Q2 2022 Brown-Forman Corp Earnings Call

December 8, 2021

Speaker 1: Good day, and thank you for standing by. Welcome to the Brown Forman Corporation second quarter and first half fiscal 2022 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone.

Good day and thank you for standing by welcome to the Brown Forman Corporation second quarter and first half fiscal 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the <unk>.

You will need to press star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Sue Param director of Investor Relations. Please go.

Speaker 1: Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Sue Parham, Director of Investor Relations. Please go ahead.

Thank you and good morning, everyone I would like to thank each of you for joining us today for Brown Forman second quarter and first half fiscal 2022 earnings call.

Speaker 1: Thank you and good morning everyone. I would like to thank each of you for joining us today for Brown Foreman's second quarter and first half fiscal 2022 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer, and Leanne Cunningham, Senior Vice President and Chief Financial Officer.

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.

Speaker 1: 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.

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 second quarter and first half of fiscal 'twenty 'twenty. Two in addition to posting presentation materials that Lawson and Leann will walk through momentarily.

Both the release and the presentation can be found on our website under the section titled investors events and presentations.

In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward looking statements.

Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission <unk>.

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. Thank you Sue and good morning, everyone I'm pleased to share our second quarter and first half of fiscal 'twenty. Two results with you today, but before I do will open up with a toast opposed to the fact that after three and a half years. The U S and EU reached an agreement on <unk>.

Trade in steel and aluminum and the EU will be removing tariffs on American whiskey on January one 2022, the tariffs have been in place longer than I've been in this role and as such it's been one of the most discussed topics of my tenure as CEO, having been a part of our conversations in the past 12 quarterly earnings calls as well as the <unk>.

<unk> three annual stockholder meetings, it's been an exhausting an expensive chapter in the company's 151 year history as we've been so disproportionally impacted by the tariffs compared to our competitors, who have remained strong and resilient as an organization and I believe we are very well positioned to deliver solid growth in the short and the meal.

Liam and in the long term that said, though you can be certain that we look forward to the return of a level playing field for American whiskey in the EU and hope a similar outcome can very soon be achieved between the U S and the U K.

So with that let's turn our attention to the other headlines of our first half first our topline growth remains strong driven by the reopening of the on premise channel the return of tourism and the cycling of the lower comparisons during the first half of last year, most notably in the emerging markets and travel retail.

We really do have pretty significant optimism about the health of the spirits industry and our business in particular, we continue to see strong consumer demand across our portfolio brands and we're benefiting from consumers increased preference for spirits and the sustained growth for both the American whiskey and tequila categories, our portfolio, which consists largely of.

Premium and Super premium brands is also really benefiting from the continued premium amortization trends across our industry. Our other major headlines that we continue to face challenges from the supply chain largely related to glass supplier, which has really impacted our finished goods inventories along with the inventories at both the distributor and retailer levels.

This is a contributing factor to the difference in our reported and underlying results while working to mitigate this impact the supply chain challenges along with higher input costs, mainly related to agave continue to pressure our gross margin Liam is going to talk more about this in just a few minutes.

I'll start with the top line, where our overall underlying net sales increased 12% in the first half even as supply chain disruptions had an adverse effect on the year to date results. This was led by a double digit underlying net sales increase for the Jack Daniel's family of brands within the Jack family, Jack Daniel's, Tennessee Whiskey fueled the growth with underlying net sales.

Plus 15%.

First half of this fiscal year is benefiting from relatively easy comparisons as the prior year included a time period, where the on premise channel was largely closed around the world on a two year CAGR, Jack Daniel's, Tennessee Whiskey grew underlying net sales, 3%, which is similar to the low single digit growth of brand delivered pre pandemic the consumer trends of flu.

Aver and convenience continue to drive the growth of projecting as flavors and Jack Daniels RTD is higher volumes of Jack Daniel's, Tennessee, Honey, which just celebrated its 10th year in the market as well as the continued international launch objecting those Tennessee Apple contributed to high single digit growth in underlying net sales for the Jack Daniel's flavors injected.

And as our Tvs grew underlying net sales mid single digits in the first half of the fiscal year, notably this growth comes against difficult comparisons on a two year CAGR the Jack Daniel's RTD, he's delivered 19% underlying net sales growth. So overall, we believe consumer demand for <unk> remains very strong on a global basis.

Woodford reserve continued to benefit from premium position trends, which were only amplified by the pandemic and the growth in the American Whiskey category. The brand again delivered double digit underlying net sales growth. Despite supply chain challenges, we believe the underlying consumer momentum for Woodford reserve remains incredibly strong.

Our full strength to keyless era, or an L. Humidor continue to benefit from the strength of the Tequila category and grew underlying net sales in the first half by 46% and 19% respectively. This increase more than offset a decline in new mix, which as a reminder, experienced exceptional growth in the first quarter of fiscal 'twenty, one driven by the <unk>.

Pereira interruption in Mexico's beer supply chain.

In addition, our emerging brands portfolio in the U S continued its momentum growing strong double digits, even as it was cycling the strong double digits comparison in the first half of last year old Forester Sham bore our single malt Scotch portfolio and Fords Gin led this growth we also strengthened our investment behind our emerging <unk>.

<unk> teams in several markets in Europe. This past year based on our experience in the U S. We know that Super premium brands benefit from a high level of focus and we're seeing the benefit in Europe already is the Woodford reserve family of brands. The single malt Scotches as well as our Tequila and Shambaugh have responded with very strong growth I do think our portfolio.

Super premium brands supported by a dedicated emerging brands team offers the company a really big opportunity for growth internationally, and we plan to be more aggressive in our expansion plans in the future.

The key themes in the first half of this fiscal year are really about our focused efforts on driving top line momentum, but while absorbing the cost of the tariffs and significant increases in input costs, especially agave and wood and through it all we continued to invest in long term health of our brands, but thankfully I do believe many of the headwinds we have faced are bigger.

Getting to become tail ones the.

The emphasis on long term growth and performance is built into brown Forman DNA, we're fortunate to have a shareholder base that understands the importance of making decisions today that will deliver value for the next generation. This long term perspective is replicated time and time again and all that we do and is foundational to our business strategy as well as our.

<unk> environmental social and governance commitments, we recently updated our global sustainability goals, which serve as a roadmap for advancing our sustainability efforts, reducing the company's environmental footprint and increasing our positive impact on the community and the environment.

