Q2 2021 Brown-Forman Corp Earnings Call
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Good morning, My name is the other every line I would like to thank.
Good morning, My name is FIA and I will be the conference operator today at this time I would like to welcome everyone to the second quarter fiscal Twentytwenty. One earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If he would like to ask a question during the <unk>.
The time simply press star and the number one the on your telephone keypad to withdraw the question press the pound key. Thank you at this time I would like to turn the conference over to Leann Cunningham.
Thank you and good morning, everyone I would like to thank each of you for joining us for Brown Formans second quarter and first half of fiscal 2021 earnings call. Joining me today are lost in the lighting, President and Chief Executive Officer, and Jay Marino Executive Vice President and Chief Financial Officer. This morning's conference call contains forward looking.
The 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 the future results are beyond the company's ability to control or predict you should not place undue reliance on any forward looking statements.
The company undertakes no obligation to update any of the statements whether due to new information future then or other wise. This morning, we issued a press release containing our results for the second quarter and first half of fiscal 2021. In addition to posting presentation materials that loss and the Jane will walk through momentarily.
Both the release of the presentation can be found on our website under the section titled investors events and presentations of.
In the press release, we have listed a number of risk factors you should consider in conjunction with our forward looking statements. Other significant risk factors are described in our form 10-K, and Ford and 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 conditions 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.
Hi, Thank you Liam I don't have to tell anyone on this call. The 2020 has been a year of that no one could of possibly predicted the.
When we started fiscal 21 back on May 1st I did not imagine that I'd be sharing switch the old results with you today.
Both from forming in the industry as a whole has been very resilient through what does the very challenging and volatile environment.
First let me start by thanking our employees. This has been a year of extreme turmoil in all areas of life No matter, who you are or where do you live and we could not deliver these results without your hard work dedication and agility.
I also want to thank our dedicated long term shareholders, including all of the Brown family members in our outstanding Board of directors for your leadership encouragement and most of all of your support.
Before turning the not to get into the business discussion I want to offer a few thoughts as we're less than a month away from closing L. Brown Formans 150 of the anniversary year.
I find it interesting the milestones that our company always seem to come about in turbulent and unforeseen times.
Our Fiftyth anniversary was back in 1920, the your prohibition began in the United States back then we found a way to continue the so whiskey through medicinal licenses and permits.
Or 75th anniversary coincided with the end of World War two.
And our 100th anniversary was the 1970 when Bourbon began its period of decline and we reinvented ourselves as a consumer goods company of an expanded beyond spirits.
And now today in our 150 of here the Mr. Global pandemic, we've again found a way to reach more consumers and delivering underlying top line growth fiscal year to date.
The sheer has reaffirmed my long held belief that no matter the circumstances Brown Forman will be agile and able to find a way to deliver top tier results.
And then this year full of uncertainties in the unexpected it's nice to have something the we can rely on the we do not take that for granted.
So as I turned or fiscal 21 results I want to talk a little bit about some of the surprises in our business.
You can imagine when we started this fiscal year back in May the headwinds appeared strong.
Bars, and restaurants had largely closed worldwide since March global travel retail had ground to a halt.
Vacations and travel and hospitality, we're getting canceled all over the world.
And in actuality most of these headwinds really haven't changed but.
But I want to share with you a few positive stories of resilience in our business in spite of these headwinds and continued uncertainty.
First is really the overall performance of the spirits industry Oh from talk about what a great business premium spirits is with solid growth nice margins and high returns on capital and this year is no exception.
Since the start of the cobot pandemic spirits performance, particularly in the United States has accelerated overall consumption is up even with many restaurants and bars closed.
We continue to take share from both wine and beer, although that's a trend that has existed in the U.S. for a long time, the gap has gotten wider in spirits favor.
I noticed the price has been the exceptional growth we've experienced in our RTD business as I mentioned last quarter. We have believed in the ready to drink category ever since we launched our first Jack Daniels RTD over 25 years ago.
But all admit that this year's performance has exceeded our expectations about the format and the category.
And this really is not a single brand or single market phenomenon Weve seen strong growth from our Jack Daniels RTD ease in markets like Australia, Germany, and the UK.
Our recent launch of the Jack Daniels spirit based or to use in the U.S. is off to a terrific start.
We've also seen excellent performance from our mall based Jack Daniels country cocktails and the U.S.
Our tequila based our T.D., so called new mix in Mexico, which is now near a record 8 million cases in the last 12 months.
And since our last earnings call. We acquired part time Rangers range of low calorie White spirit based or Tds as a targeted investment that we believe will help us grow in the ski category.
A little bit on part time Rangers. This brand was founded by two brothers in New Zealand and offers white spirits based cocktails and the convenient format. We believe the sprint can help diversify our RTD offerings in this region as well as broaden our reach into the fast growing white spirits RTD segment.
The sprint has done very well with the new generation of consumers. The we believe it is well positioned to take advantage of recent consumer trends, such as lower calorie lighter and brighter tasting.
Part-time Rangers is also known for its focus on wildlife conservation and sustainability, particularly through its charitable donations supporting conservation and ecosystem preservation.
