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.

Thank you, Lawson, and good morning, everyone. From a geographic perspective, our emerging international markets collectively delivered 11% organic net sales growth and continued to lead the company's growth in the year-to-date period. Jack Daniel's Tennessee Apple, particularly in Brazil and Chile, once again led the growth due to our ability to meet strong consumer demand with the return of normal levels of supply. Jack Daniel's Tennessee Whiskey growth was led by Turquia, as momentum in the premium whiskey category continued. In Mexico, New Mix continued to deliver strong double-digit growth as the brand continued to benefit from our pricing strategy and gained share of the RTD category. In the travel retail channel, Organic net sales grew 1% in the nine months of the fiscal year, which is impressive as it lapped 52% growth in the year-ago period when international airline travel and the cruise industry rebounded and nearly returned to pre-COVID levels. Strong double-digit growth of our super premium American whiskeys, such as Woodford Reserve, Jack Daniel's American Single Malt, our exclusive global travel retail offering, and Jack Daniel's Single Barrel was partially offset by declines in Jack Daniel's Tennessee Whiskey and Jack Daniel's Tennessee Honey. Turning to the United States... Organic net sales decreased 2% driven by lower volumes, partially reflecting an estimated net decrease in distributor inventories of 2%. The impact of our year-to-date results due to the comparison against the significant inventory rebuilding during the first half of fiscal 2023 moderated, as we believe distributor inventories normalized in the third quarter of fiscal 2023 and have remained at normal levels. Our pricing strategy, which led to higher prices across much of our portfolio, led by Jack Daniel's Tennessee Whiskey and El Jimidor, helped to limit the decline. Consumer demand for U.S. whiskey, particularly super premium, remains strong as U.S. whiskey is the second largest contributor to total distilled spirits value growth in Nielsen. The demand for our super premium Jack Daniels products, Jack Daniels Sinatra, Jack Daniels Single Barrel Rye Barrel Proof, and Jack Daniel's bonded rye, along with our limited releases of Jack Daniel's 10- and 12-year-olds delivered strong growth and partially offset the decline in Jack Daniel's Tennessee whiskey volume. The fastest growing category in the U.S. remains the ready-to-drink category. It has been nearly one year since the launch of the Jack Daniel's and Coca-Cola RTD in the United States, and the brand continues to grow and gain share. Jack Daniels RTD, led by Jack and Coke, remains a top 10 brand family by value in Nielsen. We continue to believe that our portfolio is well positioned to benefit from the consumer trends of premiumization and convenience. Moving on to our developed international markets, Collectively, organic net sales declined 6% for the nine months of fiscal 2024, driven by lower volumes primarily reflecting an estimated net decrease in distributor inventories of 6%. Growth of Jack Daniel's Tennessee Apple, led by the continuing successful launch in South Korea, and Glen Glasshouse's old and rare cask sales in Singapore was more than offset by declines for Jack Daniel's Tennessee Whiskey in Japan related to the estimated net decrease in distributor inventory due to the fulfillment of backlogged orders in the second half of last year when supply was available to meet this demand coupled with the transition activities to our own distribution. We continue to progress as planned with our launch just a few weeks away on April 1. In addition, as we continue to drive and build our business in Europe, we are pleased to announce that we will establish our own distribution organization in Italy, effective May 1, 2025. Italy is one of the top five spirits markets in the European Union, making it an important market for driving the growth of our Jack Daniels family of brands globally and in particular for our latest portfolio additions. Italy is the largest market for Gin Mare and the fifth largest market for Diplomatico Rum globally. This market holds significant potential for future growth and we believe this change will enable us to strengthen our commercial and brand building capabilities while increasing consumer focus and prioritization of our portfolio. As Lawson has shared the details of our strong gross margin expansion for the nine months of fiscal 2024, I will now turn to our operating expenses and income. As we have shared with you in prior quarters, we allocated more brand building investment in the early months of fiscal 2024 to support the launch of the Jack Daniels and Coca-Cola RTD in the United States. We also increased investment for Jack Daniels Tennessee Whiskey. Due to the phasing of our investments, our operating expenses continued to moderate through the nine months of fiscal 2024, which resulted in organic advertising expense growth of 7% in the year-to-date period. Similarly, organic SG&A investment also moderated through the nine months of fiscal 2024 as we continue to invest behind our people, primarily led by higher compensation and benefit expenses, resulting in an increase of 8% for the year-to-date period. Our year-to-date reported operating expenses, which decreased 11%, were impacted by three items. the absence of the prior year non-cash impairment charge for the Finlandia brand name, the current year gain on the sale of Finlandia, and the absence of the prior year post-closing costs and expenses related to the acquisition of Diplomatico and Genmare. In total, reported operating income increased 25% and organic operating income grew 2% in the nine months of fiscal 2024. These results led to a 32% diluted earnings per share increase to $1.58 per share. Before moving to