Q1 2022 Brown-Forman Corp Earnings Call
[music].
Hello, Thank you for standing by and welcome to the Brown Forman Corporation first quarter fiscal 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your.
Your telephone please be advised that today's conference is being recorded.
Any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today see apparel director of Investor Relations. Please go ahead.
Yeah.
Thank you and good morning, everyone I would like to thank each of you for joining us today for Brown <unk> first quarter fiscal 2022 earnings call.
Joining me today are Lawson, Whiting, President and Chief Executive Officer, and Leigh Ann Cunningham, Senior Vice President and Chief Financial Officer.
This morning's conference call contains forward looking statements based on our current expectations numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements.
Many of the factors that will determine future results are beyond the company's ability to control or predict you should not place undue reliance on any forward looking statements and 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 first quarter fiscal year 2022. In addition to posting presentation materials that Lawson and Leann will walk through momentarily.
The release and the presentation can be found on our website under the section titled investors events and presentations.
In the press release, we have listed a number of the risk factors 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 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.
Well, thank you Sue and good morning, everyone I'm pleased to share our first quarter results with you as we delivered another quarter of solid growth as.
As we've seen for many months now the pandemic has created ups and downs and twists and turns that have produced a lot of volatility a lot of uncertainty and even changes in our seasonality is.
As we indicated on our last conference call in this quarter, we benefited from the reopening of the on premise channel the return of tourism and the lapping of softer comparisons during the early months of the pandemic.
Once again I do want to extend my appreciation to the 4700 Brown Forman employees that delivered the results that we will review with you today, they're actively engaged in building an environment, where we can bring our best selves to work, which enables us to maximize our collective and individual potential and increase our productivity, our creativity and our innovation.
So above all I would like to say thank you to the people of Brown Forman. The last 18 months have been an exercise in endurance new have demonstrated nothing with excellence you are our greatest asset.
Now, let's turn our attention to the headlines of our first quarter, most notably our continued momentum on the top line growth with very broad geographical growth. The overall health of our brand portfolio with many brands contributing to solid organic growth. We really don't have a tail anymore that would be a drag on our growth rate and unfortunately, we continue.
See pressure on our gross margin.
I'll start with the top line, where our overall underlying performance was a plus 18% when factoring in the 3% underlying top line growth. We achieved in Q1 of fiscal 'twenty, one or two year average growth rate, which we calculated by adding the growth in the first quarter of 2021 with a growth rate this quarter and then divide by two but it was nearly 11%.
Gains this quarter were driven by Jack Daniel's, Tennessee Whiskey, returning to growth with underlying net sales of plus 21% or 6% on a two year average basis as we shared with you last fiscal year J D. Tw was negatively affected by the restrictions and closures in the on premise due to its huge presence in this channel when compared to other spirits brands. So long.
Last fiscal year was a tough year for J D tw, but as we shared with you. We believe that the disruptions were circumstantial and temporary the first quarter performance in fiscal 'twenty to reaffirm that belief is the sales growth was strong also earlier. This week. We were excited we announced the launch of Jack Daniel's 10 year old, Tennessee Whiskey, the distilleries first age state.
Good whiskey in more than 100 years, it's already getting some really rave reviews, but I mentioned that just because it is one example of our continued focus on brand innovation and a celebration both of our world class whiskey, making expertise and the brands really storied history. The rest of the Jack Daniel's family also delivered solid results led by double digit underlying net sales.
Kris from the Jack Daniel's flavors and Jack Daniels RTD has continued to grow on top of extremely high comparisons and on a two year average basis, we've delivered 20% an increase in underlying net sales growth as consumers continue to look for convenient ways to enjoy mixed cocktails and spirits based beverages at home in.
In addition to Jack the rest of our brand portfolio remains well positioned to continue to benefit from the growth in the American whiskey and tequila categories as well as the premium amortization trend.
Our premium Bourbons grew underlying net sales, 36% in the first quarter led by Woodford Reserve and old Forester, and our tequila portfolio produced 23% underlying net sales growth with our full strength to cuellar growing underlying net sales by nearly 50%, which more than offset a decline in new mix. So the brand lap the exceptional growth in the first quarter of <unk>.
2021, driven by the temporary interruption in Mexico's beer supply chain.
Given the strength of our brands, we are able to focus on value growth and revenue growth management initiatives as a part of these initiatives. We recently increased prices in the U S. On Woodford reserve old Forester L Humidor, Herradura and shambaugh and we informed our distributor partners that we are increasing the price of Jack Daniels over the next few months. We also delivered broad based.
Growth across geographies the U S delivered another strong quarter with 16% underlying net sales growth. Our developed international markets also grew underlying net sales in the double digits and the reopening in the on premise channel as well as a rebound in tourism were substantial contributors to growth in aggregate. We also experienced strong growth in our emerging international markets.
<unk> as well as travel retail as we cycle the effect of easy comparisons and more markets returned to growth and recover from the pandemic. We continue to focus on delivering strong topline growth and have a solid start to our fiscal year.
Our underlying gross profit increased 17% for the quarter, just slightly behind our top line growth rate.
Having said that we've been facing some challenging cost headwinds for several years now and then you combine those headwinds with the impact of tariffs and it has resulted in a gross margin contraction in the first quarter gross margin was down 70 basis points year over year, but we believe the rate of decline is slowing as the on premise reopens and premium amortization trends continue.
We're seeing a reversal of the mix headwinds, we experienced last year related to channel size and portfolio.
