Brown Forman Inc

Q1 2024 Earnings Conference Call

8/30/2023

spk11: Good morning, and welcome to Brown-Forman First Quarter Fiscal Year 2024 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 the question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Sue Perham, Vice President, Investor Relations. Ma'am, you may begin.
spk09: Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown Forman's first quarter fiscal year 2024 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 first quarter fiscal year 2024, 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 gap 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.
spk04: Thank you, Sue, and good morning, everyone. It's a pleasure to be able to speak to you today about Brown Forman's first quarter results for fiscal 2024. Before we get into the details of the quarter, there are a few key drivers of our first quarter results that you will hear about repeatedly throughout this call. First, the rebuilding of distributor inventories, primarily in the United States, in the prior year period had a significant impact on our first quarter results. As you will recall, this rebuilding in the prior year occurred as a result of supply chain disruptions. If you reference Schedule D in today's earnings release, it will provide you with additional information to put this quarter into better context. Second, the timing and phasing of our operating expenses had an impact on our first quarter operating income as we launched and acquired new brands while also investing in our existing portfolio. As you can surmise from our full-year guidance, we expect this to moderate as we continue throughout the rest of the fiscal year. And finally, and most importantly, we believe the health of our brands and our business remains strong as evidenced by consumer takeaway trends. We continue to be confident that we have the best portfolio and the best people in the market, and it's this confidence that allows us to reaffirm our full-year outlook for fiscal 2024. With this backdrop, let me quickly walk you through our high-level results for the first quarter. From a top-line perspective, our reported and organic top-line results were below our longer-term historical trends. Much of this is being driven by the comparisons to the strong double-digit top-line growth in the first quarter of last year. You'll recall our glass supply significantly increased in the spring and summer of 2022, which allowed us to rebuild distributor inventories, which created a strong comparison for the first quarter of this fiscal year. Our gross margin expanded with favorable price mix and the removal of the UK tariffs. These gains more than offset increased input costs, foreign exchange headwinds, and the impact of our recent acquisitions. In the first quarter, we also made significant investments behind our brands and our people, which resulted in a year-over-year decrease in reported and organic operating income. Now let's go into each of the P&L items a little bit more. I'll briefly provide a few more details on the top line from a brand perspective, and then I'll turn it over to Leanne, who will share additional insights on our geographic performance, as well as other financial highlights, before closing with some comments on our fiscal 2024 outlook. Our reported net sales growth increased 3%, with organic net sales growth increasing 2% after adjusting for the recent acquisitions and the negative effect of foreign exchange. Organic net sales growth in the quarter was driven by the continued growth for Jack Daniel's Tennessee Whiskey, Jack Daniel's Tennessee Apple, and El Hemador. This growth was partially offset by declines related to the estimated net decrease in distributor inventories and particularly for brands such as Woodford Reserve, Jack Daniel's Tennessee Fire, and Gentleman Jack, as we cycled against the significant inventory rebuild in the first quarter of last year. In total, we estimate that the net change in distributor inventories had a 6% impact on our overall top-line results. If you were to factor in the net change in distributor inventory, our net sales growth would have actually been above our long-term growth expectations. As I mentioned earlier, we believe our business is strong. Jack Daniel's Tennessee Whiskey led our growth as organic net sales increased 2% after lapping an organic net sales increase of 21% in the prior year period. We believe the consumer demand is normalizing and estimate that the growth rate on Jack Daniel's Tennessee Whiskey in the first quarter was lower by approximately 2 percentage points due to the net change in distributor inventory. Growth continues to benefit from our pricing strategy as well as our revenue growth management initiatives. Second, Jack Daniel's Tennessee Apple grew organic net sales more than 50% as we lapped the impact of the glass supply constraints in the year-ago period and were better able to meet consumer demand, particularly in markets such as Brazil. The brand also benefited from a strong launch in South Korea. Demand for tequila, particularly in the U.S., remained strong. El Jimidor was the third largest contributor to overall company organic growth, increasing organic net sales 26%. We continue to see strong momentum in our ready-to-drink portfolio, which grew organic net sales 5%. This was led by the launch of Jack Daniels and Coca-Cola and the continued growth of Numix, which performed well as the RTD category in Mexico is growing and the brand is increasing share. The growth was partially offset by planned declines in Jack and Cola as the markets prepared for the Jack Daniels and Coca-Cola launch. I know there's been tremendous energy and curiosity around our new Jack Daniels and Coca-Cola RTD, so I thought I'd share a bit more detail on the continued launch. Impressively, the global volume has already grown to 1.8 million cases across 11 markets, led by the U.S. and Japan. As we've shared before, some markets are being led by Brown Foreman, whereas others are being led by the Coca-Cola company. Therefore, this total case volume is not reflected in our 9-liter depletion results. We expect that this total volume will continue to grow as we plan to expand from 11 to 30 markets by the end of calendar 2024. In the U.S., the Jack Daniels and Coca-Cola RTD launch has been the most successful launch in Brown Forman history, having achieved the second highest level of off-premise distribution across the portfolio, only behind Jack Daniels Tennessee Whiskey. Today, it has reached over 2% of the RTD category's value share. And overall, we're pleased with the initial launch of this iconic product, and believe our success is driven in part by the strong investment behind the launch, including significant investments in broad reach media, events, and