Q3 2021 Brown-Forman Corp Earnings Call
Ladies and gentlemen, thank you for standing by and the welcome sort of bounds for men Corporation third quarter fiscal 'twenty 'twenty One earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during this session you will need the pets star one on your telephone please be advised that today's conference is being recorded it for you.
Any further assistance. Please press star Zero I would now like to hand, the conference you speak of today.
M Cunningham shareholder Relations Officer. Please go ahead ma'am.
Thank you and good morning, everyone I would like to thank each of you for joining us today for Brown Forman third quarter of fiscal 'twenty 'twenty One earnings call. Joining me today are Lawson, Whiting, President and Chief Executive Officer and <unk>.
Morale executive price, 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 the 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 undertakes no obligation to update any of these statements whether due to new information future events or otherwise.
This morning, we issued a press release containing our results for the third quarter of fiscal 'twenty 'twenty. One in addition to posting presentation materials net Lawson and Jane will walk through momentarily both of release and the presentation can be found on our website under the section titled investors events and presentations in the press release, we have listed a number.
Of risk factors that you should consider in conjunction with our forward looking statements.
Other significant risk factors are described in our form 10-K and form 10-Q reports filed with the Securities and Exchange Commission.
During this call we will discuss 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 Pres.
Dentation.
Before we transition directly to our third quarter of fiscal 'twenty 'twenty. One results. We have two very special guests with US today as you may recall on January 27th of this year, we announced a change in our board of directors Chair.
Here to speak about this upcoming transition, it's George Garvin Brown the force Com.
Current Brown Forman Board Chair and Campbell Brown Brown Forman Board member and incoming Board chair, both great Great grandson of the company's founder Garvin I would now like to turn the call over to you.
Thank you Leann.
And good morning, I'm delighted to join you today and the.
The 14 years that I've chaired our board.
This is just the second time speaking on one of these quarterly calls.
The first time was when the board and Paul Varga announced pulse succession plan in 2018.
When we welcomed loss from Whiting and as our next CEO.
Like then I'm here today to discuss succession planning.
To elaborate on the exciting news that the board and I announced on January 27th.
The intention to retire from the board this July.
And the board's intention to elect Campbell Brown as our next chair of the board of directors.
The fill of remember the fifth generation of the Brown family.
And a 27 year veteran of Brown Forman Corporation.
Knowing that the succession planning is among the most critical work any board can perform I thought it would be appropriate to discuss the news as we did for losses.
The board succession planning work is led principally by our governance and nominating committee chaired by our lead independent director, John The Cook Director Emeritus of Mckinsey and company.
The board and I have been working on what we call continuous long term succession planning since I joined Paul on the board in 2006.
And became chair in 2007, almost 14 years ago.
In the case of my own role I always felt that having Lawson whiting firmly in place as our CEO combined with our lead independent director in his role would be a good time to move on share succession planning.
As those two individuals learn so much stability to our governance system.
In parallel to this board work the company and the Brown family have been building out the system of Brown family shareholder engagement and governance for more than it doesn't years.
Building upon the work that the generation before US started in the 19 eighties 19 nineties and early two thousands.
Some of you may have heard me describe these efforts at the Investor conferences that we've held over the years in New York.
From the Board's point of view the governance work that the Brown family has done has allowed the board to interact with and know personally the company's long term shareholders.
As a result, the board has been able to understand the capacity capabilities.
And interest of family members with regards to potential roles in our governance system.
This interaction has been critical to enabling the board to make thorough and informed decisions on long term succession plans such as this one.
The press release, we issued pointed of Campbell's experience of Brown Forman.
His early years, hoping the globalization of our business in emerging markets.
His breadth of experience running regions and brands in our home market.
Leading relationships built with the U S distributor network.
And his leadership of the Renaissance of our founding brand old Forester.
The press release was more silent however, on Campbell's experience building our family governance system.
Since making his home in Louisville, Kentucky in 2001 Campbell has been a founding member <unk> leader in all of our family governance initiatives, coupled with leadership roles of he has taken on in Louisville.
In our community the board believes that this combination.
Of experiences with the company family and in the community make Campbell uncommonly well prepared.
Ready to take on this role.
The board also believes that having this sort of leader ready to partner with our CEO loss from Whiting.
And the board on its long term agenda is in fact another example.
Of how being a family controlled company is a competitive advantage for brown Forman in the marketplace.
And so in Campbell I have no doubt that youll find a brown friendly leader.
Who will continue to build upon and strengthen the scaffolding of relationships between the company the public.
And our long term family shareholders and industry partners.
That have made and will continue to make brown forman.
A high performing independent World Class brand building company headquartered in Louisville, Kentucky.
Worthy of your consideration is a perspective long term.
Westwood.
I do look forward to making some remarks at the annual stockholders meeting this summer.
But for now.
I'll hand, it over to Campbell.
Thank you Garvin and good morning.
First off I'd like to thank the board for the confidence it is placing in me as the next chair of our board of directors.
I first worked at Brown Forman in the summer of 1980 733 years ago.
The <unk> 19, and I was working in our mailroom.
Since then I've had the pleasure and honor to work alongside colleagues at the company of number of roles and regions based of different times in India.
The Philippines, Turkey, Maryland and of course here in Louisville, Kentucky.