With this positive price mix was more than offset by the continued cost pressures largely related to agave over the past couple of years, we have projected agave costs would begin to decline late in calendar 2021 or early calendar 'twenty two while the price of agave has stabilized below its peak demand for tequila has increased.
Given the continued growth in the U S and a faster than expected rebound in Mexico. So the relief in our gourmet costs will be lower than expected. This year also as noted in our June call. We are still experiencing many challenges in our supply chain. This is particularly true for key packaging materials, most notably glass and transportation constraints.
Such as shipping container availability Leann will talk more about this in just a few minutes before I move on from gross margins I'll share that we remain cautiously optimistic that the U S can reach a resolution on the underlying trade disputes with the U K and EU by the end of the year, which would result in the removal of tariffs on American whiskey, while we've been hopeful for.
Some time about this we believe there continues to be a reason for this optimism the EU and the U S have publicly stated their commitment to this timeline and Moreover, the UK is conducting a review of its retaliatory tariffs, which we hope will highlight that American whiskey bears a disproportionate share of this overall tariff burden in <unk>.
We had a strong start to the year and remain optimistic for continued improvement in the operating environment. Yet. We also acknowledge the potential for volatility due to the impacts of the evolving pandemic as well as the related impacts of the global supply chain imbalances in the last 18 months, our resilience and agility has been tested time in time.
Again and through it all we have persevered because our priorities have remained the same keeping our people and our business healthy. This will remain our focus and guide as we navigate future uncertainty. We continue to believe we will emerge stronger and better history has already told us that brown Forman is resilient in the face of adversity, our people respond brilliant.
Under pressure and our values will guide us to the right decisions. So with that I'll turn the call over to Leann, who will provide more detail on our first quarter of fiscal 'twenty two results.
Thank you Lawson and good morning, everyone as Arthur Ideate, our headlines for the quarter I will provide additional details on our business results and our outlook for fiscal 2022.
Starting with our top line compared to fiscal 2021, our reported net sales were up 20% for the quarter.
Additionally, we had strong double digit underlying top line growth, reflecting an increase in distributor inventory levels in the United States, partially offset by the sale of <unk> Canadian mist and Collingwood brands during the first quarter of fiscal 2021.
The increase in distributor inventory is due to the lapping of the reduction related to the build up in the early stages of the pandemic, which within our first quarter at fiscal 2021 as well as a build ahead of price increases Lockheed mentioned.
Though even with the increase in the quarter, we believe distributor inventory levels are still below their pre pandemic levels due to the various supply chain challenges.
From an underlying net sales growth perspective, we experienced broad based growth across all of our geographic clusters of the United States developed international markets and emerging markets as well as our travel retail channel.
The U S business, which represents half of our underlying net sales remained strong growing underlying net sales 16%.
Jack Daniel's, Tennessee Whiskey was the single largest contributor to growth followed by our premium Bourbon and tequila brands the.
The reopening of the on premise, which continues to approach pre pandemic levels as well as the Kentucky Derby is returned to the same spot on the first Saturday of ne field volume gains. In addition, net sales benefited from continued portfolio premium amortization mix and favorable channel and Suezmax.
And the off premise channel, we continued to experience solid growth compared to the same period of two years ago, even as the on premise continue to reopen.
The on premise recovery accelerated during the quarter as vaccination rates increased and restrictions are eased. We lived if you look at open table chance through mid August they are only slightly below their pre pandemic levels.
And the premise channel our market share, which is slightly above 2% has grown four times since the start of the pandemic.
Even as the on premise reopens and consumers begin to return to in store shopping E premise remains an important channel to consumers.
On a global basis as this channel continues to develop we are supporting its growth with the creation of the recently announced integrated marketing Communications group and we are excited about the talent joining brown Forman as a part of this team.
Developed international markets collectively delivered strong underlying net sales growth.
<unk> for the quarter with broad based growth across the markets. The Jack Daniel's family of brands experienced strong growth driven by the reopening of the on premise as well as a rebound of tourism end markets, such as Spain, and check yet, which supported Jack Daniels, Tennessee whiskey double digit volume growth.
Jack Daniel's RTD has continued to grow with higher volumes in Germany, while we continue to be a category leader.
<unk> of Tennessee, Honey grew volume high single digits led by gains in Korea, and check yet and collectively the Super premium brands Gentleman, Jack and Jack Daniel's single barrel grew volume double digits.
The newest member of the Jack Daniel's family, Jack Daniel's, Tennessee, Apple continues its international rollout launching in the Netherlands, Lithuania, Hungary, Slovakia, and Italy and is off to a strong start in those markets.
Collectively our emerging markets continue to rebound with very strong double digit underlying net sales growth driven by strong underlying growth from Jack Daniel's, Tennessee, whiskey, particularly in Turkey, Brazil, and Chile Jack.
Jack Daniel's flavors more than doubled in both Chile, and Brazil, as we benefit from the launch of Jack Daniel's, Tennessee, Apple, while <unk> grew triple digits in Mexico, as Q1 volume surpassed pre pandemic levels.
Finally, as expected our travel retail business experienced a strong rebound the volumes remain below their pre pandemic levels as international airline travel and the cruise business have yet to fully recover.
<unk> share the details on our gross margin. So I will now turn to our operating expenses.
Similar to the fourth quarter of last fiscal year and as expected we significantly increased our A&P spend which grew over 40% on both a reported and underlying basis. We continue to support the momentum behind our iconic brands by investing in world class advertising to drive our sales.
