Q3 2022 Brown-Forman Corp Earnings Call

March 3, 2022

Yeah.

Good day and thank you for standing by welcome to the Brown Forman Corporation third quarter and year to date.

Fiscal 2022 earnings conference call.

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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.

Please be advised that today's conference is being recorded.

Kearney further assistance please press star zero.

I would now like to turn the conference over to your Speaker today <unk> <unk> 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 <unk> third quarter and year to date fiscal 2022 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer and Lee.

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 except as required by law. The company undertakes no obligation to update any of these statements whether due to new information future events or otherwise.

This morning, we issued a press release containing our results for the third quarter and nine months ended January 31, 2022. In addition to posting presentation materials that Lawson and Leann, who 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 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 <unk>.

Presentation.

As of the third quarter of fiscal 2022, we have changed certain non-GAAP financial measures that we have used historically in our public disclosures.

Our analysis of results of operations in our SEC filings as well as in our earnings release documents.

We will no longer report underlying measures of change for any P&L line items. Instead, we will begin reporting organic measures of change for certain P&L line items. This.

This change to our non-GAAP financial measures is in response to comments from and discussions with the staff of the Securities and Exchange Commission.

Organic includes all of the non-GAAP adjustments that we have historically made in adjusting GAAP to underlying results except that organic does not include an adjustment for estimated net change in distributor inventories, we will continue to adjust for acquisitions and divestitures foreign exchange and unusual.

Our nonrecurring transactions.

For comparability purposes, the presentation and amounts of our non-GAAP financial measures for all prior periods presented in today's release and presentation and discussed on today's call have been restated to reflect these changes to our non-GAAP financial measures, we have posted schedules covering historical periods on our website.

Our business can be affected by changes in distributor inventories, particularly in our largest market the United States, where the three tier system includes suppliers distributors and retailers.

We will not adjust our non-GAAP P&L measures for estimated fluctuations in distributor inventories yet we will continue to provide meaningful qualitative and quantitative information. So that you can understand how estimated fluctuations in distributor inventories may affect our results from operations.

We have added scheduled E to our earnings release, which contains supplemental information that presents separately. The estimated net effect of distributor inventory changes on our results.

In addition to explaining our results when we expect that fluctuations in distributor inventories could impact our trend significantly in future periods. We plan to disclose that to you as we have endeavored to do previously.

Specifically to our outlook in the past when we have provided guidance whether in qualitative or quantitative terms, we have communicated our expectations for key measures on an underlying basis.

Forward when we provide such guidance, we will do so on an organic basis.

Therefore, the current outlook is not directly comparable to our previously presented outlook.

Accordingly, we have provided our updated fiscal 2022 outlook in our third quarter earnings release and Form 10-Q , using the organic basis.

With that I would like to turn the call over to Lawson.

Well, thank you Sue and good morning, everyone.

I'm proud to share our results with you today, because we delivered double digit organic top and bottom line growth for the first nine months of our fiscal year, but before I do I did want to take a moment to acknowledge that the entire brown Forman community is extending our thoughts to those impacted by the war in Ukraine particular, our employees and their families. We will continue to hope for.

Peaceful resolution I also want to thank our 4700 Brown Forman employees around the globe, many of whom have stepped up to help their Ukrainian colleagues, just as they've stepped up and everywhere. The last two years they've made it possible for us to deliver these strong business results. We have an immensely talented team that remains committed to our strategic priorities and our compass.

The values and it is this resolve and determination that has allowed us to navigate numerous uncertainties and challenges over the years, while delivering sustainable and consistent long term growth. So turning to the results. We continue to see strong broad based top line growth across our major geographic clusters, driven by many of the same themes that we.

We've shared with you throughout this fiscal year <unk>.

First our topline growth accelerated in the third quarter due to the gradual reopening of the on premise channel. The return of some travel and tourism and the cycling of lower comparisons, notably in emerging markets when the travel retail channel.

Second we continue to see strong consumer demand in both the American whiskey and tequila categories, where our brands are well positioned.

Portfolio is also continuing to benefit from the premium inflation trends across our industry.

Finally, we continue to face challenges from supply chain disruptions largely related to glass supply. These disruptions reduced our finished goods inventories along with the inventories at both the distributor and retailer levels. While we are seeing some signs of improvement the supply chain challenges negatively impacted our net sales and increase our costs.

In the year to date performance, we and I'll talk more about this in just a couple of minutes. These drivers led to an overall reported net sales increase of 11% year to date and 14% on an organic basis. Despite the supply chain problems negatively impacting our results. This was led by a double digit organic net sales increase for the Jack Daniel's fan.

<unk> brands fueled by a 20% organic net sales increase for Jack Daniel's, Tennessee Whiskey as a reminder, last quarter, we shared that we had prioritized Jack Daniel's, Tennessee whiskey as we navigated the supply chain challenges you can see that prioritization and the results as they demonstrate the strong consumer demand for the brand.

Clearly in the on premise as well as our focus on rebuilding inventories across the supply chain given the size of the brand of this growth is particularly impressive adding almost $1 6 million nine liter cases compared to the same period last year the strength of the Jack Daniel's trademark extends to the full family of brands year to date, Jack Daniel's <unk>.

<unk> grew organic net sales mid single digits, even against strong double digit comparisons in the prior year, the consumer trends of flavor and convenience are continuing to drive demand for our Tds as well as flavored whiskey globally collectively the Jack Daniel's flavors delivered double digit organic net sales growth year to date, the continued international launch of Jack.

In <unk>, Tennessee, Apple along with solid volume growth in the United States delivered double digit organic net sales for the brand and while Jack Daniel's Honey and Jack Daniel's fire grew organic net sales year to date, both brands' growth rates have been adversely impacted by the supply chain disruptions, which includes our decision to prioritize Jack Daniel's, Tennessee whiskey.

The same supply chain challenges had a significant impact on gentleman, Jack which led to a year to date decline in organic net sales for the Jack Daniel's Super premium brands.

Chela category remains very strong benefiting our full strength <unk> year to date, Herradura and El <unk> grew organic net sales, 29% and 20% respectively. Woodford Reserve's organic net sales grew high single digits year to date, but given the prioritization of Jack Daniel's, Tennessee Whiskey brand experienced a decline in distributor inventories adversely impacting.

Its results importantly, we believe consumer momentum for Woodford Reserve remained strong and similar to Jack Daniel's, Tennessee Whiskey should benefit from increased supply as we work through and resolve the supply chain disruptions Phi.

Finally, as I mentioned, our portfolio of Super premium brands continues to benefit from the consumer premium <unk> trends as well as our investment behind our emerging brands teams brands such as old Forester Sham bore our single malt Scotches, Glenn <unk> <unk> as well as Fords gin have also benefited from the reopening in the on premise.

Typically in the U S where this channel is an important part of our brand building model in Europe . The recent investment in our emerging brands model has enabled us to increase our footprint for the Woodford reserve family of brands share more our single malt scotches as well as art keyless with dedicated teams focused on these brands, we're able to deliver very strong growth.

And believe there is considerable opportunity for continued international expansion and growth.

As I close I want to reiterate my continued confidence in our people our brands and our strategic priorities. We believe we are uniquely and strategically positioned to capitalize on consumers' preference for premium and Super premium spirits their appreciation for American whiskey and Tequila and the continued desire for convenience. This has created strong demand.

For our portfolio of brands around the world and a healthy runway for future growth as we continue to invest behind these brands. These strengths are the foundation for our continued strong business results, even amongst continued headwinds in the form of tariffs high input costs and supply chain disruptions and thankfully I still continue to believe that many of these headwinds we have experienced.

Over the past few years are soon to become tailwind one last topic before I hand, it over to Leann yesterday, you should have seen our announcement regarding several changes to my executive leadership team I'd like to take this opportunity to thank Ralph They should bear and John Hayes, who are retiring later this summer for their many leadership contributions over decades and in many ways they've helped.

