Brown Forman Inc

Good day and thank you for standing by. Welcome to the Brown-Forman third quarter and year-to-date fiscal 2024 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sue Parham, Vice President, Director, Investor Relations.

Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown Foreman's third quarter and year-to-date fiscal 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 third quarter and nine months ended January 31st, 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 third quarter and year-to-date results for fiscal 2024. Before we get into the specifics of Brown Forman's performance, I wanted to take a moment to offer a few comments about the dynamics and trends within the broader spirits industry. the last few years have been some of the most volatile and complex in my twenty-six years in the spirits industry with a variety of factors creating noise within the system this can make it hard at times to distinguish between short-term headwinds and long-term trends the last few months have been particularly noisy as demand for spirits has been normalizing after more than two years of outstanding growth. To truly understand the current environment, however, it's important to reflect back on the beginning of the pandemic when the closure of the on-premise, limitations on travel, and remote work prompted many consumers to shift their spirits consumption from bars and restaurants and invest in at-home bars for entertaining. Once restrictions eased and bars, pubs, and restaurants reopened, consumers began spending heavily on vacations and other experiences they missed during the lockdowns. In addition, many consumers continued to entertain at home. Many in our industry called this the COVID super cycle. In calendar 2023, after two plus years of above average spending, consumers were getting back to more normal consumption patterns, but were soon faced with high inflation and increased interest rates that made them reconsider when and how they purchase spirits. By the late summer of 2023, the spirits industry across much of the developed world, including the U.S., saw the impact of these changing consumer behaviors in the form of weakening takeaway trends. However, we continue to believe, as we mentioned last quarter, that these trends are a direct result of the volatility consumers experienced since the pandemic and do not imply a longer-term change in the way they consume and enjoy spirits. At the same time consumers were adjusting their behavior as a result of the pandemic, Brown-Forman had its own set of pandemic-related challenges to navigate. This included disruptions to supply chain logistics and glass supply constraints that impacted our historical distributor ordering patterns and created unusual comparisons over the past few years. Today, we have a supply chain that is adjusting back to normal levels of consumer demand, and at the same time it's also facing increased inflation, increased interest rates, and increased competition. I share all of this to try and bring clarity to the difficult dynamics we've had to navigate and to explain why, despite a challenging fiscal year, we continue to remain confident in the long-term health of the spirits consumer and the spirits industry. The other very important topic for Brown Form in this fiscal year is the improvement in our gross margin. This, too, has been a journey we've been on now for several years. We've continued to execute our pricing strategy through our enhanced revenue growth management capabilities and increased price. We've benefited from the growth of our super premium brands in the form of more favorable price mix, and these improvements, along with the absence of the supply chain disruption costs in the year-ago period, more than offset higher input costs, and we're pleased with our strong gross margin expansion. Now, let me provide a bit of perspective on our fiscal 2024 net sales. Our reported net sales growth increased 1% in the nine months of fiscal 2024 with flat organic net sales growth. These results compare against strong results in the prior year where strong consumer demand, higher pricing, and the rebuilding of distributor inventories generated high single-digit reported net sales growth and double-digit organic net sales growth. I encourage you to reference Schedule D, which illustrates five percentage points of impact to our organic net sales from an estimated net decrease in distributor inventories. If you factor in this impact, our top-line results continue to be in the range of our longer-term trends and help support our belief that our business is solid and our brands remain healthy. In the nine months of fiscal 2024, the largest growth contributors to organic net sales growth were Jack Daniels Tennessee Apple, Numix, and Glenn Glassoff. As you will recall, the international rollout of Jack Daniel's Tennessee Apple had been slowed by the pandemic-related impacts. However, as supply and logistics challenges were eased, we were better able to meet consumer demand, which drove growth for Jack Daniel's Tennessee Apple, particularly in markets such as Brazil and Chile. We've also had a strong launch in South Korea, resulting in very strong double-digit growth for the brand. Despite a challenging environment in Mexico, Numix continued to deliver double-digit organic net sales growth as the brand benefits from higher pricing and continues to gain value share in the RTD category. Glen Glassall continues to be a standout brand as its awareness and prestige among whiskey connoisseurs continues to grow. As we discussed last quarter, the brand continued to benefit from cask sales through its old and rare program. In addition, Glen Glassall Sand End was named the 2023 Whiskey of the Year by Whiskey Advocate Magazine. This is our second year in a row that a Brown Forman brand has received powerful and impactful acclaim from whiskey critics across the globe. If you'll recall, Jack Daniels Bonded captured this most coveted global accolade in the whiskey industry back in 2022. Since I mentioned Jack Daniels Bonded, I'll also note that collectively the Jack