Brown Forman Inc

Ladies and gentlemen, thank you for standing by and welcome to the Brown Foreman third quarter fiscal 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you would like to withdraw your question, press the pound key. Please be advised that today's conference is being recorded. If you require further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Leanne Cunningham, Senior Vice President, Shareholder Relations Officer. Thank you. You may begin.

Thank you, Dorothy, and good morning, everyone. I would like to thank each of you for joining us for today's Brown Foreman's Third Quarter Fiscal 2020 Earnings Call. Joining me today are Lawson Whiting, President and Chief Executive Officer, and Jane Moreau, 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 the company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise. This morning we released a press release containing our results for the third quarter of fiscal 2020, in addition to posting presentation materials that Jane 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 risk factors that 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 statements, reports filed with the Securities and Exchange Commission. During this call, we will be delivering certain non-GAAP financial measures. These measures are 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 conditions and results of operations are contained in the press release and investor presentations. One last note this morning. The state of Kentucky will be conducting a statewide tornado drill at 10.07 this morning. We are not certain if this will create any disruption to our call. If necessarily, we may need to mute the line for a moment, and we apologize in advance for any potential disruption. With that, I would like to turn the call over to Lawson.

All right, good. Thank you, Leanne, and good morning, everyone. Before I comment on our year-to-date performance, I do want to take just a short moment to recognize what a special time it is to be part of Ground Format as we enter our 150th year. Back in 1870, our founding brand, Old Forester, was first introduced into the U.S. Today, we now have a portfolio of over 40 premium and super premium brands sold around the globe. Since our founding, the company has been agile and resilient in navigating through many challenges and including things like prohibition, world wars, and economic recessions, just to name a few historical events. Today, we find ourselves amid trade wars, resulting in tariffs that are weighing on our industry, geopolitical events that are disrupting many countries around the world, and now a virus that is threatening the global economy. While the headwinds feel pretty strong right now, Ground Foreman has continued to grow throughout our history and remains a strong, healthy company, supported by the commitment of our long-term shareholders, and importantly, our dedicated and talented employees around the world. So now, on to the performance of the company. Jane's going to take us through the company's financial results in a moment, but first I'd like to provide an update on our progress toward our strategic ambitions. As you've heard me discuss on previous calls, we continue to evaluate our performance both on a geographic and through a portfolio lens. From a geographic perspective, 18 of our 20 largest markets are delivering underlying net sales growth this year, highlighting the strong benefits of our geographic diversification. As a side note, this does not include travel retail, which actually is in decline and we can talk a little bit about later. However, the growth rates of plus 3% underlying net sales year-to-date for the company are below historical norms and they're also below our expectations, but we believe going forward these rates will return to more historical numbers and we will talk about that throughout the rest of this call. From a portfolio perspective, our premium and our super premium brands are well positioned to continue to deliver accelerating top-line momentum with leading positions in some of the most attractive and fastest-growing spirits categories, such as whiskey and tequila. In particular, the super premium brands in our portfolio are propelling the company's growth both in the U.S. and increasingly in our international markets, becoming a more powerful growth driver for the company. To get into a couple of the specific brand performance issues, look, the Jack Daniels family of brands underlying net sales is plus 3% year-to-date, essentially in line with the company's growth rate. We've encountered some near-term challenges for Jack Daniels Tennessee Whiskey, which is the black label brand, in some of our international markets. Jane's going to talk more about this in her remarks when we get into the market-by-market analysis. But from a strategic perspective, we believe we still have the right strategy in place to deliver long-term profitable growth and we are investing behind the opportunities. The Jack Daniels RTD business is now over 9 million cases globally and continues to deliver solid growth as the increasingly popular RTD format provides Jack Daniels consumers with convenience in their drinking occasions. We continue also to focus on the versatility of our portfolio through innovation, which has resulted in the creation of Jack Daniels Tennessee Honey and Fire over the last nine years, These two brands now contribute 2.4 million 9-liter cases at very attractive margins and are connecting new consumers to the Jack Daniels trademark. With the launch of Jack Daniels Tennessee Apple, which is off to a strong start in the United States, we are continuing to drive innovation and diversifying the portfolio. And for our international consumers, we're gearing up for the launch of Jack Daniels Tennessee Apple, and it should begin to appear on retail shelves in the next few months. And Gentleman Jack, which we don't talk about quite as often, one of our super premium family members is now nearly 700,000 cases and continues to deliver strong international growth. We've also made notable progress towards our strategic ambition of increasing the scale of our super premium portfolio. Woodford Reserve remains the leader in the super premium bourbon