Well focused on New Zealand and Australia over the next 12 months, we believe the sprint has the potential to move into more markets in the upcoming years.
Although the shutdown of the on premise certainly gave a boost of the RTD category, the mega trends of convenience and flavors give us confidence that this category will continue to be a growth driver and of the future.
Another pleasant surprise is the continued and really accelerated growth of Super premium brands.
As I've shared before this has been unlike any other recession that weve experienced in the U.S. ultra and Super premium spirits are gaining share at faster rates than in the pre co the time periods.
Thanks to the portfolio reshaping of the efforts of the past decade, we don't really have much below the premium price level anymore.
I also want of mentioned that we believe we are not only playing in the right price segments. We're also in the REIT categories really at the right time of.
I already mentioned, our Tds, but our two most important categories are really American whiskey into Keela.
In the U.S. both of these categories, we have seen a significant increase in their pre cobot growth trends.
And it's worth highlighting the performance of Woodford reserve. It is not only sustained its double digit growth and is growing its market share in the U.S., but also we believe is ready for a significant push in the international markets.
On a geographic basis, the strength of the the developed markets and sequential improvement in recent months of the emerging markets has been impressive growth.
Certainly been a welcome surprise in this dynamic business environment to see such robust growth from our U.S. business.
And as we progress of this pandemic, we've seen relatively healthy performance from our large developed markets and much of western Europe as well as Australia.
I'm also pleased with the improving health in the emerging markets to which did improve over this past quarter, particularly the highlight Poland in Brazil as James going to talk about in just a couple of minutes.
And lastly, the teams deserve a lot of credit for the delivery of New World class Creative we signed the deal with our new agency of record energy be video almost exactly one year ago.
And in less than a year. They have created beautiful global 360 campaigns for American Whiskey brands old Forester, Woodford Reserve and Jack Daniels, all through a global pandemic and all done remotely.
If you haven't seen these campaigns yet we've included the in our slides today and you can believe the brown Forman employees around the world are planning to make it count this holiday season.
So in summary, while we continue to face the uncertainty and disruptions to markets and channels throughout the world I remain confident that the essential is of our business are strong and then as we approach the end of our 100 Fiftyth anniversary Brown Forman will enjoy many more milestones to come.
With that I'll turn the call over to Jane who will walk us through our second quarter and first half financial results.
Thank you Lawson and good morning, everyone.
As loss of said this year has been all of the process.
Considering all the volatility and uncertainty in the world today.
We believe the results we released today are strong.
In the first half both our underlying net sales and operating income are up relative to last year with an acceleration of our top line growth registered in the quarter or not.
Not surprisingly many of the items the credit noise in our first quarter continue to impact on the second quarter, including price.
Product innovation launches, notably Jack Daniels, Tennessee Apple.
I mean related items, both this year and last year.
And of course COVID-19, resulting impacts that include inventory fluctuations customer buying pattern changes in geographic channel SaaS and portfolio mix shifts.
Before I discuss our results in more detail I would like to take you back a year ago.
Specifically as a reminder, in the second quarter of fiscal 2020, we launched Jack Daniels, Tennessee, Apple in the United States and sustained or double digit underlying net sales growth from our premium Bourbon and to keep the portfolios.
No one could have the vision the world as it is today.
And of course COVID-19 has created challenges and the uncertainty but also opportunities.
We believe this is evidence by the continuation of our stronger than expected performance. This second quarter.
With that as a backdrop, let's now turn our attention to the second quarter and first half performance. We're familiar trends continued to produce solid results.
Starting with our top line compared to the first half of last year reported net sales were down modestly as the result of the decrease in distributor inventory levels that were built in the United States in April.
And the negative effect of the stronger U.S.
Yes dollar.
Adjusting for these factors our underlying net sales grew 4%.
As we look broadly across our geographic clusters, we saw a wide range of top line performance with either strong growth are generally double digit declines.
We experienced top line growth and approximately 85% of our markets. The the first half driven.
Driven by a number of factors.
Including our well positioned portfolio.
Premiumization trends, our innovation and externally the impact the government stimulus package has had in a number of markets on the economy.
The markets, where we are experiencing significant declines appear to have been impacted by a variety of factors such as downtrading due to economic conditions.
Heavy on premise exposure and for us in markets, such as Spain and check yeah.
Declines in tourism of course in travel retail, but also in southeast Asia as an example, and the.
The the external factor lacking here, what's the lack of stimulus of.
From the government and many of the markets starting with our use of business, which represents approximately half our net sales we sustain our strong first quarter underlying net sales performance in the quarter. This.
Despite lapping last year's launch objecting of Tennessee Apple.
As our year to date underlying net sales grew 9%.
The strong growth reflects many of the same themes, we discussed in the first quarter.
First the strength in the off premise.
The channel shifts since the pandemic began has remained significant.
With off premise volume metric growth more than offsetting the on premise declines our portfolio continues to benefit from being well positioned in growing categories and to meet the needs of our consumers during this environment at home consumption.
Most notably the consumers' desire for convenience portability and variety as well as ease of Mixability is being met by the Jack Daniels RTD.
Checking the flavors and our portfolio of the keyless.