trade execution. As the launch evolves, we would naturally expect this investment to normalize. We're also excited by the brand visibility, the market share gains, and the positive feedback from distributors, retailers, and most importantly, consumers. I must say, you know you're doing something right when consumers start wearing your spirit brands, and I just saw a picture of the first reported Jack and Coke RTD tattoo. The loyalty of our Jack Daniels fans is strong and impressive. The Jack Daniels and Coca-Cola RTD has been a strong addition to the portfolio, which, as you know, we have been very strategically reshaping over the last couple of decades to focus on premium and super premium brands. We continue to believe this premiumization provides us with the best opportunity for long-term growth and value creation. The integration of our newest brands, Ginmari and Diplomatico, continues to go well. The brands increased reported net sales in the first quarter by 2%, and we continue to expect these brands will be meaningful contributors to our long-term growth. Also, as a part of this portfolio evolution, we announced the sale of Finlandia vodka earlier in the quarter. Finlandia has played an important role in the global growth of Brown Foreman since it joined our portfolio fully in 2004, and we appreciate the many talented employees who worked hard over the two decades to build the brand. We know this brand will continue to evolve in the capable hands of Coca-Cola HBC when the sale closes in the second half of the 2023 calendar year. Before turning the call over to Leanne, I'd also like to add some additional perspective on our gross margins and operating expenses. In the first quarter of 2024, a reported and organic gross profit increased 5%, both ahead of the respected top-line growth rates. While we experienced some headwinds in the form of higher input costs and the negative effect of foreign exchange, they were more than offset by the tailwinds of favorable price mix, lower supply chain disruption-related costs, and lower tariff-related costs due to the removal of the UK tariffs on American whiskey. This resulted in 90 basis points of gross margin expansion in the quarter. We continue to be focused on the execution of our long-term pricing strategy and believe the health and relevance of our brands, supported by our continued brand building investments, will allow us to continue to achieve our strategic priorities. Our brand building investments were evident in our first quarter as organic advertising expenses grew 14%. This was largely due to the timing of our increased spend to support the launch of the Jack Daniels and Coca-Cola RTD, which, as I mentioned earlier, is significantly skewed to the first few months of our fiscal year, as well as increased investment for Jack Daniels Tennessee Whiskey. We also continue to invest behind our people. Our organic SG&A investment increased 12%, driven primarily by higher compensation-related expenses related to organizational changes, including our route to consumer expansions, which we believe will support Brown-Forman's long-term success. In summary, we're off to a good start in fiscal 2024 and remain optimistic that we can achieve our full-year goals. While consumer demand for our brands begins to reflect a normalization back to our more historical trends, we expect to continue to benefit from our long-term pricing and revenue growth management strategies, as well as a more normalized cost environment. We're still operating in a highly dynamic world, yet we have remained agile, focused, and committed to the long-term growth of our people, our brands, and our business. We take pride in our ability to deliver consistent and reliable growth year after year, decade after decade, and we believe this tradition of excellence will continue in fiscal 2024. With that, I'll turn the call over to Leanne, and she'll provide more details on our first quarter results.
spk05: Thank you, Lawson, and good morning, everyone. As Lawson mentioned, I will provide additional details on our geographic performance, other financial highlights, as well as our fiscal 2024 outlook. From a geographic perspective, collectively, our emerging international markets continue to deliver very strong double-digit organic net sales growth, driven by Jack Daniel's Tennessee Whiskey, particularly in the United Arab Emirates, due to increased distribution and strong consumer demand, and Turkey, where the premium whiskey category is accelerating. Jack Daniel's Tennessee Honey, led by Turkey, as well as Brazil, where the brand is returning to normal levels of supply, and Numix, which continues to grow strong double digits in Mexico, where the RTD category is accelerated and we are gaining share. As the international airline travel and cruise business continued to return to more normalized growth levels, the travel retail channel grew organic net sales 9%, led by higher volumes of Woodford Reserve. Our business in this channel continues to remain above pre-pandemic levels. Organic net sales for our developed international markets collectively were flat for the first quarter as growth in the United Kingdom, South Korea, and Germany was offset by declines in Australia and Japan. Jack Daniels Tennessee Apple was the largest contributor to growth driven by the successful launch of the brand in South Korea. This growth was offset by year-over-year declines for Jack Daniels RTDs, driven by Australia, where microeconomic pressures negatively impacted volume growth, and the United Kingdom, where we are transitioning from Jack Daniels and Cola to Jack Daniels and Coca-Cola, partially offset the growth in Germany. and jack daniel's tennessee whiskey which had strong growth in the united kingdom but was negatively impacted by japan due to an estimated net decrease in distributor inventory where we remain on track for our transition to owned distribution on april first of this fiscal year and for the united states Organic net sales decreased 9% as a result of lower volumes due to an estimated net decrease in distributor inventories of 11%, partially offset by higher prices across our portfolio. As Lawson highlighted, In the first quarter, we cycled against the significant inventory rebuild during the same period last year, which was particularly impactful to the United States market as we focused on rebuilding distributor inventory for brands with substantial volume in the U.S., including Woodford Reserve, Gentleman Jack, Jack Daniel's Tennessee Honey and Jack Daniel's Tennessee Fire. With the rebuilding of finished goods inventory across the three-tier system we accomplished in fiscal 2023, we believe that distributor inventories have returned to more normal levels. The consumer premiumization trend continued to drive