The goals were highlighted in our most recent annual report, but given the importance of the work I wanted to call special attention to them today, the new sustainability goals center around really four pillars climate action, specifically to reduce greenhouse gas emissions water stewardship circular economy, and our supply chain we recognize.

Is the increased importance for organizations like Brown Forman to play a leading role in the environmental stewardship and look forward to sharing our progress against these goals in the years to come.

In a moment I'll hand, the call over to Leann, who will provide more details on our first half of fiscal 'twenty two results as well as our recent capital allocation actions, but before I do on behalf of the Brown Forman Board of directors and executive leadership team I want to say, thank you to the 4700 Brown Forman employees around the globe, who give me a multiple.

Two reasons to be thankful as we mark the end of another calendar year as a company. We've lived our values of integrity respect trust teamwork and excellence each and every time, we've had headwinds and challenges come our way.

Last few years have not been easy, but it has been a beautiful thing to watch how our teams have responded and produce solid business results by living these values. Our people have enabled our business to be resilient and I believe that because of our people Brown Forman will get better year after year and continue to thrive for generations to come.

Liam I'll now hand, the call over to you.

Thank you Lawson and good morning, everyone as lots of IV aid our headlines for the first half and will provide additional details on our business results and our outlook for fiscal 2022 starting with the top line reported net sales were at 9% in the first half of the fiscal year compared to the same period in the prior fiscal year.

This growth was driven by favorable price mix higher volumes and the positive effect of foreign exchange.

Offset by an estimated net decrease in distributor inventory and the effect of the sale of early times Canadian Mist and Hollywood brands. During the first half of fiscal 'twenty 'twenty. One the decrease in distributor inventory is primarily due to the supply chain disruptions Lawson mentioned and that I'll address in more detail now.

<unk> currently.

Underlying net sales growth perspective, we experienced broad based growth across all of our geographic clusters at the U S.

<unk> international markets and emerging markets as well as our travel retail channel starting with the U S business, which represents approximately half of our underlying net sales for the first half of fiscal 2022 underlying net sales grew 6% due to higher volumes as well as positive says and channel mix.

Jack Daniel's, Tennessee Whiskey was the largest contributor to growth fueled by higher volumes and a favorable channel mix shift with the reopening of the on premise channel recent trends observed by mobility and open table reflect a stabilization in the on premise channel just below their pre pandemic levels.

Consumer premium innovation trends continued to propel our premium Bourbons led by Woodford reserve and old Forester, both with their strong double digit underlying growth rates, along with strong consumer demand for our tequila brands resulted in higher volumes of ore Dara and our Hema door this growth.

Was partially offset by lower volumes in the off premise channel due to a strong prior year comparisons supply chain disruptions, particularly for the Jack Daniel's flavors and Woodford Reserve also had an adverse effect on our first half results and reduced inventory levels. These disruptions impacted our finished.

Inventories along with inventories at our distributors and retailers and E premise channel our market share remains slightly above 2% and well above pre pandemic levels, even as the on premise channel reopens and consumers began to return to in store shopping.

Developed international markets collectively delivered strong underlying net sales growth up double digits in the first half with broad based growth across the markets despite supply chain challenges.

This growth was largely driven by the reopening of the on premise as well as a rebound of tourism in some markets. The Jack Daniel's family of brands experienced strong growth driven by Jack Daniel's, Tennessee Whiskey high single digit volume growth led by markets, such as Germany, and the U K, where the brand.

<unk> is gaining share the brand also grew in Spain, as tourism returns and Korea, where whiskey consumption shifted to international brands.

Jack Daniel's ready to drinks experienced strong volume growth in Germany, where we continue to be a category leader and the U K.

These gains were partially offset by lower volumes in Australia due to strong prior year comparisons.

Jack Daniels, Tennessee, Honey grew volume double digits fueled by gains in France, Czech and Korea, and collectively the Jack Daniel's Super premium brands Gentleman, Jack and Jack Daniel's single barrel grew volume low single digits as they were significantly impacted by supply chain challenges. In addition to the Jack Daniel's family.

Collectively our Super premium brands delivered very strong double digit underlying net sales growth as Lachlan mentioned, we continue to invest in these brands through our emerging brands group in Europe collectively are emerging markets continue to rebound against easier comparisons with strong double.

Digit underlying net sales growth driven by the growth of Jack Daniel's, Tennessee, Whiskey, and Turkey, Brazil, and Chile they.

The continued launch of Jack Daniel's Apple, most notably in Brazil, and Chile, and collectively are false drink Tequila brands grew double digits in Mexico, as the down trading trend shifted back towards premium amortization, which more than offset the strong prior year comparisons of <unk> <unk>.

As well, our new mix is down year over year. The brand is performing above its pre pandemic levels.

And from an innovation perspective, we continue to innovate in the RTD category and recently launched Al Hema door Seltzer in Mexico and October.

Finally, our travel retail business continued to experience a strong rebound as we cycled against significant declines during the early days of the pandemic volumes continue to remain below their pre pandemic levels as international airline travel and the cruise business have not fully recovered.

Moving on to gross profit and gross margin in the first half of the fiscal year reported gross profit increased 9% with underlying growth of 12% in line with our underlying top line growth.

And gross margin was down 10 basis points year over year. This represents an improvement in gross margin in the second quarter compared to the same period last year.

Consistent with last quarter, we continue to navigate the impacts of global supply chain disruptions and input cost headwinds as we shared last quarter, our supply chain disruptions have largely been driven by glass supply constraints.

Glass supply constraints have eased in the second quarter. They resulted in a decrease in our finished goods inventory along with the inventories at both the distributor and retailer. These.

These challenges have had a negative impact on our price mix in the first half of this fiscal year due to unfavorable product mix on our higher margin brands, including the Jack Daniel's family of brands as well as Woodford Reserve.

And similar to many other CPG companies, we have also experienced higher than expected logistics cost.

The input cost headwinds related to agave and commodity prices largely grain and aluminum also continued throughout the first half of the year.

Consistent with our last call greater demand of Arctic Hela brand driven by the continued growth in the U S and a faster than expected rebound in Mexico has required a greater supply of agave as.

As a reminder, agave cost are below their peak, though easing at a slower pace than expected due to the higher demand within the category.

