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spk02: 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.
spk03: 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.
spk07: 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.
spk08: Thank you, Lawson, and good morning, everyone. I will provide additional details on our geographic performance, other financial highlights, as well as our updated fiscal 2024 outlook. From a geographic perspective, our emerging international markets continue to lead the company's growth, collectively delivering very strong double-digit organic net sales growth driven by Jack Daniel's Tennessee Whiskey, particularly in Turkey, as momentum in the premium whiskey category continued. the United Arab Emirates due to increased distribution and strong consumer demand, and Poland, which is benefiting from our pricing strategy. Numix, which grew strong double digits in Mexico, is benefiting from our pricing strategy and gaining share of the RTD category. And Jack Daniel's Tennessee Apple led by Brazil, as well as Chile, where the brand is returning to normal levels of supply. Also during the quarter, we launched our own distribution in Slovakia. Slovakia has a substantial premium whiskey market where American whiskey is the value leader of the category. This makes it an important market as we drive the global growth of the Jack Daniels family of brands and bring our broader portfolio to the market, in particular, our recently acquired Diplomatico Rum. As we have demonstrated with our previous route to consumer investments, we believe owned distribution provides us with increased consumer insights, focus on our broader portfolio, and a greater portion of the value chain. Organic net sales in the travel retail channel were flat in the first half, as the channel lapped sixty seven per cent growth in the year-ago period strong double digit growth of our super premium america whiskeys such as woodford reserve our exclusive global travel retail offering jack daniel's american single malt and Jack Daniel's Single Barrel were offset by declines in Jack Daniel's Tennessee Whiskey and Jack Daniel's Tennessee Honey. Organic net sales in our developed international markets collectively were down 2% for the first half as growth in Singapore, Germany, and South Korea were offset by declines in Japan and the United Kingdom. Jack Daniel's Tennessee Apple was again the largest contributor to growth, driven by the continuing successful launch of the brand in South Korea. Glenn Glassow, as Lawson highlighted earlier, drove the growth in Singapore. El Jimidor was the next largest contributor. This performance supports our belief that El Jimidor has the ability to create and grow the premium tequila category outside of the U.S. and Mexico. This growth was more than offset by year-over-year declines for Jack Daniel's Tennessee Whiskey, which was negatively impacted by Japan due to an estimated net decrease in distributor inventory. As an update on our transition to own distribution in Japan, we are pleased to announce that we recently opened our new office and are on track for the launch on April 1st of this fiscal year. Turning to the United States, Organic net sales decreased 5% as a result of lower volumes due to an estimated net decrease in distributor inventories of 6%, partially offset by higher prices across much of our portfolio. As Lawson highlighted, in the first half, we cycled against the significant inventory rebuild during the same period last year. This was particularly impactful to the US market where we saw a 7% contribution to organic net sales growth in the prior year period from an estimated net increase in distributor inventories. As we lap this inventory rebuild, we believe that distributor inventories are at normal levels. From a takeaway perspective, Trends for total distilled spirits as well as brown form and continue to normalize with the recent value growth below the historical mid single digit range as consumer demand has slowed. Growth continues to be driven by RTDs, US whiskey and tequila, which aligns well with our portfolio. We expect our portfolio to continue to benefit from consumer premiumization as the launch of the Jack Daniels and Coca-Cola RTD and demand for our super premium Jack Daniels products partially offset the volume declines. The Jack and Coke RTD continues to grow, gain share, and bring recognition to the entire Jack Daniels family of brands. And the newest member of the Jack Daniels Bonded series, Jack Daniels Bonded Rye, along with Jack Daniels Sinatra and our specialty launches, such as Jack Daniels Single Barrel Rye Barrel Proof, are delivering strong growth. Not only do these innovations premiumize the Jack Daniels family of brands, they elevate our whiskey credentials, provide a halo for the rest of the family, and give consumers the opportunity to explore and discover within the Jack Daniels family. As Lawson has shared the details of our gross margin expansion and operating expenses for the first half, I will now turn to our operating income. In total, reported and organic operating income increased by 1% in the first half of fiscal 2024, largely driven by our gross profit growth, partially offset by the phasing of our operating expenses. These results, along with the benefit of a lower effective tax rate, were more than offset by an increase in interest expense resulting in a 1% diluted earnings per share