Q1 2021 Brown-Forman Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Brown Forman first quarter fiscal 2021 earnings call. At this time all participants are in listen only mode. After the speaker's remarks, there will be a question and answer session to ask a question. During the session you need to press star one on yours.
Telephone if you'd like to withdraw your question press the pound.
Please be advised of today's conference is being recorded.
Other assistance. Please press star zero it when I went to him a conference over to your speaker today, Leann Cunningham Senior Vice President shareholder Relations officer. Thank you you may begin.
Thank you Dorothy and good morning, everyone I would like to thank each of you for joining us for Brown Formans first quarter fiscal 2021 earnings call. Joining me today I lost in lighting, President and Chief Executive Officer, and Jay Monroe, 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 the statements.
Many of the factors that will determine future results are beyond the companys ability to control or predict you should not place undue reliance on any forward looking statements and the company takes no obligation to update any of these statements whether due to new information future events or otherwise.
This morning, we issued a press release containing our results for the first quarter fiscal 2021. In addition to posting presentation materials that Lawson and Jane will walk you through momentarily, but it's a release and the presentation can be found on our website under the section titled investors events and presentations.
And the press release, we listed a number of risk factors that you should consider in conjunction with our forward looking statements. Other significant risks factors are described in our form 10-K and form 10-K reports filed with the Securities and Exchange Commission.
During this call we literally disgusting certain non-GAAP financial measures. These measures a reconciliation to the most directly comparable GAAP financial measures and the reason management believes they provide useful information to investors regarding the companys financial conditions and results of operations are contained in the press release and Investor.
Doesn't station with that I would like to turn the call over to Lawson.
Thank you Leo and good morning, everyone.
As I stated in the earnings release that went out earlier. This morning, I'm I'm actually very pleased with the company's first quarter performance and truly want to thank our dedicated agile and resilient team of employees worldwide, who made these results possible.
We entered this fiscal year in one of the most complex and challenging business environments that we have seen in decades.
Every market around the world has and continues to experience for health and economic impacts of the covert 19 pandemic.
We've continued to lead by our values, keeping the health and safety of all our employees was our highest priority.
We remain committed to our strategic priorities, but like much of the world. We're adjusting the ways in which we do our work there have been very dramatic changes to channels to brands occasions, which really impacts things like seismic some formats and we continue to see a lot of volatility around the world.
What are the most obvious ways. The covert 19 has impacted our businesses the prolonged closure of the on premise and the resulting shifting consumption at home occasions.
As you can imagine weve rapidly shift shifted people and investments into the off from us, but different markets around the world who have shown very different results.
Even more interesting we've also seen the pandemic accelerate a number of macro consumer trends.
For the most part trends that were happening before the pandemic have really accelerated over the past few months.
So I thought I'd walk through some of these accelerating trends as walls provide examples of how we're capitalizing on these trends door advantage.
The first really would be premiumization.
This was a growing trend pre covert and really has been a trend in the spirits business for us for a long time, what we've seen growth rates of premium and Super premium brands accelerate greatly in the U.S. since March.
Before I go further I did want to note that this is an area, where we have started to see a divergence between the more developed markets like much of Europe in the United States in the emerging markets.
We believe this was largely due to the broader social safety nets and other forms of stimulus that the larger developed markets offer. So consumer spending has remained strong in many different markets in the spirits industry is benefiting.
We do believe consumers are looking for everyday luxuries and this is great for superpremium spirits.
In the U.S. Nielsen trends for spirits remain very strong since the beginning of the pandemic and have really maintain those high rates of growth through the summer.
The long term trend of spirits, taking share from beer and wine continues.
I think as long as people are largely on able to spend on travel and other forms of entertainment. We think that the spirit strong growth will continue predominantly in the off from us making cocktails at home has certainly become a source of entertainment for many and that makes us pandemic, just a little bit easier to take.
We also have confidence that we may not see the level of downtrading that we might have seen in past recessions in the developed economies. The factors are just different this time.
As a premium spirits company, we feel that our portfolio brands is well positioned to win in this type of environment.
The next macro trend I wanted to touch on his media consumption consumers have been shifting away from more traditional forms of media you know for a number of years and were not only seeing an increase in overall media consumption, which is intuitive as consumers around the world are spending more time at home but.
But also an acceleration of media consumption by digital platforms like social and streaming services.
As I've mentioned on prior calls we continue to move more and more of our investments behind our brands into broad reach media, especially growth areas like online video.
And I'm thrilled that we brought our new creative partner energy be video onboard at the beginning a 2020.
Before the world wanting to shut down.
Well our brand expense was down significantly in Q1, driven by the uncertain environment. Starting in Q2, you begin seeing more spending as we launch new creative across many of our brands. Some of you have may already seen the new Woodford reserve adds that began airing earlier this month and a lot of new work from the Jack Daniels family, which will be coming out soon.
Well not unique to spirits. The ecommerce channel globally has been growing even faster since the pandemic as consumers look for greater convenience.
Ecommerce is still a small part of our overall business today since March we've increased our investment both both in dollars and then people to focus on this growing channel.
