Brown Forman Inc

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 conditions and results of operations are contained in the press release and investor presentation. With that, I would like to turn the call over to Lawson.

Thank you, Leanne. I don't have to tell anyone on this call that 2020 has been a year that no one could have possibly predicted. And when we started fiscal 21 back on May 1st, I did not imagine that I'd be sharing such solid results with you today. Both Brown Forman and the industry as a whole has been very resilient through what is a very challenging and volatile environment. But first, let me start by thanking our employees. This has been a year of extreme turmoil in all areas of life, no matter who you are or where you live, and we could not deliver these results without your hard work, dedication, and agility. I also want to thank our dedicated long-term shareholders. including all of the Brown family members and our outstanding board of directors for your leadership, encouragement, and most of all, your support. Before Jane and I get into the business discussion, I want to offer a few thoughts as we're less than a month away from closing out Brown Foreman's 150th anniversary year. I find it interesting that milestones at our company always seem to come about in turbulent and unforeseen times. Our 50th anniversary was back in 1920, the year prohibition began in the United States. Back then, we found a way to continue to sell whiskey through medicinal licenses and permits. Our 75th anniversary coincided with the end of World War II, and our 100th anniversary was in 1970 when bourbon began its period of decline, and we reinvented ourselves as a consumer goods company and expanded beyond spirits. And now today, in our 150th year, amidst a global pandemic, we have again found a way to reach more consumers and delivering underlying top-line growth fiscal year to date. This year has reaffirmed my long-held belief that no matter the circumstances, Brown Forman will be agile and able to find a way to deliver top-tier results. And in this year, full of uncertainties and the unexpected, it's nice to have something that we can rely on, and we do not take that for granted. So, as I turn to our fiscal 21 results, I want to talk a little bit about some of the surprises in our business. As you can imagine, when we started this fiscal year back in May, the headwinds appeared strong. Bars and restaurants had largely closed worldwide since March. Global travel retail had ground to a halt. Vacations and travel and hospitality were getting canceled all over the world. And in actuality, most of these headwinds really haven't changed. But I want to share with you a few positive stories of resilience in our business in spite of these headwinds and continued uncertainty. First is really the overall performance of the spirits industry. I often talk about what a great business Premium Spirits is with solid growth, nice margins, and high returns on capital. And this year is no exception. Since the start of the COVID pandemic, Spirits' performance, particularly in the United States, has accelerated. Overall consumption is up, even with many restaurants and bars closed. And we continue to take share from both wine and beer. Although that's a trend that has existed in the U.S. for a long time, the gap has gotten wider in Spirits' favor. Another surprise has been the exceptional growth we've experienced in our RTD business. As I mentioned last quarter, we have believed in the ready-to-drink category ever since we launched our first Jack Daniels RTD over 25 years ago. But I'll admit that this year's performance has exceeded our expectations about the format and the category. And this really is not a single brand or single market phenomenon. We've seen strong growth from our Jack Daniels RTDs in markets like Australia, Germany, and the U.K., Our recent launch of the Jack Daniels Spirit-based RTDs in the U.S. is off to a terrific start. We've also seen excellent performance from our malt-based Jack Daniels Country Cocktails in the U.S. Our tequila-based RTDs called Numix in Mexico, which is now near a record 8 million cases in the last 12 months. And since our last earnings call, we acquired part-time rangers, a range of low-calorie, white spirit-based RTDs as a targeted investment that we believe will help us grow in this key category. A little bit on Part-Time Rangers. This brand was found by Two Brothers in New Zealand and offers white spirit-based cocktails in a convenient format. We believe this brand can help diversify our RTD offerings in this region, as well as broaden our reach into the fast-growing white spirit RTD segment. This brand has done very well with a new generation of consumers, and we believe it's well-positioned to take advantage of recent consumer trends such as lower calorie, lighter, and brighter tasting. Part-Time Rangers is also known for its focus on wildlife conservation and sustainability, particularly through its charitable donations supporting conservation and ecosystem preservation. While focused on New Zealand and Australia over the next 12 months, we believe this brand has the potential to move into more markets in upcoming years. Although the shutdown of the on-premise certainly gave a boost to the RTD category, the megatrends of convenience and flavors give us confidence that this category will continue to be a growth driver into the future. Another pleasant surprise is the continued and really accelerated growth of super premium brands. As I've shared before, this has been unlike any other recession that we've experienced. In the U.S., ultra and super premium spirits are gaining share at faster rates than in the pre-COVID time periods. And thanks to the portfolio reshaping efforts of the past decade, we don't really have much below the premium price level anymore. I also want to mention that we believe we are not only playing in the right price segments, we're also in the right categories really at the right time. I've already mentioned RTDs. but our two most important categories are really American whiskey and tequila. In the U.S., both of these categories have seen a significant increase in their pre-COVID growth trends. And it's worth highlighting the performance of Woodford Reserve. It has not only sustained its double-digit growth and is growing its market share in the U.S., but also, we believe, is ready for a significant push in the international markets. On a geographic basis, the strength of the developed markets and sequential improvement in recent months of the emerging markets has been impressive. It has certainly been a welcome surprise in this dynamic business environment to see such robust growth from our U.S. business. And as we've progressed through this pandemic, we've seen relatively healthy performance from our large developed markets in much of Western Europe as well as Australia. I'm also pleased with the improving health in the emerging markets, too, which did improve over this past quarter, particularly highlight Poland and Brazil, as Jane's going to talk about in just a couple minutes. And lastly, the teams deserve a lot of credit for the delivery of new world-class creative. We signed the deal with our new agency of record, Energy BBDO, almost exactly one year ago. And in less than a year, they have created beautiful Global 360 campaigns for our American whiskey brands, Old Forrester, Woodford Reserve, and Jack Daniels, all through a global pandemic and all done remotely. If you haven't seen these campaigns yet, we've included them in our slides today. And you can believe that Brown Forman employees around the world are planning to make it count this holiday season. So in summary, while we continue to face uncertainty and disruptions to markets and channels throughout the world, I remain confident that the essentials of our business are strong and that as we approach the end of our 150th anniversary, Brown Forman will enjoy many more milestones to come. With that, I'll turn the call over to Jane, who will walk us through our second quarter and first half financial results.