In the first quarter, we did lap the impacts of the early stages of the pandemic, where on premise activations were cancelled consumer events, such as the Kentucky Derby Summer festivals, and sponsorships were rescheduled or canceled and in the month of July last year, we paused uncertain social media platforms.
On an absolute dollar perspective, our level of investment in Q1 more closely reflects the normal seasonal ization of our spin.
Our underlying SG&A investment increased double digits, driven by the timing of compensation related expenses non income tax items and the cycling of lower discretionary spend during the same period last year due to the impacts related to the COVID-19 pandemic.
In total we grew underlying operating income 15% for the first quarter on a reported basis operating income declined 25% due to the sale of early times Canadian mist, and Collingwood brands last year.
This combined with an increase in our effective tax rate resulted in a 41% diluted EPS decrease of <unk> 40 per share.
And finally to our fiscal 'twenty 'twenty two outlook.
Even with the volatility and resurgence of COVID-19, we remain confident in our top line growth momentum. We believe our portfolio is well positioned to capitalize on the reopening of the on premise channel the recovery of countries heavily reliant on tourism.
Degree of business and personal travel resuming.
And the growing pre musaceous trends in.
In aggregate, we expect strong growth in our emerging markets as well as travel retail, which will cycle the effect of easy comparisons as they began to stabilize and recover.
Further we do not expect the non core business, mainly used barrel sales to have a material impact on our business this fiscal year.
Turning to gross margins currently we are managing through the impact of global supply chain disruptions, including glass supply and challenging cost headwinds.
Similar to others, we are experiencing greater than expected logistics costs higher input costs on items, such as grain and aluminum agave costs that are below their peak and stable, though easing at a slower pace than previously forecasted due to higher demand within the category. In addition, with the rebound and recovery of our markets.
And channels, coupled with strong consumer demand for our brands. We are currently managing through glass supply constraints. We have deployed a number of risk mitigation strategies and are working actively with our suppliers and distributor partners to optimize our supply chain to meet the consumer demand, while we expect these disruptions to.
Persist throughout the fiscal year, we believe that the impact will become less significant in the second half of the year. As a result of these factors. We now expect our gross margin to be flat or slightly down for the fiscal year versus the slight improvement we originally anticipated we.
We expect our operating investments advertising and SG&A to be in the mid single digit range as we continue to invest behind our brands to support topline growth and progress of various strategic initiatives, including three new RTC is the expansion of our emerging brands team in select international markets.
Focused on growing our super premium portfolio, and increasing our digital marketing and e-commerce capabilities.
Similar to last fiscal year, we do expect the seasonality of our results to be volatile during the year, particularly in operating income.
Despite these challenges and excluding any potential impact from changes in tariffs. We continue to expect both our underlying net sales and underlying operating income to grow in the mid single digit range. Lastly, we expect our fiscal 'twenty 'twenty two effective tax rate to be in the range of 22 to 'twenty three.
Percent in summary, and as <unk> stated, we have had a strong start to fiscal 2022, while uncertainty and volatility will likely continue to be a significant part of our business environment. This year. Our brands are strong our topline has momentum and we remain well positioned with a strong balance sheet and cash flow.
<unk>.
This concludes our prepared remarks, please open the line for questions.
Thank you.
To ask a question you will need to press star one on your telephone to withdraw.
To your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from Dara <unk> with Morgan Stanley You May proceed with your question.
Hey, guys good morning.
Good morning.
So could you just give us a bit more detail on the supply chain issues you mentioned it sounds like it's more glass supply.
Is that correct or the shipping and other issues also pronounced.
And it sounded to me like this is more sort of creating higher costs for you guys in terms of supplying retail it doesn't sound like it's ultimately going to have as much impact on retail sales or your ability to.
Supply demand at retail is that correct.
So I'll start with that one and then loss of income kind of follow on <unk>.
Correct.
And that it is glass related largely for us.
Again, similar to others in the operating environment that we're in like many other CPG companies, we are seeing challenges across packaging material all the way through logistics services.
As you can stay on slide four as an example, Jack Daniel's, Tennessee Whiskey rebounded strongly from a negative 10 in Q1 of 'twenty one.
Plus 21, and this current quarter.
To support that growth by driving down our finished goods inventory and with the glass suppliers. We are working closely with them to <unk>.
Increase our capacity that's available to us and working closely with our distributor partners. We continue to deploy several of our risk mitigation teams against these strategies and closely partnering with.
Everyone in the supply chain, we do believe that our current guidance reflects these challenges and volatility.
We believe that as we navigate through the challenges and headwinds that we will have a better understanding of this impact as we get through our next quarter.
We did we did state that as we we believe these challenges will persist through the fiscal year, but we believe they will ease in the back half of the year.
Yes, I mean, I think on the margin versus mist sales part of the question.
Our first quarter was actually.
As you can see with the numbers of the sales were obviously very very good.
So I would say minimal impact on sales in Q1 were a little more cautious on Q2 to be honest.
<unk>.
We are we have drawn down inventory levels across both distributors.
I think on the country in different wholesalers and all the way down through retail and so.
There is.
There's only so much maneuvering you can do on that and so we're at a higher risk. It hasnt happened yet, but that is one of the reasons, we're a little more cautious on the guidance for the full years, we're just not sure how much glass, we're going to be able to acquire over the next really in it for the next few months.
It would be at risk as we've worked very hard with our vast supplier over the last really over the summer.