Turning to our operating expenses, we continue to support our topline momentum through our investments behind our iconic brands and our people are reported advertising expense increased 24% and on an underlying basis grew 23% in the first half as we lap the impact of the <unk>.

Early stages of the pandemic when on premise activations consumer events, some of festivals and sponsorships were rescheduled or canceled.

Reported SG&A expenses increased 10% with underlying growth of 8% driven by the timing of that compensation related expenses non income tax items and the cycling of lower discretionary spend during the same period last year due to COVID-19.

In total on a reported basis operating income decreased 15% largely driven by the effect of acquisitions and divestitures, primarily the gain on the sale of early times Canadian Mist, and <unk> brands last year and the decrease in distributor inventories and on an <unk>.

You're lying basis operating income grew 13% for the first half.

The decrease in reported operating income combined with an increase in our effective tax rate resulted in a 24% decrease in diluted EPS to 89 cents per share.

And finally to our fiscal 2022 outlook, even with the volatility and potential resurgence of COVID-19, due to emerging variance we remain confident in our top line growth momentum based on the continuing performance of our U S business the collective strength of our developed markets.

<unk> performed well throughout the pandemic and the off premise channel and should continue to benefit from the reopening of the on premise channel and increasing levels in tourism.

In the aggregate, we still expect strong growth in our emerging international markets as well as travel retail as we cycle the effect of easier comparisons and they continue their path to recovery and.

And further we do not expect our noncore business, mainly used barrel sales to have a material impact on our results this year.

We also believe our portfolio remains well positioned to continue to benefit from growing premium amortization trends. Additionally, as we mentioned last quarter given the strength of our brands. We are able to focus on value growth through revenue growth management initiatives and have increased price on a number of our brand.

In the U S, including Jack Daniels.

We believe our ability to take price reflects the health and the investments we are making behind our brands as well as a more favorable pricing environment.

Based on our strong results in the first half of the fiscal year, coupled with solid consumer takeaway trends. We now expect underlying net sales to grow in the high single digit range.

Turning to gross margin, we continue to manage through the unfavorable impact of global supply chain disruptions and have deployed a number of risk mitigation strategies to address the various constraints on our business. While we expect these disruptions to continue throughout the remainder of the fiscal year, we believe.

The impact will become less significant in the second half of the year.

We believe this along with persistent cost headwinds related to agave logistics costs and commodity prices will continue to have a negative impact on our gross margin.

We also believe we will have a modest impact from the removal of tariffs in the EU. The tariffs are scheduled to end on January one 2022 therefore, the impact to the full year fiscal 2022 will be minimal, but it will be a tailwind.

As a result of these factors, we still expect gross margin for the fiscal year to be flat or slightly down.

The spirits category continues to take share from beer and wine and we will continue to invest behind our brands to ensure we optimize our opportunity to gain share in the market.

We expect underlying advertising expense to be in line with top line growth, which is consistent with our long term philosophy. We also remain committed to supporting our various strategic initiatives, including our three new Rtc's of Russia, Belgium, and Taiwan. The continued expansion of our emerging brands team.

<unk> and select international markets and the increased investment in our digital marketing and E. Commerce capabilities. Therefore, we now expect our underlying operating expenses advertising and SG&A to be in the high single digit range.

And we now expect our underlying operating income to grow in the high single digit range in line to slightly below underlying net sales growth.

Lastly, we continue to expect our fiscal 2022 effective tax rate to be in the range of about 22% to 23%.

As a reminder, the seasonality of our results are expected to be volatile for the remainder of the year, particularly our operating income as a result of unusual comparisons in our prior year before I conclude my remarks, I wanted to briefly highlight our longstanding capital allocation philosophy that has produced strong.

Results for our investors and allowed us to maintain a healthy balance sheet.

As I shared during our Investor day in September our four guiding principles are first to fully invest behind our business second to pay increasing regular dividends.

Third to Opportunistically look for acquisitions that we believe create long term value and finally to seek opportunities to return cash to shareholders in excess of regular dividends.

Throughout the pandemic, we thoughtfully and judiciously prioritized managed and allocated capital and emerge with an even stronger balance sheet.

As we announced on November 18th the Brown Forman Board of directors approved a 5% increase in the regular quarterly cash dividend. We are proud to be a member of the prestigious S&P 500 dividend aristocrat index, having paid regular quarterly cash dividend for 70.

Eight consecutive years and increased our regular dividend for 38 consecutive years and addition, Brown Forman Board of directors declared a special cash dividend of $1 per share or approximately $480 million on our class a and class b common.

In stock, we firmly believe our capital allocation philosophy, coupled with our strategic priorities will continue to drive superior returns over the long term.

In summary, we are pleased with the strong first half of the fiscal year, we are able to share. These results today because of the strength of our brands and the commitment of our people the strong and talented spirits that makeup brown forman over the last 20 months our employees around the world have demonstrated the same high level.

<unk> of agility and resilience that we've seen exemplified throughout the course of our 151 year history.

They have shown us once again that we can continue to build our brands achieve our strategic ambitions and thrive in the long term even under challenging conditions I'll, let requires his determination perseverance and a commitment to ensuring there's nothing better than the market than brown Forman. This concludes.

Our prepared remarks, please open the line for questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Kevin Grundy from Jefferies. Your line is now open.

Great. Thanks, good morning, everyone.

Kevin.

I was hoping you could spend a moment on the on the U S market, which is obviously your biggest market globally.

When I looked at the reported results. It appears that the U S declined in the second quarter very strong first half of the year, but declined a bit in the second quarter the year over year comparison looks similar in the first quarter relative to the second then understand youre working through some supply chain issues, but maybe just spend a moment on some of the factors driving the deceleration in the second quarter.

And then Relatedly, perhaps you have an estimate for depletions in the U S <unk>.

All channel retail takeaway and then I have a follow up thanks.

Alright, Thanks, Kevin.

Let me step back.

We knew this question of what's coming a little bit I want to give you a little bit of a longer story of what has happened with the Jack Daniel's family and then they also the impact on the rest of the portfolio really over the last two years.

So if we go back to fiscal 'twenty, one just to remind everyone. This is a global statement, so I'll get to the us towards the end.

Just as we look back to fiscal 'twenty. One so the year that ended April 30 of 2021, Jack Daniel's, Tennessee Whiskey sales were down 4%, but Brown Forman Corp was plus six. So this was the year, obviously that Jack Daniel's, Tennessee whiskey with its huge on premise presence around the world one into decline.