Thank you, Lawson. and good morning everyone. As Lawson said, this year has been full of surprises. Considering all the volatility and uncertainty in the world today, we believe the results we released today are strong. In the first half, both our underlying net sales and operating income are up relative to last year, with an acceleration in our top line growth registered in the quarter. Not surprisingly, Many of the items that created noise in our first quarter continue to impact our second quarter, including product innovation launches, notably Jack Daniel's Tennessee Apple, timing-related items both this year and last year, and, of course, COVID-19 resulting impacts that include inventory fluctuations, customer buying pattern changes, and geographic channel size and portfolio mix shifts. Before I discuss our results in more detail, I would like to take you back a year ago. Specifically, as a reminder, in the second quarter of fiscal 2020, we launched Jack Daniel's Tennessee Apple in the United States and sustained our double-digit underlying net sales growth from our premium bourbon and tequila portfolios. While no one could have envisioned the world as it is today, and of course COVID-19 has created challenges and uncertainty, but also opportunities. We believe this is evidenced by the continuation of our stronger than expected performance this second quarter. With that as a backdrop, let's now turn our attention to the second quarter and first half performance where familiar trends continue to produce solid results. Starting with our top line, compared to the first half of last year, reporting net sales were down modestly as a result of the decrease in distributor inventory levels that were built in the United States in April, and the negative effect of the stronger U.S. dollar. Adjusting for these factors, our underlying net sales grew 4%. As we look broadly across our geographic clusters, we saw a wide range of top-line performance with either strong growth or generally double-digit declines. we experienced top line growth in approximately 85% of our markets through the first half, driven by a number of factors, including our well-positioned portfolio, premiumization trends, our innovation, and externally, the impact that government stimulus packages had in a number of markets on the economy. The markets where we are experiencing significant declines appear to have been impacted by a variety of factors, such as down trading due to economic conditions, heavy on-premise exposure, and for us in markets such as Spain and Czechia, declines in tourism, of course in travel retail, but also in Southeast Asia as an example. And then the external factor lacking here was the lack of stimulus from the government in many of these markets. Starting with our U.S. business, which represents approximately half our net sales, We sustained our strong first quarter underlying net sales performance in the quarter, despite lapping last year's launch of Jack Daniel's Tennessee Apple, as our year-to-date underlying net sales grew 9%. This strong growth reflects many of the same themes we discussed in the first quarter. First, the strength in the off-premise. The channel shift since the pandemic began has remained significant with off-premise volumetric growth more than offsetting the on-premise declines. Our portfolio continues to benefit from being well positioned in growing categories and to meet the needs of our consumers during this environment at home consumption. Most notably, the consumers desire for convenience, portability, and variety, as well as ease of mixability, is being met by the Jack Daniel's RTDs, Jack Daniel's flavors, and our portfolio of tequilas. Of note, Jack Daniel's country cocktails again delivered exceptional performance, more than doubling volume both in the quarter and on a year-to-date basis compared to last year. Separately, the shift to at-home consumption, convenience, and the desire for contactless commerce has propelled our portfolio's explosive growth in the e-commerce channel with continued triple-digit trends compared to pre-COVID levels. And as consumers seek everyday luxury, premiumization continues to favor our super-premium portfolio, particularly Woodford Reserve and our craft series expressions of Old Forrester, as these brand families sustain their double-digit underlying net sales growth. Our developed markets grew underlying net sales into high single digits for the second quarter and 10% through the first half. Continued growing demand for Jack Daniels RTDs, most notably in Australia and Germany, benefiting from the consumer's desire for convenience and the launch of Jack Daniels Tennessee Apple drove these gains. We remain pleased with the launch of Jackie Anderson's Apple internationally, where we continue to see the rate of sales equal to or greater than the honey post-launch rate of sales. Our emerging markets collectively reversed their first quarter declines, growing underlying net sales low single digits for the second quarter and lifting the underlying net sales to flat year to date. Poland and Brazil have been resilient in the first half, And while Mexico declined in the quarter, its underlying net sales have grown year-to-day, driven by the exceptional performance of the new mixed RTD business in the first quarter, benefiting from the temporary interruption experience in the country's beer supply chain. While the new mixed business remains healthy, we continue to see evidence of consumer trade down in the tequila and whiskey categories in Mexico today. and several other emerging markets. The rest of our emerging markets collectively remain down year-to-date, most notably Southeast Asia, Russia, India, and Latin America. Finally, our travel retail business continued to be the most significantly affected, with international airline travel declining almost 90%, and nearly all the cruise industry remained shut down. While