demand for our super premium Jack Daniels products and partially offset the decline. This included growth from Jack Daniels Sinatra, our specialty launches such as Jack Daniels Single Barrel Rye Barrel Proof, and the newest member of our bonded series, Jack Daniels Bonded Rye. These products highlight our whiskey credentials and give consumers the opportunity to explore and discover within the Jack Daniels family while premiumizing the Jack Daniels family of brands. The tequila category also continued to experience growth in the United States with El Himador leading the growth of our tequila portfolio, delivering double-digit organic net sales growth. And the launch of Jack Daniels and Coca-Cola RTD drove a high single-digit organic net sales increase for the Jack Daniels Ready to Drink portfolio. From a takeaway perspective, the data reflects a normalization as total distilled spirits, as well as brown foreman, delivered value growth in the mid-single digits, driven by growth in RTDs, tequila, and U.S. whiskey. As Lawson shared, the details of our gross margin expansion and operating expenses for the quarter, I will now turn to our operating income. In total, reported and organic operating income decreased 4% and 6% respectively in the first quarter of fiscal 2024, largely driven by the phasing of our operating expense growth, partially offset by our gross margin expansion. These results, combined with a decrease in our effective tax rate and an increase in interest expense, resulted in a 7% diluted EPS decrease to 48 cents per share. And finally, to our fiscal 2024 outlook, which we are reaffirming. In what has been a highly dynamic operating environment, we continue to be optimistic. We continue to believe global trends will normalize after two years of very strong growth. And while consumer demand for our brands is also starting to reflect more historical trends, we expect to continue to grow on this elevated base as a result of our long-term pricing and revenue growth management strategies, as well as the addition of two super premium brands, Genmari and Diplomatico, to our portfolio, partially offset by a portfolio mixed shift to RTDs. i will also note that due to the timing of the genmari and diplomatigo acquisitions which were in the third quarter of fiscal twenty twenty three the contribution of these brands in the first half of fiscal twenty twenty four will only appear in our reported results as the operating activity in this period will be non-comparable year over year. Once we lap the acquisitions, the results will then be included in our organic results. While we remain cautious due to the current macroeconomic volatility and the potential impact of inflation on consumer spending, we maintain our belief that the collective strength of our U.S. and international markets along with the travel retail channel should reflect our longer-term growth algorithm and therefore reiterate our organic net sales growth expectation for fiscal 2024 in the 5% to 7% range. Today, we have intentionally highlighted the impact of our results from the strong shipments in the year-ago period related to the rebuilding of distributor inventories. As a reminder, we began rebuilding distributor inventories in the second half of fiscal 2022 through the first half of fiscal 2023. I also want to remind you of the stronger shipments associated with the launch of Jack Daniels and Coca-Cola RTD in the United States in the back half of fiscal 2023 will have to be lapped in the second half of fiscal 2024. Both are reflected in our guidance. We believe inflation will continue to negatively impact our input cost, which will partially be offset by lower year-over-year costs associated with the supply chain disruption we incurred in fiscal 2023. On the topic of input cost, I'd like to take a moment here to share some thoughts on the recent changes in agave pricing. As we have discussed with you over the last few quarters, given the increase in tequila demand, there was a significant increase in the number of plantings several years ago. We have long believed that this would lead to an eventual increase in supply and subsequent decrease in cost, assuming the tequila category remains strong. In the last three months, we have seen a significant decrease in agave costs from 28 to 30 Mexican pesos per kilo to 16 to 18 Mexican pesos per kilo, depending on the quality of the agave. While we are very encouraged that prices are finally coming down, the benefits to our cost of goods sold will not be immediate for three reasons. First, we have finished goods inventory produced prior to the reduction in agave prices that need to be sold. secondly more than half of our tequila is aged liquid for expressions such as reposado and añejo which will require some time before it is bottled and sold for our blanco expression we will begin to see a benefit more quickly in addition and as we have shared We both grow agave internally and source it externally, and this mix can vary based off our needs and the volume growth by expression. So while the overall agave pricing trend is increasingly favorable, we still believe that inflation will be a headwind for our overall input cost in fiscal 2024. Turning our attention to the full-year operating expenses. Our outlook continues to reflect a normalization of incremental advertising spend aligned with our long-term philosophy for advertising spend to be aligned with our top-line growth. And SG&A growth is still likely to remain higher than historical averages as we continue to expect higher compensation-related expenses and expenses related to the transition to owned distribution in Japan. Based off these expectations, we continue to anticipate organic operating income growth in the 6% to 8% range for the full fiscal year. We also expect our fiscal 2024 effective tax rate to be in the range of approximately 21% to 23% and our capital expenditures to be in the range of $250 million to $270 million for the full year. In summary, we have had a good start to fiscal 2024. The results reflect the continued normalization of consumer demand as well as the comparison against the very strong shipments related to the rebuilding of distributor inventories in the year-ago period. They also include the benefit of our pricing strategy and the phasing of our brand investments. While our short-term organic results in the quarter were below our historical trends, we believe our brand and our business are healthy. We remain optimistic as we look ahead to the full fiscal year and are confident in our ability to deliver our near-term goals and our long-term strategy. This concludes our prepared remarks. Please open the line for questions.
spk11: Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Nadine Sawat with Bernstein. Your line is open.