Our company and grow and our inclusive culture thrive and.

In addition to these retirements are making further changes to my team through disciplined succession planning to continue the company's successful brand building and growth strategies I am extremely grateful for the opportunity to work with an executive leadership team composed of such experienced and talented leaders and I am confident brown Forman is in capable hands under their leadership Leann I'll now.

Turn things over to you.

Thank you Lawson and good morning, everyone and also review the key themes for the first nine months of our fiscal year as well as the performance of our brands I will provide additional details on our geographic performance business results and our outlook for fiscal 2022 first from a geographic perspective.

<unk> markets developed international markets, the U S and the travel retail channel all contributed significantly to our organic net sales growth.

Collectively emerging markets, while impacted by supply chain challenges delivered strong double digit organic net sales growth year to date against favorable prior year comparisons. This performance was driven by the growth of Jack Daniel's, Tennessee, Whiskey in Turkey, and Chile, and continued launch of Jack Daniel's Tennessee.

April most notably in Brazil, and Chile, and collectively are fostering tequila brands grew double digits in Mexico as the premium amortization trend continued which more than offset the prior year comparison.

<unk> RTD.

Our overall business in Mexico continues to perform well as we are experiencing a faster than expected recovery in the on trade or market share trends are improving and the pricing environment is positive as suppliers are implementing price increases across the spirits industry.

Developed international markets collectively also delivered strong organic net sales growth up double digits year to date growth with broad based largely due to the reopening of the on premise as well as a rebound of travel and tourism in some markets supply chain challenges impacted our business in countries such as the euro.

<unk> in Kingdom, and France, the Jack Daniel's family of brands continued to drive overall growth as Jack Daniels, Tennessee Whiskey delivered strong double digit organic net sales growth led by markets, such as Germany, where we are gaining market share in Spain, which is benefiting from the gradual return of tourism.

The United Kingdom in only its second year of own distribution experienced strong growth despite being impacted by supply chain challenges, while Korea is benefiting from a shift in whiskey consumption to international brands.

Jack Daniel's RTD also delivered double digit organic sales growth as we continue to experience strong volume growth in Germany, where the brand sustained its momentum and remains the category leader and even with Australia lapping strong prior year comparisons it continues to contribute to our growth.

In addition, Jack Daniels, Tennessee, Honey grew organic net sales by double digits led by Korea shift to international whisky brands strong consumer demand in France, and tourism, returning and check yes.

While collectively the Jack Daniel's Super premium brands, which includes gentleman, Jack and Jack Daniel's single barrel grew organic net sales mid single digits as they were significantly impacted by supply chain disruption.

Beyond the Jack Daniel's family the rest of our portfolio delivered very strong double digit organic net sales growth led by L. Humidor, Shambaugh, and Woodford reserve, particularly in the United Kingdom, where we have placed additional focus on these brands through our emerging brands great.

The U S business delivered high single digit organic net sales growth in the first nine months of the fiscal year, the largest contributor to growth with Jack Daniels, Tennessee Whiskey, driven by volume growth with the continued reopening of the on premise channel, which led to favorable channel mix and addition distributor.

<unk> increased as we work to resolve supply chain challenges.

Our tequila brands led by era Dara also contributed to the strong growth as the Tequila category continues to be among the fastest growing spirits categories driven by premium innovation.

Consumer premium amortization trends also continued to benefit our premium Bourbons led by Woodford reserve and old Forester get their growth rates have been significantly impacted by supply chain disruptions, particularly for Woodford reserve.

These disruptions reduced our finished goods inventory along with the inventories of our distributors and retailers.

Jack Daniels, Tennessee, Honey and gentleman Jack were also negatively impacted by the supply chain challenges, which led to lower year to date volumes for these brands. We continue to monitor consumer mobility trends observed by Google mobility, and open table and they showed a decline in consumer active.

During the third quarter, reflecting the disruption from the omicron variant, but trends appear to be rebounding in the recent weeks.

And the premise channel our market share continues to remain slightly above 2% and well above pre pandemic levels, even as the on premise channel reopens and consumers begin to return to in store shopping.

Finally, our travel retail business continued to experience a strong rebound driven by an increase in volume as we cycled against significant declines experienced during this period last year.

Our travel retail business is still in recovery as it is dependent on international airline travel in the cruise business, which continued to be below their pre pandemic levels.

Moving on to gross profit and gross margin year to date reported gross profit increased 11% with organic growth of 14% in line with our organic top line growth.

Reported gross margin was down 20 basis points year over year, driven primarily by unfavorable cost mix and the negative effect of foreign exchange largely offset by favorable price mix and the impact of the sale of Canadian Mist early times and Collingwood brands in the prior fiscal year.

Positive price mix was driven by favorable portfolio and channel mix.

Portfolio mix has shifted to our higher margin full strength spirits brands, especially as we compare to the year ago period, when we experienced very strong growth of our RTD.

In addition, the reopening of the on premise channel continues to have a positive impact on our channel mix.

Consistent with our comments over the last two quarters, our cost increases have been driven by our efforts to minimize the impact of the supply chain disruptions largely related to the glass supply constraints as well as input cost headwinds related to agave and other commodity prices, namely green.

<unk>.

Through close partnerships with our glass suppliers supply constraints have continued to ease, allowing for some improvement in inventory levels in the U S, particularly for Jack Daniel's, Tennessee Whiskey.

Inventory levels do remain below the prior year at both the distributor and retailer levels.

<unk> costs are remaining stable, but are higher than our expectations as they are not easing as quickly as we thought due to the increased demand for Arctic Hela brands as growth in the U S and a faster than expected rebound in Mexico continue.

Turning to our operating expenses, which represent the investments we make behind our people and our brands to drive sustainable long term top line growth on a reported and organic advertising expense increased 12% year to date as we continue to invest behind our brands.

In the third quarter reported advertising expense decreased 4% down 2% on an organic basis as we now cycle the phasing of spend from the first half to the second half of last fiscal year.

SG&A expenses on a reported and organic year to date basis increased 8% led by compensation related expenses, our operating income on a reported basis decreased 4%, primarily driven by the effect of the prior year sale of early times Canadian mist and colleagues with brands.

On an organic basis operating income grew 19% year to date.

The decrease in reported operating income combined with a year over year increase in our effective tax rate resulted in a 12% decrease in diluted earnings per share to $1 43 per share.

Now to our updated fiscal 2022 outlook as Sue mentioned in our opening comments when referring to certain non-GAAP financial measures. We will no longer report underlying measures of change for any P&L line item and we will report organic measures of change therefore.

This current outlook is presented on an organic basis and is not directly comparable to our previously presented outlook.

With that the operating environment does remain challenging and there are a number of uncertainties related to the pandemic.

Apply chain inflation and the geopolitical environment.

These uncertainties, we continue to be confident in the strength of our portfolio of brands and our team's ability to navigate these challenges. Therefore, we are optimistic in our ability to deliver strong full year results.

With our strong year to date performance and consumer demand for our brands, we expect organic net sales growth of 11% to 13% for the full fiscal year.

This is based on the continuing strength of our U S business, even as we cycle. The prior year reopening of the on premise. The continued benefit from the reopening of the on premise channel and the gradual recovery in travel and tourism in our developed international markets.

Strong growth in our emerging markets as well as travel retail as the recovery gains momentum and we cycle the effects of easier comparisons.

And we continue to expect our non core business, mainly used barrel sales do not have a material impact on our results this fiscal year.

We also believe that our supply chain constraints will continue to ease, enabling us to meet consumer demand as well as rebuild inventory levels across our supply chain.

Additionally, we believe our portfolio of brands is well positioned to continue to benefit from premium <unk> trends as well as the price increases on a number of our brands in the U S, including Jack Daniels.

We are beginning to see pricing reflected in the U S data and while food and beverage as well as the spirits inflation lags. The overall CPI the numbers still show a healthy pricing environment.