we saw slight improvement in the second quarter, as our military channel is performing well, our travel retail business, excluding this channel, continued to experience net sales declines well over 60% for the first half of the fiscal year. Turning to our largest brand for a moment, Jack Daniel's Tennessee Whiskey. Overall, through the first half, the brand's volumes remained down, with essentially flat volumes in both the U.S. and our developed international markets and declines in emerging markets, though the rate of declines improved somewhat in the second quarter and declines in the travel retail channel. The shift from on-premise to off-premise consumption in our developed markets continues to drag down Jack Daniel's Tennessee Whiskey's underlying net sales year to date. However, we believe the brand remains quite healthy and is gaining share in the majority of its top 10 markets. Now turning to our gross margin. Our gross margin declined 350 basis points through the first half, resulting in our underlying gross profit dropping 1%. Higher input costs related to agave and wood, as well as a reduction in fixed cost absorption due to lower Jack Daniels Tennessee whiskey volumes, represented nearly two-thirds of our gross margin decline. Channel and portfolio mixed shifts essentially drove the remainder of the margin drop. Moving to brand expense. While our advertising spend was down for the quarter, reflecting the reduction in on-premise activations and the cancellation of various events and sponsorships, we did see the decline slow compared to the first quarter as our investments most notably behind our new Jack Daniels Make It Count campaign, began in October. We continue to expect our advertising investment to accelerate over the balance of the fiscal year. Our underlying SG&A investment remained down in the quarter, reflecting tight management of discretionary spending, such as travel and hiring freezes. And finally, to our fiscal 2021 outlook. As we look ahead, a high-level uncertainty continues to exist, including the impact of the current surge in COVID-19 cases and resulting restriction, as well as the impact this may have on our consumer demand, notably during the critical holiday season that is upon us. And the tapering off of government financial stimulus in a number of countries barring no changes between now and the end of the calendar year, and the potential effect on the global economy, employment, and overall recovery. As a result of this uncertainty and volatility that we expect to persist over the months to come, we are not providing quantitative guidance for fiscal 2021 at this time. With that being said, and more qualitatively speaking, as we think about our broad geographic clusters. First, our developed markets. While we expect the volatility and uncertainty to remain high for the foreseeable future as we experience a second round of lockdowns related to the pandemic and have noted slowdown in our November early results in Europe, we remain optimistic given the resiliency and strength of our performance during COVID-19. to date. Travel retail. We do not expect our business to recover this year in this channel and will remain down significantly. We expect many of our emerging markets will remain subdued, though we anticipate to benefit from easy comps when we begin to lap the start of the pandemic in our fourth quarter. Our non-branded business dominated by the sales of used barrels is expected to continue to be a drag on our top line performance this year. as it was in the first half, reflecting the expectation of lower volumes and pricing. A gross margin will remain under pressure for the year, driven by the expectation of higher input costs and mix shifts. However, where our gross margin ultimately lands will depend not only on the volumes of our business, but the mix of our business geographically by portfolio, channel, and size. Regarding operating investments, We believe we are well positioned to invest effectively. We expect our unusually high operating expense leverage in the first half to significantly reverse in the second half, reflecting a notable increase in broad reach media spend. As we are investing more into the important holiday period and the recently launched Jack Daniels Make It Count campaign. As it relates to our effective tax rate for the full year, we still expect our all-in tax rate to be in the range of 17% to 19%. Our balance sheet and cash flows remain strong, and our capital allocation strategy is unchanged. I thought I'd pause and just mention a few recent actions in this arena. As you know, our first priority is to invest fully behind our businesses. Our board recently approved an investment of $125 million in capital to expand our bourbon-making capacity in Kentucky to meet the anticipated future consumer demand of our brands. We also announced a couple weeks ago an increase in our annual regular dividend, marking the 37th consecutive year of increases and the 76th year of paying quarterly dividends in our 150-year history. We continue to actively evaluate our portfolio, selling the early times Canadian mist and Collingwood brands, and, as Lawson mentioned, acquiring the ready-to-drink brand, Part-Time Rangers. In summary, while there have been a number of challenges and headwinds in the first six months of our year, we believe our results reflect our agility and resilience to adapt, and seize the opportunities in this very volatile and uncertain environment. As the COVID-19 pandemic and its effect on the global economy continues to evolve, we will continue to manage as we always have, putting our people first and staying focused on the long term. As Lawson mentioned, in our 150-year history, we have experienced many turbulent and unforeseen events and have emerged from those times stronger, and with healthier brands. And with that, this concludes our prepared remark. Let's open the line to questions.