Of note jetliners country cocktails again delivered exceptional performance more than doubling volume both in the quarter and on the year to date basis compared to last year.
Separately the shift to at home consumption convenience and the desire for contact list Commerce has propelled our portfolio of explosive growth in the E Commerce channel with continued triple digit trends compared to pre called the levels.
And as consumers seek every day luxury premiumization continues to favor our super premium portfolio, particularly Woodford reserve and our craft series expressions of old Forester is the brand families sustain double digit underlying net sales growth.
Our developed markets grew underlying net sales in the high single digits for the second quarter and 10 per cent through the first half.
Continued growing demand projected tuners, RTD, most notably in Australia, and Germany benefiting from the consumers desire from convenience and the launch of Jack Daniel's, Tennessee Apple drove these gains.
We remain pleased with the launch of Jack Daniel's, Tennessee, Apple internationally, where we continue to see the rate of sales equal to or greater than the honey post launch of great of sales, our emerging markets collectively reversed or first quarter of declines growing underlying net sales low single digits for the second quarter.
And the lifting the underlying net sales the flat you are today.
Poland in Brazil have been resilient in the first half.
And while Mexico declined in the quarter its underlying net sales have grown year to date.
Driven by the exceptional performance of the new makes our TV business in the fourth quarter Ben.
Benefiting from the temporary interruption experience in the country's beer supply chain.
Well the new mix business remains healthy we continue to see evidence of consumer trade down into the Keala whiskey categories in Mexico.
Several other emerging markets.
The rest of our emerging markets collectively remain down year to date, most notably Southeast Asia, Russia, India and Latin America.
Finally, our travel retail business continued to be the most significantly affected.
The international airline travel the declining almost 90% and nearly all of the cruise industry remained shut down.
While we saw a slight improvement in the second quarter as our military channel is performing well.
Our travel retail business, excluding this channel.
Continue to experience net sales declines well over 60% for the first half of the fiscal year.
Turning to our largest brand for a moment, Jack Daniels, Tennessee Whiskey overall through the first half the brands from volumes remain down was essentially flat volumes in both the us and our developed international markets.
And declines in the emerging markets, but the rate of the declines improved somewhat in the second quarter and declines in the travel retail channel.
The shift from on premise the off premise consumption in the our developed markets continues to drag down Jack Daniels, Tennessee Whiskey underlying net sales year to date.
However, we believe the brand remains quite healthy and is gaining share in the majority of its top 10 markets.
Now turning to our gross margin.
Our gross margin declined 350 basis points through the first half, resulting in our underlying gross profit dropping 1%.
Higher input costs related to GAAP and wood.
As well as of reduction in fixed cost absorption due to lower Jack Daniels, Tennessee whiskey volumes represent nearly two thirds of our gross margin decline.
Channel in portfolio mix shifts essentially drove the remainder of the margin drop moving to brand the expense.
Advertising spend was down for the quarter, reflecting the reduction in on premise activation and the cancellation of various events and sponsorships.
We did see the declines slow compared to the first quarter as the our investments most notably behind our new Jack Daniels make it can't cash paying began in October we continue to expect our advertising investment to accelerate over the balance of the fiscal year.
Underlying SDMA investment remained down in the quarter, reflecting tight management of discretionary spending such as travel in hiring freezes.
And finally to our fiscal 2021.
Outlook as we look ahead, a high level uncertainty continues to exist, including the impact of the current surge and COVID-19 cases, and resulting restriction as well of the impact this may have.
On our consumer demand.
Notably during the critical holiday season that is upon us and the tapering off of government financial stimulus in a number of countries.
Sorry, no changes between now and the end of the calendar year.
And the potential effect on the global economy employment and overall recovery.
As a result of this uncertainty and volatility that we expect to persist over the months to come we.
We are not providing quantitative guidance for fiscal 2021 at this time.
With that being said more qualitatively speaking.
As we think about our broad geographic clusters first.
Our developed markets.
Are we back the volatility and uncertainty to remain high for the foreseeable future as we experienced the second round of Lockdowns of related to the pandemic and have noted.
Slowdown in our November early results in Europe, we remain optimistic given the resiliency and strength of the performance during co but to date travel retail we do not expect our business to recover this year and this channel.
Non down significantly we expect many of our emerging markets will remain subdued the we anticipate to benefit from easy comps when we begin to lap the start of the pandemic fourth quarter, our non branded business dominated by the sales of used barrels is expected to continue to be a drag on our total.
The plant performance this year.
As it was in the first half.
Selecting the expectation of lower volumes and pricing.
Our gross margin will remain under pressure for the year true.
Given by the expectation of higher input cost and mix shift.
However, where our gross margin ultimately land will depend not only on the volumes of our business, but the mix of our business geographically by portfolio channel insight regarding operating investments. We believe we are well positioned to Beth effectively.
We expect our unusually high operating expense leverage in the first half to significantly reverse in the second half.
Reflecting a notable increase in broad reach media spend.
As we are investing more into the important holiday period, and the recently launched Jack Daniels make it count campaign.
As it relates to our effective tax rate from the full year, we still expect our all in tax rate to be in the range of 17% to 19%.