As Garland mentioned in addition to the various operational roles I've been a part of over my 27 years here I've also enjoyed working with members of my family and other leaders with NBS on our evolving governance initiatives really since they were more formally kicked off for my fifth generation in the year 2000.
Yeah.
And so as you could well imagine I couldn't be more honored to take on this new responsibility for the company.
As we prepare to welcome our 151st year of operation.
As you would have heard us say before we believe the beverage alcohol brands and in particular, aged spirits whiskey brands performed well in the hands of multi generational stewards.
My own time, leading the Renaissance of our founding brand old Forester I've seen firsthand. The success that we can realize when we pull all of the value drivers of our industry together in the right way with the right people at the right time.
I can assure you that I view the responsibilities that our board has with the company the community and our shareholders in much the same way.
We understand our responsibilities to you our public partners in the same way, we do our brands, namely long term sustainable growth achieved responsibly over generational timelines.
I look forward to meeting you in due time, when we can all get together and convene again I certainly plan to attend future investor conferences, but for now I'll hand, it over the Lawson to walk us through the Q3 results.
Thank you Garvin and Campbell and good morning, everyone I hope the Garvin and Campbell's remarks of reminder of our long term perspective, and how we approach our business of.
I really do want to thank garvin for being an invaluable partner to me for 20 plus years I believe we have an outstanding board of directors of very committed set of shareholders that are supportive of the strategic direction of the company. So garvin. Thank you for everything you've done to set this company up for success.
Campbell I look forward of partnering with you in order to deliver many more years of continued growth.
So with that I'll talk now of a little bit more about our third quarter results. During this past quarter. We closed out Brown Forman is of 150th anniversary year and said goodbye to 2020.
And while calendar 'twenty 'twenty, one has not ended the pandemic can and certainly not reopened all of the bars and restaurants and nor is it enabled people to travel freely again, we have found ways to leverage our strengths and to find a way to deliver solid results in this challenging environment.
So as I turn to our third quarter and year to date fiscal 'twenty. One results I want to share my thoughts on why I believe we're operating from a position of strength.
As you can imagine many of the favorable trends that I talked about in our calls earlier this fiscal year remain relevant.
First spirits performance continues to be very strong and to take share from both wine and beer.
This category also offers attractive growth healthy margins and high returns on capital and we remain confident that we're in the right categories American Whiskey and Tequila continue to grow and take share.
And these two categories, which also include our RTD business represent the majority of our sales and profits and are driving our performance.
We also remain confident that we're focused on the right price segments Super premium brands continue to experience strong growth relative to the lower price segments, and we believe that Super premium price point, we will continue to grow very nicely even in the post pandemic period.
Another area of strength has really been our RTD business benefiting from the convenience trend. The RTD category has been exploding in many parts of the world.
We continue to see strong growth from our Jack Daniel's Spirit based our T D's in markets like Australia, and Germany, and while in its first year. We're pleased with the performance of our spirit based or Tds and the U S.
Our tequila based RTD, new mix, which crossed 8 million cases in Mexico. This year continues to deliver good results.
The strongest performance has come from our Jack Daniel's country cocktails here in the U S, which has more than doubled in size over the past year, we introduced Jack Daniel's country cocktails over 25 years ago and the brand has brought many new consumers into the Jack Daniels family.
And so with that ready to drink category booming. We felt the time was right to capitalize on this opportunity. So as we announced back in December we'll be partnering with Pabst Brewing company for the supply sales and distribution of Jack Daniel's country cocktails within the U S and domestic military.
This partnership provides tremendous growth potential for the brand with greater access to can production in variety pack capabilities, which are driving the industry.
Furthermore, with perhaps distribution network, Jack Daniel's country cocktails will gain much more efficient access to new distribution channels.
And with perhaps focused on Jack Daniel's country cocktails, our core domestic distributor partners can place even more focus on our premium and super premium spirits portfolio.
Jean will talk more about our brand and geography performance in greater detail here in a minute, but I did want to share a little bit on the performance of the Jack Daniel's family of brands.
Year to date, the Jack Daniel's family of brands underlying performance has remained strong we are benefiting from the convenience trend that I just mentioned, but also from increased interest in mix ability while mix ability has been a powerful part of our story for a long time, obviously with Jack and Coke, our Jack Daniel's flavors portfolio is now providing consumers with ease and making flavor for.
The yet simple cocktails.
Jack Daniels, Tennessee, Honey crossed 2 million cases in the third quarter with more than half of its volume outside of the United States and we're encouraged by the initial performance of Tennessee, Apple as we continue its global rollout.
With respect of J D T W, which is the core black label. This has been a tough year, but we believe any disruptions really are circumstantial and temporary one data point that I found interesting was the at least according to our WSI Jack Daniel's, Tennessee Whiskey is the second largest on premise brand in the entire spirits world by volume.
This business has obviously fallen off quite sharply in this environment, but we do see light at the end of the tunnel and we are all looking for to the reopening of the bars and restaurants around the world.
The last point, and then I'll hand, it over to Jane I'm cautiously optimistic that the U K and EU tariffs on American whiskey will be resolved, but it goes without saying the P. F has been hurt and unduly impacted by this trade war with Europe, a couple of points that I think you may find interesting the latest eurostat data shows that about 25 per cent of the entirety of the U K.
And EU tariffs leveled against the U S have been borne by the American Whiskey category and so based on IW of Saar. We know were about two thirds of the American whiskey category exports of the UK and EU. So do the math, we estimate that we alone so brown Forman Louisville, Kentucky based company has borne roughly 15% of the entire tariff bill.