decrease to 98 cents per share. Before moving to our outlook, I'd like to take the opportunity to provide you with an update on our recently announced share repurchase program. As we announced on October the 2nd, 2023, the Brown-Forman Board of Directors authorized the repurchase of up to $400 million of our outstanding shares of Class A and Class B common stock from October 2nd, 2023 through October 1st, 2024. As of November 30th, 2023, we have completed over half of the program. Our Board of Directors also recently approved a 6% increase in the quarterly cash dividend, marking the 40th consecutive year of an increase to the regular dividend. Brown Foreman continues to be a member of the prestigious S&P 500 Dividend Aristocrats Index and has paid regular quarterly cash dividends for 80 consecutive years. We remain appropriately attentive to today's uncertain market conditions while also confident in the long-term potential of our portfolio of brands. Our capital allocation philosophy has allowed us to maintain a healthy balance sheet and has produced superior returns over the long term. We continue to believe that our capital allocation philosophy, coupled with our strategic ambitions, will deliver strong results for our investors. Turning now to our revised fiscal 2024 outlook. In what has been a highly volatile and dynamic operating environment, we continue to be optimistic and believe global trends are normalizing after two years of very strong growth. We expect to continue to grow on this elevated base due to the contributions from 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. As a reminder, we completed the Genmare and Diplomatico acquisitions in the third quarter of fiscal 2023. Therefore, the contributions of these brands will be included in our organic results going forward. As we mentioned, last quarter we remained cautious due to the current macroeconomic volatility and the potential impact of inflation on consumer spending. Despite a moderating inflationary environment, complex global economic conditions remain, which is creating mixed consumer and channel dynamics and creating a more challenging operating environment. We maintain our belief that the collective strength of our U.S. and international markets, along with the travel retail channel, will deliver growth in fiscal 2024, though have tempered our expectations due to slower-than-anticipated growth through the first half of the fiscal year, particularly in the United States. and Mexico due to recent changes in trends in the whiskey and tequila categories. With this, we now expect our organic net sales growth for fiscal 2024 to be in the 3% to 5% range. Today, we have highlighted the impact on our results from the strong shipments in the year-ago period related to the rebuilding of distributor inventories as supply chain disruption eased. As we have shared in previous calls, I would like to remind you again 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 that will be lapped in the second half of fiscal 2024. This is reflected in our guidance. We believe inflation will continue to negatively affect input costs, even with the favorable agave pricing trend. As we mentioned last quarter, while we are very encouraged that agave prices are finally on the downward trajectory, the benefits to our cost of goods sold will not be immediate. Additionally, we believe higher input costs will be partially offset by lower year-over-year costs due to the absence of the supply chain disruption we incurred in fiscal 2023. Our outlook for the full year operating expenses continue 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. Also, our expectation is that SG&A growth will 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 on these expectations, we anticipate organic operating income growth in the 4% to 6% range for the fiscal year. We also continue to 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. before wrapping up i would like to add a few additional details regarding the sale of the finlandia brand as is customary divestitures are subject to a closing process where the sale price is adjusted for inventory and other working capital items based on the adjusted sale price at closing the value of the net assets held for sale, as well as the absence of Finlandia's operating income in the second half of fiscal 2024, we expect the transaction will be accretive to our fiscal year 2024 diluted earnings per share by an estimated 12 cents per share. In summary, we have now lapped the historically high first half reported and organic net sales growth rates, while adjusting to more normalized levels of consumer demand, and we continue to deliver both organic net sales and operating income growth. As we look towards the second half of fiscal 2024, we will begin to compare against a more normalized environment. We believe we will benefit from the strength of our strong portfolio of brands, the benefit of our portfolio evolution efforts with the addition of GenMari and Diplomatico, our pricing strategy, our gross margin recovery, and the phasing of our brand investments. Over the last few years, we have faced significant disruptions and challenges. We believe we have now moved beyond the most difficult comparisons of our fiscal year and remain focused on executing our strategy and delivering sustainable and consistent long-term performance. This concludes our prepared remarks. Please open the line for questions.