Our balance sheet and cash flows remain strong and our capital allocation strategy is unchanged.
Well thought of paused and just mention a few recent action in this arena.
As you know our first priority is the best fully behind our business.
Our board recently approved in the investment of $125 million and capital to expand our Bourbon, making capacity in Kentucky to meet the anticipated future consumer demand of our brands.
We also announced the couple of weeks ago, an increase in our annual regular dividend Mark.
Marking the 37th consecutive year of increases.
And the 76 year of paying quarterly dividends in our hundred and 50 year history. We continue to actively evaluate of portfolio selling their early times Canadian mist, and Collingwood brands and as Lawson mentioned acquiring the ready to drink brand part time Rangers.
In summary, while there have been a number of challenges and headwinds in the first six months of our year. We believe our results reflect our agility and resilience to adapt and seize the opportunities in this very volatile and uncertain environment as the COVID-19 pandemic NSS.
Second the global economy continues to evolve.
We will continue the main age as we always have putting our people first and staying focused on the long term.
As Lawson mentioned.
150 year history, we have experienced many turbulent and unforeseen events and have emerged from those times stronger and with healthier brands.
And with that this concludes our prepared remark, let's open the line to questions.
At this time I would like to remind everyone that if he would like to ask a question depressed star one again Thats star one for any questions, we'll pause for just a moment.
And the first question will come from Steve powers powers with Deutsche Bank. Please go ahead.
Yes, great. Thanks, good morning.
The.
Hey, so.
I guess, maybe we can start on on the NP, if I could I guess I'm curious as to.
With the lower spending in the first half just what that implies about your share of voice year to date, and then how you anticipate that that share of voice too.
Yes, the trend as you as you ramp the broad reach investments you called out second.
You got me I can start off with the phasing of.
Ben I mean really what you saw on the just as reminder.
Yeah, we were down significantly in the first quarter and it was really more driven by when the pandemic hit and that's taken a pause in our spend.
The we can evaluate and reflect where we want it the Stan the type of spending that we wanted to have take place.
And so that continue the bid into the second quarter, though.
I will say that it's always.
The more important the that.
Back and go back the onion, if you will understand that we were spending and did increase our spending.
In places, where the momentum was going so behind you with Woodford reserve and old forester behind our RTD behind or flavor. So all the things that you have seen drop from John.
Driving our growth in the <unk>.
Water, we spent behind and half of them behind here today, what we did though was pulled back a bit as I said in the first quarter rightfully so from the coated environment because of the restrictions.
On the on premise channel, which took activities out of that as well as sponsorship of been something and we said, let's take the money there and reallocate it.
Too broad of retreat media and say in and focus that when the news.
Campaigned it lost the mentioned earlier, Okay came out of comes out and that's really behind Jack Daniels and the make it count camping.
And it really just started and the October period really late October and so you didnt see a lot of that but you're going to see a heavy concentration when we think about the phasing of it we wanted to be there for the holiday or a lot of spending is focused in the holiday period, what we think will have nice share of voice.
And from then on when you compare our spend relative to prior year.
The fourth quarter, where we were down because again cobot related so I'll, let law and pick up on share of voice or anything.
The only thing to add to that is the share of voice at least I think in general.
General opinion.
It's getting to be less and less relevant as a metric to use because the explosion in the spending in the world of digital and social media. So.
While I do think our share of voice will be going up markedly over the next few months.
I'd just be a little cautious on using that as of real strong metrics because of the different ways. When people are spending and the same said. She is right. We were I know the teams were very excited to get these new campaigns out there and there was just a bit of of buyers to wait until we have that and so.
The most part Jack is ready now Woodford has been out now for a few months, you're going to see more from old forester or more of our tequila.
In the very near future and so you'll be seeing more of their brands on a share.
Starting now.
Okay, that's great and maybe to follow up on on the debt question MP and the.
The different buckets of investments I'm curious about on the MP.
When I look back it's hard to guess the to figure out what the right benchmark of a decade ago.
He was running at about about the mid teens the percentage of sales.
Clearly first half were down below 10% I guess, when you think about half of the the norm.
Normalization of looks like as we as we emerge what how should investors be thinking about the right level of spending for your business doesn't as it's currently scale.
And then that's like a follow up from the second bucket that it just didn't come up in your prepared remarks, the but obviously E commerce is the.
The making great inroads in.
In your across the market, but in your categories, specifically I'm just curious as to how you you've pivoted.
The step up your investments there and whether you think you're you're you're keeping pace with the change you're effectively the head just what your level of readiness is for the yeah. The ecommerce.
The commerce channel as it as it looks in the future.
Let me, let me take the first part of the question.
I love the build on that but something that we talk we try to target each year. The certainly at this point in time the world the.
The burj from that we try the target our spending in line with our revenue growth.
And so you wouldn't see.
I think what you're seeing in the first half is just what I explained earlier in my commentary of which was the timing the phasing how cope with it had been set but again.
And that's why the so dramatic in the first half relative to our top line growth is being down but it is something that we.
Long term once has been in line with our.
Our sales growth.
I hear what you're saying you're looking back a decade ago, there's lots of puts and takes in the area I look at the pull out of effect.