our outlook, I'd like to take the opportunity to provide you with an update on our share repurchase program that we announced on October 2, 2023. As you may recall, 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. I am pleased to announce that as of December 31, 2023, we have completed the program. Now turning to our updated fiscal 2024 outlook. As Lawson highlighted, global trends are normalizing after two years of very strong organic net sales growth. In what has been a challenging and dynamic operating environment, we experienced softer-than-expected consumer trends during the important holiday selling season globally, which limited our expected top-line acceleration. While we have to lap stronger shipments associated with the launch of Jack Daniels and Coca-Cola RTD in the U.S. in the fourth quarter of fiscal 2023, the year-ago period is in line with longer-term historic trends. We also expect to continue to benefit from our long-term pricing and revenue growth management strategies, as well as the contribution from our recent super premium brand acquisitions, Genmari and Diplomatico. We now expect our organic net sales growth to be flat for fiscal 2024. Also in this fiscal year, we continue to believe our gross margin will expand as higher input costs driven by inflation will be more than offset by price mix and the absence of supply chain disruption. Our outlook for organic operating expenses to increase remains the same and assumes incremental advertising spend will be above our top line growth rate. Our expectation is that SG&A growth will remain higher than historical averages as we continue to expect higher compensation and benefit related expenses and costs related to our transition to owned distribution in Japan. Based on these expectations, we anticipate organic operating income growth to be in the range of 0 to 2% for the full fiscal year. We have revised our expectation for the effective tax rate for fiscal 2024 to now be in the range of approximately 20 to 22%. And we now anticipate capital expenditures to be in the range of $230 to $240 million for the full year. Before opening the call up to Q&A, I would also like to add a few comments on our recent capital allocation actions. In particular, the sale of our cooperage in Alabama, the pending divestiture of Sonoma-Couture, and our long-standing commitment to our community and the environment during the third quarter we announced the sale of our cooperage in trinity alabama to independent stave company in our continuing efforts to optimize our wood supply chain we have committed to a long-term strategic relationship with independent stave company to ensure a stable supply of high quality barrels to meet our demand at a competitive price while creating efficiencies and optimizing capital allocation in our supply chain the relationship also allows for the expansion and diversification of our supply chain network brown foreman will continue to own and fully leverage the Brown Foreman Cooperage in Louisville, Kentucky. This allows us to produce approximately half of the barrels required to support our needs while enabling us to continue developing and innovating for our brands and new expressions. Moving to Sonoma Couture. The divestiture to the Duckhorn portfolio and the assumption of an equity ownership position in the company subject to certain customary closing adjustments and conditions is still expected to close in the fourth quarter of fiscal year 2024. We continue to believe in the strength of the Sonoma Couture brand and its future growth opportunities and that this transaction reflects our portfolio evolution strategy as well as our commitment to long-term value creation. And lastly, I would like to share that we have recently announced that in fiscal 2024, we have committed to a $22.5 million investment benefiting the Brown Foreman Foundation and Dendra Fund. The Brown Foreman Foundation was created in fiscal 2018 with a goal of helping fund our ongoing philanthropic endeavors with a focus on our corporate hometown of Louisville, Kentucky. The Dendra Fund, a nonprofit seed fund created by Brown Foreman and the Brown family in 2012, helps to promote a more sustainable whiskey industry with a focus on the three natural resources most important for the distillation and aging of whiskeys, wood, water, and grain. As you know, at Brown Foreman, we take an integrated approach to value creation where all aspects of our company contribute to and are fundamental to our strategy. including our commitment to environmental sustainability, alcohol and marketing responsibility, diversity and inclusion, and contributing to the vitality of the communities in which we live and work. These investments are just two examples of how we are living our spirit of commitment. In summary, we are adjusting to more normalized levels of consumer demand in a challenging and dynamic operating environment. As we look to the end of fiscal 2024, we believe that we have moved beyond the most difficult comparisons and disruptions of our fiscal year and will benefit from our long-term strategies as well as our portfolio evolution. We believe our portfolio of brands is strong as they are participating in growing categories and price segments and are driven by the consumer trends of premiumization and the desire for convenience and flavor. While we have more modest near-term expectations, we believe our long-term perspective will enable us to navigate the current environment and its short-term impacts, as we have many times since our founding in 1870, and to deliver consistent and reliable performance and returns over the long term. We look forward to seeing many of you in person soon and sharing more about the confidence we have in our long-term ambitions at our Investor Day on March 20th. This concludes our prepared remarks. Please open the line for questions.