Based on Nielsen takeaway data through the end of our third fiscal quarter Brown Forman is outpacing Tds pricing growth and is a pricing leader.

Turning to gross margin, we continued to utilize our risk mitigation strategies to manage through the impact of supply chain disruptions and are addressing the various constraints on our business. We still believe that these challenges will continue to improve as we end the fiscal year, though still a headwind on a full year basis.

We project cost headwinds related to logistics as well as agave and other commodity prices, mainly grain will continue to have a negative impact on our gross margin.

As we shared last quarter. These headwinds will be slightly offset by the modest positive impact from the removal of tariffs in the EU, which ended on January one 2022.

Based on these combined headwinds and <unk>, we continue to expect reported gross margin to be flat or slightly down for the full year compared to fiscal 2021.

Before I move on I wanted to provide a quick update regarding the UK whiskey tariffs, while the EU tariffs have been removed the U K tariffs remain in place.

<unk> are still ongoing between the U S and the U K regarding the tariffs that remain in place and we continue to be cautiously optimistic that both parties will resolve this ongoing trade disputes.

We expect our total organic operating expenses, which include advertising and SG&A expenses to be in the 7% to 9% range as we continue to invest behind our brands to support our ability to gain share and to drive topline growth on an organic basis, we anticipate.

Advertising expense to be slightly below topline growth the growth in SG&A has been focused on increasing the level of control we have in our route to consumers two of which Belgium, and Taiwan have already launched this year we.

We have also invested in the international expansion of our emerging brands teams and increased investment in our digital marketing and E. Commerce capabilities. These strategic initiatives support the growth and development of our broader portfolio of brands.

Based on the above expectations, we believe our organic operating income growth will be in the range of 12% to 16% for the full year.

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

In summary, we are pleased with our strong year to date results, which delivered double digit organic top and bottom line growth over these past nine months, we have continued to build momentum in a challenging and evolving operating environment and believe we are well positioned to have a strong fiscal 2022 because of the strength of our team members.

And our portfolio of brands.

Our team has remained agile and resilient while living our company's values.

And our portfolio of brands has remained strong supported by our strategic priorities are investments and consumer trends.

We will continue to care for our people and our brands as they are the pillars of our ability to deliver sustainable long term growth.

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.

Draw your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from Vivien <unk> with Cowen Your line is open.

Hi, Thank you good morning.

Morning.

So I have kind of a modeling question and then just a follow up on Woodford. Please so on the model I'm, having a really hard time understanding what happened with currencies this quarter.

6% on the top line versus 18% on Oi I would've thought that you would have seen more on gross profit given the transaction impact, but but the GP hit was only eight so if you could offer any color on why the FX impact was such a greater magnitude on the Oi line in the quarter that would be really helpful. Thank you.

While we know that in that the strongest drivers of that is the strengthening of the US dollar and then against that the currencies would have been the largest impact was in Turkey and then we also had an impact with Russia and.

The U K.

So those were the largest drivers and you can see that in the schedule.

That in the press release, where it says rest of that's where you'll see the biggest impact yes, I believe thats scheduled for Ya.

Yeah.

Is it just an outsized translation impact just kind of a timing of recognition in the quarter.

Let's say it's from translation.

And translation Okay.

Very good. Thank you I can certainly follow up after that.

Woodford.

Totally understand the re prioritization of the glass supply and it looks like that strategy is playing out quite nicely given the reacceleration that you are seeing on the Jack Daniels franchise, and Jack Daniels, Tennessee Whiskey in particular, but I was curious if you could comment. Please on the sequential degradation that you saw on price mix for Woodford in particular thanks.

Okay sure Vivien.

And I'm going to walk you all through kind of a long story as to what has happened between the quarters on the rest of the portfolio and Jack just so everyone understands it because I do realize this is very complicated and kind of hard to follow.

Let me say something about Ukraine, and Russia first just to get it to get it out of the way, but no that.

It's hard to talk business these days.

So this is hanging over so just a couple of things one.

No. Obviously, we are most concerned with our people that are over there. We do know they are all safe right now, but it is certainly a very very difficult and volatile situations.

Gary its AD, it's exhausting for the employees.

We're trying to do what we can from here, we're committing financial assistance not only to our employees, but to some of the big organizations that are trying to help out and just a little story that I found.

I don't know touching I guess, a little bit and that our employees that live in Poland, and Romania and Hungary.

Hungry.

A number of them. They go to the borders and our employees that have been trying to leave Ukraine and thankfully. They were they got ahead of the masses over there and met with defense's literally and our employees pick them up and talking to their houses and are taking care of them. Now. So there are some touching stories out there and our thoughts are with with all of them.

<unk>.

The other part of this but I might as well get out of the way now is just on the business side of things. It does feel awkward to talk about the business in Ukraine is obviously shutdown, but in Russia.

I want to make sure that people don't over estimate the size of our Russian business. It's a top 10 market I mean, it's Tim thanks.

In fiscal 'twenty, one and we disclosed last last year. It was 1% of our business worldwide. So.

An important it's been a growing market for us which.

That's obviously going to be greatly disrupted but.

As I think you all would know or those that have been following us closely we've been building.

Have our own route to market organization. There we've got about 80, some odd employees now.

We're hiring a lot more than that with the intent to go live in July we've stalled that are paused. It we've paused on the recruiting there and at this point were just waiting to see we're going to we're going to have to evaluate the situation.

It's only been a week so we.

We don't really have a lot more information to share on it right now, but know that we're doing everything we can so.

Get that out of the way and then I'll answer your other question really speaks the Woodford and it's more than Woodford, who does.

Essentially all of our core brands outside of Jack Daniel's, Tennessee Whiskey, so to set the stage.

Remember in fiscal 'twenty, one Jack Daniel's, Tennessee Whiskey was down 4% as it is on premise business.

So we would borrow from Corp did a plus six which the only way that math works for US as you saw very very dynamic growth in brands like Woodford old Forester, our tequila is namely the Jack Daniel's flavors everything was practically practically everything was in double digit growth mode last year. So it was an unusual year.

But it worked out that the company was still able to deliver a 6% growth in a chaotic year.

Now moving forward a little bit Q1, we've talked for the first time in Q1, which was August of last year, we started talking about allocating glass so Jack Daniels.

The on premise was opening around the world and we did not want to miss that opportunity and so that was the prioritization.

The nine months, Jack Daniel's, Tennessee Whiskey organic growth is plus 20.

Our numbers that I have never seen in my career.

And it's driven by the strength of the on premise and global travel retail, but it's still it's it's.

So that would be on the off premise too. So it is a global.

Drive to drive that brand up and it's an incremental $1 6 million cases in the first nine months of the year $1 6 million cases is bigger than most of the Perkins on our portfolio and thats incremental in nine months. So in Jackson, Tennessee Whiskey is above Tds and the United States, just by a little bit but.

Quite honestly.

<unk> label has not been above Tds, given its size and a long time. So it's just I think shows that when the stock is available when the glasses available. There is still tremendous amount of consumer demand for the brand and that makes us feel good.

Moving forward in the fall.

As we had allocated towards Tennessee whiskey.

We really the rest of the portfolio began to slow in in the fall we were able to draw down on inventories for a while but thats. We ran through the inventory space September October November timeframe.

It became a bigger and bigger problem and so if anyone is looking at particularly data the Nielsen takeaway data, which was very weak on that rest of the portfolio. It is directly because of the Christmas season for a lot of those brands we were out of stock.

And it was painful.

Something the entire organization was going through and it showed up in the U S. Most directly because of that the U S has the broader market the broadest set of brands in the market. So.

That was a tough cycle to get through but now fast forwarding to the last quarter and you can see on schedule Lee and our earnings about how we're now rebuilding those.

Those inventories and shipments are running ahead of Depletions.