Transit of come and gone and things of that nature and we also look at the spending that we do.
Not just in the A.M.P. line items, we've talked about the before I know on calls we look at.
Oh the line items in the P analysis of our packaging costs will show up in cost of goods are good.
It shows up in cost of goods or promotional activity, which are our net reduction to our sales price and then of course are people, who build the brands and so we look at it.
Holistically like that as opposed to just one line item, but again I would say our ambitions are true again.
Been in line with our growth in revenues on an ongoing thing basis, Yes fleet. So the 10% number you quoted from the first half you can kind of throw that out there.
Because we will be we will be building back up as we've said in here from the second half of the year pretty pretty strongly.
Of course, the E Commerce, I mean, I think we're we like a lot of other see the opportunity here in the us.
You know everybody is seeing that but we have industry estimates that say that the the next 345 years, you're going to see as much as 10% of the global sales going through E Commerce, and it's only a two per cent today. So.
You know you're going to see an explosion of there and we're obviously going to be a part of the act, but it is small in the U.S., it's sort of one per cent right now one one and a half but we've added a lot of investment there and we will be adding more over the next of say six to six months or so and so we've got we've got a number of ideas from things that were going to do there and we're reallocating resources.
For the much like you would expect we would.
To make sure that we're there you know for that channel but.
You know, it's not only of U.S. thing in fact, it's bigger than in many markets outside of the U.S. me, China being the most well known but UK, Germany, France, Australia, Brazil, Mexico, it's all of them.
Yes, all of those markets are seeing exploding ecommerce growth and we're making sure that we're going to be a part of it.
Okay, perfect I'll pass it on thanks, so much.
The next question will come from Sean King We view vs. Please go ahead.
Hi, Thanks of the question.
I guess I'd like to understand your outlook on the tariffs given the new administration and within that.
In the event that you saw some hotels, where a tariff relief will you passed on to consumers and the former pricing or potentially step up investment or even flow through to the bottom line.
Okay. The big My favorite question.
Well, the tariffs, which now two and a half years into it.
None of us two and a half years ago thought that we would still be in the situation that we're in now and.
And we continue to work hard to try to find ways for the entire industry to get out of this mess.
There are I mean, I think compared to say last quarter. When we talked about the certainly from encouraging signs certainly of the do administration.
Seems to be putting people in place and important sort of economic roles or trade related roles.
That are more centrist of a little more free trade than what we've seen out of the Trump administration and so we have to be a little more optimistic there.
And we'll see I mean I.
I do think also the really both the U.S. and the EU together want more stability in these international relations they don't like the chaos either and so.
We don't know what the by the administration is going to do.
What we're trying to bring the we can do to influence to make sure that you know that these trade disputes get resolved and so.
You know.
Hey.
I am more optimistic I guess of been optimistic now for two and a half years in the still hasn't solved itself. So.
Optimism isn't getting it done but.
There's so many people that are getting hurt by these things and I think the entire industry is looking at this like we need to solve both sides of the Atlantic.
It's tough to say at the same time, because they are two different disputes but.
Both sides are working to two limited or get rid of it all together and then there is Brexit, which is only three weeks away or something like that and so I do think the U.S. and UK had been making progress there on trying to find free trade agreements and so that one may pop up sooner than that of resolution with you but net.
Net.
Getting more positive on the topic.
Yes.
To your second part of the build on what book.
The second part of your question.
We don't have a crystal ball I said, we are optimistic cautiously optimistic but it if the tariffs would go away you are asking what would we do we dropped the to the bottom line then we take pricing we're evaluating all of those things of think our bias would be.
Certainly to take some and reinvest it back in the business look at pricing and all the different variables. So this is something we hope we can actually.
Implement here if it if the share go away from you.
Pricing decisions of the largely separate from tariffs it's more of the how much are we going to reinvest in the business.
How much is going to drop to the bottom line and.
I think it's a lot of it depends when this actually happens how do you do the UK versus the you a lot of things like that but it will be a balance between the two.
Great very tough question and I appreciate the answer thank you.
The next question will come from Lauren Lieberman with Barclays. Please go ahead.
Thanks, Good morning.
You book spoke a lot about about marketing and the new Jack Daniels campaign, and TV, but I was also curious about.
And the building brand equity and sort of in the new world assuming the timeframe for on premise to completely come back even post vaccine and that's been such a core part of the.
The the spirits model and the especially for establishing some of your newer more premium brands.
In in new markets and new geographies. So just curious how you're thinking about that.
Demand brand awareness creation model and what it looks like again with the more limited on premise.
Footprint pose even post pandemic.
Yes, I mean look that's that's a tough question the going forward I do think first of all of the restaurant business while flow to come back it will come back and we will continue to use that as a nice channel to promote particularly the smaller brands and that's what was working very very well pre coded was the brands like Ford's in the range like sling.
Moving on.
Given our one drama can understand our single malt Scotch of so that model really really was working well, we're having to pivot to spend a little bit more time and attention with those folks in the specialty on premise channel, which is still huge are the.
The steps from especially off from a channel I'm, sorry, which is still very very big in and it's just a matter of focus that seems to be working it you can do that focus on the on premise you can do it on the off from us but.