spk10: Hi, thank you for taking my questions. I'd like to zoom in on the distributor inventory in two parts. So the first, could you just quantify How much of the change in distributor inventory was due to the tough comp you highlighted versus how much is due to actual distributor destocking? And if there is a fair amount of actual destocking, what is driving this? And then secondly, are you happy with current distributor stock levels or should we be expecting some destocking in the next quarter? Thank you.
spk05: Good morning, Nadine. Thank you. I'll start with the first part of your question, which is, We have talked about the comp that we had in the first quarter compared to the comp that we had in the first quarter of last year, which was when we had very strong shipments. And if you go back to our, what is that point in time with the Schedule C, you would have seen the impact that we had there. So it is partially that we are comping the very strong comp. It's also We don't see it as destocking. We have finally gotten our inventory levels back up to what we believe is normal. We've been working on that for a year and bringing you along in that story along the way. What we see now is a change in distributor buying patterns in that other part that you're asking about. And it really comes back to we continue, though we've lapped everything related to the pandemic, we now have to comp the things related to supply chain disruption. And as we got into supply chain disruption, before that we had a very consistent cadence and seasonality of our shipments. But due to the various ways that we determined that we needed to rebuild our distributor inventories, first prioritizing Jack Daniel's Tennessee Whiskey, which would have started in the second half of 2020, and then moving into the first half of 2023, where we were able to prioritize Woodford Reserve, Gentleman Jack, and Jack Daniel's Flavors. We also prioritized markets for the U.S. first and then Europe and Emerging International as we worked our way through the rebuilding of the inventory. So the cadence and timing of our shipments are abnormal from what we would, our historic norms. So once we're back into a stable inventory position for long enough, we believe it'll become less volatile and we'll be kind of back to our historic norms. But again, for us, we have been working for a year to kind of get back up to that normal level of inventory across the world, and we now believe that we're there. So I hope that helps.
spk04: Let me try to add on to that, Nadine, a little bit too, because I do want to make sure everybody sort of, I get that this is really confusing. And I do reiterate really what Leanne said, that this is a comparison issue, though. It is not a destocking. And let me give you the why it's not a destocking, because I know that would sort of feel normal at this point. So if you go, literally, you can go back three years, the summer of 2020 into the fall, really into the spring of, I'm talking calendar years here, not fiscals. We, that was kind of the boom years. It was the post-COVID period. Nielsen numbers were up at like 30% for everyone, and it was just an enormous uplift in the entire industry. You get to the summer of 21, and it begins to show up in terms of glass shortages. Really, for ground foreman, it's seemingly worse than anyone else, but we really began to have those challenges in the summer of 21, and it was a challenge for about eight months where we ran global inventories down so low and that would be going so far as to say the consumer inventory the retail inventories layers of distributors it got very low and we had out of stocks all over the place we are at that time working very hard we're diversifying our glass supply we're moving bottling lines we're doing all sorts of things to try to alleviate the you know the glass shortage and it starts to come back right or in the spring of 22 so And as Leanne said, we prioritized Jack because at that point, the on-premise is opening around the world, and we did not want to miss that. So Jack Daniels really begins to move and had a huge year in fiscal 22 and had a big year in fiscal 23 also. So Jack gets replenished in the spring and into the early summer, but now you get into the summer of 22, which is the one we're comparing against, As we said earlier, Woodford, Gentleman Jack, all three flavors, and basically our whole portfolio really begins to come back online. Now, the reason there's not a destock here, this is where you wouldn't think this at first, but what was happening because retail inventories were so low that those cases of Woodford and the Gentleman Jack and the entire portfolio got to the distributor warehouse And they were outside the back door in about 20 minutes because the retail environment was so desperate for the product. So our days never crept up. And so we haven't had to take them down. So it's not a days of inventory issue, and it's not a destocking issue. It's just these comparisons against some crazy quarters. And I'll finish this off, and I don't want to spend that much more time on this. But Q1 of last year, Jack Daniel's Tennessee Whiskey was plus 21. total company was plus 17. So you're comping against numbers like that. Q2, just to sort of foreshadow everyone, is a big quarter too. So we have another one as we continued to replenish these inventories through Q2 of last year, and then the comps get much, much easier. But it's been a volatile ride. It's been a volatile ride for five years. But the business is solid. I think if you look at the Nielsen numbers in particular right now, they're normalized. But as we said last quarter, normal is good. I mean, we've got this business, I think, rolling in the right direction and momentum is good. And, you know, the volatility, we don't love the volatility, but it is there. We've got a little bit longer to go, but I still argue, or not argue, but I'd still venture to say that our underlying business is in pretty good shape.
spk10: All right. That's very helpful. So just to clarify, I know in the release you called out that it was partially due to the comp issue. Are you saying that there is no destocking whatsoever? There isn't a change in distributor buying patterns? More caution. This is purely a comp cadence issue. And then if you could just clarify what we should expect for Q2. Thank you.
spk05: Yes. So just for clarification, we said partially comping the rebuilding. And it's also partially a change in the distributor buying patterns because we are off our normal cadence of shipments or our historical trends because of how we chose to prioritize how we rebuilt our brands and in what markets we were rebuilding those. So over the longer period of time, that will begin to normalize.
