Brown Forman Inc

Good day and thank you for standing by. Welcome to the Brown Forming Corporation second quarter and first half fiscal 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Sue Parham, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown Forman's second quarter and first half fiscal 2022 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer, and Leanne Cunningham, Senior 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 issued a press release containing our results for the second quarter and first half of fiscal 2022, 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 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, Sue, and good morning, everyone. I'm pleased to share our second quarter and first half of Fiscal 22 results with you today. But before I do, we'll open up with a toast, a toast to the fact that after three and a half years, the U.S. and EU have reached an agreement on trade in steel and aluminum, and the EU will be removing tariffs on American whiskey on January 1st, 2022. The tariffs have been in place longer than I've been in this role, and as such, it's been one of the most discussed topics of my tenure as CEO, having been a part of our conversations in the past 12 quarterly earnings calls, as well as the last three annual stockholder meetings. It's been an exhausting and expensive chapter in the company's 151-year history as we've been so disproportionately impacted by the tariffs compared to our competitors. We've remained strong and resilient as an organization, and I believe we are very well positioned to deliver solid growth in the short, in the medium, and in the long term. That said, though, you can be certain that we look forward to the return of a level playing field for American whiskey in the EU and hope a similar outcome can very soon be achieved between the US and the UK. So with that, let's turn our attention to the other headlines of our first half. First, our top line growth remains strong, driven by the reopening of the on-premise channel, the return of tourism, and the cycling of the lower comparisons during the first half of last year, most notably in the emerging markets and travel retail. Second, we really do have pretty significant optimism about the health of the spirits industry and our business in particular. We continue to see strong consumer demand across our portfolio brands, and we're benefiting from consumers' increased preference for spirits and the sustained growth for both the American whiskey and tequila categories. Our portfolio, which consists largely of premium and super premium brands, is also really benefiting from the continued premiumization trends across our industry. Our other major headline is that we continue to face challenges from the supply chain, largely related to glass supply, which has really impacted our finished goods inventories, along with the inventories of both the distributor and retailer levels. This is a contributing factor to the difference in our reported and underlying results. While we're working to mitigate this impact, Supply chain challenges, along with higher input costs, mainly related to agave, continue to pressure our gross margin. Leanne's going to talk more about this in just a few minutes. I'll start with the top line, where our overall underlying net sales increased 12% in the first half, even as supply chain disruptions had an adverse effect on the year-to-date results. This was led by a double-digit underlying net sales increase for the Jack Daniels family of brands. Within the Jack family, Jack Daniel's Tennessee Whiskey fueled the growth with underlying net sales of plus 15%. The first half of this fiscal year is benefiting from relatively easy comparisons, as the prior year included a time period where the on-premise channel was largely closed around the world. On a two-year CAGR, Jack Daniel's Tennessee Whiskey grew underlying net sales 3%, which is similar to the low single-digit growth the brand delivered pre-pandemic. The consumer trends of flavor and convenience continue to drive the growth of the Jack Daniel's flavors and Jack Daniel's RTDs. Higher volumes of Jack Daniel's Tennessee Honey, which just celebrated its 10th year in the market, as well as the continued international launch of Jack Daniel's Tennessee Apple, contributed to high single-digit growth and underlying net sales for the Jack Daniel's flavors. And Jack Daniel's RTDs grew underlying net sales mid-single digits in the first half of the fiscal year. Notably, this growth comes against difficult comparisons. On a two-year CAGR, the Jack Daniels RTDs delivered 19% underlying net sales growth. So overall, we believe consumer demand for RTDs remains very strong on a global basis. Woodford Reserve continued to benefit from premiumization trends, which were only amplified by the pandemic and the growth in the American whiskey category. The brand again delivered double-digit underlying net sales growth despite supply chain challenges. we believe the underlying consumer momentum for Woodford Reserve remains incredibly strong. Our full-strength tequilas, Herradura and El Jimidor, continue to benefit from the strength of the tequila category and grew underlying net sales in the first half by 46% and 19% respectively. This increase more than offset a decline in new mix, which as a reminder experienced exceptional growth in the first quarter of fiscal 21, driven by the temporary interruption in Mexico's beer supply chain. In addition, our emerging brands portfolio in the U.S. continued its momentum, growing strong double digits even as it was cycling the strong double digits comparison in the first half of last year. Old Forester, Chambord, our single malt scotch portfolio, and Forge Gin led this growth. We also strengthened our investment behind our emerging brands teams in several markets in Europe this past year. Based on our experience in the U.S., we know that super premium brands benefit from a high level of focus. and we're seeing the benefit in Europe already as the Woodford Reserve family of brands, the single malt scotches, as well as our tequilas and chambord have responded with very strong growth. I do think our portfolio of super premium brands, supported by a dedicated emerging brands team, offers the company a really big opportunity for growth internationally, and we plan to be more aggressive in our expansion plans in the future. The key themes in the first half of this fiscal year are really about our focused efforts on driving top-line momentum, but while absorbing the cost of the tariffs and significant increases in input costs, especially agave and wood, and through it all, we continue to invest in the long-term health of our brands. But thankfully, I do believe many of the headwinds we have faced are beginning to become tailwinds. The emphasis on long-term growth and performance is built into Brown Forman's DNA. We're fortunate to have a shareholder base that understands the importance of making decisions today that will deliver value for the next generation. This long-term perspective is replicated time and time again in all that we do and is foundational to our business strategy as well as our integrated environmental, social, and governance commitments. We recently updated our global sustainability goals, which serve as a roadmap for advancing our sustainability efforts, reducing the company's environmental footprint and increasing our positive impact on the community and the environment. The goals were highlighted in our most recent annual report, But given the importance of the work, I wanted to call special attention to them today. The new sustainability goals center around really four pillars. Climate action, specifically to reduce greenhouse gas emissions, water stewardship, circular economy, and our supply chain. We recognize the increased importance for organizations like Brown Foreman to play a leading role in the environmental stewardship and look forward to sharing our progress against these goals in the years to come. In a moment, I'll hand the call over to Leanne, who will provide more details on our first half of fiscal 22 results, as well as our recent capital allocation actions. But before I do, on behalf of the Brown Forman Board of Directors and executive leadership team, I want to say thank you to the 4,700 Brown Forman employees around the globe who give me a multitude of reasons to be thankful as we mark the end of another calendar year. As a company, we've lived our values of integrity, respect, trust, teamwork, and excellence each and every time we've had headwinds and challenges come our way. The last few years have not been easy, but it has been a beautiful thing to watch how our teams have responded and produced solid business results. By living these values, our people have enabled our business to be resilient, and I believe that because of our people, Brown Foreman will get better year after year and continue to thrive for generations to come. Leanne, I'll now hand the call over to you.