I think the good news with a positive news out of that are the positive takeaway out of that was that Brown Forman has now got enough legs under the stool that one Tennessee whiskey struggles a little bit the company can deliver a plus six so we felt.

Pretty good about that now.

Now moving forward now moving into fiscal 'twenty two.

The on premise business in the U S really started to come back in a stronger way sort of late spring early summer.

And Jack Daniel's, Tennessee, Whiskey came with that and had a very very strong start to the fiscal year as you mentioned.

But then at the same time as that is happening in the supply chain problems creep into our situation really in late spring early summer and Jack Daniel's, Tennessee Whiskey was the first to really feel it and so we drew down inventories at the beginning of the year really throughout the entire supply chain on a global basis, but.

You bet that started to hit US harder we started to have out of stock problems later in kind of late summer early fall.

And we had to make some tough decisions and so what we did was prioritize.

Sort of I'll say August timeframe August September timeframe, where we said we have to keep Jack Daniel's, Tennessee, whiskey moving and healthy.

Particularly the on premises reopening again, and so the glass really got prioritized projected Tennessee whiskey and you've seen pretty good performance out of the brand throughout even I think through the first half in.

And I'm feeling pretty confident in the outlook even in the second half, but what happened with that that has been so difficult was in particular, the Jack Daniel's flavors in the U S.

Gentleman, Jack globally, Woodford, which is primarily a U S brand also felt it even old forester felt it so.

We began to.

Those brands all began to soften really September October timeframe, and so a lot of you all that are looking at say not good data or Nielsen data, that's coming through in that September October timeframe, especially as I said on the flavors.

If you look at schedule B in the earnings release. It has the distributor inventory column you can see the difference between reported in <unk>.

Underlying there and you can see there are huge numbers on there.

We've really taken down inventories, particularly in the United States and we fought off these out of stock problems now.

It's a long way of getting around to saying this are getting an important point across the situation is improving now we do believe the worst is behind us.

But it has been a challenge and difficult situation in the last few months.

Particularly if you take a brand like Woodford just as an example, or even gentleman Jack the consumer momentum behind those brands is so strong.

Debt to have out of stocks, just absolutely makes life very difficult our commercial teams.

Obviously, we're very frustrated with that whole situation, but.

As are the production teams and everywhere else. It is a massive effort inside the company to try to mitigate these challenges as best we can and we're doing it and as I say I think it's behind us. So youll start to see improved numbers takeaway numbers going forward, particularly in the U S.

Important points to make on all of that is all of this is inside the guidance that we gave so we were able to raise sales guidance even after fighting through all of these problems. So.

Thank you for listening.

The answer to that but I wanted it we needed to kind of get that out there before we get through the rest of this call I think because it affects everything.

No. It's very helpful color, if I could just squeezing one more and then I'll pass it on I suppose the other sort of obvious question is this unwelcome new COVID-19 variance. So I think any color that you can provide in terms of what you saw in your business in the month of November what Youre seeing now, particularly and then perhaps more channel sensitive.

Areas that being on premise travel retail anything you can you can share there I think would be helpful. I'll pass it on thank you.

If I'm honest its been too soon to see anything.

Particularly in November.

It's just not impacting results right now in the on premise and you all have seen the numbers. The on premise numbers are actually pretty good in the United States. These days.

It's not absolutely flying but we have not seen degradation I mean I think.

I don't think well I'd be guessing I don't I don't think the omicron is having a big of an effect is really I think the restaurants from a labor shortage and all the other challenges that the on premise world as having that we've all experienced I am sure. If you go out to dinner is having a bigger a limiting impact on the on premise has really been.

Variance on.

And then the only thing that I would add is over time to this last 20 months, our teams and our brands have figured out how to navigate through.

Different levels of restrictions in different channels, and we have figured out a way how to continue to get our brands in the hands of our consumers.

Sure.

Okay very good. Thank you both good luck.

Thank you. Our next question comes from the line of Andrea Teixeira from Jpmorgan. Your line is now open.

Thank you good morning.

So it was I wanted to just go back to the tariff relief.

Like something that will impact.

Surprised I didn't bring of course, you had a lot of different <unk>.

On the cost side, but.

It sounds to me like keeping the margin flat with the foremost benefit do you have a ahead of ahead of you like can you parse out what type of pressures that you're having or you finding they need to invest more in pricing or promo or anything that we may not be aware of.

And if you can give us like a little bit of color.

Into 2022 into fiscal 'twenty three calendar 'twenty two how are you going to be seeing.

That play out that that reinvestment being used form for marketing.

Okay. So I'll take that one and I'll start with.

I think it's great that you have the question on the board and how we think about tariffs and the great news of three and a half years and that they have now been.

Lives as of January one what is relieved as of January one is the European Union portion of the tariff.

We continue to have tariffs on American whiskey brands for the United Kingdom, So with that when you think about the information that we've put out previously.

Our European Union portion of that is approximately 80% and then where you think we are in the fiscal year.

That starts on January one, which only leaves us four months of our fiscal year, we do have inventory in the markets that we have to work through and then with the remaining months and our fiscal year not being the largest volume month then.

We don't get like we said a modest positive impact in this fiscal year.

And to your point, our 'twenty three we are very excited about looking forward.

But what for today and for what we need to be focused on is delivering to all of our shareholders that the outlook that we just.

Issued today, which is high single digits on both the topline and the bottom line as we move forward. So we've got to focus on delivering that.

But as often mentioned we now are incredibly excited that.

This tailwind that has been a tailwind for <unk>.

Headwind that's been a headwind for far too long is now turning into a tailwind.

Did that did you follow the math that we just it just doesn't affect much in this fiscal year largely because of the inventory that we got to March through before and so you are only getting a month or a couple of months' worth of benefit.

And as it relates to FY 'twenty three we generally give that guidance as we get into the fourth quarter of this fiscal year.

That's fair no I did I did follow thank you very much for that clarification and then the other thing I wanted to just double check the glass shortages that who said it.

Our better now could you give us an idea how.

Like how where you are in terms of meeting that demand and as we go which we go through the rest of your fiscal year. What are you embedding in terms of the impact going forward.

For the lack of the back of the.

We can we can probably do the math here on the Depletions and I saw some of your some of your arm.

Skews down 26%.