spk11: Thank you. Perfect. Thank you. Please stand by for our next question. Our next question comes from the line of Bryant Spilling with Bank of America. Your line is open.
spk03: Hey, thanks, operator. And good morning, Lawson, Leanne. So thanks for all of that commentary on inventory. And I guess if I were to sum it up, if you deplete 10 cases, you'll ship 10 cases, right? That's what the plan is built on? Pretty much. Okay. And then, Lawson, maybe could you just give a little perspective on, you know, depletions in the quarter, volume depletions were up 1%. And so could you just kind of put that in context of, you know, is that, you know, more or less in line with what you were expecting? Maybe what that looks like relative to the industry? You know, there's a lot of focus right now on volume and volume growth and you know just just what's happening with consumption not just for brown forma just more broadly across i know our entire coverage you know consumer coverage universe so just trying to get a sense of if you could put that into perspective of just what you're seeing in terms of volume consumption trends and and whether uh you know kind of a one to two percent type uh depletion is is maybe what we should be thinking about in terms of brown formant and maybe just you know the industry uh for the year
spk05: I'll add some color to that. And if you look at Schedule B, you can see that really for the most part, shipments and depletions are aligned, except for where you get down to the Jack Daniels ready to drink, and that's all about the launch of the Jack Daniels and Coca-Cola in the U.S. So where we are right now is they're in line. Over a longer period of time, as shipments over the last few years have been stronger than depletions as we've been working to rebuild inventories, we do expect that depletions would need to come back in line and will exceed our shipments in this year is what is built into our guidance. So as we think about that, we will continue to update you as we go through the quarters. But right now, we still believe our depletions will be a bit ahead of our shipments as we go through this fiscal year.
spk04: I mean, I think to tear it apart a little bit by geography. I mean, the U.S. market, if you look at TDS in Nielsen, it's sort of a between five and six, I think. We're right there, too. So the U.S. market, I mean, there's so much noise in the sales numbers, I know, but the U.S. market's in pretty decent shape. It's definitely being elevated by the RTD piece of things. So I think it's fair to say the full strength has some of its comparisons, but the full strength market has softened a little bit. But it's being made up for us, for the most part, in our international markets, which continue to be really strong, and particularly the emerging markets, which really is in its third year of pretty outstanding growth. That growth is coming from a very wide variety of markets, which is always nice also. While we are so dependent on Jack Daniels, when you talk about the international markets, there's so much geographic diversification that For instance, South America and Mexico, we've had an outstanding run, and there are markets in Eastern Europe that are on really strong runs right now. So we've got really strong pockets of growth coming out of some of our most important markets. The U.K. is actually in pretty good shape right now, too, and is delivering well. So, no, the business is not turning into a 1% growth. No one is thinking that.
spk03: Very helpful. Thanks, Lawson.
spk11: Thank you. Please stand by for our next question. Our next question comes from the line of Eric Sirota with Morgan Stanley. Your line is open.
spk08: Great. Thanks, everyone. With regards to the comment that you made in the press release and the prepared remarks about declines in the old Jack and Cola offsetting growth in the Jack and Coke launch. If I remember correctly, the previous comments that you made were that Jack and Coke was nicely incremental. So just looking for some color as to why they largely offset in the quarter. Was there a timing issue with getting some of the old Jack and Cola out of the channel, or was some of this, a lot of this growth reported on Coke's books and not yours? Any color into that dynamic would be great, really helpful.
spk04: Yeah, so sure. Because this is one of those topics that also is a little bit confusing. So as I mentioned in my prepared remarks, the global volume sits about 1.8 million cases across the 11 markets. Now, the part I think most people know, but a reminder, I guess, some markets are led by Brown Foreman and others are being led by the Coca-Cola company. So that is what is throwing some of our volume numbers off in the spreadsheet, and I think it's what you're referring to. There are markets where Coca-Cola is taking the lead, and I'll use the UK as probably the clearest example. We had a big Jack and Cola business there, and now we are evolving that over to Jack and Coke. So those sales... of the sales to the Tescos of the world will not be on our books anymore. It's going to be on Coca-Cola's books. It doesn't mean the business is going away. It's just we're taking out the cola and replacing it with Jack and Coke. And so that's why the numbers look like they're going down, but that's not really the case in real life. System-wide, they're not. It's just the way that it's being reflected on our financial statements. And I think, look, I'd also reiterate I mean, look, this has been a great launch. It's an iconic product. We are really investing highly behind this launch, as is the Coca-Cola company. And so there's been a lot of broad reach media, there's events, there's trade executions, and it is off to a very strong start. So the increased visibility, I think, is important. The market share gains we're getting, we've got a lot of positive factors. And it's got 2% of the category in the U.S. It's got 2% share already, and it's only been three or four months. So You know, it's off to a good start and we feel pretty good about it. And I think the long-term potential is exciting in a lot of things that it does for the health of the brand, along with the actual business proposal itself. So, it's off to a good start.
spk08: Great. And then just to follow up on the inventory dynamic, hopefully this is one of the last questions on it, but you did mention or you did flag Rightfully so. I think some tough comp again in the second quarter. My recollection is the rebuild last year in the second quarter was somewhat less than it was in the first quarter. Am I remembering that correctly? And should we expect some sort of moderation in that year-on-year headwind in the second quarter before All things being equal should be about neutral in the second half.