To ensure that we're getting we're getting all the glass. So we can get from them.
Great Yeah.
That's very helpful.
And then just maybe a bit of a short term ups update.
Obviously, we've had the delta Varian and Horizon case counts, particularly in the U S as well as some other large markets. So can you just give us a bit of an update on if you think youre seeing much consumer reaction to that in the U S or in some of the other large markets and.
If demand has stayed pretty steady when you don't have severe government restrictions in place or if consumers are reacting to that.
<unk> gave us a bit of detail on on premise, but it'd just be helpful to have a bit more detail there and any thoughts. Thanks.
I think yes.
Yes, I mean, as we talked about the on premise. It certainly came back over the summer and Thats, where you would have expected to see.
Yes.
Weaker results if people really staying at home a lot more and youre not seeing that.
What I think is almost more interesting and it's just we've tried to peel back the numbers and cut through the noise and understand what's happening in the off premise because the numbers are still very very strong in the U S.
And so youre not seeing youre not.
We're seeing a pullback in the off premise youre, not really seeing an acceleration either but they're already off of very elevated numbers anyway, but if you take <unk>.
My preferred way to look at that really as take just taken Nielsen data as an example, and take them to the full year. The 52 week results and do a two year stack on that.
<unk> are still really I mean, they are still in the low double digits in the 13 week is better than the 52 weeks. So there is enough evidence out there that I think gives us some confidence that overall consumer takeaway remains strong and remains elevated above where it was pre pandemic.
Yeah.
Great. That's helpful. Thanks, guys.
We've had good U S results I was just going to say in some of our competitors and so the just particularly in the U S market.
The healthy place these days.
Okay, and I guess it doesn't sound like August is a big change so far obviously theres a lot of volatility, but it sounds like.
In general that that strength in consumer spending is continuing.
As far as we can tell it's only September ones being August yet, but.
But it's pretty good.
Okay, great. Thank you.
Okay.
Thank you. Our next question comes from Vivien <unk> with Cowen You May proceed with your question.
Hi, Thank you good morning.
Well can I was wondering if you could expand a little bit. Please on your commentary around the price increases on our Jack Daniels and perhaps.
For them with the last round of pricing that you took which I think was 2013.
Okay.
Josh was it that long ago.
Yes, I mean look a step back over the last well.
You can go back 20 years pricing in the U S spirits business and I would also I would also say food in general.
And the two thousands timeframe was very very strong the financial crisis hit in 2008 nine ish in that pricing went away and it really never came back.
You referenced 2013, because that was.
That was an error when American whiskey really took off and the supply was short lived and we as the sort of market leaders were able to get a lot of pricing through but.
Youre right, we have been pretty it's been pretty flattish.
Over the last few years, particularly as a lot of our competitors have gotten more aggressive and we found ourselves in a challenging spot. So fast forward to this year or really the last few months.
Not only I mean, there are costs that are flowing through you have seen those and thats. One reason to be a little more aggressive with price, but the competitive set now this time. Unlike a few years ago, starting to go up to and so we.
We got more aggressive both in American whiskey into Q in a couple of other brands too.
Because we could.
And we want to be.
We want to be pricing leaders, we've been saying that for a while and it's been challenging but it feels good that finally, we are getting some of this.
To flow through.
Absolutely that's helpful. Thank you.
Follow up you guys have announced that you're launching your first.
<unk> expression.
For Jack Daniel.
I'm curious to hear your expectations for contribution to the top line, which I expect are probably a little bit muted.
Given the glass supply issues, you guys are contending with but anything about that product launch would be great. Thanks.
And we would project that debate smaller in fiscal 2022 as it were just we'll just be launching it in the U S. And then supply again, we will be limited for a period of time as we grow into this expression.
Okay.
But it does allow us to continue to ladder up the premium amortization for Jack Daniel's, Tennessee, whiskey and innovate around that.
Understood. Thank you very much.
Thanks Vivian.
Thank you. Our next question comes from Andrea Teixeira with Jpmorgan you May proceed with your question.
Thank you good morning.
Question is on <unk>, obviously, we saw a nice lift during COVID-19.
And pro forma has been continue to move assets continuing to invest behind them.
I was wondering if you can comment about the recent slowdown.
Obviously, you're not a heartfelt this per se, but.
And does it give you any pause on devoting some of these resources to the segment and do you see perhaps the second leg of the spirits space RTD softening growth from the hard seltzer.
Likewise.
You see some of those be a hard seltzer brands, how do you see them moving into spirit and some of it's been expense.
And even the alcoholic liver disease.
Do you see these lines blurring between brands or segments or do you think this is sustainable and that is something that will fall in the <unk>.
Going forward. Thank you.
Yes, so I mean I'll start landing certainly add in.
With RTD has a been a huge business for brown Forman for a long time.
So many folks are focusing on the U S market and filters.
It.
Where the vast majority of our teas are outside of the United States, It's a very big business for us something in the range of.
About 18 million cases, or so outside of the United States compared to only three ish inside so very very different now.
Cocktails.
I mean as much as <unk> seen a slowdown in the Seltzer world, we have not seen a material slowdown in country cocktails, but some of that we know is a benefit from switching from.
Our own internal network in the past, perhaps they're new they only assumed sales of the brand at the beginning of this fiscal.
So its finding all these new distribution points and the brand is still flying and so.
We've done very well with that and feel pretty good about it.
As far as seltzer is taking share or impacting the spirits business.