Familiar and trusted brands are opposed to win in these types of shopping environment, which gives many of our brands like Jack Daniels or Woodford Reserve, we believe a good advantage.
Furthermore, convenience more broadly as a macro trends has influenced our business in a couple of ways with bars close consumers want convenient and easy to mix cocktails at home.
Our Jack Daniels, Tennessee, Honey, and Apple brands are providing consumers ease and making flavor full yet simple cocktails.
And there are a lot of people, making murder readers at home too and that has really helped her to kill a portfolio continue to grow across the U.S.
We're really pleased with the early success of or drink works partnership and our first branded cocktail with them objecting those Lynchburg lemonade.
Consumers are also increasingly interested in a ready to drink cocktails. So I think I'd like to spend a couple of minutes. This morning, just on this increasingly popular category and as Jean will share with you a key driver of our first quarter results ready to drink beverages or tdrs are having a moment right now, but it's a business we believed and invested in for a long time.
It was nearly 30 years ago that we launched Jack Daniels country cocktails and the U.S. since that time, we've been building or Tds in many markets around the world.
Globally, Jack Daniels Archie. These are now over 10 million cases, with Australia, the U.S., Germany in Mexico, all over a million cases, this really has become a meaningful business for a company.
Jack RTD is were created to expand occasions for Jack could be enjoyed and focus is really on the key cocktail serves such as Jack and Cola Lynchburg, Lemonade and Jakone Ginger ale.
These are two do you serve as an important consumer recruitment vehicle due to the categories light and really accessible flavor profile.
Through innovation, we feel we can meet consumer tastes and preferences as they really do vary by market. Such recent examples would include Jakone Barry in Germany, double Jack and American serve in Australia, and then Jack Daniels country cocktail southern Peach and southern citrus in the U.S.
Our other large RTD business start to kill a based new mix, our Tds in Mexico, which are now over 7 million cases. This business is also doing well in the environment. We're in I believe that we're well positioned with the right offerings at the right time to meet the increase in popularity of these ready to drink cocktails, so with that I'll turn the call over to Jane walk us through our first quarter for.
Actual results.
Thank you Lawson and good morning, everyone as well. So said we are pleased with the start to our fiscal year, particularly in light at the current environment with both our underlying net sales and operating income up relative to last year and arc ported operating income as increasing.
Okay.
Not surprising and amplified during this volatile time there is considerable noise in these results ranging from product innovation launches.
Timing related items in the same period last year.
Folio reshaping.
A significant discrete tax benefit and of course cobot 19 related effects that include inventory fluctuations customer buying pattern changes.
Geographic channel size and portfolio mix shift.
I plan on highlighting these effects on our results to provide more clarity on our performance in the quarter.
First as a reminder, our business began to significantly experienced the impact of cobot 19 pandemic fourth quarter fiscal 2020.
Beginning in mid March and continuing throughout April.
As a result, we estimated that the pandemic negatively affected our underlying net sales approximately 15% for the March April period, with a greater negative effect occurring in April following some benefit we believe we experienced from pantry loading in March and some of our larger developed market.
Now with that as a backdrop, let's turn our attention to the first quarter.
Our results improved significantly.
Relative to our fourth quarter fiscal 2020.
Starting with our topline compared to the first quarter of last year reported net sales were down modestly reflecting that rebalancing our get back at the distributor inventory build in the U.S.
April 20, Tony during the period of great uncertainty surrounding potential supply chain disruptions.
Adjusting for this factor.
Our underlying net sales grew 3%.
When stripping out the noise I noted earlier, however, we believe our net sales were down low single digits.
As we look broadly across our geographic clusters, all were effect in some way during this quarter by the pandemic and its related effects of course, some more than others.
Our travel retail business continued to be the most significantly affected.
International airline travel remains a very low levels airport stores are larger close.
Airlines are offering limited in flight services in the cruise industry is still shut down.
These factors contributed to our underlying net sales declining over 60% for the quarter for our travel retail business, our emerging markets collectively decline underlying net sales low single digits for the quarter.
Benefits from timing related customer buying patterns in Q1 above last year.
This year, notably in Poland in Brazil, and exceptional growth from our new mix RTD business in Mexico, driven by the temporary interruption experience in the countries beer supply chain in May June.
Mass to significant and broad base declines registered across nearly all are emerging markets.
Our developed international markets, we turn to underlying net sales growth in the quarter up double digits propelled by the accelerated demand RTD, most notably in Australia in Germany, which are both benefiting from the consumer desire for convenience.
The launch of Jack Daniels, and Barry in Germany, and Jack Daniels, Tennessee, Apple in a number of key markets, including UK, Germany and France.
Also contributed to the quarter over quarter increase.
Further we estimate the favorable comparisons.
Q1 last year and customer buying patterns. This year contributed nearly half of the growth in underlying net sales.
Adjusting for these factors, we believe our developed international business grew low single digits.
And finally, our U.S. business, which represents half ordinate cells has remained resilient throughout this pandemic.
Our portfolio appears to be well position as Lawson mentioned in this important market to meet some of the changing consumer needs and behaviors driven by the significant increase at home consumption in the desire for everyday luxury.