Thank you. As a reminder, to ask a question, 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.

One moment for questions.

And our first question comes from Lauren Lieberman with Barclays. You may proceed.

Great. Thanks so much. So I'm still, honestly, after all the prepared remarks, a bit confused around where the shortfall really stemmed from, both in the quarter and stemming, you know, going into Q4. Because you had talked about sequential improvement in the second half with what was expected. Third quarter looks like it decelerated sequentially despite the easier comp. I know you mentioned softer holiday demand globally, but again, that doesn't really help me with the four Qs. So just if you could maybe rank order what sort of where the areas were of short-term negative surprise, I think that'd be really helpful. Thanks.

Thanks, Lauren. And I'll go ahead and I'll step back a little bit broader first, and then I'll narrow in specifically to your question. So first let me say, you know, we think about our business in decades and generations, and I'd like to point you to slide five, which When we think about the 2020 decade that we're in and the kind of the first three full fiscal years, you can see that our compounded annual growth rate for that period of time on an organic net sales basis is at a 9%, which is definitely above our long-term growth algorithm. And then kind of moving closer into the periods that we're in now, we have now lapped the first half of F23, which was our strongest first half growth rate in the last decade. We talked about that in our last call. And that was all about rebuilding our inventories. And then if you kind of look at last year, kind of nine months, year to date, and this year, that CAGR is 6%, which is in line with our longer-term growth algorithm. So when we step back and look at it at the broadest perspective, so far for this decade, we believe we're off to a good start, and we have confidence and that our business is sound with a strong gross margin expansion and strong cash flow. So just to set the stage and then I'll dial in even closer to your question is you're right. And that's what we said is during the important holiday selling season, we did not expect the softness of consumer trends that we did see during that important holiday selling season. And that has now limited our top line acceleration. When we think about it from a markets perspective, for us it was US and the key developed markets of the UK and France. And I'm sure in this call we'll talk a lot about the US, but while we're here I'll talk about the UK, which we know the UK part of it is about our transition to of the Jack Daniels and Cola to the Jack Daniels and Coca-Cola business, but we really did see a slowing consumer and a very strong promotional environment during the holiday selling season. And then in France, we saw the slowing consumer trend even kind of declining more than what we expected with the softness in the whiskey category and definitely some trading down in that market. And then what I would say then kind of the rest of that piece is the slowdown across many of our emerging international markets which was just more than what we had expected in our guidance. One thing I can say is you can see in Schedule D, or sorry, Schedule B, that when we reported last time, our shipments and depletions for our full-strength portfolio were in line. We now see, where we are year-to-date, that our depletions are ahead of shipments. So again, that's another signal that we believe that we are kind of moving beyond what we have had to lap. But then as we talk about kind of to your point with the last quarter, like we shared in our last call, when we think about the second half, we know we have to lap the launch of Jack Daniels and Coca-Cola RTD in the U.S. But when you look at kind of the half as a whole, we have to comp a plus 5%. And where we believe we're going to be able to do that is, again, with the contribution of our newly acquired brands of Genmari and Diplomatico. We're continuing to see benefits from pricing and revenue growth management, which is kind of equating to that strong gross margin expansion that you have seen in our results. And then, again, our operating expenses increase that remains the same where we had phasing where our brand expense was greater in in the first part of the year we now that will moderate through the rest of this year and sgna expenses that's just that's related to the comp higher compensation and benefits related expenses as well as our increased expenses for the own distribution investment that we're making in japan that's set to go live on April 1st. So that is all built into our guidance.