The inventory, but as we look through the math when we take a picture again at the end of the fiscal year would you think that the second half would be is to impact the door.

You see that kind of normalizing already by the fourth quarter.

Yeah as long as we are.

Mentioned in our scripts, we do believe that.

Our glass supply constraints are easing.

We are moving more now and to the position of replenishing the supply chain and getting the cases to the market through every mode of transportation that's available to us to get our brands again in the consumers' hands.

On.

So as it relates to how we're thinking about it for the full year, we have that full.

Everything that we can estimate built into our full year guidance and we have said flat flat to slightly down but really it is it's really all.

Coming around.

We're getting closer to flat.

But I do think it's prudent that we play slightly down in the inflationary environment that we're in and we're seeing inflationary cost as we mentioned on grains, and aluminum and energy and even for some of our wood. So again just to be prudent we established that guidance last quarter. We continue to believe that is the <unk>.

Guidance to give though.

With a small positive impact.

Of tariffs, we are moving back towards closer to flat.

Uh-huh. Thank you very much I'll pass it on.

Thank you. Our next question comes from the line of Vivien <unk> from Cowen. Your line is now open.

Hi, good morning. Thank you so much for the color around the impact of the supply chain I wanted to dig into that just a little bit more as it relates to your pricing posture, particularly in the U S. Watson, we talked about a rhythm.

Renewed focus on pricing for the first time in eight years in this marketplace and I am wondering whether you had to adjust those plans at all given some of the glass shortages that impacted Woodford and non core areas.

Yes, hi.

The supply chain impact on pricing I actually would call that.

Relatively minimal.

Sure.

What we've been talking about I think in the last couple of quarters and I'll bring it up again now is just as you mentioned there hasnt been a lot of pricing and really not only in the U S. But globally in the world of spirits over the last really decade.

And we want to see more balance to that for sure both within volume and price and so.

I mean, I think as you've heard us talk about before we've put a lot of money into people and the systems and really trying to grow our capabilities in revenue growth management and those become part of the story as to how we.

Intend on getting our price up.

Some cases, just taken a frontline price increase too. So it is it's sort of all in with all the tools that we have.

I think given the inflationary environment that we're in right now that we're all seeing it would certainly be a missed opportunity. If we didn't take price right now and so we are doing it youre not really seeing it in the numbers yet. It's just that's just the timing thing.

I think youll start to see it come through as we get into the <unk>.

Latter half of this year and into next summer and really trying to change the mentality, even within the company to focus on value share.

Focus really on our Super premium brands make sure our innovation pipeline all of those things all add up together to try to get a better price mix balance in everything that we do so yes. So I mean it is it is a bit of a mindset difference I think within the company.

That just really hasnt been there.

As I said for eight or 10 years.

Okay, that's encouraging that you're sticking with that posture.

Follow up question is on A&P spend so heard you guys loud and clear it should grow in line with sales, but if we look backwards.

A&P on an underlying basis has grown ahead of organic sales for the last four quarters. So as you think about the back half of the year.

And given the recovery that you're seeing in international markets or are you thinking about any kind of a geographic mix shift as you deploy those resources. Thank you.

We're going to we're going to continue to invest and where we see the opportunity for growth and as you talk about the last four quarters and we are.

Talked about this and I know you understand it is that the.

<unk> of the actions that we took as we were entering into the pandemic moved into the fiscal 'twenty one at a very slow pace with the cancellation of a lot of events and.

Sponsorships and concerts and they were closing down and then as we got into the back half of the year, we started to invest much more heavily so not only are we.

Comping against kind of the easier comps in the first half of this year. We're also investing at I would call. It the more a more traditional seasonality.

Balanced across but again with our topline growth, we are able to invest at a higher rate and we will put that to get back against the opportunities that we see and as Lachlan mentioned with our.

Strong growth that we're having in the U S. On the underlying basis of course, we'll continue to focus on the U S.

But then through our emerging brand great It and the European Division when we look at just really the strong double digit growth that they are.

Creating both from our Super premium American Whiskey Antarctic Halo brands actually not albeit on a smaller base.

Strong double digit growth we are continuing.

To fuel the momentum there as well as.

Our international markets, where we made adjustments.

The early portions of the pandemic does that help.

It does indeed, thank you so much I'll pass along.

Thank you. Our next question comes from the line of Steve Powers from Deutsche Bank. Your line is now open.

Yes, Hey, good morning, everybody. Thank you.

Maybe shifting back to the supply dynamics at play right now I guess can you first talk about how the low levels of inventory that you called out exiting <unk>. Both in your own finished goods as well as throughout the trade.

It might be impacting the business into and through the holiday period, just any incremental challenges versus normal you might be managing true.

Then I guess, maybe even more importantly, as things hopefully improve and it sounds like they are I guess can you talk about what success looks like for the second half is it is it just being able to better keep pace with.

Underlying sales demand or do you think you can actually.

Make up ground that at least partially rebuild the trade inventories as we progress through the second half set against what you've laid out your underlying sales growth guidance. Thank you.

So let me I'll take the beginning of it land pipe in here.

For Sue.

So in terms of supply chain and how it's impacting Christmas I mean, it's clearly it's impacting right now as I said, we have some out of stock problems in the U S.

That are uncomfortable in that where triangle plug right now we're all working very hard to have that happen.

Outside of the United States to supply chain problems are not quite as severe largely because they are Tennessee whiskey led as opposed to the rest of the portfolio.

And we've been able to supply those markets earlier on when we were tight so so it's not really a Christmas.

So we're not worried but we are.

We're less concerned about the international supply chain challenges right now it is really a U S thing.

But it needs to catch up look theyre going to be some lost sales.

We've said we've included in the guidance, but clearly it is pinching us this year.

As madly trying to get patients onto the shelf right now I mean, thats, what gets December rate or whatever it is.

Some of that if youre not there by now you're probably not going to get there but.

I do think it will have some benefit though in the year ago period to I mean, there's so much going on in this year ago period as the comps get very very difficult in Q4, but there's also going to be some offset as we replenish distributors and retailers.

In the U S and really around the world also so.

We will see we gave it the best guess, we did in the guidance that we gave.

And I'll just add on here, we talked about our risk mitigation teams and strategies and locked in already mentioned that we took the glass supply that was available to us over these last few months and focused on prioritizing Jack Daniel's, Tennessee whiskey.