The acceleration in our underlying net sales growth in the quarter in this market was driven by those brands in our portfolio. There are meeting those needs.
For example, the desire for convenience.
Our Jack dangerous RTD experienced strong consumer demand both from our existing Jack Daniels country cocktails brand as well as excitement of our recent limited introduction of new spirits base, Jack Daniels RTD.
The ease of Mixability.
The continued launch objective centers, Tennessee Apple.
Higher volumes objective centers, Tennessee, Honey, NRT, keyless, feraheme and ordinary dura provided a benefit to the quarter.
As a reminder, we won't begin to lap the launch objective centers, Tennessee Apple in this market in our second quarter.
Everyday luxury.
What for reserve and old Forester continued to sustain double digit growth trends that we've enjoyed for a number of years.
Now I'd like to span a bit further on lawson's comments as they relate to the U.S. market.
Leveraging both Nielsen in Africa takeaway information.
Since the pandemic began the off premise takeaway trends for beverage alcohol significantly accelerate.
We also note the acceleration in volumes in the off premise has consistently throughout this period more than offset the declines in the on premise.
Meaning overall Tds consumption volumetrically.
Crease compared to pre cobot.
Consistent with Tds.
We have also experienced increased some volumes.
However portfolio on channel mix shifts have adversely affected our margins, which I will discuss in a bit.
As you know each of our major markets around the world are in very stages of reopening and in some cases are experiencing halt in reopening.
New restrictions or even a second round closures.
Consumer purchase patterns continue to evolve is bars restaurants, and other on premise chain or try to remain open while complying with various regulations.
And in some markets, we are seeing a return of consumers to the on premise as restrictions on consumer movement or easing.
I thought it was important to take a minute and talk about our flagship brand Jack Daniels, Tennessee, Whiskey and how it's performing in this environment.
Overall.
For the quarter, Tennessee Whiskey volumes were down.
Essentially flat volumes in the developed markets and declines in the emerging in travel retail channel.
The shift from on premise off premise consumption in the developed markets drove the brands underlying net sales down further.
However, overall the brand remains quite healthy and is gaining share in the majority of its top 10 markets.
In the brands largest market the U.S. volumetric trends are assessed generally consistent with pre cobot trends.
Now turning to our gross margin.
For the quarter, our gross margin declined 20 basis points.
Which also resulted in our underlying gross profit dropping 1%.
Higher input costs related to a Gaba.
Lower volumes for Jack Daniels, Tennessee, Whiskey, resulting in a reduction of fixed cost absorption.
Unfavorable mix drove our margin down.
The mix impact reflects a shift in where consumers are buying our brands.
The on premise to the off premise.
Yes.
A significant acceleration in the rate of sales growth from RTD portfolio.
Combined the shift.
Reduced our gross margin.
Approximately 100 basis points.
Not surprising given the rapid restrictions placed by the cobot 19 crisis in the timing of our quarter.
Our advertising investments were down significantly in the first three months of the fiscal year.
This not only reflects a reduction on premise activations in the cancellation of consumer events, such as summer festivals and sponsorships, but also our pause in the month of July.
Certain social media platforms.
Typically Facebook and Instagram.
In addition, and importantly debt reduction reflects the phasing of spending.
For example, our investment in the Kentucky Derby has been shifted from Q1, two key too.
As the event was rescheduled.
We expect our advertising investment to accelerate over the balance of the fiscal year.
In the meantime, we have quickly adjusted our focus some resources based on the evolving landscape.
Our underlying SGN Bay investment was down in the quarter as well, reflecting a significant reduction in discretionary spending such as travel and entertainment.
Special meeting.
As well as hiring freezes.
There's a covert 19 pandemic in this effect on the global economy continues to evolve.
We continue to closely monitor key indicators in each market judges stage of restriction consumer trends and behavioral insights in macro economic conditions.
We believe this has and will continue to aid us in a frequent evaluations of the pace of recovery.
Where and when to invest.
There are two items that positively impacted our first quarter reported results only.
First the sell the early times Canadian mist, and Collingwood brands and the Canadian Mist production facility.
Altered in an E. P. S estimated gain on sale of 19 cents.
Second we recognize an eight cents per share benefit related to a discrete tax item.
These two items combined with the increase in operating income from our business resulted in diluted earnings per share increasing 73% to 67 cents.
And finally to our fiscal 2021 outlook.
We continue to face.
Substantial uncertainty and that has not diminished since our year in early June call.
As a result at this uncertainty and volatility that we expect to persist over the months to come.
In the low visibility we have on recovery, we are not able to provide quantitative guidance for fiscal 2021 at this time.
But that being said more qualitatively speaking.
As we think about our broad geographic clusters.
We expect travel retail business to not recover.
We remain down significantly for the year.
Considering the benefits the aided our emerging markets underlying topline performance in the quarter and the continued expect this shift in spending to value brands and assist needs.
We expect the declines in our emerging markets collectively to increase compared to Q1 performance over the balance of the fiscal year.
For a developed markets, we expect the volatility and uncertainty to remain high for the foreseeable future and hope to have a better understanding that such impact of volatility. When we report our Q2 performance later this calendar year.
