Brown Forman Inc

Hello, and welcome to Brown Foreman Corporation's second quarter and first half of 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 will now like to hand the conference over to Sue Perham, Vice President, Director, Investor Relations. You may begin.

Thank you and good morning, everyone. I would like to thank each of you for joining us today for Brown Foreman's second quarter and first half of 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 second quarter and first half of 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 GAAP 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.

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