spk05: You're remembering that correctly. And what we're talking about as far as comp is the entire company because we had the really strong shipments in the first half of last year. But you are correct that as we get into the second quarter, the shipments and depletions more normalized. But the one thing we have to remember is when, and we'll share this with you every quarter as we get into the fourth quarter, of fiscal 2024, then we'll have to lapse the launch of Jack Daniels and Coca-Cola in the U.S.
spk04: But, yeah, I mean, so it is less. With Q2, as I said a minute ago, Jack was still up 14 in Q2. So it's still – we've still got high comps, but it is normalizing.
spk08: Terrific. I'll pass it on. Thanks for your help.
spk11: Thank you. Please stand by for our next question. Our next question comes from the line of Andrea with JP Morgan. Your line is open.
spk01: Hey, good morning. This is Drew Levine for Andrea. Thanks for taking our questions. So I wanted to pick up on the U.S. So it looked like underlying trends were up around 2% in the quarter and a loss, and you mentioned TDS was up sort of mid-single digit. And in the track channels, it looks like even Brown Foreman was up stronger than that. So Just curious if you can elaborate maybe on what the disconnect there is and if we should see that sort of delta between the underlying growth rate and what we're seeing in track channels narrow looking ahead.
spk04: Well, I mean, those numbers never tick and tie exactly. I think the 5% growth number, which includes Jack and Coke, is a pretty solid sort of result. The U.S. You know, the U.S. for like a decade has been between 4% and 5%, with the exception of these sort of post-COVID years when it really blew up. Yeah, the difference between getting from minus 9 on an organic basis and adjusting for the distributor inventories is what gets you to the 2. I don't know if I can explain the difference between the 2 and 5 necessarily. I don't think it's not a huge number.
spk05: It's really about the launch of the Jack and Coke and the buying patterns that are in there. So that's creating a lot of noise and the difference between what you would see in our takeaway trends and what's happening in our net sales. So it's just, again, as we were coming through and the gap was narrowing over the last few quarters, but then as we launched Jack and Coke and it's not all the way through, into those takeaway numbers yet, that's creating the gap for us.
spk01: All right, fair enough. And then if I could ask a follow-up on gross margins. So it looks like costs were about 100 bps headwind this quarter, moderated from the fourth quarter, which I think was around 350 bps. And you mentioned you'll be lapping a lot of those supply chain mitigation efforts from last year. So can you maybe offer some more color on gross margin expectations looking ahead? Should we think about gross margins potentially over 60% here going forward? And then, you know, on the Blanco or Agave situation, is there any sort of way to think about the internal versus external mix of supply there? So thank you for that.
spk05: Okay, great. Thanks. So I'll start with our gross margin for the first quarter, which was, as you noted, expanded 90 basis points, and it's where our price mix more than offset the inflation on our input cost. And it was really driven by our price mix, which was plus 250 basis points that was driven by kind of the price increases across our portfolio that was led by Jack Daniel's Tennessee Whiskey. We also still, and I'll just point this out, it's the last time I'll have the opportunity to say it, the last of the benefit from the removal of the UK tariffs on American whiskey because they rolled off June 1 of 22. And as you pointed out, the impact of inflation on our input cost has been partially offset by supply chain disruption costs. And then so that's a good segue for me to go into the full year. And again, everything I say here is built into our operating income guidance. But we do expect price mix to continue to be a leader for us this year with our long-term pricing and revenue growth management strategies. From a cost perspective, we'll have the absence of the supply chain disruption costs that will be significantly less to zero in F24. And we'll still have inflation that will negatively impact our input cost in total, but though at a lower level. And to your question, I'll talk to you about a couple of our key input items, starting with agave. And it really is about what we said. We've been talking about this for a very long time. We're really excited that it's finally starting to come down. We've been looking out there for such a long period of time, seeing those large number of plantings and waiting for supply to catch up with the demand. And we are approaching and arriving to that now. We just wanted to be clear though with everybody though, like we said in our prepared remarks, We do have finished cases in the supply chain in our inventory that need to be sold through. And it varies by SKU how much inventory we have, but generally speaking, that would be three to four months, depending on SKU. So we'll need to work through that. And then like we talked about, for our portfolio of tequilas, Reposado and Añejo and some of our other expressions are aged liquid. So we need to continue to let them go through their aging cycle before they're bottled and that inventory is sold through. But as we get to expressions like Blanco or any non-aged expression, we'll see that benefit more quickly. So it's really more about moving through the aged liquid and the finished goods inventory, though a bit of it will be the mix, just between what do we need to meet our needs. So we do grow our own internal agave, but where we have needs, we source on the spot market. As you know, we've been clear with that over time. So balancing all those things, I think all to say that in a number of months from now, we're going to see a meaningful benefit that will come towards the end of our fiscal 24 and well into F-25, which continues to to make us excited about as we look ahead, because we know agave and the cost of wood have been our two biggest challenges over the last number of years as it relates to our costs. And just to give you a quick update on wood while I'm here, excuse me, the commodity cost for wood continues to remain high, but we have made a lot of strategic changes to our wood supply chain that is beginning to benefit us and yield those benefits, and we continue to believe We're going to continue to see those benefits as we move through 24 and then well into the future as well. So we've got that position well. I'll real quickly hit, just in case anybody's curious, grain for us, which is largely corn, it's below its peak. We're expecting it to be stable, but well below the prior year's prices. And with the reduction of natural gas and diesel prices, we will still see a bit of a slight increase in our glass costs, but less than what we've had. So all in all, this is built into our guidance. And in total, our cost trends are moving and appear to be moving in a favorable direction for us. So I hope that helps as you think about gross margin where we were for the quarter and kind of where we're thinking for the full year.