Our non branded business dominated by cells abuse barrels is expected to continue to be a drag on our top line performance. This year as it was in the quarter, reflecting the expectation of lower volumes and pricing.
We believe the timing and strength of the on premise channel recovery will depend on a variety of factors, but will look different and not at full capacity by the fiscal year end.
Our gross margin will likely remain under pressure for the year driven by the expectation of higher input costs and mix shift.
Where our gross margin ultimately lands will depend only on the volumes of our business.
But the mix of our business geographically by portfolio channel in size.
Regarding our operating investments, both advertising and SG ne.
We believe we are well positioned term best effectively as a recovery occurs.
But overall operating expenses, notably our advertising investments to accelerate.
The significant year over year rate of declines in Q1 will not be sustained throughout the year.
We of course will remain agile diligent focus and disciplined on our investments as the environment continues to evolve.
As it relates to our effective tax rate for the full year, we expect our tax rate from operations to be about 21% and our all in tax rate to be in a range of 17% to 19%.
In summary, why there's a lot of noise in our first quarter performance. We believe our results are solid I missed this very challenging environment.
Our balance sheet remains strong and are continuing capacity to generate solid operating cash flow is sale.
As always we will continue to manage our uses of cash thoughtfully.
We believe these actions and stream will allow us to navigate this crisis as circumstances of bald and we will emerge from this unprecedented time and even stronger company with healthier brands.
And with that this concludes our prepared remarks, Dorothy may open the lineup.
The question.
At this time, if he would like to ask the question. Please press Star then he number one on your telephone keypad that is star one to ask a question, we'll pause for just a moment to compile the Q and a roster.
First question comes from a line of Peter Grom with JP Morgan.
Hey, good morning, everyone. Congratulations.
Yes, good morning.
So I was hoping you could help us understand the phasing the quarter.
You show that one slide.
March and April performance in each market and just kind of a drastic improvement.
In Q1, and I know you talked about some of the timing related items that could.
Could you speak.
The sequential improvement in trends that you saw in June and July both from a channel standpoint, but also in key regions and then.
Just to the extent that you're willing to share how did those.
Progress in August thanks.
Yes, I mean, let me start up I know you asked a lot here and I think your make sure I understand you're you're focusing specifically on the topline is that correct.
That's right. Okay. So if you recall that our year end.
Call Weve had already some visibility in our month May result.
And we told you at that time that they had improved from our lows in April we think that was the trough.
Thing.
And but they were still down so the month of June and July.
We're both positive month.
Look at it growth obviously to drive the quarter when we look at what's driving this travel retail has not improved it remains down.
Our emerging market.
Set aside though.
Three countries I know that within our script today, which is Poland, Brazil, and Mexico were all down pretty significantly there's no. There's been no change there really.
From what we had thing at year end.
Well, we saw the biggest changes we're in an acceleration in the U.S., which by the way has remained resilient throughout this paint that make that we saw some acceleration there Lawson worst referred to some of the reasons why that was which is earlier the consumer behaviors and.
Bizarre for convenience with the at home consumption and our TV businesses, so well placed for that as is our AR.
Flavored whiskey and Kayla.
So we benefited from that from that and then finally, the developed markets improved significantly from your and that's where we got a fair amount of in the numbers we hit them.
He are favorable comparisons to last year, we also saw.
Restocking if you will.
In some markets that we stopped at the hypermarkets, where they were people will go shopping at the local corner before let's say as an example, so we got to benefit from that.
We had the launch Apple in there both from the U.S. It wasn't there in the first quarter last year more lap and then second quarter. This year, but also the launch of six market.
Last year and six more markets.
Actually at the beginning of this year.
And.
So we wanted to get visibility into that and say really if you strip all that out our permanent developed market.
Has improved but not at the right that you're seeing and or estimate anymore in the low single digit type of growth.
If you look at channels.
And things of that nature the on premise.
Has started to recover in some markets, though down significantly about 60% in that.
Overseas, we just started seeing some of that more easing in the month of June and July in a promising trends there, but have a ways to go particularly in the tourist market such as banking and Turkey in check yeah.
He premise remains on virus often mentioned.
So that that growth rate has continued to be pretty solid throughout.
A lot of change in that.
But all in what we were trying to give exposure to that we think all of our trends and the business.
Yeah.
I haven't heard.
Not at the rights that we recorded in the first quarter, we think were down grown when if you put a lot of the onetime factors out more into one down low single digit.
Great. Thank you.
Your next question comes from a line of.
With Cowen.
Hi, Good morning, I was hoping to ask about.
Woodford Reserve.
Double digit growth is is excellent.
Given the strong track record that we've seen for the brand, but the growth that you guys reporting certainly is below what we're seeing in Yeltsin now got and so my understanding was at the international exposure for that brand inclusive of travel retail, it's still relatively small, but just wondering how big of a headwind that might have been.
What for underlying trends thanks.
Jeremy travel retail.
It is a meaningful business for the Woodford Reserve brand, so that would have put a little bit of pressure on it but the bigger issue. The on premise really in the U.S. for Woodford I mean, it's.