spk02: 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.
spk12: Our first question comes from the line of Peter Grone with UBS.
spk02: Your line is open.
spk04: Thanks, operator, and good morning, everyone. So, obviously, a tougher first half given the inventory dynamic, and I recognize if you back that out, you know, organic would have been relatively solid in the first half. But to kind of hit the low end of the range, it does imply a return to kind of mid-single-digit growth in the back half of the year. So can you maybe just walk us through the confidence and the outlook at this stage? Should we expect growth to be more at the low end rather than the high end? And just, you know, any thoughts on phasing as we look out to the back half of the year? Maybe specifically, obviously, it might be hard to guess, but, you know, is there any kind of shipment dynamic if – that's kind of occurring as we kind of work through this EU tariff situation. Thanks.
spk08: Thanks, Peter. I'll start with that. Our guidance does imply that we're going to have sequential improvement in the second half. And as we shared in our Q1 call, we continue to remain cautious with changes in trends, such as the impact of inflation on consumer spending and the current microeconomic volatility. And as you heard in our prepared remarks, we do expect all of our markets and channels to continue to grow, but it's about the tempering of our expectations. And when we were specific to the United States, when we were on our call in our first quarter, we were looking at US three-month value growth trends for TDS with acceleration and trends kind of in that mid-single digits. The environment that we're in today, we've had a change or a shift in trends where we're looking at TDS decelerating and low single digits. So that's been included as we look out. But the drivers that we see for our acceleration is that you can see on slide five, we've now lapped and are growing on top of just a really exceptionally high first half of last year, which was a plus 17. like we said in our prepared remarks, you know, that average is eight. And one thing we've also talked about is we did launch Jack Daniels and Coca-Cola in the second half of last year, and we will have to comp that as we go through the fourth quarter of this year. But again, generally speaking, the back half of the year, we have significantly easier comps in the back half. And we continue to believe that we're going to be able to benefit from our long-term pricing strategy. We're really leaning on our revenue growth management strategies. We'll talk about that probably in a bit. What else is going to drive our acceleration is that GenMari and Diplomatico, our recent super and ultra premium acquisitions, are going to come into our organic results in the back half of the year. which will help us, and we continue to see that our cost trends are heading in the right direction, and we're on a path to gross margin recovery, which is going to continue to help deliver some of that acceleration in the second half, as well as you heard us say in the first quarter call, as well as this quarter, in the support of the launch of Jack Daniels and Coca-Cola in the U.S., we just had a lot of operating expenses loaded into the first quarter of this year. We saw moderation in the second quarter, and we're going to continue to see that moderation as we go through the rest of this year. So those are kind of the components that are built into our outlook.
spk07: And you talked about tariffs real quick at the end of that, just a brief thing on that. First, and I assume what you meant was have we been shipping incremental cases into Europe ahead of the potential for these tariffs, and we have not. We have not, largely because we don't believe that they are going to come through in the real near future. For those that are not as close to this whole situation, we continue to work with both sides of the Atlantic. We said that on the prepared remarks a little bit. There have been some rumblings lately that these tariffs could come back around. Look, we were smarter about this than we were four or five years ago when it first came out. We've got a lot of mitigation scenarios that we know what to do. But at this point, as long as both sides are at the table, which they are right now, we do not expect this to come around. And I think our pretty strong belief is that this will kick the can down the road for at least a couple of years until some of these tariff conversations can get resolved.
spk04: Got it. So basically, even... if we get to this deadline, you're kind of more of the view that this could still be kicked down the road, negotiations could continue. So it's not like, you know, a month from now, this automatically goes back in is kind of your view. Correct. Correct. Okay. That's really helpful. Thank you. I'll pass it on.
spk02: Thank you.
spk12: Please stand by for our next question. Our next question comes from the line of Vivian Acer with TD Cohen.
spk02: Your line is open.