Let me give you a shorter version of that, Lauren. Christmas stunk. Christmas stunk around the world. I mean, we had a lot of markets that disappointed during Christmas this year, which we did not expect when we were thinking about our year-to-go period, you know, three months ago. So it was surprisingly weak.

Okay. Now, just one quick follow-up because that was a very fulsome answer, so thank you. Both versions, the short and the long. But what does that mean for inventory levels in Q4? I know, Leanne, you called it the ships versus the pleats and that the big picture laps are getting to a better – we're moving along. But shipments – I guess shipments were also weak for Christmas, right? Right. I'm just trying to put the two pieces together, because if you expected Christmas to be better, usually the shipments have kind of happened. Right. And it's the depletions of the problem. So that's also a little bit surprising to me, if I'm making sense. I would expect it to be shipments might have been OK, but depletions would have been the problem. And that would leave a hangover for Q4.

Yeah, I think what we saw was we didn't see those orders come in for the important holiday selling season at the level that we traditionally do and being able to comp above where we were. So that didn't come in the way that we expected, again, in that late November, December timeframe that we were expecting. And so when we think about it again, we continue to be in a bit of a different position, which we've talked about this many times as we rebuilt our inventory, we continue to believe that our inventories through the supplier to the distributor to the retailer to the consumer are in line. And really, this is about consumer takeaway at this point for us. And so again, that fluctuation in consumer takeaway being lower than what we expected really drove that for us. We do continue to see, you know, when we'll go to the U.S. specifically, you continue to see that net change in distributor inventory kind of come back in line. If you look from the first half to the third to the nine months ended, that is coming much more back in line, which we said we expected it to moderate.

Okay. All right. Great. Thank you. I'll pass it on.

Thank you.

One moment for questions. Our next question comes from Bonnie Herzog with Goldman Sachs.

You may proceed.

All right. Thank you. Good morning. I actually, you know, just maybe have a bit of a follow-on on the conversation you guys were just having regarding, you know, inventory levels, but more at the consumer, I guess, level. Do you have a sense of where these are and, you know, really how much you think consumer pantry de-stocking is impacting the category and then your thoughts on when that might reverse? And Lawson, do you still believe the category growth will get back to the mid-signal digit range? And then if so, how quickly could this occur? Thank you.

Yeah, okay, Bonnie, that's a good question because we have talked a lot about that internally over the last few weeks around, I'm talking about the consumer inventory thing. And I do think and I believe, although it is, that's a hard number to get to. There's really no way to study consumer inventories necessarily of what's still in the pantry. But My theory, if you look at the last three, four, five years, you can see the elevated growth rates. Leanne was just quoting a few of them, but let's just focus on the three-year because it's on that page five of ours. You're looking at a 9% organic growth rate over three years, including this year. That is way several points above any sort of normal run rate for the most part in our industry. Some of that has to be sitting in a consumer's pantry at home. people think of spirits as often referred to as a fast-moving consumer good, and it's really not. It's not like food or some other categories that move much faster. Spirits, I call it kind of in the middle. When I think about different consumer categories, I think about food being the fastest. I think about an exercise bike is the slowest, because once you pull that demand forward, you're not going to go buy another bike. Spirits is in the middle, and so it is taking some time to clear those consumer cabinets. We've We've said before that we look at like 80% of our consumer base only buys two bottles a year. So they have a bottle sitting in their cabinet at home that's probably half full, and it's just the deferred cost. The good thing is we think that if you do the math around that, that should largely be over. And that's why Leanne just said here, we expect going forward, particularly in the U.S., I think we're talking, but our sales rates to be much closer to what consumer takeaway is right now. So that's question one. What was the other?

Oh, just when, you know, you take the category.

Yeah, you know, TDS getting back to norm of 4% to 5%, which is what it has been for, like, decades, short of the last couple of years in all the volatility. I know I've seen some of our competitors that have said anywhere from 6 to 18 months, and that's a pretty big range. I think for us, as what we're saying, we do believe next year we'll start to return to those normal levels as, you know, this inventory conversation largely, you know, we think will largely be over.

All right. Thank you.

Thank you. One moment for questions. Our next question comes from Andrea Teixeira with J.P. Morgan. You may proceed.