But you just need to put time and attention against the smaller brands and the separating those people's responsibilities from building of Jack Daniels of building a woodford.
You know has worked very very well in the U.S. and it's something we're going to do.
Outside of the U.S. now too I mean, we're we're.
It would certainly worked better one of the on premise is more vibrant.
But these folks are able to do both channels at the same time and really build these brands and I think we've got enough confidence that that model can work that we are going to continue to.
The focus on it.
Just the build on line losses of I think our our model.
Part of it has been in of the on premise of what I think we are also saying is saying is that we know that help brands growth is software in it and.
So whether.
The traditional media, which has been.
Going away for some time in terms of the spend with cord cutters, and so forth like that of more towards streaming.
Video streaming online social of things of that nature. These brands can get awareness through those mechanisms of those two of those channels.
And so again, we want to be reach for trying to reach more consumers regardless of what it is which brands whether small or large so our brand building model is really focused on line.
Range and be in top of Mad if it's small and however, we might do it in the like I said.
Thank the smell.
The smaller brands can play well in the meat and in the digital space.
Great. Thank you.
The next question is from Peter of Grom with JP Morgan. Please go ahead.
Hey, good morning, everyone. So.
I was hoping to get a little bit more color on the gross margin performance and.
Fully understand how the company is thinking about that line item moving forward.
Again, I know you mentioned that the pressure is expected to continue in the.
Visibility on channel and country mix is limited, but could you maybe help us understand how we should think about raw material inflation in the back half where I would imagine you have a higher degree of visibility and then building on that specifically there seems to be of view from.
Some of your competitors that that of Gabi prices have stabilized is that something you were also seeing or is the expectation that relief there still those income until the end of that.
Calendar 21 thanks.
Sure.
Great question.
Just think maybe I'll start off with just what where we are year to date and then what were forecasting.
For the rest of the year or expecting for the resi or other than this pull ourselves back and say what does this look like over the longer term.
So as you heard me and you saw in our earnings release. This morning, we talked about three.
350 basis points of margin erosion.
About a third of that is really due to this channel five portfolio shift mix and the other two thirds of it is really do the input costs.
And fixed cost absorption being low.
Because the volume.
Now the input costs is driven by two components the gavi.
And what are the cost of making.
The spent a lot of time, Tom talked about in the past the.
Reminded all of US here that are would call or laying down four years ago under coming through today.
And so the reason why I mentioned and that is because of some of the things. We're working on today, which will help improve our margins longer term. So I'll come back to that and just the moment. So that's where we are on a year to date basis, hopefully that makes the issue.
As you said, yes, we said, we do still expect margins to be down for the year.
We're forecasting by the end of the year that we've won.
We will improve from the 350 basis points drag of where we are today. It will improve from there. So I think the pit our our peak if you will.
And so we expect that to improve where we land as as you all from pointed out Peter depends upon the it's the mix the true.
Total makes the portfolio mix and so forth, but we do expect an improvement in the back half of the year.
Now thinking.
Thinking of our future expectations of margin medium to long term.
I started off explained in the the.
The wood.
Situation because the again, what we're seeing income through the PML. The shares would it was laid out 456 years ago.
And so we've got to the number of initiatives that we've been working on and continue to work on and we'll continue to work on that will help improve our cost situation.
In the input and these kind of type of areas like wood things that are going into the aging of the barrel.
It will not show up this year they.
They will show up down the road.
Darby you mentioned the Gabi, we really haven't changed our outlook on a GAAP based on what we explained in the first quarter.
Again, just as a reminder.
It's really based upon CRT plantings from 15 and 16, we expect the thing too.
The the situation the supply demand imbalance improved by the end of the.
Next the about a year from now which is our calendar 22. So this time next year.
We have no because overall the keeler on a worldwide basis.
Well I'm doing great in the U.S.
And they're growing quite rapidly.
It's actually forecast down for the year Mexico's down parts of other other parts of the world, where it's really not that big anyhow, but it's down so I think I'd of yes, our said came out with the forecast of of.
The kilos of being down about 4% for the.
Calendar year I only mention that it is because we have the.
Well as I mentioned in pricing.
No change really from our first quarter conversation with the which is about 26 to 28 pesos, so still in that range, but.
Perhaps the price.
Sure on the prices will come down a bit faster we're hoping.
The and maybe just kind of next year, but we're not seeing a rapid change we don't expect it to be all of the sudden drop drop down to the bottom the.
But we do expect the start seeing some benefit starting later next net next fiscal year for sure.
Then finally, if if.
One of the previous callers asked was about terror and we're cautiously optimistic that they will resolve the.
Successfully and that will also take pressure off of our margin and so over the long term if I'm thinking of medium long term I'm looking at our margins to improve from not only where it is today, but even from.
From there we have one final variable that weve been working on which is our pricing.
Talk about the before with the.
This group of believe which is.
Our revenue growth management capabilities.
We've invested a lot of tools.
We've gotten quite sophisticated in our U.S. organization and just recently rolled it out to the rest of our major markets around the rule. The world of we're building those capabilities and what that capabilities allow us to do is to look at optimizing our pricing by channel by customer whether our promotions are affected per not effective.
