the smallest of the single malt scotch brands we purchased. And while we've always believed in a strong future for the brand, there just hasn't been enough supply to be material to our results as it takes a decade or more for these products to mature.
Through the brands, old and rare program, we have discovered that while Glenglassaugh may be smaller relative to our other single malt brands, the value of its casks are mighty. We've recently sold a single Glenglassaugh cask from 1967 that was one of the largest cask sales in terms of rarity, volume and value in the history of the scotch whiskey industry. Cask sales from Glenglassaugh in the first half of fiscal '24 helped place the brand as the third largest contributor to the company's organic net sales growth.
In addition, the brand has recently been relaunched with its first ever 12-year-old expression, new packaging and new creative assets. And having just returned from a trip to Scotland, I can personally attest to the fabulous liquid and the strong growth potential of this wonderful coastal single malt. In addition to Glenglassaugh, we continue to increase our supply for all of our single malt scotch brands and believe these brands will be critical contributors to Brown-Forman's next generation of growth.
Our single malt scotch portfolio is one example of our portfolio reshaping efforts over the last decade to increase focus on premium and super-premium brands. Last year, of course, we acquired our newest brands, Gin Mare, and Diplomatico. I'm very pleased with the integration of these brands as they contributed 2 percentage points of growth to our reported net sales in the first half of fiscal '24. Our portfolio evolution has also required us at times to say good bye to brands.
It's always a highly deliberate and thoughtful decision when we decided to sell a brand and we do so only when we feel it aligns with our strategic ambitions and portfolio priorities. This was the case with both Finlandia Vodka and Sonoma-Cutrer, our two most recently announced divestitures. The sale of Finlandia Vodka to Coca-Cola HBC AG was completed on November 1, 2023. And the recently announced decision to sell Sonoma-Cutrer to The Duckhorn Portfolio and take an equity ownership position in the company reflects our commitment to long-term value creation. We believe our equity ownership stake in The Duckhorn Portfolio will be of value-generating relationship for Brown-Forman and offers the benefit of allowing us the opportunity to continue to participate in the premium and ultra-premium wine category.
We continue to believe in the strength of the Sonoma-Cutrer brand and its future growth opportunities. In the hands of The Duckhorn Portfolio, with their expertise combined with our strong and diverse route-to-market, we have great confidence that Sonoma-Cutrer will continue to grow and on an accelerated trajectory.
In addition to acquisitions and divestitures, we've also focused significant efforts on premium innovations. We recently released the third member of the Jack Daniel's bonded series, Jack Daniel's Bonded Rye, building on the success of the Jack Daniel's Bonded Tennessee Whiskey and Jack Daniel's Triple Mash. And it was just a year ago that we launched the iconic Jack & Coke cocktail as a branded ready-to-drink adult beverage in Mexico. Since then, we've expanded Jack & Coke into 13 markets, including Germany, which just launched in September. Overall, we're pleased with the initial launches and are excited about the brand visibility and market share gains.
For example, in the U.S., the Jack Daniel's and Coca-Cola RTD is now a top 10 spirit-based ready-to-drink brand and the number one whiskey-based RTD in Nielsen. And the spirit business, a global industry trade publication just named Jack Daniel's and Coca-Cola as the best new product in 2023. The positive feedback from distributors, retail, and most importantly, consumers continues to benefit not only the Jack Daniel's and Coca-Cola RTD, but also the perception for Jack Daniel's Tennessee Whiskey, as noted in consumer research. We continue to expect the planned organic net sales declines in the Jack Daniel's and Cola RTD will partially offset the growth of the Jack Daniel's and Coca-Cola RTD as we continue its transition. We believe this premiumization provides us with the greatest opportunity for long-term growth and value-creation.
Before turning the call over to Leanne, I'd also like to add some additional perspective on our gross margin and operating expenses. In the first half of fiscal 2024, our reported and organic gross profit increased 7%, both ahead of the respective top-line growth rates. We continue to focus on the execution of our long-term pricing strategy and believe we're in a strong position given the strength and relevance of our brands and our continued brand building investments.
We're also benefiting from the absence of costs related to the supply chain mitigation. As you'll recall, this time last year, we incurred increased transportation and logistics costs in order to satisfy the demand from our distributors and retailers ahead of the important holiday season. Collectively, we have tailwinds of favorable price mix, the absence of supply chain disruption-related costs and lower tariff-related costs due to the removal of the U.K. tariffs on American whiskey, which more than offset the headwinds of higher input costs and the negative effect of foreign exchange. This resulted in 280 basis points of gross margin expansion in the first half.
As expected, operating expenses moderated in the second quarter as the phasing of our brand building investments was significantly skewed to the first few months of our fiscal year to support the launch of the Jack Daniel's and Coca-Cola RTD as well as increased investments for Jack Daniel's Tennessee Whiskey. This resulted in an organic advertising expense growth of 12% in the first half of fiscal '24, while also moderating in the second quarter organic SG&A investments increased 9% for the first half as we continue to invest behind our people, driven primarily by higher compensation and benefit expenses.
Since I mentioned the removal of the tariffs on American whiskey, I will share the latest update on the EU tariffs. When the EU tariffs were removed a year ago, a final agreement still needed to be reached concerning, steel and aluminum prior to November 1, 2023 or the retaliatory tariffs on American whiskey would return. In mid-October, the U.S. and EU announced they will continue negotiating for two more months. Importantly, the American whiskey tariffs are not expected to return while negotiations are ongoing.
Brown-Forman continues to work with governments on both sides of the Atlantic, advocating for a solution that brings long-term stability to the U.S. and EU trade relationship. We believe that all parties are seeking a solution and neither party wishes to see the return of these tariffs. We hope that as the deadline for an agreement approaches, the U.S. and EU governments will find a solution that enables the long-term health of the global spirits industry.
In summary, we believe we're off to a good start in fiscal '24, continuing to grow on the exceptionally high same prior year period base even as consumer demand normalizes. I hope these results illustrate how our business has remained resilient through very dynamic operating conditions as we continue to focus on our long-term strategic ambitions. We believe we will continue to benefit from our long-term pricing and revenue growth management strategies as well as a more normalized cost environment. Our brands and our business continue to grow because of the people of Brown-Forman. I would like to thank them for their continuous efforts and commitment to ensuring that there is nothing better in the market than Brown-Forman.
With that, I'll turn the call over to Leanne and she will provide more details on our first half results.