<unk>, that's been leveled against the U S.
Its just a terrible situation and it's imperative that we get it resolved and get it resolved as soon as possible. So in summary, while uncertainty and volatility remain I'm confident that our well positioned portfolio. The resilience of our people and the agility of the company will enable us to continue moving forward from a position of strength with that I'll turn the call over to <unk>.
Jane who will walk us through our third quarter and year to date financial results.
Thank you Lawson and good morning, everyone. As Lawson said, we have experienced plenty of challenges this year that because of our people and our brands. We delivered solid results for the first nine months of fiscal 'twenty 'twenty, one with both underlying net sales and operating income up relative.
To the same period last year.
As expected in the third quarter, we experienced a slowdown in our top line growth, reflecting the lapping of objecting those Tennessee Apple launch in the U S.
The renewed lockdowns and restrictions, particularly across Europe related to COVID-19.
Also as planned.
Operating expense leverage in the first half began to reverse in the third quarter, reflecting a notable increase in our A&P investments behind our brands.
With that as the backdrop, let's begin by reviewing our year to date performance.
Starting with our top line.
Compared to the first nine months last year, our reported net sales were flat, reflecting a decrease in distributor inventory levels, primarily in the United States that were built in response to the supply chain uncertainty during the early days at the pandemic.
Adjusting for this factor our underlying net sales grew 2%.
As we look broadly across our geographic clusters, we experienced underlying net sales growth in each day.
Developed markets continued to grow while our emerging markets returned to growth.
However, underlying net sales in the travel retail channel.
Down significantly.
Starting with our U S business, which represents approximately half of our net self underlying net sales grew high single digits. Despite cycling last year's launch objecting of Tennessee, Apple, which slow growth approximately two points.
This strong growth was driven largely by several of our premium whiskey brands, notably the Woodford reserve family of brands old Forester, and gentleman, Jack as well as Jack Daniel's country of cocktails or Tequila is injecting of Tennessee Honey.
We continue to experience very strong growth in the off premise, which is more than offsetting the on premise volumetric weakness.
Additionally, while still a small percentage of our off premise south our portfolio's explosive growth in the E. Commerce channel has continued to expand at triple digit rates.
e-commerce for beverage alcohol with the fast growing trends pre COVID-19 and has significantly accelerated during COVID-19. We believe consumers have become comfortable purchasing products through this channel, which will enable continued strong channel growth and of pulse.
Covid environment.
We believe we are well positioned for the shift to E premise and are continuing to increase our investments and advance our efforts in this channel.
As Lawson mentioned, we believe our portfolio of mains, well positioned and growing categories and is meeting the consumers' need for at home consumption convenience ease of mixed ability and great tasting cocktail.
As evidenced by the performance of our Super premium portfolio premium inflation remains of trend as consumers continued to treat themselves to every day luxuries, such as Woodford reserve double oak and the old Forester craft series.
Our developed international markets experienced a slowdown of net sales trends in Q3, reflecting the restrictions and lockdowns in Europe during the important holiday selling season.
Despite these challenges as well as the clients throughout the fiscal year in countries that are heavily weighted towards terrorism and the on premise like check in Spain, our developed international markets collectively delivered strong underlying net sales growth up high single digits year today.
The key drivers of this growth have been the strong performance of our T D, particularly in Australia, and Germany, and the launch of Jack Daniel's, Tennessee Apple.
Based on off premise takeaway data in the major markets of Australia, the UK, Germany and France.
Each of our growing double digits and gaining value share relative the T D S.
Collectively our emerging markets underlying net sales returned to growth growing modestly in the year to date period, but the story is mixed.
The growth was driven by our new MX RTD business in Mexico, as well as gains in Brazil, Poland and China.
We continue to experience decline in a number of other emerging markets, including parts of Southeast Asia, India and several countries in Latin America.
Excluding our new mixed business, Mexico of is experiencing considerable decline looks like and evidence of consumer trade down.
Finally, our travel retail business remained under pressure.
Despite registering slight improvement in the third quarter driven by our military channel.
Our travel retail business has shown little improvement today.
With underlying net sales declining significantly.
Turning to our largest brand underlying net sales projecting of Tennessee whiskey remain down high single digits consistent with the results of our first half.
The brand's performance continues to be impacted by the shift from the on premise to the off premise consumption, including considering its overall concentration in the on premise.
The central halting of travel retail and the trading down experienced in many emerging markets importantly, based on the brand's key consumer metrics. We believe Jack gain of remains healthy and is gaining share in the majority of its top 10 markets.
Now turning to our gross margin, which declined 280 basis points today and resulted in our underlying gross profit declining 1%.
Higher input costs related to agave and wood as well as a reduction in fixed cost absorption due to lower Jack Daniel's, Tennessee whiskey volumes represented nearly three quarters of our gross margin decline.
Channel and portfolio of ships basically zero the remainder of the gross margin drop.
Moving to brand expense.
As discussed last quarter, we began to increase our investments most notably behind our new Jack Daniels make it count Global campaign that launched in October.
These investments continued throughout the third quarter.
And while A&P is still down year to date, our investments grew double digits for the quarter.
Our underlying SG&A investment remained down year to date, reflecting the continuation of tight management of discretionary spending including travel and hiring.