spk10: Hi, thank you. Good morning. Something to follow up on your commentary around more cautious outlook on the U.S. Lawson, maybe you can just unpack it a little bit. Are we more concerned around price elasticities? Is this more tempered outlook a function of more down trading than you were anticipating? Or is there something kind of more structural in terms of per capita consumption within spirits? Thank you.
spk07: Oh, no, it's definitely not the last. Look, I think it is simply the consumer has weakened a bit over the last three, four, five months. That's kind of what's changed since where we would have been last quarter. As Leanne went through it, I mean, if you just look at TDS, which, as you know, has been running at four to 5% for 20 years or something like that. Certainly stepped up over the COVID, which I know some of you called it a super cycle, you know, went up quite a bit over those years and it's come back down. And I would have said most of 2023, calendar 2023, we were in that mid single digit range and then it really fell off, you know, over the last, as I say, three or four months. And so I think there's just been a bit of weakness and consumer confidence that has hit the entire market and brought the number down a little bit. But it's still growing, I should say, too. It's still at a sort of plus two range. And so it just made us get a little bit more cautious on the outlook for the U.S.
spk10: Thanks for that. And just as a quick follow-up, you guys noted, you know, the inclusion of Genmari and Diplomatico. You know, those are, you know, quite high-end offerings. So how are you kind of thinking about the contribution to organic growth from those two brands? Is your outlook, you know, a little bit more restrained on that too, given concerns around the consumer? Thanks.
spk08: Well, where we see kind of really strong growth for Genmari and Diplomatico, globally, yes, but these brands are really large in our European markets where we – align well with the investments we made in our route to consumers. So we believe with those brands in our hands in those markets and the performance that we're seeing in those markets, we do see consumers in Europe, I mean, they're optimizing their spend, but they're still looking for experiences and everyday affordable luxuries. And so we see a path to growth for those brands. And again, in our reported results, they've contributed two points of growth you know, for a year to date, and we expect that momentum to continue as we go into the back half of this year.
spk12: That's helpful. Thank you so much. Thanks. Thank you. Please stand by for our next question. Our next question comes from Ilana Filippo for Lorne with Citi.
spk02: Your line is open.
spk01: Hey, good morning, everyone. I had a question on your comment on distributed inventories. I know you cycled the rebuild in the first half, and you also mentioned that they're not at a normal level. Given the weakness that we're seeing at the consumption level, which you alluded to, is there a risk that you're going to see more of a normalization further below this current level? Many of your spirit peers have talked about more of a normalization of distributor inventory. So I'll be curious on your perspective there.
spk08: Okay, great. Yeah, we believe that, and kind of like we stated in our prepared remarks in general, that distributor and retailer inventories have normalized. The impact of that estimated net change in distributor inventories for us is largely related to that year-over-year comparison. And if you take a look at Schedule D, or B, I'm sorry, which is in our earnings release, And you kind of look at the shipments and depletions for our full-strength portfolio. You'll see that the shipments and depletions are largely aligned. And we've talked about we've lapped supply chain challenges, our inventory is returning to normal. So really what we see going forward is going to be related to consumer demand. One small note is that our recent acquisitions of Genmari and Diplomatico aren't yet reflected in the schedule, and we'll be adding those in the next quarter. And maybe just to kind of dig in a little bit deeper, the U.S., we believe they're back to normal. This time last year in Europe, we were, and really in October, was the big month where we were air freighting cases into Europe, so we had product available, so we were still rebuilding inventory. Again, in Q2 of this year, we had really the largest impact of the absence of those supply chain disruption costs, but we believe they're back to normal as well. And then in our largest markets in Latin America, Brazil, our business is strong and our inventories are at normal levels. And Mexico as well, for both Brazil and Mexico, we own our route to consumer. So we have visibility through there. And then we purchase retail inventory data that continues to let us see further through the chain. So Brazil, we feel like our levels are normal. And in Mexico, yes, with the really recent change in trend, we're adjusting accordingly. And all that's built into our guidance.
spk01: Great. That's super helpful. And then a quick follow-up on your tequila business. Obviously, we're coming off a cycle of very high inflation in agave costs, which is now turning the other way. How do you assess the potential risk of more price competition in the category, particularly given we're seeing also a slowdown in consumption levels? Thank you.