No that's put pressure on it that's why you see better Nielsen trends, when you're going to see and our reported results.
Another part of it I think this is interesting Derby remember moved from May to this coming weekend and so we were comping against.
Core that had all the Kentucky Derby related volume to it. So we hope to see Autobytel pickup is this coming weekend.
It's all though.
Lord knows we don't know what kind of Derby, it's going to be but you know that put pressure on it too.
Got it that's really helpful.
Follow up please.
Youre can copy offering in the U.S.
The web site is looked at about 16 state.
Just curious to understand like what your level of distribution as.
Well, you're not limited footprint and how we should think about further.
For the can't.
Thank you.
Yes.
Yes, I don't know the distribution numbers off my head, but it's still I.
I mean it.
You know, it's an effort it's really an innovation effort that we're trying to just get off the broke ground right now and figure out which flavors are going to work best we do know the Jakone Cola.
Well in for Lemonade.
Or the two flavors that seem to be doing the best.
It's still.
In terms of scale of our RTT business, the spirit based or can be used for school.
Yes.
One for sensors.
The country cocktails brand in his.
Absolutely on far now that is one of the warm, but it has really.
Taken off in this environment.
As we mentioned the southern teach in particular I mean, if it's a it's a business. It is across 2 million cases at this point, so it's much bigger than the spirit.
Understood.
Yes, absolutely just seems like the therapy RTD, there are gaining a lot of attention.
From consumers about you guys are planar to thanks very much for the time.
Your next question comes from a line of Kevin Grundy with Jefferies.
Hey, good morning, everyone and congrats on a scale quarter.
I wanted to come back to the on premise and the cadence there and how that's improving just given the importance here, it's more broadly to the recovery and the alcohol space. So.
James you give a lot of color appreciate down the call and you mentioned some of the recovery to Peter's question earlier, so specifically with respect to on premise because we've seen some case counts tick up in Western Europe now at this point.
Can you just talk a little bit about what you've seen specifically on an on premise for for July and August is that sort of hit a little bit of a pause or did you see continued improvement.
You're exiting exiting the quarter.
Yes.
Thanks.
Your question in the U.S., we have seen it more leveled out.
And again year over year.
Look back in June May June even early July and gain some the if you will.
The.
Recent halt.
Turning to new restrictions and put in place really the momentum really has as leveled out in the U.S.
Overseas I think it's picked up a bit.
The good information a bit later on that but it has picked up.
Picked up a bit depends on the market of course and offices.
Right.
Our determined by market were might be performing works not but I think probably importantly, it's something we've been talking about I'm looking and I'm sure you've seen this as well as that just the overall consumption. This is a U.S. comment by the way just the overall consumption.
[music].
Total distilled spirits pre co but this is on a volume metric based on value basis, as well to of course, but on a volume metric basis, it's higher even with.
60% declines in the on premise, which is pretty amazing and its remain steady and for US we have seen similar trends in terms of our volumes in the U.S.
Offsetting.
The on premise closures and shut downs and even the decline hope that gives you a little color.
Yes.
Go ahead.
Which is a good spot to make sure that everyone sort of understands this point volumetric. If you just take the U.S. as needed sample market.
During the on premise slows down.
Which is basically a one liter size product and a lot of the volume moving into wants them farms volumetrically looks pretty good but the margins are weaker on the one some five and so that is one of the factors.
Putting pressure on our gross margins.
Just wanted to make sure everybody sort of understood that.
That will reverse at some point when the on premise comes back again, and we will take the result, we're getting for now, but they're pretty big different margins between the two sites.
I appreciate that just one follow up if I Mary Jane just with respect to advertising, which which was obviously down pretty sharply year over year, you expected to be up.
For for for the entirety of the year and maybe give us a little bit to help if you would not mine just on the cadence.
For the balance of the year in sort of the quarterly sequencing I think that'd be helpful. And then I'll pass it on thank you.
Yes, sure I'll try to do that Kevin it's such a volatile environment now and as you can imagine we're watching closely and beam.
In terms of when and where reinvest.
And in its consent and what brands channels than in the likes of what we did in the first quarter as you know that.
Not surprisingly.
In terms of how our quarter fell which was so close to the beginning of code, but we really did step back and Paul.
Locked in evaluate consumers listening, what's appropriate type lending for brands and so forth and so as you didn't know that it was down significantly we do not as as both blossoming mentioned, we do not expected to be down for the year.
I like it was in the first quarter, where we land in the year, we're going to be very agile about this.
You will see quite a bit in celebration in our second quarter.
Lawson mentioned this because this is off of one we're going to be launching new creative the shift.
Maybe if you will from the first quarter second quarter wont be.
No the Super Bowl.
Pick up in spending there.
And just a number of activities that we've got going on that we believe we'll be attending.
Uh huh.
In terms of trying to get down to any quarterly phasing that's about as far as I can go now we've picked and with respect to pick up in the second quarter third quarter for sure remember last year's fourth quarter was down.
Because of the on premise closures the cancellation of events and will be cycling against that fourth quarter, but as always we want to be thoughtful prudent agile and just accordingly, where the consumer is and that'll give you right now very uncertain.