In the aggregate we grew underlying operating income, 3% year to date and reported even stronger.
This can bandwidth of reduction in our effective tax rate help power the 12% diluted EPS growth to $1 63 per share through the first nine months of the fiscal year.
And finally to our fiscal 2021 outlook as.
As we look ahead, we continue to believe we are operating from a position of strength.
Despite the high level of uncertainty that exists, particularly around the rollout of that the COVID-19 vaccine and the eventual easing of restrictions and the government financial stimulus policies and a number of countries and the potential effect on the global economy and consumer spending.
As a result of this uncertainty and low visibility of the timing of recovery in various markets and channels, we are not providing quantitative guidance for fiscal 2021.
However, we are optimistic as we look to our fourth quarter, where we begin to cycle of the initial impact of COVID-19.
And are seeing improving levels of consumer confidence in many markets around the world.
Beyond this fiscal year, we expect the challenging operating environment to continue to improve particularly as the on premise and countries heavily reliant on tourism began to recover.
From a qualitative perspective, while we expect continued volatility in our developed markets. We remain confident in the resilience and strong growth that these markets have collected flea exhibits it to remain for the for year.
We do not expect certain developed markets like Spain, and check year, many of our emerging markets. The travel retail channel are our used barrel sales to recover this fiscal year.
Our gross margin will remain down for the year, driven by higher input costs and mix shifts.
Looking beyond this year into the next couple of years, we are expecting margins to improve nicely driven by a number of productivity related initiatives underway and the benefit of lower agave cost regarding operating investments advertising and SG&A, we expect to continue to invest.
The hind our brands, resulting in a significant acceleration most notably in advertising in the fourth quarter as we invest behind areas, where the business is showing strong momentum.
Coupled with cycling against last year's significant decline in spend during the early weeks of COVID-19.
Our full year effective tax rate outlook is unchanged at 17% to 19%.
Our balance sheet remains strong and our continued capacity to generate strong operating cash flows is sound.
System with our long held capital allocation philosophy, we continue to invest behind our business fully pay increasing dividends and look for opportunities to acquire great brands, such as part time Rangers RTD.
In summary, while the past year has been like no. Other presented many challenges. We believe our results today are strong and reflective of our ability to leverage our strength in this environment.
We are optimistic as we look ahead beyond this fiscal year, what we expect our medium term growth rates to accelerate toward our long term expirations.
With that this concludes our prepared remarks, Boston I will now take your questions. Operator, you may open the line.
Thank you as a reminder to ask a question you will need the tough star one on your telephone so let's try your question pets. The pankey. Please standby, while we compare of the candy of us there.
And our first question comes from debt in Asia with Cowen. Your line is now open.
Hi, Thanks, so much.
The citizens.
Campbell on the line Campbell I'd love to pose the question to you <unk>.
The inclusion has become very topical and on consumer packaged goods. So I'd love to hear your perspective on how you can bring stewardship.
In that area.
In your role as chairman of the board.
Hi, Vivien.
Campbell is not live on the liner he has stepped away, but I'll take a shot at your answer.
Yes, I mean the.
For the DNI efforts that have been going on of Brown Forman, partially for a decade or longer really.
I think of served us very well over the last year.
<unk>, obviously been a very very difficult year on that front.
But the fact that we were.
Personally feel we were better prepared than many many others.
As you know has helped us and so.
Looking ahead.
Thats something Campbell is very involved in the community of thank you.
He referenced that a little bit.
And mobile has been of flash point for many of.
Of the challenges that are happening not only here, but across the U S. So so yes, I mean I think they will remain very important for us. We're certainly not backing down are backing away from any of those efforts.
It takes up a lot of time on all of our management team, we're really trying to do it the right way and we keep saying be better do better.
And we will continue on that front and I might add one point to what losses.
I think the board believes in it so much and I think that's one of the things you were getting serious well debt heart, you'll see this in this year's proxy.
The part of the executive leadership.
It will be tied to.
DNR and the progress we make in that space, which of course is a component of the BSG.
So I think that's important.
Signal.
From our board to that important.
Terms of our incentive day here at the top of the company, which.
Well of course.
Make its way down throughout the organization and he is making its way down through the organization as time goes on.
Absolutely that's really helpful color. Thank you, both Lachlan and James if I could just squeeze in a follow up James you noted.
The longer term glide path to the margin recovery switch you sounded pretty high conviction.
Around can you just kind of remind us I know you don't want to put targets on this but maybe just from a net Bobby.
Timing perspective, when we might start cycling.
The headwinds there.
Sure Yes.
Again, just a reminder of the one we were on our second quarter call, We said and I'm one of the reiterated that where we were in our second quarter, the margins, which will have 59%. We said that's the ball.
All of them from here on it's going up from there and I think yourself from improvement in our third quarter, we were down 150 basis points from last year. So you did see some improvement.
Yeah.
As it relates to the Earth.
<unk> of the question, Yes, we do have a number of initiatives underway as I alluded to it will improve our margins over the next few years debt.
It relates to the godly along we've been pretty consistent on this.
This response.
As we look at the CRT plantings back in 15 and 16, we can see the acceleration in an implanting center occurred that will then become available in the back half of net.
Next year, maybe a little bit earlier next year being our fiscal 2022 for later this calendar year I think it may actually happened a little earlier, because we've seen some stability in the agave prices, but more importantly, one thing we've not talked about before as it relates to the Gaba and why we're confident we'll start seeing benefits in our F. 'twenty two.