We've been trying to look at that for a while.
I'll give the same answer I've given before it's pretty for the seltzer occasion, and the whisky drinker, but a large part of pretty.
It's not the same occasion and many many.
In many ways and it is not even really the same consumer in many ways and so we just don't think we've seen much in the way of an impact or lost share to the self serve and if you really just look at the numbers.
Erika Whiskey is doing as well as it ever has in total as a category. So I just don't I'm, saying that over the last few years.
Just don't see that the sell throughs have really taken much share at that I mean.
It feels like the filters are coming at vodka, and tonic, maybe or a gin and tonic and maybe putting a little dent in that business, but for us.
It would be a very small part of our overall portfolio.
Thanks, Jim.
Yeah, no absolutely that's super helpful.
The other question that I have just a follow up on <unk>.
Do you feel <unk> sorry.
Like we're seeing some weaker map data in July anything specific to call out there.
Is that any.
This is all that we can see that makes you feel comfortable from your comments that this trend continues.
Hey, Ron.
I'm not sure if I understood. Your question were you, saying you saw some weakness in one of our brands are just in the market in general you're thinking naphtha, because what im looking.
Looking at a year does not have a lot of weakness on a napkin.
Once again im probably not looking at the same data you are we've got a two year stack in front of us here for NAPCO data.
I mean, it's as strong as the Nielsen values.
There was a little while now and actually accelerated in the three months compared to 12 so.
<unk>.
Yes.
I think overall the market remains pretty strong naphtha, all obviously has the on premise data flowing through it.
So youre getting that youre getting that reload in the on premise.
I think at least for now supporting supportive in Africa.
Uh-huh no.
Jack Daniel's family of brands, but no no call out specifically right on those.
I mean.
Yes, we're still positive and growing yes were still doing pretty well I'm not I'm, not sure, which Brian Im not seeing a slowdown in the market that even for our brands I mean, there's a couple of them that are obviously.
And some of that is related to like a gentleman, Jack and single barrel, even our flavors the comps are.
Are challenging for the next few months as they did so well last fiscal year. So it's not something I would say.
I'm concerned about.
Mhm, Okay perfect. Thank you so much.
Thank you. Our next question comes from Bryan Spillane with Bank of America. You May proceed with your question.
Good morning, guys.
Good morning.
Yes.
Maybe I think it would be helpful.
Austin just to get a sense of.
If you could give us a sense of how brown forman.
Performing relative to the market. So I guess my question is this.
Could you give us a sense of what you see the spirits market growth and it's right now and maybe some of the key markets. So in the U S.
To be developed international and developing international.
And how are you tracking ahead or behind industry, just trying to get a sense of how we should look at these results relative to where the industry is tracking and maybe if you could give us a sense of just.
Whether the industry right now is sort of ahead or behind what your original expectations are.
Yes.
Great.
It is difficult to do.
Do those comparisons right now for the <unk>.
These reasons that we have in April 30 year end in their June 30 for several of the Big guys are June 30, and those months of May and June.
Were so volatile in the last couple of years and so.
The short term, it's it's tough to dissect and you got it you got to use a little bit of work to.
To make the comparison.
If I step back and just talk about the U S. I mean, there's some what I already said.
We've been saying for a long time the algorithm for our business has been grow the U S business about Tds, a couple of points higher than our developed international and then particularly in the good years, we get well into double digit growth in our emerging markets.
That sort of overall medium term to longer term growth algorithm I think is still very relevant.
One that I have the most data on is obviously going to be the U S and we're right at Tds for the most part trends on.
Sure.
Which time period, you pick and all of that but I mean, literally plus or minus one point from Tds.
As I said on one of the previous questions.
The total takeaway numbers in the U S market remain elevated.
I'm not sure if it's going to hold throughout the entirety of the fiscal year or the account.
We're all sort of expecting it to slow down, but it's not happening yet.
And I do think that has a lot to do with for US I mean look Jack Daniels Black label has always had a challenge to grow at a rate of Tds, just given its absolute size, but.
We have the rest of our portfolio, which has gotten much more meaningful in the last few years.
Well into double digit growth mode in many of the brands are.
It's significantly higher growth rates than that in.
Site.
Something that we said last quarter, which I still find to be an interesting statistic because it just would not have been true only a couple of years ago. So this fiscal year and are backing up one quarter, but Jack Daniel's globally sales were down 4% and the company did a plus six for the full year.
That viewed dramatic growth in the rest of portfolio for Brown Forman and that continues to buoy our results even now so.
Yes, we're feeling we're feeling good and we feel like we've got a lot more growth drivers now than we would have had just just a handful of years ago.
And we've gotten rid of the tail of the other part of it is.
And as you know we've had four or five brands that we sold in the last five years that we are all in decline and that certainly makes it easier to grow a little faster too.
And then thanks for that loss and then just any context just outside the U S.
Do you think the industry is growing faster than it was or slower than it was maybe pre pandemic.
Appreciate the reason why I'm asking you is because we can't figure it out.
But.
Just trying to understand any any context at all.
How you think that the industry is growing outside the U S. As well I mean, I think if we looked at last fiscal so not necessarily this past quarter, but last fiscal you remember we had a handful of markets that were growing very fast I mean, it was the markets that had the big developed economies that had governments that we're supporting with fiscal.
Stimulus on those kind of things and so when you look at it in Australia, you look into Germany.
Or some of the other ones that were really growing.