Which is a good thing I mean, we're finally getting the glass to be able to reload the minute that stuff gets into this is mostly a U S conversation when it gets into the warehouse. It is very quickly out the door and back on retail shelves.

And we believe that the trends will resume so Woodford will get Woodford reserve was growing at 20% a year plus for 20 years.

There is no sense that that brand is going to lose consumer momentum, it's just got to be available and so.

Getting onto the shelves now.

It will take us several more quarters, we think.

Fully reload, we'll see.

But it's not that data.

<unk> is not reflected in the current set of <unk>.

Overall, the takeaway is not reflected yet in the Nielsen figures, we believe it will shortly but that is the reason why it looks like it had lost so much momentum so.

That's the long answer to a short question, but.

But that is I hope.

Do you understand the sort of at least what has happened.

Thank you very much for the color and I'll certainly.

Our sincere thoughts and prayers for your team in the region.

Great. Thanks, Dave.

Our next question comes from Nick Farwell with Bernstein. Your line is open.

Hi, Welcome Lee and thanks for taking my question.

Some advertising expense so I appreciate the comp impact but.

By my calculation on a nine month basis, you're reporting advertising margin was about 10 six below last year of 11, 5% and below the EF 14 peak of $14. Six so is there a technical reason.

Behind this being lower and what should we expect for normal advertising spend going forward. Thanks.

Thank you Nathan and it's nice to have you on the call.

Our brand expense perspective, it really is a story of prior year, because as we entered into our first fiscal full fiscal year F. 'twenty. One we didn't know what the operating environment was going to be events where were.

Closed and not available to us.

As well as sponsorship so we had lighter spending in the first half of fiscal 'twenty, one and we were more heavily weighted to the back end of the year for fiscal 'twenty. Two we are much more spending along our normal phasing cycle its just going against.

And unusual prior year and then as you think about it.

Previously as we had talked about our brand spend being in line with our topline growth as we have moved to a organic basis. Our brand spend we believe for the quarters ahead, we'll be slightly below.

Our topline growth.

But still very healthy.

We're still.

What is it year to date.

Our full year increases in the 7% to 9% range and that includes both our.

<unk> initiatives by investing in and our brand expense.

Got it thank you and if I could just squeeze one more the price mix of 70 bps contribution to the nine month gross margin change in the presentation was really good notable improvement on the 10 bps drag that we saw at each one can you give us a sense of how that split between price and mix and then I'll hand it over thank you.

So it's more volume driven but as it related to as we said in our prepared remarks, the reopening of the on premise from a positive channel mix perspective, and then also from our portfolio mix, which were more skewed in this fiscal year toward our full strength spirits, particularly Jack Daniel's, Tennessee whiskey.

And last year, we just had the strong growth in RTD that way that we're now cycling. So it makes it a positive portfolio mix.

Perfect. Thank you very much very helpful.

Our next question comes from Nik Modi with RBC capital markets. Your line is open.

Yes. Thank you good morning, everyone.

Just a couple of questions. We've been hearing in the trade that maybe some of your competitors might not be doing as well on the gas glass supply situation. So I wanted to see if that was something that you have seen in the market and if you think that contributed.

How you're benefiting from that and at retail.

And then the second question is again.

Lately inflation, obviously has not been great for the consumer.

Our hearing from.

Consumer shock I guess with some of the pricing that's in the marketplace. I was just curious if you had any any commentary on that or have you seen that in the market as well. Thanks.

Well I'll start specifically with our glass supply and we've been talking about this for several quarters now.

For Brown Forman that was our largest driver of supply chain disruptions and we've just continued to work really closely with them.

Our current supplier, which has yielded an improved glass supply and additional capacity.

And then also expanding our glass supplier network and we believe that that would that work.

We will start.

Increasing and supplementing our current supply in the fourth quarter of this year and as <unk> mentioned is that glass is coming in.

We are producing it as quickly as possible.

But with the multiple months that we had to draw down our finished goods inventory at all levels of the distribution channel the supply chain. It is moving through the supply chain incredibly quickly and we are still working to rebuild our inventory to date. It has been some <unk>.

Aleve that it has taken us multiple quarters to get to draw down those inventories thats going to take multiple quarters to build that back.

And we just continue to have teams that are working on prioritizing.

The most optimal use of those finished cases that we're able to produce.

Now from a competitive perspective, we know others have commented on it and we'll let them kind of to help their story, so with that I'll switch over to inflation and as we talked about with our year to date gross margin. We did have 110 basis points related to higher cost.

That is split between the supply chain channel the cost associated with our supply chain challenges that we've had in trying to as quickly as possible and get our finished cases into the consumers' hands, while like others, we're facing increasing commodity cost on corn grains natural gases.

Wood steel.

But it didn't is is agave has stabilized we had hoped that the cost of agave the price of the gourmet was going to decline more quickly.

But as we've reported on multiple quarters now the increased demand for.

But the Cola category has just maintain that but at least it has stabilized in that 27% to 29 pesos per kilo range.

So we.

We are seeing inflation, but the good news is we've got a lot of things working in our favor which is premium as Asian trends, we already mentioned our favorable channel mix, we're fully utilizing our RG M tools and we've talked about how we are taking price to help.

With the inflation that we're seeing that the reason why we are taking it but it is it is a positive offset to some of the price increases are some of the cost increases that we're seeing yes, I mean I think.

In terms of inflation make sure I answer the right question, but the.

There is some spirit there is.

Pricing happening in the spirits category right now that is stronger than it has been I'll say in the last I don't know five years or more.

If you really try to pick apart from Nielsen figure then obviously this is a U S comment.

Spirit's inflations between one and two points and we're going to be there to maybe even a little better than that and I would call that really on a global basis that is the that is it's almost been I don't know if I quite caught it.

Cultural change, but it has been a mindset change.

Inside the company really over the last year not just the last quarter, where we are pushing through low single digit, but steady price increases and it's our goal to be able to do that.

Consistently over the upcoming years, and we will see what the consumer reaction is I mean, the consumer reaction right now on other inflationary comment gab.

Gas prices going up is generally not great for the spirits industry, it's not great for consumer spending in general will have to see how that plays out I mean, so much of it is so recent that I don't really have any data to support that but no. We've pushed through price increases in the U S. On Woodford on old Forester, <unk> and really the vast majority.

Any of the Jack Daniel's portfolio. So we are following through with what we said to you last quarter and still feeling pretty good about our position.

Excellent if I could just quickly follow up on the inflation comment.

Even the aging process of the product would it be fair to say that some of the inflation that youre seeing now won't really be an issue for brown Forman until we get kind of maybe into 2023 and beyond or am I not.

To get in too much of the technicalities.

With the way in the methods that we use.

Most notably LIFO, most commodity costs will come through as we.

As we incur them.

Except for Wood Wood is one that will layer in over time.

Got it great. Thank you I'll pass it on good luck.

Thank you.

Our next question is from Bonnie Herzog with Goldman Sachs. Your line is open.

Thank you good morning, everyone.

Hi.

Hi, I just wanted to kind of circle back on a few things and just kind of ask about.

The way Youre going to be discussing results now going forward in terms of organic sales growth and then distributor inventories.

Understand everything you guys said, but I just was hoping to maybe get a sense of how much distributor inventories may have impacted your results in the quarter.

And then given the supply challenges, which you guys have discussed is there a way for you to quantify how much your top line was negatively impacted in the quarter I'm just trying to get a sense of maybe how much higher it could have been and then when you guys are expecting some of these supply chain pressures to ease.

So I'll start with.

The the change and how we talk about our business.

And again as you would have heard from Sue this is driven by.

A comment letter from and discussions with the SEC and just so that you. All are aware all of that has posted as of yesterday at on Edgar and available to you.

As we think about it it might be easier to run through an example, so when in our earnings release when you read that.

The U S business on a reported basis grew 5% organic basis, 8% and then in the commentary. It says an estimated net increase in distributor inventories positively impacted net sales.