spk07: Yeah. So, look, tequila has been on a – pretty unbelievable run, actually, over the last few years, as particularly, I'll say that 22, 24-year-olds up into their 30s really have adopted tequila as sort of their drink of choice. And it's, you know, it's done really, really well, particularly at that super premium, ultra premium price point, which is where Dura plays. El Jimidor is going to be a little bit less than that, but still, you know, a solid, well-positioned brand across both Mexico, the U.S., and in El Jimidor's case, increasingly in some other markets around the world. So now to your question about, you know, what's going to happen with pricing in the category. Look, I think, you know, and hope that the people that are playing in that ultra-premium price point for tequila are the big, you know, have suffered through a period of time when the agave costs were so high and hurt everyone's margins that would have been playing in that, that it's time now to reach some of those benefits of the better margins. So, you know, I don't expect that we're going to see significant changes in promotional pricing. And I haven't seen it yet in any kind of material way. But, you know, we'll have to see what happens over the next six, 12 months. But I know, at least from Brown Foreman's perspective, we are not planning to get more aggressive in that category. We want to be able to stay as an ultra-premium brand. Great.
spk01: Thank you, guys. I appreciate it.
spk02: Thank you.
spk12: Please stand by for our next question. Our next question comes from the line of Nadine Sarwat with Bernstein.
spk02: The line is open.
spk09: Morning everybody, thank you for taking my question earlier. You called out seeing low single digit net sales growth for the US spirits market overall. Are you anticipating getting back to that long term single digit growth rate that we saw in the US? And if so, over what time horizon are your expectations sort of that coming back in the next few quarters? Or is this well over a year into the future? And then just a slightly shorter-term question, any color that you could add on what you're seeing in the last month in U.S. spirits and global spirits since the end of the quarter? Any changes to the trends that you've reported today, or is it largely in line? Thank you.
spk07: Well, look, those are pretty short timeframes there. forecasting where the U.S. market's going to go. As I said, it's in that sort of low single-digit range right now. I just talked a minute ago about it being in the four to five for years and years and years with the exception of the COVID boom. But I don't know how to predict when it's going to come back. Certainly, you know, if we looked at past cycles, the only time that TDS has really materially weakened in the last 20 years was after the financial crisis, sort of 2009 time frame. And it snapped back really fast. I think all of us, well, those that have been in this business that long remember that because it surprised everyone and it came back. And I think it's a category, this is an amazing resilient category in the United States. And I do not believe it's lost that factor. So I do think it's just sort of a weakening right now. And then we're just going to have to see where consumer spending goes over the next six months. But hoping and believing we'll be back in that sort of mid-single-digit range and I'm guessing here, but we're talking six to 12 months. And what was the second half of the question? Oh, I have, you know, to be honest, Nadine, I haven't really, I haven't seen, I'm looking at the same data you are in terms of Nielsen and NAPCA. I haven't seen anything real recent that was any different. The step down was more in the, you know, August, September range. Not even sure the numbers have updated to October yet.
spk09: All right. Thank you very much.
spk02: Thank you.
spk12: Please stand by for our next question.
spk02: Our next question comes from the line of Bryant Spilling with Bank of America. Your line is open.
spk05: Hey, thanks, operator. Good morning, Lawson, Leanne. First question, just, Leanne, I might have missed this, but Finlandia, is the divestiture now
spk08: included in the guidance i i i think i kind of i kind of missed that towards towards the end of your prepared remarks just trying to understand how finlandia impacts the guidance now versus the previous guide right well we guide on an organic basis which would which would exclude um that benefit but that's why we also thought it was important to give to you all today quantify that impact because it does kind of fall outside of our organic outlook, so we wanted to make sure that you had that piece.
spk05: Okay, and that's true for EBIT as well as revenue, right? Yes. Okay. And then second is just Lawson, you talked about the U.S. a bit. Travel retail in Mexico, I guess those are two other areas where we have fielded some questions just about potential slowing. So Is there anything there we should have noted, I guess in terms of how you kind of moderated the full-year outlook, aside from the U.S., those two or any other geographies, I guess, that might have factored into the more moderate growth expectation?