Now, Brazil is a little different in that it didnt have so much fiscal stimulus, but our.
Our results in Brazil have been brilliant now for a number of years I think that's just organic momentum, but I think the big really big markets that got the fiscal stimulus. The reality is a lot of consumers use that stimulus and went and bought alcohol products and so that kept that kept growth rates elevated.
I think it's too early to make a determine whether or not how thats going to come down I mean, it's a great question, though of has the consumer.
Just adopted spirits relative to beer and wine.
And will that hold as time goes on and sort of the world returns to normal and.
And if theres a good chance it will but we'll see.
Alright, Thanks, Boston appreciate it look forward to tomorrow.
Thank you. Our next question comes from Bonnie Herzog with Goldman Sachs. You May proceed with your question.
Thanks, So much this is actually Sam Reid pinch hitting for Bonnie here. So maybe wanted to touch really quickly on E premise, it's exciting to hear the strength there.
Could you give us a rough sense as to how the economics here might compare to some of the other channels.
And anything around that that we should be mindful of.
As this continues to become a more important part of your business.
Well, that's going to depend on where you are market by market and just around the world. The economics are different as we look at each one of those so stepping back and looking at it collectively it continues to be an important channel for where consumers are going to drive where our products are.
It's one we're continuing to invest and we need to be there with our products within the hands rates of our consumer we're continuing to invest in it because it will continue to be an increasing part of our business. As we said, it's just over 2% of our business, but it has grown four times just recently over the last couple of years.
So.
From a profitability perspective is a channel where we can drive incremental profitability, if how we choose to market inside of that.
And I think.
Talking about the U S. First and then we'll hit some of the international markets I find that e-commerce in the U S to be interesting to talk about because it's largely a delivery service.
And that just adds costs into the system, but it's not coming out of Brown Forman pocket, it's not coming out of the distributors market is coming out of the consumer who is willing to pay a little bit more to get the product delivered.
If you are trying to analyze the economics of the U S E Commerce business.
It's kind of neutral I think for the suppliers for the most part now you start to get into the conversation around direct shipping.
From Woodford to another state that give a look that's a little different that is a very very tiny business.
Net.
It doesn't work well within the three tier system very well.
Yes.
It's so small right now.
I don't even know if I can give you good answering the question, but if you move into Europe.
Certainly Asia, where we have setup e-commerce platforms.
In that case, you are taking a retailer out of the.
The mix.
So somebody is going to get a piece of that margin.
We would get a piece of it and then whoever fulfillment partner as we get a piece of that but I think thats largely more profitable.
Per case.
Regular business and then China, China would really be the same thing is Europe in terms of it's a much bigger business over there.
But you are cutting out tiers in the supply chain. So just like it does for Amazon non alcohol products.
For a lot of suppliers that use Amazon, it's different because youre cutting out the retail.
That's incredibly helpful color I really appreciate it.
And then may be just wanted to quickly switch gears here and just touch on tariffs.
It's great to hear the update that you guys provided there I was wondering would you be able to walk us through maybe a little bit more detail on some of your own lobbying efforts as it relates to tariffs and perhaps the role that those efforts might be playing and getting both the U S and the EU to come to a resolution thanks for the time.
Well look I got to be really careful on that.
We have done our best over the last.
Over three years now that we've been suffering through this obviously with American whiskey being the only category left.
That is getting tariffs everyone else have gotten off it is.
To say frustrating would be an understatement.
And we've done what we can but quite honestly there is a limit to how much we can do given the size of the steel and aluminum industry relative to American whiskey. So we just keep opening that cooler heads are going to prevail.
They have made public statements in the last.
Since <unk> was elected.
That the groups, we're going to work together to try to get these to get them over with <unk>.
We've got to believe that that's true and we have indications that it's true but.
As I say I've wished that.
I've thought and wish that these were going to be over before and I was wrong every time and so we're just going to have to wait and see how it turns out.
Absolutely well no. Thanks, so much for the color really appreciate it I'll pass it on.
Thank you. Our next question comes from Eric <unk> with Evercore you May proceed with your question.
Thanks.
One for Leann and then one for loss in first.
You guys maintained the mid single digit top line and.
Our guidance with the gross margin.
Lower.
And then previously expected so that would imply some reduction in your planned spending on A&P or SG&A.
Is that a fair conclusion or is it more some rounding as.
Mid single digits or kind of a range and your spending plans haven't changed and then for loss and hoping you could give some perspective as to how youre looking at the next phase for our Woodford growth.
Obviously made some great headway in the U S silica.
20, plus year journey and started too.
Build out some some solid international positions, but would love to get your big picture.
A big picture perspective as to where.
The next phase of Woodford growth is going to come from.
Okay, well I'll go back to your question right related to guidance.
We're off to a strong start.
It is early in our fiscal year, but as we mentioned with the volatility and the challenges we.
We believe that is built in to the guidance that we've reiterated and issued today.
Again, with the supply chain disruption and increasing cost headwinds we did change from.
Slight improvement to flat to slightly down.
As you can think about our investments back behind our brands. We continue to operate with a philosophy that the investment rate will be in line with our top line sales growth that will find efficiencies.
In our SG&A and other operating line items to continue to be within the range that we have provided from an operating income perspective.
And then Woodford first of all make an advertisement for tomorrow at our Investor Conference, we're going to spend a fair amount of time talking about Woodford and its long term potential. So I don't want to steal the thunder from that but in short.
I think what you probably already know about we have been putting in.
Caught us specialty.