Hey, good morning. This is Drew Levine. I'm for Andrea. Thank you for taking our question. So just following up on the U.S., You talked about some changes in consumer behavior internationally in France. I think you were seeing some trade-down. Can you talk about what you're seeing in the U.S., any evidence of perhaps more value-seeking challenges for trade-down, and then also what you're seeing from an on-premise perspective, if there's been any incremental softness there? Thank you.

Yeah. So, look, I mean, on the trade-down, this is the U.S., and I think this is good news I think relative to probably what people are expecting but if you look at the data particularly I'm looking at Nielsen data over the last three months you're not seeing trade down and we've still got that same dynamic where I'll simplify a little bit here but $30 and above is growing much and take RTDs aside pull that out of that when I say this but 30 and above is growing at a materially better number than 30 and below and so That's just, we're not seeing the trade down in our own portfolio, and we're not really seeing it across the industry yet. So I think that just hasn't happened. And that, I think we were expecting to see maybe a little bit more of that. So I generally consider that good news. And on the pricing environment, which you didn't specifically ask about that, but I think it's worth talking about that for a second, because pricing really has not You know, we've been worried, as you've seen, consumer weakness, that somehow that would result in more aggressive pricing, deeper pricing, the Christmas, all those kind of things. And it didn't really happen. And we're not really seeing that coming through the data right now. You look at TDS across spirits, it's still positive, like plus one or 1.5, something right in there. And interestingly, this is where we were narrowing down even quicker, is tequila in the U.S. and then U.S. whiskey across the U.S. And both are also positive. So There's been a lot of speculation that tequila pricing would start to fall apart as the costs have come down. It's just not showing. And if you look at the last 13 weeks and you go, which would cover the Christmas time period, both of those categories saw improved pricing, not lower. And so while I do hear a lot of these anecdotal stories of XYZ brand went deep or whatever it might have been, and there are examples out there like that, but for the most part, pricing is holding up so far. And I consider that to be a know a pretty big positive too did i answer on premise on premise do you have i don't have the on-premise numbers in front of me um so sorry we don't i don't have the on-premise numbers right in front of me so i don't i haven't seen a material change in those necessarily but i'm trying to find the the data point. Let's get back to you on the on-premise one.

This is where we talked about that there's two points of acceleration compared to the October 23rd, so we continue to see acceleration there with TDS in brown form and now growing low single digits.

All right, I'll pass it on. Thank you so much. Thank you. One moment for questions. Our next question goes from Chris Pitcher with Redburn Atlantic. You may proceed.

Thank you very much. Just a question in terms of buying patterns. You've sort of alluded to it, but in the current environment, have you seen any structural changes in how retailers or wholesalers are buying, given the interest rate environment and the uncertainty? Is that making it harder for you guys to plan? And then if I could have a follow-up, just on Japan, you flagged that as being one of the areas that got hit hard by de-stocking. With sales down it's quite hard to gauge what the real underlying revenue is with your new route to market there. Could you give us an idea of what sort of scale the Japanese business is still running at despite all these massive distortions? Thanks very much.

Yeah, so I'll go back to the first part of your question, which is, you know, as far as buying patterns, we shared with you, I think, in our last call that how we prioritize rebuilding the markets that we have with and replenishing their distributor and retailer inventory that kind of has changed in the short term our traditional consistent seasonality of the shipments that we pattern buying that we have seen we're still lapping some of that especially as you get into our emerging international markets and we're laughing the way that we rebuilt that and the timing and the cadence is a little bit different. It makes it does make it a little bit harder, but I think for us the biggest piece again was back to that important holiday selling season and you know consumers being stretching their discretionary spend. Because of how they've been impacted with interest rates and inflation. And for Japan, when, when we look at that business, again, this has been a year of kind of two pieces. One was how we rebuilt our inventory in the prior year. Um, and I think we said in our prepared remarks, you know, we had a backlog of orders waiting for supply to be able to fill those. We were able to do that in the second half of last year. So coupling that with our route to consumer change. It has just basically, we haven't needed to make any shipments to Japan this year. To your point, what's the business look like more on a depletion base? And we would say we have been in frequent connection with the team there as they continue to progress to this own distribution model on April the 1st. And from a depletion base, we're still excited about the health of our brands in that market. So again, I would say from an organic perspective, we're investing in the long-term value creation opportunity in Japan, and it's set to be a growth driver as we're moving forward.