We added we believe that it is.

Important information at with the transparency of what the health of our underlying of our business and the fact that we have added schedule E and at the bottom you can see how then following onto US Example, that the net change in distributor inventories was 2% for the United States.

So our organic was.

Supported by 2%.

Net change in distributor inventories, we believe that supplemental information is important to continue to provide transparency into the trends of our business.

That chart will give you.

Our geographic and brands and then at the bottom you can see that the.

Our statement of operations line items that net sales.

In total was 2% impacted by our organic impacted by the net change in distributor inventory.

Does that help.

Definitely yes that does and then just thinking about all of these puts and takes.

And especially kind of going back to the supply chain precious because if I'm hearing you correctly like that obviously was an impact in the quarter and I think year to date. So I'm just trying to get a sense of the magnitude and when some of these are expected to maybe normalize so the pressure is.

Yeah and then.

As previously stated it took us several quarters as we were going through the most significant.

Period of glass supply constraints, and we had to draw down distributor and retailer inventories and even inventories at our own facilities.

To take us several months.

To rebuild that so we do expect for shipments too.

Exceed our depletions as we continue to rebuild that inventory in.

Comment on the underlying thing too a little bit we were the only company I think this is true that was doing underlying reporting is why the FCC couldnt couldnt get their heads around it so.

We switched to organic which is now largely consistent with way the rest of the industry has been doing it for a long time, so on a positive side of it all we're now sort of equivalent with them and make it a little bit easier to compare.

But I do recognize that this is a crazy quarter to be doing it.

Given the volatility in distributor inventory alright.

Alright, Thank you both so much.

Thank you our next question from Kevin Grundy with Jefferies. Your line is open.

Thanks, Good morning, everyone. Two questions from me if I may just first on the organic sales growth guidance not asking you to repeat what <unk> said in prior questions, but just specifically with the change in methodology because it would seem like some of the upward revision would be owed to changes in distributor inventory levels, but very specifically if you can sort of.

Unpack the other items other areas of the business, which are coming in better than you had expected I think that would be appreciated. It seems like international business certainly stronger than we had modeled on premise recovery sounds like Xiaomi model, but maybe on a like for like basis, just comment on what came in better in the quarter, then I have a follow up thanks.

Yes.

It all started at least what came in better in the quarter was Jack Daniel's, Tennessee Whiskey.

<unk>.

It.

It was a blowout in terms of its ability to get the glass get it through the system.

And the demand.

I won't say surprised us to the upside, but it was just very very strong and so.

When that gets going it's amazing what kind of growth that this company can do as a comparative to last year. When it was down 4% and we were able to do the same.

It's not going to maintain a 20% growth rate through the year, but it's still going to be outstanding so and it really it came from.

All parts of the world.

Really showed pretty dynamic growth, we had some really strong markets in Europe .

Some very strong markets in the emerging and the emerging world. So.

Yeah, and I think Thats the Big story, the Big story is our business has.

It's been very resilient and Jack Daniel's, Tennessee whiskey, returning to growth related to the reopening travelling tourism really we keep seeing strong consumer demand for both our American whiskey and our tequila.

Premium amortization to the extent that they werent disrupted by supply chain challenges of Woodford reserve old Forester Herradura continue digit.

Exceed expectations and then again, we have the rebound from the travel retail and all of our and we said in our opening comments we are seeing.

Growth in all areas of our business geographically, including the.

Global travel retail channel so.

That is an underlying regardless of what method.

Our methodology our basis change, we're using I think thats. The big story, so that would have been that would have been a driver.

Regardless of the change what you can do again at the bottom of the bottom of scheduled E. You can take a look at the organic guidance that we have put out there and as you try to make some high level adjustments for net change in distributor inventory I think you continue to see that.

Compared to our half year, we have momentum.

Got it that's helpful. If I could just one more I will take a number of these offline, but just shifting to capital allocation.

Repurchases and share repurchases, specifically any updated thoughts there and maybe just comment on.

I guess, maybe some of the hesitancy to sort of way back in with respect to share buybacks. The cash level is near historic highs your leverage ratio continues to creep lower and the business is obviously performing really well.

And volatility, it's obviously still volatile, but we're in a much better place collectively than we were a year or two ago, so kind of pulling that altogether, what maybe comment on the hesitancy to buy back shares and then ill pass it on thank you.

Yes, I don't know if I would call. It a hesitancy I think we always look.

We tried to use a very balanced approach because our core objective is for sustainable long term value creation.

We've talked about this many times all of the dimensions over which we we balance that and we have.

Ongoing investments in our business as far as the Kentucky, just filling expansion and we have had just filling expansion in Arctic Hela facilities, we have our single malt Scotch Glenn Jonnick expansions, we have warehouse expansions to support Jack Daniels.

<unk> family of brands growth in Woodford reserve and those are.

<unk>.

They cost more in today's environment based off the inflation that we talked about.

But our number one objective is to maintain flexibility.

And strength of our balance sheet to do a couple of things, which is to be able to invest behind our business and to take advantage of growth opportunities and recently, we did just do a special dividend.

It's approximately $480 million. So we did deploy cash to our shareholders from using that method. So again, our approach is consistent balanced it's about maintaining flexibility and we are.

Looking at many things to and from the investments that I just spoke of.

And we're also thinking about the increased volatility that might be in the months and times ahead related to the geopolitical environment that are just unknown at this moment.

Okay very good thank you for all that.

Okay.

Thank you. Our next question comes from powers with Deutsche Bank. Your line is open.

Hey, thanks.

So.

On the operating income guidance year to date growth is plus 19% the guidance for 12 months 2016.

<unk> to be negative and I just I was wondering if you could just unpack the drivers there.

Especially because you're cycling last year's foundation contribution I don't know if thats included in the organic base or not but just how we should think about think about.

My progression in <unk>, and then I guess on top of that back to <unk> question, just how we should expect FX to FX impacts the trend.

As it relates to operating income.

Through the remainder of the year.

Well I'll start with your last part of we don't we don't forecast.

FX, we have it in there as what is known to date, but we wouldn't attempt to forecast what that changes going forward and then as I would just say from an outlook perspective, and our fourth quarter, we really are going to be cycling, our strongest comps from the prior year when in the last quarter of the prior.

For year, the on premise largely I mean in some places around the world, but specifically in the U S. Our largest market began to reopen so we do know we're going against some tough comps.

We also are still addressing some supply chain constraints and input cost headwinds and then I will just layer on the last piece, which is <unk>.

Potentially the rising there.

Rising uncertainty of the geopolitical environment, and the unknowns by which that create.

Okay, That's fair I guess.

Thinking about those the organic guidance implies growth.

Both shipment and probably some inventory catch up.

But then you are.

The cost trends are overwhelming that and the implied guide so is it whereas the cost pressure coming from is it is it Cogs is it is it incremental SG&A and just how we should think about that.

So from a cost perspective, we've talked about our commodities, we've talked about with labor we've talked about.

Transportation, which continues to be constrained of freight rates.

Logistics imbalances all of those things are in there and then we also are continuing to invest.

From an SG&A perspective, and our strategic initiatives, which is increasing in the control of our distribution increasing the focus on our Super premium brands in places around the World and then just increasing investments back behind our brands with.

New marketing campaigns and a new high in what we refer to as our IMC organization.

Yes, I mean, I think the biggest part of it really tough comps. So I think there's nothing really.

Unusual going on or anything like that it's just I mean last year fourth quarter was plus 19 is that right, yes, so going against a plus my team.

Okay. Okay.

I guess.

If I could squeeze in one more question just.

I know, it's hard to dimension and certainly hard to time, but as we think about.

Just how far below some kind of normalized inventory levels.

<unk>.

Exiting the third quarter is there a way to size that is that is that on an annualized basis maybe.

A couple of points of revenue growth to catch up to the relative normal or how do we think about that.