And the market price is the a few years ago, we changed our strategy of how much of a point to cultivate ourselves how much we were going to own how much we're going to be exposed to on the market and so we have starting next year of higher mix of our business that will be cultivating from the agave plants coming through our own business, which.
Much of the bus and what the Gabon in the market and so we will start seeing that benefit next year. We believe we will continue to see benefits from the exposure of both of the external market into our own internal mix of our product next year, following a year and a little bit more of the following director of that.
Hope that answers your question.
Really helpful. Thanks, so much.
Thank you. Our next question comes from Bryan Spillane with Bank of America. Your line is now open.
Hey, good morning, everyone.
Just a couple of questions first of all just a quick one first Jane I don't know if I caught this but capital spending did you give the capex outlook for for fiscal after the for the full year.
Yes.
Many of them this is going to be somewhere in the 70 million type of range for this year.
Hey.
Thank you and then and then I guess more just just kind of thinking about modeling out the future of not even specifically to the 22, but just medium term.
How should we think about the U S and developed international year to date.
Our boat.
Both grown a couple of hundred basis points faster than what the run rate was for the last few years. So.
They are actually.
In this period growing faster and obviously.
The the developing markets in the travel retail growing slower I guess my question is this where we're kind of thinking about getting back to.
Brown Forman medium term and long term growth rate or the developed international and U S markets would you expect them to accelerate off of this so has there been some structural change with regard to like the growth of ready to drink market share gains.
It would could those could those markets specifically grow faster than they had pre COVID-19 or are we really looking at those kind of reverting back maybe to the mi and getting the.
Kind of the growth back and emerging in travel retail just trying to understand.
Kind of the moving parts within that and again not necessarily thinking about it for 'twenty, one, but just over the medium term just how should we should think about those pieces.
Yeah, Brian Let me take I'll take a stab at it.
If you backup pre Covid times.
The U S business was growing sort of around Tds and we've that's been of golf for us for a long time and Thats sort of the net four 5% range developed international maybe a point or two higher than that in our emerging markets, which are like everyone else have been more volatile, but had been several points above that in the prior few years.
Come come fiscal 'twenty, one as we said with the U S business has picked up the the Mark we essentially we did a bit of a study of <unk>.
Which markets you can see which markets are growing really nicely. This year of new Azure, Australia, Ism, Germany's and even in the U S and some of these really big markets that have done really really well.
Influenced somewhat by what Jane said in her earlier comments of the stimulus and the markets that had fiscal stimulus from their governments have done remarkably well and that's been a big benefit of that and those that didn't so southeast Asia and India is in Africa as interest generally there are a lot of the emerging markets didn't and they fell off quite a bit.
Net.
Now looking into the future of little bit is the algorithm change a little bit.
Hi.
I think our portfolio is well positioned and I think it's important that say the Woodford is of the world of narrowed heroes of the war and brands like that that are in very hot categories of just simply gotten bigger and so.
That will have a more impactful.
The impact on our results going forward, so that helps a little bit I do think and then the RTD business has been on fire no. It's not kind of stay at the rates, but it is right now of country caucus doubled so.
That's going to slow down a little bit, but I think it'll be picked up by the emerging markets, which we expect I mean, the comps for the next couple of at least for the next year.
We're going to be easy. So we expect some better growth out of there. So I do think there'll be a bit of a reversion to the mean, but longer term I think we've got our portfolio well positioned to to do maybe a point or two better than we've done historically, we will see.
Okay, great. Thanks, that's really helpful.
Thank you and our next question comes from Andrea Teixeira with Jpmorgan. Your line is now open.
Hi, Good morning, Thank you and congrats on the succession announcements I appreciate the commentary on the import tariffs and I know it is the topic that you'd like to discuss so could you update us on the thoughts there.
How it would flow from the commentary that you gave the last quarter.
And for the bottom line, our part of it will be reinvested back on advertisement and promotion as the industry recovers in Europe, and then as a follow up on the agave costs and I. Appreciate the commentary. So your main competitor increased prices, particularly in the U S. Right are you planning to follow them and pricing.
<unk> or the integration of the I got the plantation that of discuss.
And of course with a sad that appreciate so.
Yes, just a quick response on the agave.
We've increased the our price it really significant under all three of our brands in the U S. Pepe Lopez, which is our value price per annum, but the two main brands that are are the came from our acquisition back in 2007 era, Dara and elohim into of what double digits from pricing and we did that earlier this year.
So that's already in our numbers then I think that it was actually.
One of the milk from report I read recently, we were at the top of the list in terms of pricing there.
As it relates to the tariff from I turn it over to Austin to answer that question. Yeah. I mean, thank you mentioned I'd like to talk about tariffs.
I hate talking about there.
They are they have becomes such a big problem for us, but look I mean, I think we're encouraged over the last few months of some of the conversations that have happened, particularly some comments coming out of the European trade people and we need to get the U S trade representative in her and her seat, which I think is expected to happen.
And the next few weeks.
To really get meaningful conversations happening again, but it does feel like there's a little bit of breaking the ice.
Between the two sides.
<unk>.
We are working.
Hard as we can to try to effect that and to try to make it go to make them go away now in terms of what happens when they actually go away, we really have not.
Made that decision yet.
Mostly I mean, I think you would probably expect kind of a typical brown forman thing.