Leaving the Salesforce, but a specialty team that we've already put into the United States. When we did we did several years ago not for Woodford, but we did we called the emerging brands group, which.
It has been an outstanding source of growth for us in the brands that have gone in there absolutely hit an accelerated growth rate and so we've taken those lessons and we put it into some of the bigger markets Europe and another in Australia, and I expect we will expand that idea over and over the next few years to really get some focus on at a big loss.
And learned is it.
Woodford and these brands would be equivalent to <unk> <unk> in the United States or something where its small relative particularly of the Jack Daniel's portfolio and so incremental focus on that brand and you get you get paid back very quickly and so.
It's one of the bigger strategic platforms that we have I think for the next few years is not only woodford, but really going to push on gentleman Jack as an example, we're going to push on our single malt really the super premium and ultra premium brands that get a little bit of focus and get it and get it.
Our growth rate and so.
Yes, youre going to hear a lot more about Woodford in its international growth plans, not only tomorrow, but in upcoming quarters too.
Great well stay tuned I'll pass it on thanks.
Thank you. Our next question comes from Steve Powers with Deutsche Bank. You May proceed with your question.
Yes, Hey, good morning. Thanks.
So Lawson you said at least to my ear anyway, pretty bullish and optimistic on demand trends in your own execution and clearly the portfolio delivered.
A big acceleration in underlying top line trends on a two year basis in the first quarter.
Then I would juxtapose that against.
It looks like a pretty material resumption in two year deceleration as implied in your outlook for the balance of the year. So I was just hoping you can maybe.
And provide a little bit more color to square that circle.
I guess it is the guidance just prudent that prudent versus your own optimism.
Or are the supply constraints that you've called out.
Are they that severe that they may be threatened to.
Put you behind the eight ball relative to demand trends if they continue the way you've described.
Well look I.
I am bullish both I'll call it short medium and long term.
Dan gave you some of the more details in just a second ago on on the top line guidance that we have it is trying to be a bit conservative as we're only one quarter in and Theres just a lot of clouds on the horizon. These days that put a lot of unknowns out there in the supply situation is real we walked through.
That already but.
When I say supply them in glass supply situation.
Is one thing we're just uncertain about it if we don't have it.
We can fulfill all of our orders and not lose any sales at all.
We will do well this year, we will do even better I think than the guidance out there is just uncertainty around.
How much.
How big of an impact thats going to have and we do have increasing confidence and our top line.
Momentum maybe landing is closer to the top end of the range, but is often said is our first quarter. It's very early in the year. When we think about the abnormal seasonality that the pandemic created our fourth quarter of last year.
With very strong and we will be comping against that in the fourth quarter of this year, which is the furthest quarter away from us, which just again with the uncertainty and volatility between here and there it makes it very difficult to forecast.
Okay.
<unk> completely understandable.
I guess just to just to.
Tie that back to how you answered.
Eric question, just a moment ago. So if you if you do see that over delivery.
On the top line as the year progresses.
Does the does the investments spending pick up commensurate with that or does that become a source of.
So profitability and margin.
Over deliver on the top line yes.
Yes, so I mean, I think that goes back to what we've stated are.
Largely central often has been in his role as the philosophy.
Reinvesting back behind our brands in line with top line sales. So I think that's definitely that the model that we are moving forward with and again as we move through the next quarter, we will have greater visibility into what does this uncertainty and volatility mean and.
We'll just have more information available to you.
When we talk again soon.
Very good thank you both.
Thank you. Our next question comes from Kevin Grundy with Jefferies. You May proceed with your question.
Great. Thanks, good morning, everyone.
A lot of ground on the business I wanted to ask about capital allocation priorities and key factors informing your view there.
The cash balance reaching historical highs in the leverage ratio continues to move lower and then.
With that comment just if you could.
Touch upon.
Decision, making around buybacks you sound optimistic on the business. The stock here has pulled back pretty significantly in recent months comment on how the market should interpret your potential views on your stock's valuation should the company not the <unk>.
<unk> are up not to resume share buybacks. Thanks.
Well I'll start with our philosophy, which I think that we've reiterated that is many times and they continue to be a balanced by which that guidance.
And first and foremost is fully invest back behind the business again, I think with the position were taking you continue to see us being conservative with what we see as volatility and uncertainty ahead.
Again second lien and very important to us is paying the regular.
And increasing dividend always being opportunistic with our long term value, creating looking for acquisition and then rates Opportunistically returning cash to shareholders. So that all in place and.
Stable from an environment perspective, we continue to do the work.
That will guide us and what our future actions would be.
I mean, there's not much more I can say it over and above that I mean, we will continue.
Our long held sort of capital allocation strategies, we think it's a very shareholder friendly strategy itself, it's not rocket science.
And you're right our balance sheet is.
As more consumers.
More conservative, but obviously, we are we've reduced leverage quite a bit in the last couple of years.
And we continue to have active conversations on what's the best.
What's the best way to employ that.
Okay. Thank you Bob just a quick follow up on tariffs and understanding the volatility that exists around supply chain and commodities, but you certainly sounded good on the tariff piece more optimistic.
That could potentially be north of 200 basis point benefit as we calculate it to gross margins as you're thinking about that how should investors.
Perceive the potential benefit in terms of what will flow through.
The earnings understanding there'll be the environment's going to dictate some of that around commodities and currency et cetera, but I'd like to kind of get your thoughts as you are thinking about scenario planning should that go your way.