The magnitude of the inventory rebuild that remains.

And this isn't going to be an absolute a.

A couple of times and this is on a specific number but if for example, it has taken a three quarters to draw down that inventory. We do believe that is going to take us three quarters.

To fully.

Replenish our inventories at all levels of the supply chain. So as we look ahead, we do believe that.

We're going to see those shipments be stronger as we rebuild inventory levels across.

The retailer the distributor and our internal.

Okay.

Thank you both I appreciate it.

Thank you. Our next question comes from Christopher <unk> with Redburn. Your line is open.

Thank you very much a couple of follow up questions for me. Thank you.

Firstly I apologize for coming back on the Russia situation, but you had a very strong organic performance in Russia, what were you shipping and rebuilding inventories that the new route to market in place there or are we still selling into independent.

Independent.

Policies.

Terms of that going forward, the inventories that will be enough to carry forward.

How many quarters without the ability to ship in and then secondly has the sort of the development and global events, perhaps slowed the expansion of route to consumer that you've been putting in place I think you'd got up to 70% of your international business. So your own distribution is something that perhaps we might see a pause now for a while until things settle.

Thank you.

Well, we're still for the time being we're going to continue using that same I think you called independent third party distributor.

I don't have I don't know how many months of inventory they have.

They are continuing to stay in place and so that we don't expect a ton of disruption on at least format side now consumer demand is going to fall off there is no way I mean, we're all in I think the competitors are doing it to taking big price increases as the ruble has fallen so far so.

That's going to that's going to shave off some demand but.

What was a very strong market for us.

Is going to be less of a driver going forward, but as we said earlier I mean it is in fiscal 'twenty. One it was 1% of our sales so it's not our.

Falling off the cliff.

And then the only thing I would add is.

We arent in a normal steady state we are in a situation, where we are prioritizing the most optimal usage of our finished goods. So as we think about our business, we will but we will do.

Deploy that inventory globally in the way that most optimally benefit.

The company.

Meaning higher margin markets are going to.

Get more get first choice in the glass line over those that are lower.

Maybe to flip it.

How much in the way of costs get into Russia.

Still at the sort of the design Phase I think you mentioned you would start to take I'm, just trying to get a sense of how much sunk cost.

Variable.

Well I mean, we have begun our we had begun to hiring I said, a little bit ago, We had 80 some odd people.

In the Russian market right now, we're obviously, putting a pause on that and we're just trying to survey and it's only been a week. So we just haven't.

We havent made any sort of material decisions, yet, but there wouldn't there is not going be a write off or anything like that.

If I can.

We would expect out of that market I mean, yes, it's a fluid situation and where it will as we as we need.

Three months from now we hope that we have much better.

Geopolitical news to report, but at this point, we're just continuing to assess where we are.

Yeah.

Thank you.

Great. Thank you.

Thank you we have run out of time for Q&A I would now like to turn the call back over to <unk> director of Investor Relations for closing remarks.

Thank you Shannon and thank you to Lawson in Lee and thank you to everyone for joining us today for Brown <unk> third quarter and year to date fiscal 2022 earnings call. If you have any additional questions. Please contact us with that this concludes our call.

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

[music].

Yes.

[music].

Good day, and thank you for standing by welcome to the Brown Forman Corporation's third quarter and year to date.

2022 earnings conference call.

At this time listeners are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded.

Kearney furthest assistance, please press star zero.

I would now like to turn the conference over to your speaker today.

Sue Peril 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 third quarter and year to date fiscal 2022 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer and Lee.

And 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.

Your presentation.

As of the third quarter of fiscal 2022, we have changed certain non-GAAP financial measures that we have used historically in our public disclosures in our analysis of results of operations in our SEC filings as well as in our earnings release documents.

We will no longer report underlying measures of change for any P&L line items in <unk>.

Third we will begin reporting organic measures of change for certain P&L line items.

This change to our non-GAAP financial measures is in response to comments from and discussions with the staff of the Securities and Exchange Commission.

We will continue to adjust for acquisitions, and divestitures and foreign exchange and unusual or nonrecurring transactions.

For comparability purposes, the presentation and a mouth of our non-GAAP financial measures for all prior periods presented in today's release and presentation and discussed on today's call have been restated to reflect these changes to our non-GAAP financial measures, we have posted schedules covering historical periods on our website.

Our business can be affected by changes in distributor inventories, particularly in our largest market the United States, where the three tier system includes suppliers distributors and retailers.

We have added scheduled E to our earnings release, which contains supplemental information that presents separately. The estimated net effect of distributor inventory changes on our results.

Specifically to our outlook in the past when we have provided guidance whether in qualitative or quantitative terms, we have communicated our expectations for key measures on an underlying basis going forward. When we provide such guidance, we will do so on an organic basis.

Therefore, the current outlook is not directly comparable to our previously presented outlook.

Accordingly, we have provided our updated fiscal 2022 outlook in our third quarter earnings release and Form 10-Q , using the organic basis.

With that I would like to turn the call over to Wassa.

Well, thank you Sue and good morning, everyone.

Standing our thoughts to those impacted by the war in Ukraine particular, our employees and their families. We will continue to hope for a peaceful resolution I also want to thank our 4700 Brown Forman employees around the globe, many of whom have stepped up to help their Ukrainian colleagues just as they've stepped up in every way the last two years they've made it possible for.

For us to deliver these strong business results, we have an immensely talented team that remains committed to our strategic priorities in our company values and it is this resolve and determination that has allowed us to navigate numerous uncertainties and challenges over the years, while delivering sustainable and consistent long term growth. So turning to the results we continue.

To see strong broad based top line growth across our major geographic clusters, driven by many of the same themes that we've shared with you throughout this fiscal year.

Second we continue to see strong consumer demand in both the American whiskey and tequila categories, where our brands are well positioned.

Portfolio is also continuing to benefit from the premium <unk> trends across our industry.

<unk> brands fueled by a 20% organic net sales increase for Jack Daniels, Tennessee Whiskey as a reminder, last quarter, we shared that we had prioritized Jack Daniel's, Tennessee whiskey as we navigated the supply chain challenges you can see that prioritization and the results as they demonstrate the strong consumer demand for the brand.

Clearly in the on premise as well as our focus on rebuilding inventories across the supply chain given the size of the brand to this growth is particularly impressive adding almost $1 6 million nine liter cases compared to the same period last year the strength of the Jack Daniel's trademark extends to the full family of brands year to date, Jack Daniel's RTD.

Dana is Tennessee, Apple along with solid volume growth in the United States delivered double digit organic net sales for the brand and while Jack Daniel's Honey and Jack Daniel's fire grew organic net sales year to date, both brands' growth rates have been adversely impacted by the supply chain disruptions, which includes our decision to prioritize Jack Daniel's, Tennessee whiskey.

The same supply chain challenges had a significant impact on gentleman, Jack which led to a year to date decline in organic net sales for the Jack Daniel's Super premium brands.

Chela category remains very strong benefiting our full strength Shaquille is year to date, Herradura and El <unk> grew organic net sales, 29% and 20% respectively. Woodford reserves organic net sales grew high single digits year to date, but given the prioritization of Jack Daniel's, Tennessee Whiskey, the brand experienced a decline in distributor inventories adversely impacting.

<unk> results importantly, we believe consumer momentum for Woodford Reserve remains strong and similar to Jack Daniel's, Tennessee Whiskey should benefit from increased supply as we work through and resolve the supply chain disruptions.

Finally, as I mentioned, our portfolio of Super premium brands continues to benefit from the consumer premium <unk> trends as well as our investment behind our emerging brands teams brands such as old Forester Sham bore our single malt Scotches <unk> glass as well as Fords gin have also benefited from the reopening in the on premise.