And we also prioritize markets that had a longer supply chain with transit time, So as and we took every mode of transportation to prioritize getting cases first of Jack Daniel's, Tennessee whiskey over to our international markets knowing that in the U S. We still had the month of November.

And some of December to get those cases.

Produced and with a shorter supply chain, hopefully sell out to the market and to the shelf.

Air Freighting in cases of Jack Daniels to Europe has never that's expensive. So that's one of the things youre seeing in the in the <unk>.

Recent.

Gross margin expectations.

We wanted that to be better at this stage, we do not expect we were going to be air shipping as much as we have thankfully. This is kind of a onetime thing.

And it's going to get better in the year ago period, we won't be we won't be in a place where we need to air ship, but we're I think we're pretty much already past that now.

Yes.

It's helpful and I guess.

I guess my question and I know I. Appreciate you don't guide to trade inventory swings, but when you talk about improving and things getting better and replenishment.

In the back half is that is that replenishment.

So the two consumption. So that you can you're underlying demand accelerates to consumption and inventories keep pace or do you actually think you can replenish trade inventory and actually run net positive on that in the back half.

Yes, I mean at this point, we are totally focused on working with all of our partners to continue to get all of the input materials that we need.

Navigate to the logistics challenges to get.

Our inventory to the distributors and then even at distributor levels around the world. They're also facing workforce challenges to get those cases to the market. So there is a lot.

Supply chain I know I know, you're aware of that with other others that you're speaking with but.

It's just important for US right now to make sure that we are getting there.

The cases, the extent that we can to the market.

And over the back half and probably be even a longer period of time than just the second half of our year to rebuild.

We began to fully replenish and rebuild our supply chain, but we are focused on getting those cases to the market first and rebuilding where we can.

Okay. Thank you very much I appreciate it.

Thank you. Our next question comes from the line of Lauren Lieberman from Barclays. Your line is now open.

Great. Thanks, good morning.

So just two questions firstly, just carrying on this conversation.

Supply chain challenges apologies.

But how do you compare your out of stock situation to that of competitors at this point <unk> been even in the last couple of months.

I mean it.

That's very difficult to estimate in terms of.

Out of stock on the retail shelf because the data is just okay.

It's pretty tough to get to that data.

So I actually don't really know I can and this is a bit anecdotal, but we know everyone.

Many competitors are having some of the same challenges that we are I would the one.

Place you can look that I think that was interesting was about two months ago, The Pennsylvania liquor control Board published a list of all the brands that they had.

That they were going to limit to purchases of only two bottles.

And Jack was one of them put buys where it was really the big brands small brands don't.

There are smaller they don't have to run out as fast, they're not turning as fast and so.

So we were able to pinpoint while the big brands that we compete with a lot of them are all having the same problems we are.

I know it doesn't perfectly to answer to your question, but yeah, and I think for us to anything we tried to.

We are seeing a bit more clearly now we did say it in the last quarter is we feel like for us.

We have an additional challenge with the extent that we had glass supply quantity and quality challenges.

With that challenge, we had to utilize our finished goods inventory that we had stored in warehouses around the world to meet consumer demand, while we were working with our partners to get a higher level glass supply and so it's just kind of a net.

Working through that gap and our supply chain and so I would say we went into logistics challenges.

Created by the pandemic with lower inventory levels and likely some of our peers did.

And again to <unk> point that is we don't have their information so it's really hard to estimate that.

I understand I guess, one thing I've been thinking about is the degree to which scarcity.

Ultimately benefits pricing.

And that's inclusive of promotions and particularly in your categories that we're not talking about laundry detergent here right.

I know you've been talking in the past about how you've invested in data analytics and revenue growth management capabilities.

And it may be premature to answer the question because I know or even think about it is I know pricing is really just going in in the U S.

Jack Daniel's but.

Do you think that is it possible that the promotional environment changes you know that.

Consumers that perhaps had gotten accustomed to buying Jack and Jim beam for example on on deal.

<unk> had been weaned off of that over the last two years.

Curious to get your thoughts on that.

I like that thought.

I think.

And really in the short term.

Didn't cite as previous caller asked the question, but I mean, there has been a reduction in discounting or promotional levels.

Really I mean, I think globally over the last few months. So there is no reason to put something on promotion.

Edging on having an out of stock problem and so that's been the shortest term impact, but I mean.

Longer term have we re educated the consumer a little bit.

I think it probably is too early to make that call.

But I do think that look I mean, there is inflation and there is pricing coming through on so many consumer categories right now.

Consumers aren't really going to have an option.

As so many of the brands.

We expect to see the industry and we've heard comments from even from other competitors that.

Now is the time to rebalance a little bit the volume and the value trends.

Okay.

I guess in that vein I think you are.

Spoke earlier on the call and in the past about spirits ongoing share gain from at the expense of beer and wine, but something that's been really interesting over the last couple of months is that as reopening has happened you've seen more pressure from a category standpoint.

Significantly more I would argue volumetric Lee on on beer and wine people as they shift back to on premise.

You drink less of the on premise occasion do you think it more of as an occasion rather than every day when we're all locked in their houses.

But spirits volumes have remained pretty resilient.

So any thoughts you might offer things that youre seeing in your consumer research that are driving that different outside of just this long term trend of share gains for the for the industry.

Yes, I mean, you bring up what.

What I think is one of the more most important sort of things that's happening. These days, we're trying to measure and I am sure you are too and Thats really is the U S. Spirits market is it at a stepped up growth rate. It certainly was as you mentioned sort of.

The 12 months.

Our first 12 months of a pandemic, but now we're in the second we're closing out the second 12 months.

And the trends that we're looking at are still very strong on a too, particularly I'm just staring at a two year stack, which.

I encourage everyone to do that as opposed to the one year's because.

I think within Brown Forman, particularly on a one year basis youre going to be looking at you kind of get apples and oranges mixed up because we did not fall nearly as far as our competitive set at the beginning of the pandemic and so our comparisons are a little bit more difficult now.

So that's why we're internally really focused on that on the two year stack, but if I look at NAPCO data.

I mean Tds is still up there in the sort of low double digit range and it's not slowing down in fact three months is better than 12, so when you've got you've got some real strong trends in spirits.

It seems like it's retained its share gains that are made during the pandemic and just the question is how long can it hold it.

I don't expect double digit growth necessarily to hold forever, but.