Just a quick follow-up. Normally, a country, a market would drop out if it's not in the top 10 in a period. Can we assume the fact that you've still put Japan in there that it would be a top 10 market for you on a normalized basis?

Yeah, how we set our top 10, and I think we have it in our queue, it's basically set on April 30th of our prior year. So it's in there for that reason.

Thank you. Thank you. One moment for questions. Our next question comes from Nadine Sawat with Bernstein. You may proceed.

Hi, thank you for taking my question 2 for me. 1st, just a clarifying question. You had mentioned your view that perhaps the market in the US could get back to that historical 4 to 5% value growth in the next year. I just clarify with that fiscal next year or calendar next year. And then my 2nd question, something I think a lot of people. are bringing up amongst investors the topic of moderation, perhaps younger consumers drinking less, add in some GLP-1s in there. I mean, all of this has been thrown around as potential reasons for the weakness that we're seeing in U.S. spirits, but to be honest, in U.S. alcohol more broadly with the implication that that could be a permanent change. I would be curious to get your views on that, all those factors I listed, and where do you think it goes from here? Thank you. Thank you.

Yeah, good. So, Nadine, a few things on this because this is obviously a topic that we have spent a lot of time trying to understand a little bit better, too. You know, if over the last, I'll make it up, five years, we had seen TDS go from five to four to three to two to one, something like that, I would be concerned that some of those things you just talked about, wellness trends, cannabis trends, GLP-1s, all those types of things, You know, that would be an indicator that something is happening structurally in the business that's going to, you know, that could be permanent. But that's not what we saw. We, as I think everyone on this call knows, I mean, that four to five range, COVID moved it around volatility-wise, but it has been in that range for decades. And then all of a sudden, we know, if you look at TDS, the same, you look at July of last summer and you see a very sharp deceleration in the market. like GLP-1s or cannabis is not going to take a market and move it four or five points, you know, seemingly overnight. And so I just don't think that's what is, I don't think those big macro concerns that are out there are what is impacting the market today. Now, over the next decade or two, do I want to look at that and understand that better? It is, you know, it could be a headwind, yes. But particularly on, you know, a healthier Gen Z kind of conversation, Cannabis, you know, that's been around now for, I don't even know, 10-plus years, whatever it is. We've studied that 18 ways till Sunday and have never been able to find a state where we saw reduced alcohol consumption based on it going legal. And it's tough to do now because so many places are legal. So, yeah, so I do think in general these are shorter-term challenges, particularly with the U.S., but it's also true in Europe, too. Europe is dealing a lot of the same macro factors as the U.S. is. And I do think it's the combination of what we've already talked about, but the very difficult comps. I think the consumer is weaker than it was, say, this time last year. But predicting is the turnaround going to be six months or 12 months, I don't know. I don't have a crystal ball on that. But I am a believer that the macro factors impacting our business are more short-term in nature than these big macro headwinds.

Got it. And just to confirm that getting back to four to 5% next year comment with that next year fiscal calendar.

I don't know if I was kind of making it up. But I mean, it's more of a return to normal over the next call it 12 to 24 months in our, in our world, something like that.

Yeah. And then the one thing that we looked at is in history is not always a predictor of the future for many reasons. We know when we went and looked back at You know, the last time the consumer was really stretched with macroeconomic factors, we looked at 2000, 2001, 2008, 2009. They were followed by really strong years of growth. And those trends were, when they were negatively impacted, were much shorter. And like Lawson just said, it's kind of that 12 to 18 month window by which we're already in it. So none of us know. But that's what history has said to us.

Got it. Very clear. Thank you very much.

Thank you. One moment for questions. Our next question comes from Eric Sirota with Morgan Stanley. You may proceed.

Good morning. Thanks for taking the question. First of all, I'm hoping you could expand upon your comments earlier on pricing and promotions. First, I guess as a housekeeping item, when did your pricing in the U.S., particularly on Jack Daniels, go in? And then I know you said that those who are not seeing much pricing in the data, But it does seem like it's more than kind of one-off anecdotal or the anecdotal reports about discounting seem to be more than one-off. I know Diageo mentioned some increased promotions in the U.S. Just wondering if you have any broader perspective between, you know, what seems to be a broader theme of increased promotions and what you guys are seeing in the data.