We'll be reinvesting a pretty nice chunk of debt back into back into the business, but some of it would fall of the bottom line too.
But as I say we.
We haven't put a specific number out there yet and I think thats a bit of TBD.
Okay. Thank you so much I wish the best on that one.
Thank you.
Thank you. Our next question comes from the Lauren Lieberman with Barclays. Your line is now open.
Great. Thank you.
Wanted to just follow up on the conversation on the Tequila and maybe the relative pricing that you took will help answer the question but.
My understanding is that some of the other large established brands in the U S.
Really really strong growth.
Year to date with comparable Carrington the last nine line.
And which would make it look like herradura might actually be not keeping up and not gaining share for.
For the.
Weakness relative weakness in the killers really coming out of ex U.
<unk> is coming out of Mexico. So I was just kind of hoping for more clarity on what's going on with the tequila business. It.
It should be.
<unk> been discussing a huge opportunity for growth in the U S and also in <unk>.
Lot of developed markets across the world.
Let me take a stab at the beginning of men.
Jay has got some thoughts too, but the step back for a second explain our tequila business relative to some of our competitors.
The first big thing, especially if youre looking at our earnings release and Youre looking at the revenue number.
In the exhibit and it's pretty underwhelming.
A lot of that is because we have a very big business in Mexico itself.
The competitive brands that you are looking at for the most part do not they don't even exist of Mexico. So we have been dragged down.
Our global number has been dragged down by.
From the Mexican market, where as I say, where large not only in the the kilos, but even Jack Daniels is a pretty substantial business down there and it's been very weak one of the emerging markets that has struggled so but our U S business turning to that for a second.
Okay.
<unk> is the.
As our ultra premium brand that competes with some of our the large competitors who had admittedly fantastic results.
And what we've seen too.
So two things on that <unk> of one has a very heavy on premise presence somewhere 40 plus percent of its businesses in the on premise and that has been tough.
Which would also be a drag on the overall number but our Nielsen numbers I just thought.
Recently, the ones that came out I think it for the last few days.
Of plus 64% of Nielsen so.
While that would lag some of the bigger competitors not by a lot. So I feel really good about <unk> positioning it's got a long runway to go it's still not.
It doesn't even have distribution in large chunks of the United States and so.
We will continue to invest behind that and we will continue to push pretty hard.
Think of that as one of the brands that we really see is sort of the.
One of the gems of the future okay.
Building on what losses for supporting what he said.
Our Mexico business is a fairly sizable business.
Fortunately the shares Cup, we've seen a lot of trading down in that market, particularly on the Aratana of brand. The Altra brand that was moving so fast.
Rapidly.
For now and then shifted so much debt if you want the split or numbers of park, which you saw on the table.
The Mexico business is down 30 ish percent on the strip net sales basis. If you look at our U S business is up.
Almost 20% on the strip net sales basis. So that's why you also fine.
There's lots of said the underwhelming numbers and it's gotten such that now are you at the business is going this.
As for pressing the path of the Mexico business.
The bode well for the future as debt.
This type of growth and with sales growth seminar.
Eric.
Well as lost throughout.
Throughout the numbers from the latest Nielsen relative to the price point.
The era of place than it is.
Is gaining share that price point categories growing around 40%. So it is what you see the real acceleration in the.
The tequila growth is above that price point more of the ultra price point and so we're going to be playing.
Some things there too we've got a wonderful brand that we've launched recently from Aratana Earth, Aaron Deer legend, it's very ultra ultra premium but.
But we think it's got lots of legs and people are again indulging in these everyday luxury.
And the Altera is of a product that we introduced in Mexico, a few years ago barely introduce it in the U S.
Again these are higher price point, that's where you see the real accelerated growth and we've got a new campaign that we're launching in April.
And we're really excited about that from energy BBB. So there are some things debt.
We're looking at as we go ahead to continue the accelerated the both the bulk of our brands are doing well.
Well in the U S.
And the price points they plan.
Okay. That's great. Thank you for so much.
Thanks Lauren.
Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. Your line is now open okay. Thank you hi, everyone.
I actually wanted to ask about the AD spend Jane you just touched on this.
But as I look at it in the quarter. It was up a bit more than I was expecting and really a pretty big jump as a percentage of sales so I guess I'm.
I'm wondering if that was maybe a pull forward from your Q4 or should we assume similar spending levels for the remainder of this fiscal year and then you know maybe as we look forward how should we think about your AD spending levels and the anticipated impact on your top line, especially.
The in the context.
You know of what you mentioned earlier lots of about you know your your long term growth expectations, I guess I'm trying to get a sense of your confidence level that youre spending the rights.
Levels in terms of AD.
And to drive top line and possibly accelerate it. Thank you.
Let me start off I'm sure losses.
Sales in here as well, but.
<unk>.
We knew this year was kind of be a crazy looking here on phasing and just to remind you actually started last year in the fourth quarter.
In the last six weeks of the of fiscal year. So when Covid hit in the Middle of March <unk> of April when we shut down.
Most of our shut down the bin sponsorships all of those things went away.
We knew early on so our first quarter was an unusual quarter, we really didn't start spending.
And so the second quarter and that was purposeful not only because of the consumer and its readiness for here what we've worked for Ann but also because we had of new.
Agency partner, <unk>, which we launched our make it count campaign towards the end of October So what youre seeing in the third quarter, we had been talking about all year long for some of them.