Daniels Super Premium Expressions delivered strong double-digit organic net sales growth in the year-to-date period. This growth was led by Jack Daniels Sinatra, Jack Daniels Single Barrel Rye Barrel Proof, and the newest member of the Bonded series, Jack Daniels Bonded Rye. This is the result of our purposeful efforts to premiumize the Jack Daniels family of brands and elevate our whiskey credentials through innovation and special launches. In doing so, we give both long-term friends of Jack Daniels and new friends the opportunity to explore and discover within the Jack Daniels family. Also included in this innovation is the Jack Daniels and Coca-Cola RTD, which just celebrated one year since the national launch in Mexico. While it's still early to the brand's global launch, the Jack & Coke RTD has earned numerous awards, including Best Canned Cocktail and Best Drink Concept by Beverage Digest and named the Coca-Cola Company's number one innovation in 2023. Jack & Coke is the number one RTD SKU in Great Britain and Poland and remains the number one whiskey-based RTD in the United States. And in less than 12 months, over 100 million cans have been sold in just 13 markets, increasing brand visibility not only for the RTD, but also for Jack Daniels' full-strength portfolio. The Jack Daniels RTD portfolio had minimal impact on the overall organic net sales results in the year-to-date period, largely due to the transition of the Jack and Cola business to Jack and Coke. We believe this transition is building a stronger, more premium, and more global foundation that creates value and supports our long-term growth. The benefits from the premiumization trend continue to be evident in the organic net sales growth of Woodford Reserve, which returned to growth in the year-to-date period, driven by the brand's luxury expressions such as Batch Proof and the Masters Collection. Our founding brand, Old Forrester, introduced the newest expression in its Super Premium Whiskey Roast series, Old Forrester 1924, a 10-year-old whiskey with a suggested selling price of $115.00. The Whiskey Row series continues to grow, but also creates a halo for the parent brand, and I'm proud to say that Old Forrester has recently crossed the half-a-million, nine-liter case milestone. And our newest super and ultra-premium brands, Gin Mare and Diplomatico, entered our organic results in the third quarter and collectively delivered a very strong double-digit organic net sales growth. To wrap up our top-line performance, I'll share a few thoughts on Jack Daniel's Tennessee Whiskey, which was the largest offset to growth of our organic net sales. First of all, it is lapping an exceptionally high comp from the prior year period. Also, volume declined in the nine months of the fiscal year, mainly related to our route to consumer transition in Japan, the U.S., and the comparison against the inventory rebuild in sub-Saharan Africa in the year-ago period. We believe these disruptions are circumstantial and temporary and are confident that Jack Daniels remains in a position of strength with robust medium and long-term performance and exceptional brand health. For example, Jack Daniel's Tennessee Whiskey has again been named the most valuable spirits brand in the world by Interbrand, making this the eighth year in a row. In fact, based on our consumer insights research, Jack Daniel's Tennessee Whiskey ranks number one or number two across the measures of brand awareness, penetration, and consideration across most markets. And we continue to support the brand's health and growth through the Make It Count global campaign, the Jack and Coke RTD, and the McLaren Formula One sponsorship. We have strategies and plans in place to return Jack Daniel's Tennessee Whiskey to growth, which we will share in more detail during our Investor Day later this month. While the path to normalization in the spirits category impacted our top-line results, we continue to be pleased with our gross margin. As I shared previously, we have moved from contraction to expansion. In the first nine months of fiscal 2024, our reported and organic gross profit increased 5% and 6% respectively. Both were ahead of the respective top-line growth rates. The strength and health of our brands, along with our continued brand building investments, enabled us to increase price across many brands in our portfolio, which helped drive the 290 basis points of price mix contribution to gross margin. Gross margin also benefited from the absence of supply chain mitigation costs, which more than offset higher input costs. As a reminder, in the prior year-to-date period, we incurred increased transportation and logistics costs, in order to satisfy the demand from our distributors and retailers for the important holiday season. In total, favorable price mix, the absence of supply chain mitigation costs, and lower tariff-related costs due to the removal of the UK tariffs on American whiskey more than offset higher input costs and the negative effects of foreign exchange and acquisitions and divestitures. This resulted in 250 basis points of reported gross margin expansion in the year-to-date period. In summary, we continue to operate in a very dynamic operating environment that has impacted our short-term results. We believe that we will benefit from the evolution of our brand portfolio, long-term pricing and revenue growth management strategies, as well as a moderating cost environment, even as consumer demand normalizes. The Spirits category offers attractive growth. healthy margins, and high returns on capital, and we're well positioned globally with premium and super premium brands in growing categories. We also have an organization of highly talented people who are committed to our strategic priorities and company values. I'd like to thank all of our Brown Forman employees across the world for their focus on growing our brands and achieving our long-term ambitions. With that, I'll turn the call over to Leanne, and she'll provide additional details on our geographic performance, other financial highlights, as well as our updated fiscal 2024 outlook.