U S spirits market that used to be maybe a four five or five gross market is it six or seven now.

I think we'll see as the next few months and quarters sort of go by but right now it feels it feels pretty good.

Okay, Alright, thanks, I'll pass it on I appreciate the comment.

Thank you.

Our next question comes from the line of Sean King from UBS. Your line is now open.

Hey, great. Thanks for the question.

I guess with respect to capital allocation is there anything that you can do to invest in having adequate class supplies for future periods.

Outsized growth or is this really really a transitory issue that is more related to the quality of the glass. It's the ladder. It really is a transitory issue.

And as we are investing I would say in extending partnerships broader across.

Those that do produce glass.

So that we have a broader base to navigate any continued disruption that might be out there in the future, but from a capital allocation perspective, I think that.

It would be outside of our core competency in our and our best path forward is to just ensure that we have a broader network by which to to source all of our materials.

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

Thank you. Our next question comes from the line of Bryan Spillane from Bank of America. Your line is now open.

Thanks, operator, and good morning, everyone.

Hi, Brian Hi, I just had two maybe just two.

Two more.

I don't know clarification as a follow up so just this whole conversation that we've had earlier around.

I guess underlying sales versus reported sales and whether we can catch up at all some of the inventory. So just want to make sure I'm hearing it correctly, because you've given you've given the revenue guidance on underlying sales, but it sounded to me.

And your response to Steve Powers' question is it seems like.

We're not quite sure and Theres, a possibility that your youll effectively under ship consumption rate that underlying sales will still be.

Ahead of reported again forgetting about currency just because we're still not sure if we can.

Rebuild all of the inventory between now and the end of the fiscal year. So just wanted to make sure that I heard that correctly.

You did yes, it could carry into the next fiscal year, but our ambition would be to get as much of that.

<unk> before the end of the fiscal year, but we do believe it'll take a bit longer periods and that you did hear that correctly, okay, and then related to that just the your advertising.

Spend is going up versus what you what was in the original guidance and I guess.

My question was just.

We're having issues keeping product in stock.

Does it make a lot of sense to increase advertising.

As it is stimulating demand while while theirs.

Product scarcity I guess.

Like does the advertising increase at all exasperate the problem potentially.

Well.

I'm going to look at advertising has just got such a longer term outlook, then stimulating current quarter sales that I.

Probably wouldnt go there I mean, we're thinking more.

The algorithm or the guidance I think we've given around advertising expenses being largely in line with underlying sales.

There's something not just for next quarter, but for.

For the upcoming years and so.

Yeah.

We're not thinking really we're going to cut back based on our suppliers to supply chain challenge yes.

We do believe that as temporary in nature, and then I would just add you know we just celebrated our first year with the global Jack Daniel's, Tennessee Whiskey make it count campaign, we're continuing to invest in expanding that across gentleman, Jack and the rest of the flavors again. We believe this is a long term endeavor and we're continuing to add.

Allocate.

Allocate dollars to broad reach media to continue to reach the consumers, but to losses pointed its going up.

Building for the long term.

Okay, and then just the last one and this is maybe more of a follow up to Lauren Lauren's question earlier.

We're at a point where.

We are beginning to move maybe consumers off of price points right that we're perceived this quote unquote value right because prices are moving.

Over over time is there an opportunity to also.

Maybe introduce different pack sizes.

In order to maybe go smaller at a higher price per unit.

To drive some more revenue mix revenue management like we've seen in and maybe some other categories just just curious.

With the landscape kind of changing does it does it create some opportunities maybe to create some value with maybe introducing some different pack sizes.

Yes part of revenue growth management as you mentioned, we do look to small sizes are a big and profitable part of the business for us I don't know if youre, referring to the potential for the 750 to turn into a 700 in the U S that would be yes.

Yes.

Something like that could happen.

I know a lot of people are looking at that right now.

<unk>.

Trying to think.

Yes that was interesting that was the type of thing I was thinking of some of these.

Subtle change like a 750 million with 700 ml could have some pretty material.

Margin.

Or is it a margin implications I'm just curious if there is if there is real room to.

To have that type of lever if you will.

Yeah, I mean look I don't.

I don't know.

I'm going to give you a little bit of a gas in that.

Franchise is largely plays in pretty much all of the size sizes that you can legally sell in the United States right.

But the other brands have less of that and so you could see a little bit more introducing say on a woodford, which is a much more expensive product.

The smaller sizes of $3 75 for instance, those kind of things can.

Can be important or more important.

And one other thing.

Also too late as Lawson said, well, it's going to it's going to be about the brand and the brand, specifically and where the consumer is and it.

Yes.

And if we have opportunity where the product sets in the store and it's something that we would take a look at.

Okay, great. Thanks, guys.

Thank you at this time I am showing no further questions.

I would like to turn the call back over to two per annum for closing remarks.

And thank you Lawson and land and thank you to everyone for joining us today for Brown <unk> second quarter and first half of fiscal 2022 earnings call. If you have any additional questions. Please contact us.

Brown Forman has been making spirit bright since 18, 70, and we'd like to wish you all a safe and wonderful holiday season with that this concludes our call.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

One on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Joe Param director of Investor Relations. Please go.

Thank you and good morning, everyone I would like to thank each of you for joining us today for Brown Forman second quarter and first half fiscal 2022 earnings call joining.

Joining me today are Lawson, Whiting, President and Chief Executive Officer, and Leigh Ann Cunningham, Senior Vice President and Chief Financial Officer.

Both the release and the presentation can be found on our website under the section titled investors events and presentations.

In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward looking statements.

Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission.

During this call we will be discussing certain non-GAAP financial measures. These measures a reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the company's financial condition and results of operations are contained in the press release and Investor presentation.

With that I would like to turn the call over to Watson. Thank you Sue and good morning, everyone I'm pleased to share our second quarter and first half of fiscal 'twenty. Two results with you today, but before I do will open up with a toast opposed to the fact that after three and a half years. The U S and EU reached an agreement on.

Last three annual stockholder meetings, it's been an exhausting an expensive chapter in the company's 151 year history as we've been so disproportionately impacted by the tariffs compared to our competitors. We've remained strong and resilient as an organization and I believe we're very well positioned to deliver solid growth in the short and the <unk>.