category and has been consistently growing strong double digits since its introduction 20 years ago, or more, 22 years ago. Supported by its excellent track record along with innovations such as Double Oat, Woodford Reserve, has eclipsed 1 million 9-liter cases and is one of the largest growth contributors to the company. Looking ahead, we'll be focusing on the international development of this incredible brand with incremental resources being invested in a number of key markets around the world. As I mentioned a few minutes ago, Old Forrester is celebrating its 150th anniversary this year. It continues to present itself as a leader in American whiskey and The brand is steeped in a reputation of quality and innovation with its core expressions and has increasing popularity with its Whiskey Rose series. This brand has been registering impressive gains in the bourbon category and is becoming an increasingly meaningful growth driver for the company. Like Brown Foreman, coincidentally, Arradura was also founded in 1870 and is also celebrating its 150th anniversary. Since we purchased the brands over 12 years ago, excuse me, The super premium tequila category in the U.S. has shown dramatic growth. To note, Herradura's underlying net sales are up 20% year-to-date, and it's grown to over 600,000 cases with nearly half of its volume outside of Mexico. However, the unprecedented cost of externally sourced agave is putting pressure on gross margins. To help mitigate, we've been able to increase prices and accelerate the growth of Ultra, our higher-priced innovation, which is now nearly 20% of the business. We expect cost pressure to continue, however, through fiscal 21, but continuing our strong sales trends. Forward-looking, Herradura and Alhema are well-positioned in the fast-growing super premium and ultra premium segments. Our single malt scotch portfolio is also performing very well, led by Glendronic, which has experienced considerable growth and has a very promising future. And our other emerging brands, things like Slain Irish Whiskey and Cooper's Bourbon and Ford's Gin, while newer in their development, continue to show potential for very meaningful growth. So generally speaking, we feel very confident across the different brands in our portfolio and the many levers of growth that we can pull apart. Geographically, I'm very pleased with the success of our U.S. business this fiscal year to date. The U.S. is not only our largest market, but it is leading our growth in our 150th year. In the most valuable global spirits market in the world, Brown-Forman takeaway trends are outpacing TDS, driven largely by our American whiskey and flavored whiskey portfolios as well as our tequila brands. The launch of Jack Daniel's Tennessee Apple has also, as I said, gone very smoothly and is accelerating growth to our overall plan. However, we recognize we need better performance on Jack Daniel's Tennessee whiskey in the U.S., but it is worth noting that we can outpace TDS with essentially flat to low single-digit performance on our biggest brand. We could not have said that even a few years ago. but our bourbon and tequila brands have gotten big enough that they actually have a meaningful impact on the overall trends in the U.S. business. Developed International are having a relatively weak fiscal 20, but the U.K., Australia, and Japan are weighing on performance. Where we have made investments in our routes consumer, places such as France and Spain and Germany, our business is healthy, and we've been able to broaden our portfolio of brands. In the U.K., which is the second largest market in the world for brown formant, We're in the final stages of investing in a highly talented team and will soon assume full control over our route to consumer, which we believe will reaccelerate growth in this market into the next fiscal year, and expectations are that this will be a strong market for us into the future. Our emerging markets are being led by BRIC this year. All four are providing strong underlying net sales growth, largely driven by Jack Daniels' Tennessee Whiskey. Also worth pointing out is Southeast Asia is producing strong underlying double-digit growth. For the first time in a while, Asia really has been delivering solid growth this year. However, these markets are likely to suffer in the near term as a result of the impacts from coronavirus. I am, however, very encouraged that our brands are – how our brands are resonating with consumers. And looking into the future, I do think that Asia is a part of a world where we are relatively small but fast-growing, which I do think bodes well for the future opportunity we have there. To the coronavirus situation, just briefly, I do want to pause and take a moment to say the health and safety of our employees is paramount. Like other companies, we've taken steps to limit our employees' risk by limiting travel, canceling certain meetings, providing up-to-date information from the CDC and the World Health Organization, and ensuring our flexible work policies are being utilized. There's so many unknowns right now, and it's difficult to quantify the financial impact. Jane, we'll try to walk you through our thinking on this difficult topic. So in summary, we're expanding the breadth of our premium and super premium portfolio both geographically and diversifying our revenue base in categories with the strongest momentum. We continue to have confidence in our long-term global growth potential. Although currently our overall growth rate is a bit below historical trends and our expectations, these are largely driven by multiple short-term disruptions coming together in one fiscal year. We believe through continuing to execute our long-term growth strategy, focused on portfolio, geography, investments, and our people, we'll continue to extend our leadership in premium American whiskey around the world and continue our track record of consistently delivering profitable growth. While the near-term challenges remain, we will weather the storm as we have throughout our 150 years as we relentlessly focus on creating value for our shareholders. With that, I'll turn the call over to Jane and review more detail in our financial performance that we released this morning.