Got it thanks, so much good luck.
Next question comes from a line of Steve powers with Deutsche Bank.
Yes, Hey, good morning, good morning.
Could you talk a little bit more about ready to drink launched that you you began this past quarter in the U.S., where we are in that relative to being a fully national rollout.
More generally on the ready to drink portfolio as it evolves and this is sort of well the global what can you just dimension for us a bit as to how you think that's going to impact European ultimate margin perspective.
Okay, well look I'll start with the U.S.
Or to defend it not repeating what I said.
Couple of minutes ago, but country cocktails remains the majority of our TV business anyone in the U.S. than it is on fire.
Significantly.
This past quarter.
Spirit based partner and that's a mall based products.
Based RTD, which is I think what you're asking about is still less than 50000 cases.
Teen States.
Thanks.
I mean, we're seeing it now and it is everything is essentially on fire and the RTD space. These days are little bit and our timing I think was pretty good but.
It is.
As to why I think is maybe a good part of the question as all the sudden these things.
You know gone from sort of lukewarm growth rates to really spiking up in a lot of its just bidding lifestyles that are out there right now. It's obviously people are at home and they want it to be simple.
People really do turn to these folks simple RTD simple drinks, obviously it was open it on mechanical or even very mixed Apple products that we have which is why we think honey as an example is doing so very very well right now on our Apple launches actually doing quite well right now so.
We have get we're getting a lot of interest in it but as I say, it's only in revenues of 14 states. So.
These are early days, while we figure out quite honestly, what the consumers willing to pay for in pricing.
What flavor for that.
And your space, our two days in the U.S. are phenomenal and growing as our them.
Started to pick up on part two of your question.
And just building on Hoffman comments about our Tds and playing an important role in this environment further.
Sean and convenience occasion.
Fourth.
But what you're asking I believe is about the degradation on margin.
And I will say in first quarter, we talked about the degradation of both channel and portfolio, having about one percentage point on 100 basis point impact.
And a big piece of that.
Isn't related to the portfolio, Lord RTD, but more specifically it was really the new makes RTD, which we.
I found in as we said in our script, which one time, we think in nature because of the temporary disruption.
Yes.
The beer industry in Mexico with that being said, we have fret about this for some time, but then the environment like this we think volume and the self generation vehicle for our brands are more important argued increasing your demand for your products.
We are you can see that and importantly, you look at the economics of and RTD, something we do frequently and we convert it to what we call a drink equivalent basis on a whiskey basis. The economics are predominantly even better than our full stream and so that's a couple ways that we think about it and in this environment we.
Small amount of degradation in the margins not materialize.
100% makes sense and we want to be there for the consumer.
Okay, Yeah, let's let's all it's all very very helpful. I guess, if I could just.
One more.
Looking down the PNM lead over the past few years in response to things like first tariffs and now cobot, you've done a great job of managing down as you know expense.
You can take a like for like 500 basis points out of that lives this past quarter versus say 2017.
As you think about that.
You think about the go for how much of that do you view as a structural efficiency that is capable of enduring versus just just progressive belt tightening that at some point is connected to come back as things sort of you know remodel us.
Yes, no real change I can't answer that fully but definitely what you saw on the quarter. What is largely driven by just the absence of travel and entertainment quite frankly, yes, we had some hiring freezes going on as well, but it's largely aren't discretionary spending.
I think we've all learned that you can work differently in this environment and work goes and what might come back is yet to be thing and so I think this is something that was going to learn a whole lot about as we look ahead I don't really have.
As a percent answer to that at this point.
But we definitely.
No that we can work differently and haven't working effectively differently.
A little more color just thinking back if we go back four or five years ago.
I think we were pretty.
Public what this that we made a conscious effort.
Restrain us DNA growth and get more advertising dollars more rent expense dollars out there and we've been pretty successful doing that now we weren't predicting a pandemic and hoping and travel are kind of stuff and certainly comp is way down too so.
There will be.
Asking it will grow from here, it's just I think as James said there are a lot of things we're learning as a company, which you can do differently and so.
It's hard to forecast out that many years, we'll look at back to where it was.
Probably not not in the we've not in the T. an E book now.
I think there's probably a permanent change in the way that people do business and.
To see how you know how to life on holds a little bit but.
Yesterday, I think we feel pretty good about the way we've managed through the balance between those two different operating expense.
Great. Thanks again.
Your next question comes from the line of Eric Serotta from Evercore.
Good morning.
Often wanted to get.
Your thoughts on the performance of Tennessee Whiskey in the U.S.
Jane mentioned that the growth rate in the quarter was similar to pre coded levels.
I've heard you say in the past that you know that level of growth was sort of below your long term aspirations are what you hope for or what you expect for the brand could you talk a little bit about plans to accelerate that growth how dependent upon.
The reopening of on premise those plans are.
Yes, certainly Europe overall portfolio growth in the U.S. was phenomenal, especially in light of what.
Tennessee Whiskey didn't the quarter, but just wanted to get some color as to how you're thinking about Tennessee whiskey going forward.
Sure.
Couple of things wanted to point out the checking his family globally.