Yeah, well, on the pricing history, I guess, when did it kick in? If we're talking about the U.S., it was about three years ago now. So we have chosen, I think, a slightly different path than some of our competitors. We've talked about this numerous times, but it's kind of that low and slow. And it's what I want to see continuing going forward and is what we're trying to strive again even over the next 12 or 24 months. And that's a U.S. comment for the most part, but it actually does apply to much of the rest of the world, too. Europe's had pretty healthy price increases the last couple of years, too, which is collectively one of the main reasons why we've been able to improve our gross margin. And so I have very little interest in giving that back. And so we're going to continue to be pretty strong with that. As I mentioned earlier, I mean, I know anecdotally it feels that way, and I've heard the same things, and I saw what some of our competitors have said, but the reality is it's not coming through the data. So I don't know, I'm not sure how else to answer that. I mean, we talked about trade down earlier, a couple questions ago, or the lack of, I should say. So it's not coming through in trade down here, and we're not seeing it in terms of really individual brands that have all of a sudden gone deep. And by the way, I think it's worth probably commenting too, and this is a very high level, so I personally, we're not deep studying this quite yet, but the competitive, some of the brands that have gone lower haven't seen much in the way of a decent rebound in their volumes. I'm just not sure these, I'm not sure that's the core consumer problem right now is higher pricing. Pricing elasticity is, As I said, low and slow, but if you compare pricing changes over the last two, three years to what grocery has done, to what other consumer categories have done, where it was much more, you saw much higher inflation in the food channel, let's say, than you did in spirits. I'm not that worried that our pricing actions have chased consumers away from our products. I think that would be sort of missing what the actual problem is.

Great. And then just one other question. I'm hoping to get your perspective on either Brown Foreman or industry barreled whiskey inventories. Obviously been a massive investment cycle over the past decade, making up for the previous three or four decades. But, you know, maybe hopefully you can give some comments as to where you think inventories are today relative to future demand, realizing you've got a plan for multi-decade cycles here?

Yeah, so I'll talk about our barrel whiskey inventory. And I think for anybody who's followed us for a while, you've probably heard us say that we have a very robust semi-annual process where we're always adjusting to future consumer demand outlooks. And with doing that, we capture the change in trends, if there are any. So when you look at our barrel whiskey, we're constantly adjusting it. When you look at our balance sheet, when you see increases for us there, it is about looking out over the long term, and that represents our future growth expectations. And you probably, with work in process, also in some brands, you would find our aging inventories there. And with the acquisition of Diplomatico, you would have seen that increase as well. So for many in the industry, I don't want to speak on anybody's behalf, but many in the industry use not the same proprietary way of doing the work. But I know that they often look at their long-term demand over that cycle as well. So I think people are always adjusting.

Great. I'll pass it on. Thank you.

Thank you. One moment for questions. Our next question comes from Peter Grom with UBS. You may proceed.

Thanks, Operator, and good morning, everyone. Hope you're doing well. So I guess I'm a bit confused by the commentary on the top-line trajectory. You know, so on one hand, you're talking about a normalization of category growth And you'd expect that to get back to that mid-single-digit growth, you know, at some point over the next 12 to 18 months. And that would kind of seem to imply that 25 could be another challenging year. But on the other hand, if you back out the distributor inventory headwind, which sounds like you expect to be largely complete after 4Q, you're kind of already at this mid-single-digit growth rate. So I know we'll get to fiscal 25 in June, but, you know, how should we think about the building blocks for your organic growth outlook for, you know, over the next 12 to 18 months? Should we focus more on that? you know, category growth rate, or should we be kind of focusing on kind of mapping this distributor inventory at once? Thanks.

Yeah, so as excited as we are to begin to talk about our next fiscal year, we'll have that in full detail for you in our next call.

But I do think you picked up on an important point. If you look at that depletion schedule or Schedule D, if you If you assume that we're there from an inventory perspective, certainly depletions are better than, certainly a lot better than shipments over this year. So we're getting there. We're getting past these comps. I mean, there's like light at the end of the tunnel. We can't get there fast enough, but we're almost there.