The situation on the circumstantial relative to what's going on in Covid. Some of it is because we planned it this way, but as you look to the balance of the year I think I said this in our remarks, we look to the fourth quarter Youre going to continue to stay in the acceleration in the rate of.
Growth so our year over year rate of growth because of the decline last year plus just the why we spent this year is going to be up even more on a percentage basis than it was in the third quarter.
If youre thinking of head.
How you should expect the spin it can be choppy next year, because you're going to get the flip of that but let's just talk big picture.
If I'm thinking about debt our expirations have been always come in every year like that.
The somewhere in line with the rate of growth.
You may of credit sales growth yeah, the alright.
Another thing within the mix of spend I think is interesting too because of their.
There have been some massive swings there.
Backup for a second go back like two or three year, probably two years ago.
Well before Covid, even came around we were making changes to our resource allocation models to significantly update media and just general consumer touch spend and downplay some of the events place.
Places that were lower touch even on premise things like that and.
And so that had begun the mix of spend change had begun before COVID-19 hit than it hits.
Everyone, including Brown for them with the entire industry drops the on premise of spend drops the event spending drops lots of that kind of stuff and start going back at media again, so in a way it has accelerated our path to get there.
And another way, which is true.
From the process moving from the oldest until a few months ago, because we were looking at share of voice and share of different ways of spending basically everybody is doing that and so the media spend has increased significantly in our industry, but it's still the right thing to do and I think longer term we like the.
For the rebalance of how we're spending the money and I think that will.
We're going to hold onto that for for the.
The at least the medium to longer term future just the build further on what Lawson said too.
It's not just your traditional media we look at what we've spent this year. We spent a lot more digital one of 100% year to date and digital.
Media spend and that is.
Cognizant of where the consumer is and where they are watching.
Whatever theyre getting are the.
Mobile is the device they happened our hand in how they.
I'm getting the information so I don't think debt, you'll see a lot of changes that we've got to meet the consumer where they are going forward.
Okay that all makes sense and and really helpful.
If I may just ask a second question because I really wanted to ask also about the.
For the productivity initiatives, you mentioned and you know.
I might have missed this but have you guys quantified what the savings could be I guess I'm really trying to understand how meaningful these initiatives could be in and maybe hoping to get I guess some sense from you of of you know.
Samples of our opportunities that you see I think you touched on the agave, but is there are there any other buckets that we should be mindful of in the next two years, that's the big.
He is a great one of our examples of where we change our sourcing strategy on that so that absolutely will benefit of.
Another example of.
Of an initial initiatives we've undertaken is really looking at our how we source.
Yeah, how many vendors you need to sort of share of gift or Europe or things like that so more strategic sourcing.
And getting synergies there. So there is some low hanging fruit in that area for always looking at and the part of our global production's mindset for we're always looking at.
How to improve our operations instead of a Thursday, a handful of initiatives there.
I didn't quantify those we haven't quantified it but I can tell you the.
Again, just the supporting what we said that 50, 959% in our second quarter was the bottom you're going to expect to see nice improvements over the coming two to three years.
Set aside tariffs and that will just add to this.
Benefit.
You could see.
A couple of hundred 300 basis points over that period of time.
True.
Perfect. Thank you again.
Thank you. Our next question comes from Steve Powers with Deutsche Bank. Your line is now open.
Hey, Thanks, good morning, everybody.
Great I think you've covered all of it.
The well, but could you also remind us on how to think about the progression of wood costs and they'll likely impact on gross margins over the next several quarters.
And then Lawson.
You mentioned this a bit too already but I guess, you elaborated elaborate a bit further around.
Just your outlook and expectations with respect to ready to drink cocktails.
And maybe specifically update us on.
How do you anticipate mix impacts.
Flowing through the P&L assuming.
The category is set to continue to grow, especially in the context of developments like like the Pops relationship.
The highlighted about the open thanks.
Let me start with yeah.
So we have started to see.
We are taking.
The reduction I guess, if you will and the cost of acquiring would for youre going to start to see we are in the.
And our first of January 1st of this year.
The cost of wood for us is going down that will not make its way through our P&L I think I've talked about this previously because of our long.
18 process that we have for thinking about our our Jack Daniel's product our own force of products Woodford Reserve three of four five years, depending on what it is down the road before you actually see those lower costs coming through you'll start the probably start seeing some mix.
This coming through on our balance sheet of weakness of the ear come on where youll start to see debt costs offsetting some of the volumetric trends, which.
If you look at our balance sheet over the last several years, you'll have seen bear with me go up quite a bit but that's been the combination of this cost of this wood cost that's coming through our P&L now that we've been talking about last year of this year. So you really aren't going to start seeing that savings.
Until after 2025 of <unk>.
The 26 2027.
Yes.
The RTD.
Question, I mean I think.
Obviously it has been much covered the business has exploded in the United States over the last year and in a number of other countries too it's always been a consumer of recruitment vehicle and Thats the way we.
Thought about it I would say even for a couple of decades, as we built that brand and sort of the cana in the hand, and all of that it has now grown into much more than that and to be up.
Certainly of profit driver.
The country cocktails.
Partnership, let's call it that with perhaps now we do expect to continue to keep that growth rate going for lots of reasons of the most obvious one being they have.
Touch points and many channels, including convenience that we just weren't getting with the spirit the wholesalers for the most part and so the number of the distribution points will go up substantially and so we think we can keep that run going.