spk07: Yeah, global travel retail first. That one really is a factor of comps. Because if you can pick, remember, this time last year, we were refilling that channel in a big, big way. And I do expect that. I mean, just look, anyone who's been traveling anytime recently, the planes are absolutely jammed. And so I feel pretty good that that business will return to sort of its historical rate very, very quickly. It's just got to get through this comping thing. Mexico is a little bit different and a little confusing, necessarily. I mean, if you look at our schedule and I think the year-to-date sales is plus nine something like that so so you know Mexico is the second most second largest market in the world for brown format and so it is it is an important market and has been growing pretty dynamically for us you know for a period of years now that's been led right now by Numex which is a great brand it is absolutely enormous down in that country and I think everyone knows that at this time But the rest of the business, which had been doing okay throughout this year, I think we're getting a little more cautious that the Mexican consumer is showing some weakness too. And so we are expecting a little bit of a slowdown in the second half of the year in that market, but not falling off a cliff or anything like that either. It's just that both tequila and whiskey have slowed down a little bit, and so we're expecting that to continue through the rest of the fiscal year.
spk08: The only thing I was going to add on to that is we said in our prepared remarks, GTR is comping at 67%. When you look at the two first halves, the average of that were at 29%. And then one of the things that we would also add on Mexico is that while we're seeing kind of weakness in the whiskey and tequila categories, we're gaining share across that in our takeaway data. So, but again, it's what it's talking about for our outlook, kind of a revision in our expectation. And that's just kind of for that deceleration in the back half of the year.
spk05: Right, right. Yeah. Yeah, no, that makes sense. And Lawson, maybe you could just speak one last one in just, you know, the Sonoma-Couture deal, which was creative, actually, a pretty good creative solution, I thought, in terms of, you know, finding a good home for it and making it, you know, a transaction that is kind of attractive to both sides. So I give you, you know, it was actually a really good, you know, I thought creative solution to it. Just you're thinking about portfolio more going forward. Is there, you know, just how should we be thinking about, you know, acquisition divestiture, you know, is this just a, you know, continuing on kind of the shaping you've done or, you know, is there a chance we see it sort of, you know, move in either direction more meaningful?
spk07: Sure. So, I mean, Look, as we would have said literally 10 years ago, we were going to reshape our portfolio to focus on spirits, in particular on super and ultra premium spirits. And that is largely finished. You know all the different brands that we've sold over the last five, six, seven years, and we've brought a lot of new things in. And so we have definitely premiumized the portfolio to a pretty big extent. The Sonoma Couture one was slightly different because that, you know, within the world of wine, that is certainly a super premium brand. But we were not, it was the only wine brand that we owned fully on. I mean, Corbel is still here, but the brand was sort of sitting by itself, which is not the most efficient way to operate it. And the Duckhorn group are, one, they're fully focused on super ultra premium wines. They're one of the sort of premier wine companies in America. And it's one of those where we believe the value creation opportunity is better under their hands than ours. I hate to say that in some ways, but wine is really, it's their focus. It's what they do. It is the accounts that they call on are all very similar. And Sonoma Contreras is a huge benefit to them too, because it is so big, particularly now on premise in the United States. And so we just thought it made more sense that way. And as you say, we own a piece of that company now and we'll share in the upside. that hopefully comes in the relative near future.
spk05: All right. Thanks, guys.
spk02: Thank you.
spk12: Please stand by for our next question. Our next question comes from the line of Lauren Liberman with Barclays.
spk02: Your line is open.
spk11: Great. Thanks so much. I was curious if you could talk a little bit about Latin America, about Brazil in particular. You already touched on Mexico, but in Brazil, which I know is a smaller market for you, definitely heard some of your peers out there talking about a more challenged environment. So I wonder if you could talk a bit about that. And then probably much more importantly, the UK. The UK, just backing into it, looks like it was down pretty significantly this quarter. I know there's the Jack and Cola market. dynamics in there, but just any help and perspective on UK, I guess I should throw in Germany too, but Western European, sorry, I meant France. I meant France, sorry. Those are the two that for me were like a little weird, but just perspective on the consumer environment there or how much of this is more about Jack and Cola transition that's impacting the numbers right now. Thanks.