spk01: Thanks for the caller.
spk11: Thank you. Please stand by for our next question. Our next question comes from the line of Vivian Acer with Cohen. Your line is open.
spk06: Hi, good morning. I was hoping to ask about advertising spending a little bit. You know, understanding that the growth this quarter is really a phasing, and we heard you loud and clearly, Anne, on kind of the longer-term aspirations. to grow A&P in line with sales. But Leanna Orlosson, I was just curious how you're viewing the evolution of the competitive dynamic in TBA in the United States. For a whole host of reasons, a number of large public beer companies are stepping up their A&P for the remainder of the year. And just wondering how you're thinking about the potential impact on distilled spirit sales as a result and the potential need for you guys to spend more. Thanks.
spk04: Yeah, I mean, I had not heard that the beer companies were really stepping up that much. But I do think, as you said, the long-term philosophy is to keep it in step with sales. We have significantly increased our pot of spending in the last two years by well over $100 million. And so I think we feel pretty good that we have gotten ourselves in a comfortable place, and I think we can manage the P&L from there. I mean, look, the beer companies are struggling. And so they are... I'm quite sure they are trying to figure out ways to obviously turn their brands around. Some brands are in real trouble, and they're going to find a way to try to spend their way out of that. But I don't see us doing that, and I don't really think, at least in the short term, I don't see much of a reaction out of us because of that. Their challenges are sort of unique to them, and we'll continue to pop forward the way we have.
spk05: Yeah, and if you don't mind, Vivian, I'll kind of scope back out and I'll kind of talk about our full year because I think we need to put what happened in Q1 into context with how we're thinking about the full year. So I'm going to go a little bit broader first just to say, like I've shared, you know, we've lapped the impact of the pandemic to a more normalized level and we're on that elevated base. We're still lapping impacts of just supply chain disruption. But the reasons we believe that we're going to deliver our full year guidance is we've lapped those strong shipments of the rebuilding of our distributor inventories. And like we've talked about here today, once we adjust for the estimated net change in distributor inventories that you see on Schedule D, we believe our brands and our business are really healthy. So I'll tie that back to how we're investing in it. The investment really kind of came with the launch of Jack Daniels and Coca-Cola in the U.S., We're getting ready to launch that in September, which is just a few days away in Germany. So when Lawson said in his prepared remarks that the majority of that hit in the first few months of the year, it's to support those launches, and we're going to get back to that normal trend. But I think it's important to go ahead and say, you know, for our full year, we've got our pricing and our revenue strategies. We've got the addition in the back half of the year that's not in the first half of the year. which is the impact of GenMari and Diplomatico that will be moving into our organic results. So, you know, we feel good about our top line guidance. We also feel good about the absence of supply chain disruptions and the cost associated with that. We feel good that from a full year perspective, we will invest in our brands in a way that lands with how we have planned it, which is in line with top line growth, though heavily skewed to the front end. We've said this already, but from an operating expense perspective, SG&A, we continue to invest in our route to consumers. We know that's Japan and also Slovakia for fiscal 2024. We've got all this built into our guidance. So even with all the noise that we're talking through today, we believe we're going to land our operating income at growth at that 6% to 8%.
spk04: One more comment on the beer versus spirits thing. More to the RTD world. I think it's just And they need to advertise because the malt-based RTDs obviously have gone through a huge amount of upheaval in the last few years where they exploded and then they've taken a sharp dive. A lot of it is coming at the expense of the spirit-based RTDs, which I found interesting. I don't think any of us predicted that to happen. But I think at the end of the day, the consumer is willing to pay more, substantially more, for a spirit-based RTD than a malt-based RTD. because they taste better. And that, you know, is making the numbers get a little bit wild in the world of Nielsen and all the rest of it. But I think we have, we, not Brown Foreman, but I mean the industry is showing that the consumer is willing to pay a little bit more for something that tastes really good. And it's been interesting to watch those dynamics.
spk06: Absolutely. Thank you for that, Culler. If I could just squeeze in a quick follow-up on Japan specifically. You know, we've observed Brown-Forman, you know, evolve the route-to-market process in a number of different markets historically. I've never seen this much dislocation. So can you just help us think through the 80% decline in Japan and how that evolves over the course of the year? Thanks.
spk05: Yeah. So, again, we've been working, again, scoping out, working on increasing our route-to-consumer and to own distribution models for quite some time. We've had prior to fiscal 2024, we've had 14 markets move into owned distribution. We've seen a lot of success. They deliver a lot of things like they fuel our growth, strengthen our position. They do unlock value for us and we're continuing to move forward in that. So specifically in this year, as it relates to Japan, we are in the process of transition. We know that if you were to, look at a year ago period we were with our distributor partner we had inventory in that market to supply the sales and we're going through the just the transition and so as we you know again all of this is built into our full year plan but again F20 fiscal 2024 for us is going to be a year of transition in Japan and with that we have SG&A costs associated with it and we have a bit of volatility in our inventory levels as we make that transition. Understood.