Okay, that's helpful. And then maybe just a quick follow-up on gross margin. You know, I know a lot of moving pieces here, and Lawson, I appreciate the commentary on the year-to-date progress. But from a quarterly perspective, you would have to really go back to kind of the tariff days to see a sequential step down of this magnitude in the third quarter relative to the second quarter. Was that simply a function of a weaker volume performance, or was there something else that drove that kind of sequential step down?

Yeah, so when we think about our gross margin and the outlook that we have, I'm driven by a couple of things. So one, we lapped. supply chain disruption in largely speaking, we had the majority of the cost in our second quarter of last year. So that benefit continues to moderate as we move through the rest of the year. And then just as we do kind of estimates from an inventory costing perspective, we would have had a benefit in our fourth quarter of last year that we will have to comp this year. But all of that has been built into our full year guidance for the entire year where you've been able to see kind of the difference between our top line growth estimates and our operating income and the leverage that we've expected through there. But we have been very happy to return to gross margin expansion and have the strong expansion that we've had through the nine months to date. But again, talking about in that last quarter, it will go more towards the guidance that we have provided.

Thank you. One moment for questions. Our next question comes from Filippo Filorni with Citi. You may proceed.

Hi, good morning, guys. I have a question on the ready-to-drink spirits part of the category, particularly in the U.S. If you look at total spirits categories, stripping out, ready-to-drink, actually the trends have been a lot more negative than it looks on the surface. So do you think this growth in the ready-to-drink experience is more structural? And have you done any work of calculating any impact on your volumes, given obviously you sell less liquid in ready-to-drink compared to like a full bottle, if that were to continue to grow at this rate? And following up on the margin part, You talked in the past about ready-to-drink spirits being more of gross margin dilutive, although more similar at the operating margin level. So any thought on the margin implications will be helpful as well. Thank you.

Yeah, so your first part of that was the TDS, and yes, you're right. RTDs are boosting TDS for sure. You take those out, and it's closer to flat, which, honestly, close to flat, it's been 30 plus years since TDS has gone negative in the United States, not since the early 1990s when they had the excise tax changes. So from a pure TDS takeaway U.S. figure, it's about as bad as it's been, well it is as bad as it's been in my career. So there are certainly challenges there. Now do I think there's this big structural move in the world of RTDs? One, I mean they meet a lot of consumer trends and needs right now. So I do believe it's a very powerful category. But if you go back over the last 20 or 30 years and you look through our industry, there have been so many booms and busts of different brands that we always start out by talking about California Cooler 30 years ago when it went from 12 million cases to zero in about two years. So there are booms and busts in that space. Jack and Coke is a bit different in that it's such an established drink already. It's the largest bar call in the world. That is not a fad. in my mind um there are other brands we'll see you know we've seen what happened to the malt based rtds over the last few years and that that category got blown up um largely by these spirit based rtds so it's a it's a volatile space for sure and then to your the liquid part and the margin part of your question excuse me from liquid yes there is less liquid in a case of rtds of course than the full strength but we will be planning to

supply liquid to significantly broader geographic reach with this product Again, and we just talked about the process that we use and looking at for the demand needed for our liquid So that would be built into there and then from a margin perspective though, you know gross margins for RTDs are lower than our company average Jack and coke should be higher than the rest of our RTD portfolio because we will have a advertising support jointly funded between Brown Foreman and the Coca-Cola Company. And also we have to look at it in totality of when we are increasing our RTD business, that we're also adding in the two super and ultra premium brands of Jim Murray and Diplomatico, which have higher gross margins than the company. So you'll have to take all of those factors into account.

Got it. Thank you. I'll pass it on.

Thank you. I would now like to turn the call back over to Sue Parham for any closing remarks.

Thank you. And thank you, Lawson and Leigh Ann. And thank you to everyone for joining us today for Brown Foreman's third quarter and year-to-date fiscal 2024 earnings call. If you have any additional questions, please contact us. We look forward to seeing many of you in Louisville on Wednesday, March 20th for our 2024 Investor Day. Presentations by the company's executive leaders will focus on Brown-Forman's strategic priorities and long-term ambitions. Details regarding the live webcast of the presentations, along with a question and answer session, can be found in the March 4th press release about the event. And with that, this concludes today's call.

Thank you for your participation. You may now disconnect.