Where are those opportunities to take pricing and were actively doing that and have actually seen nice benefits from it already in the U.S. and the.
It will help as we go down the road.
Just a follow up comment on the Tequila category just because it's.
The next from fascinating the watch we've said and you can read a lot of different CPG categories, whatever trends were happening pre cove interest accelerated over the last.
Eight or nine months.
I don't think there's any category of where that may be more apparent them to cure kodiak seen a bit of the two but in.
In the U.S.
In the U.S. and the Super premium and ultra premium brands on fire I mean, they are just growing at rates.
You know that are through the roof and we all say its people like to make a margarita at home, but I don't think that many people are buying the 60 of $70 bottle skill and make a murder is where the I mean, that's overall price with the line drinking it as a cocktail and if you look at the Nielsen turns of an after trends or anything else I mean, voc of which is a much larger category for every day.
Dollar the Tequila is growing market is losing the two of the most offset each other but it.
It's just been a dramatic change in the U.S spirits business in terms of categories between those two of it so yes.
Yes, the say its been interest the watch and quality of the good thing for us because we're very small in the bulk of world and much bigger of fuel.
Cost of art.
The bigger interested in the recipe our CEO here losses reported yesterday, the Margarita is what I'm trying to night after the leases over.
Okay I appreciate that.
Just on a year of one quick follow up James of based on some of those what initiative you mentioned I guess.
When can we expect those to begin to the show up in the PML and I guess you.
No.
I guess you'd have the given the aging process here right I mean, when we're home.
How much longer do you expect the word to be inflationary given what you laid down four years ago.
Yes, so I think what we've laid down in the barrel is already in the barrel. So I think you're talking.
About four years down the road before we start seeing some real benefits, we're doing some things today that could come from.
Of bits of income throughout life.
One of the local based on the technical here, but we'll get a little bit of that kind of.
Current and next year.
Okay.
Thank you.
The next question will come from Bonnie Herzog with Goldman Sachs. Please go ahead.
Thank you good morning.
I am I'm going to touch on the divergence that you're seeing between your volumes and price mix definitely understand there are several major drivers here both from a product mix and the channel mix standpoint, but I guess it would be helpful. If you could provide a little bit more color on the drivers of this and then second.
And can you give us a sense as to when we might expect this divergence to narrow.
Yes, Im wondering how big of a risk do you guys see that pricing you know ultimately reverts to lower levels over the long term. Thanks.
Yep.
I assume what you're referring to is that our volumes were up 15%.
Year to date, and that's really driven by the RTT business.
Where we've seen explosive growth on our Jack Anders RTD sort of 36%.
And our risk in our new mix business, which is 100% in Mexico is up quite nicely as well benefiting from the first quarter.
Beard disruption in that market.
And so.
Something that we'd like to do is to type the equal emphasis on the equivalent basis and so when you equivalent of the drinks on a volume metric basis.
For full strength whiskeys and flow strength, the kilos, you're about a 1% volume metric growth.
Our mix again.
Really again driven by.
The portfolio of portfolio of shift, meaning the acceleration of the RTD and the new mix, we talked about this in our first quarter earnings call. The us.
Something we fret about from time to time is this the margin erosion from our TD.
But quite frankly, it's pretty small in the Grand scheme of the margin erosion that we've seen and we want to be there from the consumer which we are you can tell by the volume metric trends.
Meeting the convenience need ex tasty flavorful cocktail and so forth like that so we are have and will continue to believe that the small amount of margin erosion of resulting from the archi business of the good thing in this environment, particularly.
Yeah, we don't have an internal debate of quite honestly on how sustainable of these growth rates from the RTD World and.
Are they just cobot driven because people. So many people are home or are they the core they something bigger than that but.
I do think we call mega trends from inconvenience and flavor fits very well on those and so.
You know you're not going to be seeing the on triple digit growth rates that we've seen in some places but.
We feel pretty good that it's going to stay of the other big one of the chain.
You mentioned in her prepared remarks, but as the on off I mean, that's obviously very big too probably bigger than me.
The most folks from realize as the leader size of the U.S. would be the example versus the ones on five is the just much more profitable and so that will reverse and be a benefit to the gross margin.
1.2.
So there's just a lot going on in terms of mix.
That all add up but there are lots and lots of small things.
Did we answer your question.
Yes that was helpful. But I mean, if I may just circle back on the pricing lever and I don't know how comfortable you guys are talking about that that loved the here your views over the long price.
I think we've talked about the keel pricing and that is the inching up it's not going by leaps and bounds, but there's certainly momentum to take the price up in that even our own brands.
If you go skew for skew as the comparison or apples to apples. There is some small amount of price of going up now largely from reduced discounting in the off from us.
But I don't sense in the industry or even in our own sentiments that when this is over we're going to get more aggressive on pricing probably to anybody really wants that in so.
I would expect similar to what we haven't had much pricing it's been very very low single digit, but that's a fair assumption I think going forward to long term.
Okay. Thank you appreciate it.
The next question is from Kevin Grundy with Jefferies. Please go ahead.