spk06: Thank you.
spk11: Thank you. Please stand by for our next question. Our next question comes from the line of Bill Kirk with Roth MKM.
spk02: Hi, good morning, everyone. I wanted to ask about your inventory levels, not necessarily the distributor levels. Naturally, they're up from the glass shortage error. You highlighted that. However, if I go back further, I have the days up about 25% over fiscal 19. So I guess, how do you feel about the amount of inventory you hold?
spk05: So where I would say, and you can probably see some of this on our cash flow statement, is that Again, as we compare to a prior year period where we were working really, really hard to get all of the supply chain replenished with finished goods inventory, we now have what we've talked about, all of the parts of the chain replenished, including our own inventory. We go into probably the important holiday selling period. ready to supply that. So we believe by the time we, it's a bit high right now, again, if you look for our own inventories, but as we go through the holiday period, we will by the end of the year, our plan is that we have that work down and then our own inventories too are back in the normal. That's the last piece of the chain that we will be normalizing and we are ready to make those shipments for the holiday season.
spk02: Okay, excellent. And then there were two comments I want to try to tie together. I think, Lawson, you made both of them. One was you mentioned that absent distributor inventory changes, net sales would have been above long-term growth expectations. But you also suggested that 1% depletions are below what people should expect going forward. So I guess... How are the net sales X shipment timing above long-term but depletions below long-term? I'm having a little trouble with those two comments.
spk04: Well, that's just going straight to that Schedule D. So that's where we would, I think Leanne said, if you adjust the distributor inventory topic, we'd be running it at 8% top line. So that's the reference to the higher than historical norms in terms of sales growth. And that's the part that honestly gets us feeling confident because that number is pretty healthy. Now, the 1%, I think we talked about that a few minutes ago. There's a lot of RTD movement in there that's suppressing it. And the other part of it is volumes. We've taken a lot of pricing. I think that contributes to it, too, because we're getting more of our sales growth now is coming from pricing than it has over the historical periods. So it's a little bit of a balance.
spk03: Thank you. That's helpful.
spk12: Thank you. Please stand by for our next question.
spk11: Our next question comes from the line of Steven Powers with Dutcher Bank. Your line is open.
spk07: Yes. Hey, good morning. I had two follow-ups on two different questions. The first one, just quickly, on the agave topic at the end, is there a way to summarize or quantify the percentage of the company's agave needs that you currently have the capacity to self-grow versus source externally?
spk05: We've never shared that, Ben, and it changes over time depending on the category, demand, hour, finished goods inventory, our liquid inventory. So it does ebb and flow and we do grow our own and we supplement it with the external as we see demand above what we are able to grow ourselves and then our sourcing strategy that's implied in there. So again, we are excited that that is finally coming down, that supply is coming on. We continue to think that that's going to be a tailwind for us as we move through F24 and well through F25.
spk07: Okay. Okay. Fair enough. Thank you. And then probably, Lawson, for you, on Jack and Coke, I was wondering if you could talk at all about sort of the incremental distribution gains, new launches that are planned over the balance of the fiscal year that should, I think, at least, you know, partially offset the tougher comp in the fourth quarter as you left the U.S. launch. Any perspective there would be helpful. I'd also love, if you have it, any details on consumer repeat rates or what have you. The trial's been great. Just curious as to how much of the demand we're seeing is incremental, like first-time trial versus repeated consumption. Thank you very much.
spk04: All right. Let me answer the second one first a little bit, because it is – we were – obviously getting prepared for this and knew that question would come. It's very difficult to get sort of turns or repeat purchase rates. It's just too early. We're getting massive distribution flow, and that has been impressive and very good. And so we've essentially reached most of our goals in a pretty short period of time, but we just don't have that. We'll have that, I assume, by next quarter. We'll probably have some indications on that that'll be a little bit better, but it's just plain too early. Now, as the year... Excuse me. As the year goes on, the highlights, I guess, we've launched in the UK, we've launched in Spain and Poland, and all is going pretty well, and I think we've talked about that. We're really, the big one that's coming is Germany. So that's going to happen in September, and that, you know, Germany is a very large RTD market for brown form, and so sort of getting that right is obviously going to be very important, but that'll be exciting to watch, and we'll see how that goes. So And then Coca-Cola is taking it in a lot of other, you know, getting bigger in a lot of other markets, places like Japan. We talked about the Philippines, the UK, Poland, Hungary, Netherlands, Ireland. So the international rollout continues, you know, throughout this fiscal year.
spk07: Okay. Very good. Thank you so much.
spk11: Thank you. Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Sue for closing remarks.
spk09: Thank you. And thank you to Lawson and Leigh Ann. And thank you to everyone for joining us today for Brown Foreman's first quarter fiscal year 2024 earnings call. If you have any additional questions, please contact us. We do look forward to presenting at the Barclays Global Consumer Staples Conference next week, and we hope to see many of you there. For those of you that are unable to attend, the presentation will be made available as a webcast, accessible via the Brown Forming Corporate website under the section titled Investors, Events, and Presentations. We also want to wish everyone an enjoyable weekend, particularly those in the United States that will be celebrating the Labor Day holiday. And on September 2nd, we hope you will join us in raising a glass as we say happy birthday to our founder, George Garvin Brown. Cheers, everyone. With that, this concludes our call.
spk11: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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