Typically in the U S where this channel is an important part of our brand building model in Europe . The recent investment in our emerging brands model has enabled us to increase our footprint for the Woodford reserve family of brands Sham bore our single malt scotches as well as our to keyless with dedicated teams focused on these brands, we're able to deliver very strong growth.

And believe there is considerable opportunity for continued international expansion and growth.

For our portfolio brands around the world and a healthy runway for future growth as we continue to invest behind these brands. These strengths are the foundation for our continued strong business results, even amongst continued headwinds in the form of tariffs high input costs and supply chain disruptions and thankfully I still continue to believe that many of these headwinds we have experience.

Over the past few years are soon to become a tailwind.

One last topic before I hand, it over to Leann yesterday, you should have seen our announcement regarding several changes to my executive leadership team I'd like to take this opportunity to thank Ralph Dacia Bear and John Hayes, who are retiring later this summer for their many leadership contributions over decades and the many ways. They have helped our company and grow and our inclusive culture thrive.

I'll now turn things over to you.

Thank you Lawson and good morning, everyone and will also review the key themes for the first nine months of our fiscal year as well as the performance of our brands I will provide additional details on our geographic performance business results and our outlook for fiscal 2022.

First from a geographic perspective emerging markets developed international markets. The U S and the travel retail channel all contributed significantly to our organic net sales growth.

April most notably in Brazil, and Chile, and collectively are fostering tequila brands grew double digits in Mexico as the premium <unk> trend continued which more than offset the prior year comparison.

Our Tds.

Developed international markets collectively also delivered strong organic net sales growth up double digits year to date growth was broad based largely due to the reopening of the on premise as well as a rebound of travel and tourism in some markets supply chain challenges impacted our business in countries such as the euro.

Jack Daniel's RTD also delivered double digit organic sales growth as we continued to experience strong volume growth in Germany, where the brand sustained its momentum and remains the category leader and even with Australia lapping strong prior year comparison, it continues to contribute to our growth.

In addition, Jack Daniels, Tennessee, Honey grew organic net.

Net sales by double digits led by Korea shift to international whisky brands strong consumer demand in France, and tourism, returning and check.

And while collectively the Jack Daniel's Super premium brands, which includes gentleman, Jack and Jack Daniel's single barrel grew organic net sales mid single digits as they were significantly impacted by supply chain disruption.

<unk> increased as we work to resolve supply chain challenges.

Our tequila brands led by era Dara also contributed to the strong growth as the Tequila category continues to be among the fastest growing spirits categories driven by premium amortization.

These disruptions reduced our finished goods inventory along with the inventory of our distributors and retailers.

During the third quarter, reflecting the disruption from the omicron variant, but trends appear to be rebounding in the recent weeks and the premise channel our market share continues to remain slightly above 2% and well above pre pandemic levels, even as the on premise channel reopens and consumers began to return.

And store shopping.

Finally, our travel retail business continued to experience a strong rebound driven by an increase in volume as we cycled against significant declines experienced during this period last year.

Our travel retail business is still in recovery as it is dependent on international airline travel in the cruise business, which continued to be below their pre pandemic levels.

Moving on to gross profit and gross margin year to date reported gross profit increased 11% with organic growth of 14% in line with our organic topline growth.

The reported gross margin was down 20 basis points year over year, driven primarily by unfavorable cost mix and the negative effect of foreign exchange largely offset by favorable price mix and the impact of the sale of Canadian Mist early times and Collingwood brands in the prior fiscal year.

Positive price mix was driven by favorable portfolio and channel mix, our portfolio mix has shifted to our higher margin full strength spirits brands, especially as we compare to the year ago period, when we experienced very strong growth of our RTD.

In addition, the reopening of the on premise channel continues to have a positive impact on our channel mix.

<unk>.

Through close partnerships with our glass suppliers supply constraints have contained to ease, allowing for some improvement in inventory levels in the U S, particularly for Jack Daniel's, Tennessee Whiskey.

Inventory levels do remain below the prior year at both the distributor and retailer levels.

<unk> costs are remaining stable, but are higher than our expectations as they are not easing as quickly as we thought due to the increased demand for Arctic kilo brands as growth in the U S and a faster than expected rebound in Mexico continue.

In the third quarter reported advertising expense decreased 4% down 2% on an organic basis as we now cycle the phasing of spend from the first half to the second half of last fiscal year.

SG&A expenses on a reported and organic year to date basis increased 8% led by compensation related expenses.

Our operating income on a reported basis decreased 4%, primarily driven by the effect of the prior year sale of early times Canadian mist and colleagues with brands.

On an organic basis operating income grew 19% year to date.

The decrease in reported operating income combined with a year over year increase in RF active tax rate resulted in a 12% decrease in diluted earnings per share to $1 43 per share.

Now to our updated fiscal 2022 outlook as Sue mentioned in our opening comments, Brian referring to certain non-GAAP financial measures. We will no longer report underlying measures of change for any P&L line item and we will report organic measures of change therefore.

This current outlook is presented on an organic basis and is not directly comparable to our previously presented outlook.

With that the operating environment does remain challenging and there are a number of uncertainties related to the pandemic.

Apply chain inflation and the geopolitical environment.

With our strong year to date performance and consumer demand for our brands, we expect organic net sales growth of 11% to 13% for the full fiscal year.

Strong growth in our emerging markets as well as travel retail as the recovery gains momentum and we cycled the effects of easier comparisons.

And we continue to expect our non core business, mainly used barrel sales do not have a material impact on our results this fiscal year.

We also believe that our supply chain constraints will continue to ease, enabling us to meet consumer demand as well as rebuild inventory levels across our supply chain.

We are beginning to see pricing reflected in the U S data and while food and beverage as well as the spirits inflation lags. The overall CPI the numbers still show a healthy pricing environment.

Based on Nielsen takeaway data through the end of our third fiscal quarter Brown Forman is outpacing Tds pricing growth and is a pricing leader.

Turning to gross margin, we continue to utilize our risk mitigation strategies to manage through the impact of supply chain disruptions and are addressing the various constraints on our business. We still believe that these challenges will continue to improve as we end the fiscal year that is still a headwind on a full year basis.

We project cost headwinds related to logistics as well as agave and other commodity prices, mainly grain will continue to have a negative impact on our gross margin.

As we shared last quarter. These headwinds will be slightly offset by the modest positive impact from the removal of tariffs in the EU, which ended on January one 2022.

Based on these combined headwinds in tailwind we continue to expect reported gross margin to be flat or slightly down for the full year compared to fiscal 2021.

Before I move on I wanted to provide a quick update regarding the UK whiskey tariffs, while the EU tariffs had been removed the UK tariffs remain in place.

<unk> are still ongoing between the U S and the U K regarding the tariffs that remain in place and we continue to be cautiously optimistic that both parties will resolve this ongoing trade disputes.

On an organic basis, we anticipate advertising expense to be slightly below topline growth the growth in SG&A has been focused on increasing the level of control we have in our route to consumers two of which Belgium, and Taiwan have already launched this year.

Based on the above expectations, we believe our organic operating income growth will be in the range of 12% to 16% for the full year.

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

Our portfolio of brands.

Our team has remained agile and resilient while living our company's values.

And our portfolio of brands has remained strong supported by our strategic priorities are investments and consumer trends.

We will continue to care for our people and our brands as they are the pillars of our ability to deliver sustainable long term growth.

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.

Draw your question press the pound key please.

Please standby, while we compile the Q&A roster.

Our first question comes from Vivien <unk> with Cowen Your line is open.

Hi, Thank you good morning.

Good morning.

So I've kind of a modeling question and then just a follow up on Woodford. Please so on the model I'm, having a really hard time understanding what happened with currencies this quarter.

6% on the top line versus 18% on Oi I would've thought that you would have seen more on gross profit given the transaction impact, but but the GP hit was only <unk> eight. So if you could offer any color on why the FX impact was such a greater magnitude on the Oi line in the quarter that'd be really helpful. Thank you.