Hello.
Still plus 3% so in the middle of a pandemic generating 3% sales growth on the entire family I think we're pretty we're pretty happy with that now focusing just on Tennessee whiskey itself and I will talk about the whole world for a certain amount of more to your question, but the.
Keep in mind, Jack Daniels, Tennessee Whiskey. So black label is one of the largest on premise brands of the world I mean, it is in nearly every bar around the world and so that business. That's why that number is down.
For more orders at 7% down for the quarter on a global basis, a lot of that as long products in the U.S. itself 30 percentage ish of its volume is on the on premise and that went down drastically so.
You know, making it up with pretty dynamic off premise growth I mean, it feels pretty good I think the Nielsen numbers on Jack or somewhere in the high teens now.
Although I've got so so you're getting youre getting on a brand that's north of 5 million cases to get that much off premise grosses pretty.
We're bidding number so now how or what are we going to do differently, a little bit about it because you're right. It's.
We are happy with the growth rates that we've been seeing on Jack of own box logo last couple of years a lot of it does have to do with.
We're going to roll on a fair amount on these new campaigns that are coming out weve been.
Working with this new advertising agency since while they were hard in January and so obviously they went in shutdown mode, but bringing out an entirely new campaign with a whole bunch of money behind it.
And our plans for the next six months and so.
You know, we're doing a lot more other things and that obviously the brand building model is.
On pool about on hold but I mean, the way you do it is going to be very different in this environment than.
Normal course, and you got to find ways to get to consumers.
Outside of the bar at home, but I think will be pretty effective in communicating that and getting that to them and.
No as I said I think the U.S. Jack Daniels business is a pretty good shape, but also highlight gentleman Jack as an example, which is largely a U.S. brand, it's up 17% for the quarter.
Thus growth rate, we've seen on gentleman Jack in a long long time.
And then Tennessee, Honey too, we talked about that a little bit earlier, but thats brands also on fire. So the family itself I think we feel pretty good about yeah actually just build on but Lawson said the volumes in the U.S. flat that's pretty good I mean, it's basically and.
And change pretty cold yeah.
But we have even is even though Tennessee whiskey.
It's higher skewed.
Toward the on premise and the rest of the American Whiskey I think that's 30% versus 17, 18%, we were able to offset that lots of that business, which I think it is pretty strong for the brand in this environment and then more importantly, just to build on lawson's comment about.
Oh family of brands. He just for reference honey worn out 90 or that Brian is growing high single digit.
Which is.
Fascinating and amazing, it's approaching 2 million cases.
And the brand is actually bigger outside the U.S. over 1.1 million cases than it is in the U.S. and they're both from high single digits, which leads us to the comment about in the performance about brain and how we think about other the innovation that we just did with last year, which was Jack Daniels, Tennessee Apple.
Because what we're seeing number markets overseas, where we've introduced it isn't performing.
At or above.
Right at the same point in time at Cagny, which holds well for that brand on in markets outside the U.S.
Great that's really help.
Sorry.
Oh looking at O. franchise.
Great just that's really helpful. One follow up in terms of the pricing and promotional environment.
Yes.
Earlier in the year I guess pre co. The there there were some comments about.
The degree of competitive promotion moderating a little bit and the Tds market now I realize it's been a lot of noise since coated.
With that.
With brand owners and retailers pulling back on promotions.
Yes, what whenever I'm, just trying to keep the shelf stock, but I guess more recently what are you seeing in terms of the promotional environment and the competitive intensity.
Particularly from some of the players that have been aggressive at times.
No I don't the the promotional environment.
Changed a lot compared to where it was two or three months ago. It still.
We view for one customers are shop buying Murdoch shopping.
Going into the stores with their marathon and perhaps on and everybody wants to get in and out as fast as they can and so.
The retailer support so many promotions and.
They're the ones, who pocketed a lot of that different margin right now and so.
We need to do a better job at getting our own piece of that.
I know theres a lot of effort behind that right now because I do think this is an environment where.
We want to see pricing going up.
And that's an effort that we're going to have really around the world.
Over the next few quarters that we're going to push pretty hard to try to see some margin improvement there.
Great I'll pass it on thank you.
Your next question comes from the line of builds upheld.
Okay.
Thanks, Good morning.
R&D.
Morning, just a quick question on back on gross margin kit.
I wanted to understand with our Tds will the impact you better.
Maybe not as bad as you scale up or are you putting investments behind RTD is where you know it wont be as the dilutive to margins over time and also but that in mind can you give us some kind of guidance on what the divestitures due to gross margin for the next year.
I mean that I'll start with the last part of your question in terms of early times and Canadian mist.
They're very very small impact your business.
They will have a slight benefit to our topline and your gross margins.
Very light.
Canon.
Couple of 10th of a point if any more than that so just knocked out of the way.
In terms of the RTD business and where it might go in.
Whether it will have more pressure on them margins are not what I was referring to in the first quarter was we had an outsized impact from new mix.
And it with our number one driver.
Growth in the quarter.
If you look at on a Standalone brand basis, and that we don't expect that margin pressure our that margin.
Item to continue but even with though we still looking at this as I said earlier from the growth.