Yeah, and again I think we're consistent in the messages that we've delivered over time is there will be some level of reinvestment back behind the business.
Yes, there will be a portion of that that we believe will fall to the bottom line.
Okay very good thank you.
Thank you. Our next question comes from Sean King with UBS. You May proceed with your question.
Hey, guys good morning.
I guess I'd be curious, how youre thinking about the international Tequila opportunity how the market is developing outside the U S and Mexico, and maybe Brown <unk> right to win and could it could some of your own distribution build out of an impact on sort of seizing that opportunity.
Well that's a good question.
Let me take the last part of it first and then we'll get into the ultimate opportunity many yes.
We've been saying this for a couple of years and I'm honest, we havent if I'm honest, we have not delivered to the extent I would like to see but having your own controlling your own route to market gives you the ability to grow your portfolio outside intersect Daniels. If we had not made those moves in the last decade.
We would be strategically disadvantaged because nobody wants to build brand new brands as a distributor. It is just too hard and it doesn't make enough money at it and so so that was all has always been one of the underlying strategies for doing that now having said that to hela opportunity outside of the U S. We had been it's primarily been in El <unk>.
Or play to date.
A lot of consumers outside of the U S. Really just think of Tequila is a margarita input.
That is changing I think over time, but we have a decent el <unk> business in a lot of South America, I believe it or not Australia, and the UK I would say would be our principal markets, where we've developed that.
Want to see is there a dura begin to get seeded in in those markets teach consumers that there are other ways to break it other than the Margarita.
<unk> is a great one to go ahead and do that and I do think the authenticity that the Aratana brand has relative to many of the other big Tequila brands that are sold in the U S is an advantage for us.
Some of the celebrity driven brands.
I don't want to say you don't have a chance outside of the U S. But.
It's more of a U S phenomenon for those actors and actresses so.
So I think we do have a right to win with our outside of the United States.
There will be.
That's a much bigger but there is definitely going to be increased emphasis on trying to develop that brand outside of the U S.
Great. Thank you very much.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Chris pitcher with Redburn. You May proceed with your question.
Thanks, very much sort of a follow on from your previous call. It those are you mentioning the importance of it.
In distribution and in international can you say how much of your business now is going through.
Distribution and the experience that you've had it markets recently like the U K.
Is this stepping up the need to close the final GAAP, particularly as perhaps U S growth Youre, saying there is a risk of a slowdown in the shorter term.
Just want to get a feel for what new markets, you should expect perhaps coming on stream.
Yes, let me for one thing.
We're going to go into much.
Much more depth on this topic tomorrow again in our in our Investor Conference.
We're going to have Thomas get up there and talk about how many markets, we've done and what we've done with them and what might be some of the.
Potentials moving forward so that.
You'll get a mouthful on that tomorrow.
But having said that I don't know the percentage off my head, but I know we control it in seven of our 10 largest markets and then a handful of.
The next time are coming online even now.
So there are more opportunities continue to do it and we will continue to.
Forward integrate as another way to think about it but.
But it is a meaningful change almost say almost I think nearly every time, we have made a change in our route to market that particular market goes on a run.
Better growth for a number of years.
Just use Germany as an example, because it was really it was the very first one I guess, Australia was first but Germany was one second or third market in the world, where we put that in place a decade ago.
Man of leases, we have grown so much in that market over the past 10 years has just been fantastic and so.
Wouldn't say we have any.
Any regrets on any market that we've gone ahead and done that.
It's an important part of our strategy.
Perhaps as a follow up on travel retail, which was at an attractive category pre the pandemic have you rethought the resource allocation that a lot of your competitors are talking about a gradual recovery, but do you do you see that perhaps is not channel at once do you think it's been structured disadvantage.
I'll take that one and if you look back in F. 'twenty.
Travel retail was 4% of our business and F. 'twenty, one with the effects of the pandemic alert was cut in half to 2%. We continue to believe in this channel and strength and ability to build brands. We do continue to say that it's going to be a gradual return even though we are expecting.
Strong growth and if you look at slide eight and you can see the strong growth that we're already experiencing in Q1 of this year I think we'll continue to see strong growth, but it's more on the easier comparisons and some level of return to personal and business travel, but I think it will.
We'll take a number of years to fully recover but it will continue to be an important channel.
Yes. It is.
Tied to international travel.
But when that comes back I mean, I think youll see a pretty good snapback in them.
The ability of spirits brands to sell through the Internet.
I know you know this but I mean, it super premium and ultra premium brands do very well in that channel.
We have a lot more plays.
Of size that could fit well in that channel now than we would've had.
Five or 10 years ago, and so we want it to be a more meaningful channel for us going forward for all the reasons land just said.
So I don't think there is a permanent change or a reduction in the size of that market I, just think it's going to be a slow walk to get back to.
Sort of pre pandemic levels.
Thank you.
Okay.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Sue Carrel for any further remarks.
Thank you.
Thank you Lawson and Leann and to all of you for joining us today for Brown <unk> first quarter fiscal 2022 earnings call. If you have any additional questions. Please contact me.
As a reminder, tomorrow at nine am Eastern time, we will host our first virtual Investor day, We hope that you can join us to see a few familiar faces and meet the new leaders all of whom will share more about our integrated strategy that underpins our performance ambition of nothing better than the market we.
We are looking forward to sharing additional insights into our long term strategy as well as addressing additional questions details regarding this webcast can be found in our August 19th press release about the event and with that this concludes our call.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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