spk08: Okay, great. Thanks, Lauren. For Brazil specifically, again, you can see in our year-to-date results, we've got high single-digit organic net sales growth. A lot of that is being driven by, and again, when you think about how we prioritize brands and geographies in supplying our products at post-supply chain constraints, Jack Daniel's flavor portfolio has a much improved supply, or really a back-to-normal supply, and we are able to support the consumers taste profile for our products of honey and apple and really the launch of Jack Daniels Apple along with our geographic expansion strategy that we've had in that market for a while is continuing to gain market share. So the consumer takeaway is slowing a bit and we do see the competitive environment intensifying, but we continue to believe we're going to do strong business in Brazil. So I'll move to UK, and I think you've already said it. Our business is strong there. What we're seeing is this is really about the transition of our Jack and Cola business out of our results because this will be a market that is led by Coca-Cola with the Jack Daniels and Coke. And then specifically to France, that continues to remain a challenging environment with declining consumer sentiment. And inflation has been high. It is starting to impact the consumers there and their discretionary income spend. We are seeing a little bit of down trading in that market and maybe a little bit even of a switch to beer in that market while the consumer is going through this period of high inflation. But again, as we look over the longer term and how we are thinking about how Diplomatic OREM will have a strong impact to that market over a period of time. We believe this. And as we continue to revise strategies there, we continue to believe France is going to be a contributor to growth over the mid to longer term.
spk07: A follow-up on the Tennessee Apple question or comment. You saw how it is doing a brilliant job in Brazil. It's actually doing a really good job in Korea. Some sort of unusual markets that we would be talking about, but Jack Daniels says the Apple was launched in the middle of COVID and was a, you know, as really all new products during COVID was a really tough time to launch things. And, and, you know, it didn't meet anywhere near our expectations, but now that we're through a lot of that, the expectations on Apple are going up a lot. And, uh, I think it's a great product. I mean, it's just the taste alone is excellent. and appeals to a very wide palette, I think, on a global basis. And so you'll hear more from us on Apple over the next quarters or years, as we think that really has potential to be a really nice, big addition to the Jack Daniels family.
spk11: Okay. And sorry, just one more follow-up on the Jack and Cola piece on the UK. Should we assume that there's a significant drag for the next like another three quarters till that's fully out of the base.
spk08: As we're transitioning, because that Jack and Cola business will be coming out of our results so that we would need a full 12 months before we lap that.
spk12: Okay. Okay, great. Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Steve Powell with Deutsche Bank.
spk02: Your line is open.
spk06: Oh, great. Thank you so much. Just one final question on the U.S., if I could. In terms of the lowered growth expectations, are you able to talk a little bit about whether that's whiskey, that's tequila, or other from your mind, or any color by kind of price to your product? Just trying to get a little color as to where you see within the portfolio the biggest step down relative to your prior views or if it's more widespread?
spk08: I think it's just about lapping and growing on top of that really high impact of rebuilding the inventories in the year-ago period. And then as we look at where we are year-to-date and understanding what acceleration can be, and what it could potentially look like between here and the year-to-go period. So I think we would just say that, and then, you know, Jim Murray and Diplomatico would be a smaller positive impact for the U.S., but again, we do think it'll be a positive impact for the U.S. I mean, I think that it's just kind of generally where we are in the year-to-go period with what we've seen in the current trends of TDS, and one of the things we've talked about is know on this kind of path back to normalization and currently being kind of below that mid single digit you know we believe there's not going to be a linear path back to normalization it'll probably be a little bit up and down over a period of time um but we've factored in a little bit of that as well but i do i do think american whiskey and tequila are two still to the two strongest categories in the u.s spirits business which is where the vast majority of our portfolio is now
spk07: you know, delta from where we were. I mean, I think we spread it out a little bit. I think both are, you know, tequila's coming down off of sky-high numbers, where American whiskey was steady, high, but not as high as tequila, and so I guess the delta would be more on the tequila side of things. I do want to point out, too, I just want to reiterate one more time. Now, Project Daniel's Tennessee whiskey, so core black label. Now, this is not a U.S. statement. This is global, but The brand was up last year, first half, plus 18. For a brand the size of Jack Daniel's Tennessee, to be at a plus 18 is an enormous amount of volume movement. Now, to be down two over the first half of this year, while we don't love that, the two-year average is still eight. I want to make sure people don't take away from this that the brand is somehow not healthy or anything down that path. The brand has had a not only the last two halves, but even over the last five years, Tennessee whiskey has continued to be a really strong supporter and continues to be the single biggest source of growth for Mount Forman and will be for the foreseeable future.