Great. Good morning, everyone happy holidays in the congrats on the continued progress in the quarter couple.
Couple of questions from me if I may.
One on one of the outlook and then just the fall for Jane on cash and capital deployment. So the first from probably for per Lawson, just sort of understanding that we have to get through some volatility here in the winter months, but the broad question.
The how was your planning changed internally if at all as you think about of post vaccine environment over the next 12 months.
And then maybe more immediate term with respect to the guidance talk about the factors you'd like to see before reinstituting guidance. So you mentioned some of the challenges in November we understand the is going to be some volatility. The flip side is you're also seeing growth in 85% your markets I think collectively the industry.
Across the total beverage alcohol as a little bit better sense of what changes in mobility may mean with respect to channel implications and consumer end demand.
So maybe just comment on that and then I'll follow up on the on the cash from capital deployment. Thanks.
Net the doozy, okay. So the.
Look I do in terms of how we think about planning for the future of things like that I wouldn't I mean.
I know the brand expense variation between the first half from the second half seems very very covert driven and it certainly was in Q1, but we're not really changing our mentality here over the medium or long term is the Jane said, having marina.
Operating expense grow in line with sales as a pretty fair.
Way to think about it and so on.
Even though as I say, the first half hasn't been that way that is the sort of.
The near term medium and long term direction that we you know that we look at.
As far as you know.
Different and the one thing of the planning World that we'll see how the the next 12 months go is what does the recession look like I feel I think we feel pretty good about the United States and sort of the bigger markets in Europe.
But for some of the emerging markets of the World I think are still there going to be slower coming out of the us and so how do we reallocate resources to make sure we're keeping the U.S. vibrant the UK, Germany is of the world.
Without walking away from the emerging markets, but we're certainly not going to be investing at the same levels and some of those the continued to struggle.
In a recessionary environment and I.
Not that I'm, an economist, but if you you certainly the the economists that are out there are predicting a pretty rough return from places like India and Africa and pieces of South America places like that global travel retail than the other one that is likely to be on a per.
Pretty subdued.
The trends now for you know for years.
Got it that's all fair Jane did you want to make a comment as well.
Yeah, I mean, I could add just the couple of things onto the what low the Ikea.
Yeah.
The reallocation.
Has been something we've been focusing on for a while in terms of.
To be more effective in our spend.
And so the.
The the cobot impairments really accelerate at that so I don't know the well go back to the plan a bunch of.
Uh huh.
A more expensive spend.
Spending on premise, yes, we'll have people there I don't know because you said post cobot mechanism of Crystal ball. So I wish I had the actually thank behaviors and what they might look like after that.
But I think our focus will continue to be on reaching as many consumers. So we can in our messaging and continued with new creative and this new advertising agency.
But outside of my take 1.2, I want to make sure I haven't really talked about this.
Alluded to it in the risk that force.
The shutdowns in Europe, and lock down from Europe.
And the in late October so really didnt affect our result of mentioned in my script that we did see a slowdown in November.
He is going to be a tough this quarter.
And it was going to be any half going to be our toughest quarter.
Of the top line and then the the leveraging because we are spending during the day Wendy during the in the period and the and then.
Then we should swing back.
Order as we go against easy comps.
The top line and then.
The the less spending there so that's kind of a lot of tactical but I wanted to make sure of that.
I explained that summer of this conversation [laughter] I appreciate the color quick quick follow up and then I'll pass it on.
Cash is growing on the balance sheet, you don't have any debt coming due.
How are you thinking about return of capital above and beyond the normal dividend the share. The stock is still near all time highs. The company does have a history of paying special dividends per share.
The optically is.
The thinking you're going to sort of remain prudent here as long as the guidance is off the table or do the return to share buybacks and potentially consider a special dividend given where the balance sheet is and then what the cash balances and I'll pass it on thanks.
Yes, so I mean, what we were doing in the net cash position. It is up a bit this year versus last year. It's really all the uncertainty we did that purposely we do have the proceeds from the sale of the Canadian Mist early times of there we're not planning as we always do as I mentioned earlier, we want to fund our business person.
Foremost nothing's changed we mentioned to day 125 million dollar investment more than.
The just was approved by our board of directors the spin.
To expand our book and making capacity in Kentucky of that is something that were done.
Our dividend this went up but we do not have any plans for this fiscal years.
There's too much uncertainty and volatility.
Got lots of things coming of knows what we're cautiously optimistic the careful go away. The tariffs go the other way in June.
Having the cash on hand is pretty important to us and we just really don't know whats happening so.
Yes that was purposeful what you're seeing on our balance sheet and really the mix of how we're doing this between our short term debt.
And cash.
So that's the plan for this fiscal year.
Ladies and gentlemen, we've reached the end of the a lot of time for the Q1 day session are there any closing comments from management.
Well the just like the thank you at the end. Thank you lost and Jane It's all of the for joining US today from Brown Formans second quarter and first half of fiscal 2021 earnings call. If you have any additional questions. Please contact debt and with that we'd like to wish you all a safe and wonderful holiday season. Thank you.
Ladies and gentlemen, thank you for participating in today's conference call. The you may now disconnect.
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