Premium and Super premium brands is also really benefiting from the continued premium amortization trends across our industry. Our other major headline is that we continue to face challenges from the supply chain largely related to glass supply, which has really impacted our finished goods inventories along with the inventories at both the distributor and retailer levels.

This is a contributing factor to the difference in our reported and underlying results while working to mitigate this impact the supply chain challenges along with higher input costs, mainly related to agave continue to pressure. Our gross margin land is going to talk more about this in just a few minutes.

Plus 15%.

First half of this fiscal year is benefiting from relatively easy comparisons as the prior year included a time period, where the on premise channel was largely closed around the world on a two year CAGR, Jack Daniel's, Tennessee Whiskey grew underlying net sales, 3%, which is similar to the low single digit growth the brand delivered pre pandemic the consumer trends of <unk>.

Waiver and convenience continue to drive the growth of the Jack Daniel's flavors and Jack Daniels RTD is higher volumes of Jack Daniel's, Tennessee, Honey, which just celebrated its 10th year in the market as well as the continued international launch of Jack Daniel's, Tennessee, Apple contributed to high single digit growth in underlying net sales for the Jack Daniel's flavors and Jack.

Our full strength to keyless era, Darnell humidor continue to benefit from the strength of the Tequila category and grew underlying net sales in the first half by 46% and 19% respectively. This increase more than offset a decline in new mix, which as a reminder, experienced exceptional growth in the first quarter of fiscal 'twenty, one driven by the <unk>.

Temporary interruption in Mexico beer supply chain.

Teams in several markets in Europe. This past year based on our experience in the US we know that Super premium brands benefit from a high level of focus and we're seeing the benefit in Europe already is the Woodford reserve family of brands. The single malt Scotches as well as our Tequila and Shambaugh have responded with very strong growth I do think our portfolio.

The key themes in the first half of this fiscal year are really about our focused efforts on driving top line momentum, but while absorbing the cost of the tariffs and significant increases in input costs, especially agave and wood and through it all we continue to invest in long term health of our brands, but thankfully I do believe many of the headwinds we have faced are big.

Getting to become tail wins the.

Two reasons to be thankful as we mark the end of another calendar year as a company. We've lives our values of integrity respect trust teamwork and excellence each and every time, we've had headwinds and challenges come our way.

Land I'll now hand, the call over to you.

Thank you Lawson and good morning, everyone as lots of ideas our headlines for the first half I will provide additional details on our business results and our outlook for fiscal 2022 starting with the top line reported net sales were at 9% in the first half of this fiscal year compared to the same period in the prior fiscal year.

This growth was driven by favorable price mix higher volumes and the positive effect of foreign exchange, partly offset by an estimated net decrease in distributor inventory and the effect of the sale of early times Canadian Mist and Hollywood brands during the first half of fiscal 2021 today.

Kris and distributor inventory is primarily due to the supply chain disruptions Lawson mentioned and that I'll address in more detail momentarily.

Underlying net sales growth perspective, we experienced broad based growth across all of our geographic clusters at the U S.

International markets and emerging markets as well as our travel retail channel starting with the U S business, which represents approximately half of our underlying net sales for the first half of fiscal 2022 underlying net sales grew 6% due to higher volumes as well as positive says and channel mix.

Consumer premium innovation trends continue to propel our premium Bourbons led by Woodford reserve and old Forester, both with their strong double digit underlying growth rates, along with strong consumer demand for our tequila brands resulted in higher volumes of ore Dara and our humidor this growth.

Partially offset by lower volumes in the off premise channel due to a strong prior year comparisons supply chain disruptions, particularly for the Jack Daniel's flavors and Woodford Reserve also had an adverse effect on our first half results and reduced inventory levels. These disruptions impacted our finished.

<unk> is gaining share the brand also grew in Spain, as tourism returns and Korea, where whiskey consumption shifted to international brands.

Jack Daniel's ready to drinks experienced strong volume growth in Germany, where we continue to be a category leader and the U K.

These gains were partially offset by lower volumes in Australia due to strong prior year comparisons.

Jack Daniels, Tennessee, Honey grew volume double digits fueled by gains in France, Czech Ya and Korea, and collectively the Jack Daniel's Super premium brands Gentleman, Jack and Jack Daniel's single barrel grew volume low single digits as they were significantly impacted by supply chain challenges. In addition to the Jack Daniel's family.

Collectively our Super premium brands delivered very strong double digit underlying net sales growth as Lawson mentioned, we continue to invest in these brands through our emerging brands group in Europe.

Collectively our emerging markets continue to rebound against easier comparisons with strong double digit underlying net sales growth driven by the growth of Jack Daniel's, Tennessee, Whiskey, and Turkey, Brazil, and Chile they.

They continued lots of Jack Daniel's Apple, most notably in Brazil, and Chile, and collectively are false drink Tequila brands grew double digits in Mexico, as the down trading trend shifted back towards premium amortization, which more than offset the strong prior year comparisons of Nymex <unk>.

While new mix is down year over year. The brand is performing above its pre pandemic levels.

And from an innovation perspective, we continue to innovate in the RTD category and recently watched L. Humidor Seltzer in Mexico and October.

Finally, our travel retail business continued to experience a strong rebound as we cycled against significant declines during the early days of the pandemic volumes continuing to remain below their pre pandemic levels as international airline travel and the cruise business have not fully recovered.

Moving on to gross profit and gross margin in the first half of the fiscal year reported gross profit increased 9% with underlying growth of 12% in line with our underlying top line growth.

And gross margin was down 10 basis points year over year. This represents an improvement in gross margin in the second quarter compared to the same period last year.

Glass supply constraints have eased in the second quarter. They resulted in a decrease in our finished goods inventory along with the inventories at both the distributor and retailer. These.

And similar to many other CPG companies, we have also experienced higher than expected logistics costs.

The input cost headwinds related to agave and commodity prices largely grain and aluminum also continued throughout the first half of the year consistent with our last call greater demand of Arctic Hela brand driven by the continued growth in the U S and a faster than expected rebound in Mexico.

Has required a greater supply of agave.

As a reminder, agave cost are below their peak, though easing at a slower pace than expected due to the higher demand within the category.

Early stages of the pandemic when on premise activations consumer events, some of festivals and sponsorships were rescheduled or canceled.

Reported SG&A expenses increased 10% with underlying growth of 8% driven by the time. They are that's compensation related expenses non income tax items and the cycling of lower discretionary spend during the same period last year due to COVID-19.