spk08: And then one last thing I'll add on specifically about the U.S., as we talk about understanding what our opportunity, our long-term opportunity is with Jack Daniels and Coca-Cola, we know it's now a top 10 spirit-based ready-to-drink brand. It's the number one whiskey-based RTD in Nielsen. It's got over 2% of the category share, and it's really getting great accolades, like we talked about in our prepared remarks, as named one of Jack Daniels and Coca-Cola as the best new product in 2023 from the spirits business. So, again, we think this product's still fairly new in the market, but the accolades are supporting what we believe will be that future growth.
spk06: Yeah, that's helpful. So just playing it back, it sounds like the revised expectations are fairly broad-based, but just given the large numbers that were embedded in tequila growth to begin with, more of the step-down is showing up in that category. Is that fair? Correct, yeah. Yeah, okay. Very good. Thanks so much.
spk02: Thank you.
spk12: Will you stand by for our next question? Our next question comes from the line of Robert Ottenstein with Evercore.
spk02: Your line is open.
spk00: Great. Thank you very much. Two questions. First, I think in prior calls, you had talked about going to kind of a 2% to 3% or 3% price increase in the U.S. and trying to do that on a steady basis. Is that... under review or at risk now given the weakness in the market so that that would be the first question and then the second question is more on your distributors and route to market in the US and you know whether whether you're getting the kind of execution that you expect doing a lot of channel checks talking a lot of people you know, a lot of the spirits, the wine and spirits distributors have gotten very big. Some of them are taking on beer, doing other things. And I am hearing more complaints about the execution in the U.S. market and people trying to figure out what they're going to do and deal with that. So I was just wondering if that's an issue that you're looking at. Thank you.
spk07: I'm laughing. People complaining about U.S. distributors. Look, the The pricing question first. Look, we still believe and see, you know, solid consumer demand. And so we are not planning on really changing that pricing strategy. We have, we've been doing it now for two, two and a half years where we like in the U.S. it's been that two to three range. It's actually been higher in other parts of the world. And it has a lot to do with why our gross margin has expanded, you know, so much over the last, you know, say six months. And so we're We love that and still see a lot of really good pricing opportunities. So it's that low, very casual, low and slow, where we believe in that over the long term is the way to go. We did not do, like some of our competitors took huge increases back when supply chains were very constrained and all that and go to double digits. And that is a risky strategy, I think, in our industry and not one that we're going to pursue, but we are going to continue with the sort of low single-digit range, and I see that continuing for the foreseeable future. Now, back to the U.S. distributors. Certainly, there's been a lot of consolidation in that space over the last decade or really two decades. We're very comfortable with where we are. They're doing a good job for us. We're, in many cases, the largest supplier, particularly in the R&DC markets. we get our fair share of attention and feel good about that. And, you know, these are great partners that we have and we need and have good relationships with. So I don't really see any, you know, any significant changes happening there in the near future.
spk00: Great. Thank you very much.
spk02: 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.
spk03: Thank you. And thank you, Lawson and Leanne. And thank you to everyone for joining us today for Brown Foreman's second quarter and first half of fiscal year 2024 earnings call. If you have any additional questions, please contact us. We'd like to note that yesterday, December 5th, was the 90th anniversary of Repeal Day, which is the end of prohibition in the United States. And if that isn't enough reason to cheer, 90 years ago today, Brown Foreman became a publicly traded company. So I hope you will join us in celebrating responsibly, of course, these two milestones, as well as the holiday season ahead of us. Cheers to everyone and happy holidays.
spk02: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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