But the RTD business is much more much much larger outside of the U S than it is inside the sort of like three five times.
And in the international markets that is in the us from that that's a lot of Germany for instance, Germany business is well over 1 million cases, now and very very profitable and doing very very well Australia is as has been the largest of.
Our television market in the world.
Well one of the largest in the world for <unk>.
Quite some time and that business is really strong. So so yes, I think that's here to stay I do think it has been boosted by Covid.
The macro trends of convenience and flavor fit very well into the RTD business and so.
This is something that's here to stay and we'll just.
It's hard to see what the growth rates are going to be when you get the on Covid, but we certainly expect them to the stool of just will be strong.
Oh and you asked thank you for the both margin.
Yes, it did.
I forget the exact reason.
And for US this year has been very.
Yes.
And material I went back a couple of tenths of a point as it relates to the.
Our T&D business some of that was outsized in the first quarter because of our new mix business, which benefited from the beer shutdowns.
And I think we've said this on the first quarter call second quarter call as well that we.
We're fine with that right now of a 10th or two.
Typically in this environment.
We want to be where the consumer is we also noted it's something we've talked about many many times in the past the credit over but if you actually put this on the drink of equivalent basis, that's been more.
Hum of better margins than <unk>.
On a full strength.
Different ways to look at it but right now it's all about meeting the consumer needs the convenience providing them with great tasting cost sales I think the opportunity exists going forward, but I don't see it as a big margin drag and it hasnt been year to day really either.
Okay that was very full answer thanks, so much.
Yeah.
Thank you. Our next question comes from Chris pitcher with Redburn. Your line is now open.
Yes.
Thanks, very much a couple of questions. Please.
Especially on your your international reach the market could.
Could you talk about about the rest of develops.
Countries, which make the cut to.
The reported separately because several of US here I've been a big drag on credit can you give us update of what's going on in Japan, and Canada and by the.
You expect to see of recovery in those markets and then secondly on sort of.
Innovation and digital investments it looks like the sort of the.
The innovation cycle is accelerating.
Particularly with all of the new categories for the repairing.
Are you investing in terms of digital in terms of supporting these trends early and is your supply chain.
Becoming more agile to respond quicker than perhaps the old sort of three to five year cycle that you will running.
Particularly when it comes of Cellulite, Daniel flightless insightful. Thanks.
You want me to take the so the other developed markets that you were referring to I think you said, Japan and Canada and.
Yes sales.
But Japan, specifically, but I mean, a lot of the other developed markets have been weaker those are what we call partner markets.
They tend to be there's lots of them and they are the relatively small.
And a lot of those as you move for the East and Europe would capture a lot of those markets and the.
That business has been relatively weak because I mentioned those of the markets that don't have the big fiscal stimulus.
And they have been more challenging and so.
Yes, I mean without getting into any specific markets I mean, theres literally probably more than 10 less in 'twenty and there the make up those numbers. So I mean, thats a whole bunch of whole bunch of them, Yeah, I would say.
We actually are seeing growth in the <unk> notice of Japan, and Canada, I think it's being pulled down as you cannot know Bob places that are heavily on premise flex.
Southern Europe in general.
So hot tourism flight this check some of the type of markets and so that's what we're talking about we do expect.
EBIT next year, that's why we're more optimistic about those markets. When we look ahead.
I'm going to come back and they're going to be gone against nothing.
They're going to be very positive for us as we look ahead.
So that's on your interest.
The rest.
The rest of the developed question.
The innovation question can you say that again.
Look the question was I guess.
The alcohol categories.
Youre getting category shifts moving a lot quicker with the type of price of hard seltzer.
We're talking about.
Ready to start sales of suddenly increase that are important.
But the gap between Hyundai and far far enough of it shortly.
Do you get the sense that you are having to innovate quicker as an organization, but historically you've tended to do beg well considered innovations that you having to come faster do you have the.
The systems and digital.
Moving to.
All of these consumer trends early in responding to the innovation faster than you did say 12 months ago.
Yes, I mean look it is very true.
<unk> I mean thats across all CPG, I think just becoming increasingly important with respect to our Tds and the.
The referenced a little bit the seltzer, there I know the RTD category for as long as we've been in it has been.
Heavily reliant on innovation, Australia would be the.
The Best example of that every year, they come up with something new and different pack sizes improves the flavors of mixed with all of the rest of it and so we've been doing that for quite a long time and debt that will continue so the RTD space in terms of do we have the know how do we have the supply chain do we have the abilities to sort of forecast where the.
Consumer is going in that space I would write offs on debt.
As far as you referenced fire and Apple and hunting that pace is not changing I mean, we've been.
We've done three in 10 years, and really just obviously started apple a year ago or loans.
One of them more so.
That pace will not change.
So I would not expect us to do another big Jack Daniel's flavor.
In the near future at least we want to be very measured on that the big campaigns that are big launches.
They take a couple of years to execute and so don't expect that the would not expect that the pace on that will be any different than it's been.
Thank you.
Yes.
Thank you. This concludes the question and answer session I would now like to turn the call back over to the M. Cunningham for closing remarks.
Thank you. Thank you Garvin Campbell Lawson and Jane and to all of you for joining us today for Brown <unk> third quarter of fiscal 2021 earnings call. If you have any additional questions. Please contact us with that this concludes our call. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yes.
Yes.
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