Feeling to consumers and our topline growth is important in this environment.
I mean, we've had sort of internal conversations on it right now in this environment I'll take the dollars if it impacts percentage a little bit.
But at this point, we'll take it and it's not you mentioned, they're really not going to be margin improvements within the RTD world as you get efficiencies and things like that it's more just the fact that it's becoming a bigger part of our business.
And they inherently have lower gross margins.
Okay.
Yes.
That's an Lawson just can you remind us just on the new advertising from stepped up advertising kind of what the main goal is and when I say that is it trying to.
Keep up with some of the U.S. competitors that have the advertise more over the past few years is that a new demographic or new target audience that you're trying to reach or is it just more we're just trying to understand.
As we see the commercials, they do look different a little bit than some of the past messaging and so maybe just.
What the goal is over as it gets restarted what that means.
Well I mean, it is what we want to get back our share of voice, which admittedly we've lost a few.
Awesome out over the last couple of years and so we're pretty adamant about gaining on our share of voice and particularly in New York market, but that does include other other places too and so.
Couple of different ways are coming I mean, obviously with the on premise closed on events not happening and all that you did you get incremental money there and I imagine every competitor undersea, we'll have we'll get that too.
But a lot of it is also you think about how much we took it down in Q1.
And we're saying we're going to get back I don't have to see what the full year turns out to be but it will be pretty dramatic increases over the between now and Christmas.
And we'll see what happens the it's not really going out by the way a new it's not really going at a new consumer necessarily.
We've always felt that we've got sort of legal drinking age all the way too.
LDH to Dnbi Lido drinking age the damir debt that is still quite.
And we're going to work hard at.
Getting that back again.
Okay. Thank you.
Our final question comes from the line.
Bank of America.
Hey, good morning, everyone.
So just just two to two for me one Lawson you made a comment in your prepared remarks about not.
Maybe not expecting to see as much trade down.
But in the.
Sort of episode versus what we've seen in prior recessions.
I'm, assuming you were talking about the U.S. and developed international but just a little bit more color on why.
Why you think that would be the case, especially if we get to a point where.
There's less fiscal helped that government to providing for consumers.
Yes, I mean, okay.
I do think.
One we have not seen the downtrading in arm portfolio in its although probably worth pointing out to over the last 10 years, we have shift most of our our brands that were sort of less than premium and so we don't have a lot to trade down to I think in the broader question of across.
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Across the whole Tds certainly the stimulus money has a.
Big part of it.
And that travels all the way through to two Europe and some other places and as you say in the emerging markets. There is some trading down I think in emerging markets that we have seen in a lot of lot of that would be similar to what I also think in this environment. Now this is back to the us a little bit more were also in the right categories.
Kilos Whiskeys are places that were consumers are really find these days and those consumers are you know a lot of the consumers while unemployment maybe how are you know it is high right now there's a lot of consumers in the United States that are saving money from not traveling and not vacationing in not doing all those sorts of things and they've got money in about the only thing that's.
On the news a little home party or so that you know mixed cocktails and make you know all that kind of thing and so those tend to be very superpremium consumers and what they're spending their money on and so for us.
Like Woodford reserve double oaked or within old Forester. The you know the more premium line extensions. There those things are all on far may have been for awhile, but they've remained very very strong and so.
We just happen to be the recipients of it.
With the trends portfolio matches up with the consumer trends these days and we're getting some benefit from that.
Okay. Thanks, and then maybe just one more just as we're thinking about on premise and maybe like.
A couple of years out.
And especially if we get into a point, where you know where theres less TV right. We're all traveling less to.
If your expectation that the on premise.
Revenue pool.
Three years out well ultimately still be smaller that weren't where it was pretty cobot, just trying to understand how you're thinking about rate a recovery and kind of what on premise could look like you know over a multiyear period.
Look I I'm going to yes things are forecasting because I don't know any better than you would I mean, the certainly I think over the next six to 12 months. The on premise is still going to be way down and I think youre going to see a lot of restaurants closed on almost nothing.
But I'm also a strong believer that humans are very social animals and the miss it.
You know really miss going out to dinner and socialize and so I don't really see a permanent change in that I. Just think it's on take awhile does that sort of rebuild itself back up again, so I don't know I'd say I think it'll be pretty weak for the next six to 12 and then your UBI comping against such easy periods as restaurants open back up again, you're probably going to get a period of pretty good.
Celebration.
But three to 5345 years out.
Just.
Alright, well, we won't hold you to your prediction for on premise recover but we may hold you to your Derby predictions. So good luck.
Oh.
Thank you already have good neighbor to every month.
Right.
We have reached the time for a lot of quest.
I have any closing remarks please.
Oh.
Thank you Dorothy and thank you lost in the Jane into all of the for joining US today for Brown Formans first quarter fiscal 2021 earnings call. If you have any additional questions. Please feel free to contact us for those of you in the United States, We wish you and enjoyable long Labor day weekend. Thank you every dirty.
Uh-huh.
Thank you, ladies and gentlemen that does conclude today's conference call. We thank you for your participation in ASP would you. Please disconnect your lines.
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