While we know that in that the strongest drivers of that is the strengthening of the U S. Dollar and then against that the currencies would have been the largest impact was in Turkey and then we also had an impact with Russia and.

The U K.

So those were the largest drivers and you can see that in the schedule.

That in the press release, where it says rest of Thats, where youll see the biggest impact I believe thats scheduled for Ya.

Yeah.

Is it just an outsized translation impact just kind of a timing of recognition in the quarter.

I'd say from translation.

It's translation okay.

Very good. Thank you I can certainly follow up after that.

Woodford.

Totally understand the re prioritization of the glass supply and it looks like that strategy is playing out quite nicely given the re acceleration that youre seeing on the Jack Daniels franchise, and Jack Daniels, Tennessee Whiskey in particular, but I was curious if you could comment. Please on the sequential degradation that you saw on price mix for Woodford in particular thanks.

Okay sure Vivien.

And I'm going to walk you all through kind of a long story as to what has happened between the quarters on the rest of the portfolio and then Jack just so everyone understands it because I do realize this is very complicated and kind of hard to follow.

Let me say something about Ukraine, and Russia first just to get it to get it out of the way, but no that.

It's hard to talk business these days.

So this is hanging over so just a couple of things one.

No. Obviously, we are most concerned with our people that are over there. We do know they are all safe right now, but it is certainly a very very difficult and volatile situations.

Gary its AD, it's exhausting for the employees and.

We're trying to do what we can from here, we're committing financial assistance not only to our employees, but to some of the big organizations that are trying to help out.

Just a little story that I found.

I don't know to touching I guess, a little bit and that our employees that live in Poland, and Romania and Hungary.

Great.

Number of them. They go to the borders and our employees that have been trying to leave Ukraine and thankfully. They were they got ahead of the masses over there and met with defense's literally and our employees pick them up and talking to their houses and are taking care of them. Now. So there are some touching stories out there and our thoughts are with with all of them.

<unk>.

The other part of this but I might as well get out of the way now is just on the business side of things. It does feel awkward to talk about the business.

Ukraine is obviously shutdown, but in Russia.

I want to make sure that people don't over estimate the size of our Russian business. It's a top 10 market I mean, Tim Thanks, Tim.

In fiscal 'twenty, one and we disclosed last last year. It was 1% of our business worldwide. So.

An important it's been a growing market for us which.

That's obviously going to be greatly disrupted but.

As I think you all would know or those that have been following us closely we've been building.

Have our own route to market organization. There we've got about 80, some odd employees now.

We're hiring a lot more than that with the intent to go live in July we've stalled that are positive we've paused on the recruiting there and at this point were just waiting to see we're going to we're going to have to evaluate the situation is it's only been a week. So we.

We don't really have a lot more information to share on it right now, but know that we're doing everything we can so.

Get that out of the way and then I'll answer your other question really speaks the Woodford and it's more than Woodford. It is.

Essentially all of our core brands outside of Jack Daniel's, Tennessee Whiskey, so to set the stage.

Remember in fiscal 'twenty, one Jack Daniel's, Tennessee Whiskey was down 4% as it is on premise business, which was so weak from a corporate at a plus six which the only way that math works for US as you saw very very dynamic growth in brands like Woodford old Forester, our tequila is namely the Jack Daniel's flavors everything was.

Practice practically everything was in double digit growth mode last year. So it was an unusual year.

But it worked out that the company was still able to deliver a 6% growth in a chaotic year.

Now moving forward a little bit Q1, we talked for the first time in Q1, which is August of last year, we started talking about allocating glass to Jack Daniels.

The on premise was opening around the world and we did not want to miss that opportunity and so that was the prioritization.

For the nine months, Jack Daniel's, Tennessee Whiskey organic growth is plus 20.

Our numbers that I have never seen in my career.

And it's driven by the strength of the on premise and global travel retail, but it's still it's.

Also with me on the off premise too so it's a global.

Drive to drive that brand up and it's an incremental $1 6 million cases in the first nine months of the year $1 6 million cases is bigger than most of the Perkins on our portfolio and thats incremental in nine months, So and Jack Tennessee Whiskey is above Tds and the United States, just by a little bit but.

Quite honestly Jack.

<unk> label has not been above Tds, given its size and a long time. So it's just I think shows that when the stock is available when the glasses available theres still tremendous amount of consumer demand for the brand and that makes us feel good.

Moving forward in the fall.

As we had allocated towards Tennessee whiskey.

It became a bigger and bigger problem and so if anyone is looking at particularly data the Nielsen takeaway data, which is very weak on that rest of the portfolio is directly because of the Christmas season for a lot of those brands we were out of stock.

And it was painful.

Something the entire organization was going through and it showed up in the U S. Most directly because of that the U S has the broader market the broadest set of brands in the market. So.

That was a tough cycle to get through but now fast forwarding to the last quarter and you can see on schedule Lee and our earnings about how we're now rebuilding those inventories and shipments are running ahead of depletions.

Which is a good thing and we're finally getting the glass will be able to reload.

The minute that stuff gets into this is mostly a U S conversation when it gets into the warehouse. It is very quickly out the door and back on retail shelves.

And we believe that the trends will resume so Woodford will get Woodford reserve was growing at 20% a year plus for 20 years.

There is no sense that that brand is going to lose consumer momentum, it's just got to be available and so.

It is getting onto the shelves now.

Take us several more quarters, we think that.

Fully reload, we'll see.

But that data or that takeaway is not reflected in the current set of take.

I've said that wrong. The takeaway is not reflected yet in the Nielsen figures. We believe it will shortly but that is the reason why it looks like it had lost so much momentum so.

That's the long answer to a short question, but.

But that is I hope.

Do you understand the sort of at least what has happened.

Thank you very much for the color and I'll certainly.

Our sincere thoughts and prayers for your team in the region.

Great. Thanks.

Our next question comes from Nick <unk> with Bernstein. Your line is open.

Hi, Welcome Lee and thanks for taking my question.

Some advertising expense so I appreciate the comp impact, but our.

By my calculation on a nine month basis, you're reporting advertising margin was about 10 six below last year 11, 5% and below the EF 14 peak of $14. Six so is there a technical reason.

Behind this being lower and what should we expect for normal advertising spend going forward. Thanks.

Thank you Nathan and it's nice to have you on the call.

Closed and not available to us.

And unusual prior year and then as you think about it.

Our topline growth.

But still very healthy.

John .

What is it year to date.

Our full year increases in the 7% to 9% range and that includes <unk>.

With our strategic initiatives, we're investing in and our brand expense.

Got it thank you and if I could just squeeze one more the price mix of 70 bps contribution to the nine months gross margin change in the presentation was really good notable improvement on the 10 bps drag that we saw at each one can you give us a sense of how that split between price and mix and then I'll hand it over thank you.

So it's more volume driven but as it related to as we said in our prepared remarks, the reopening of the on premise from a positive channel mix perspective, and then also from our portfolio mix, which we are more skewed in this fiscal year toward our full strength spirits, particularly Jack Daniel's, Tennessee whiskey.

And last year, we just had the strong growth and RTD.

We're now cycling so it makes it a positive portfolio mix.

Perfect. Thank you very much very helpful.

Our next question comes from Nik Modi with RBC capital markets. Your line is open.

Yes. Thank you good morning, everyone.

Just a couple of questions.

We've been hearing in the trade that maybe some of your competitors might not be doing as well on the gas glass supply situation. So I wanted to see if that was something that you have seen in the market and if you think that contributed.

How you're benefiting from that and at.

At retail.

And then the second question is again more lately inflation, obviously has not been great for the consumer.

Hearing from.

Consumer shock I guess with some of the pricing that's in the marketplace. I was just curious if you had any any commentary on that or have you seen that in the market as well.

Well I'll start specifically with our glass supply and we've been talking about this for several quarters now.

Brown Forman that was our largest driver of supply chain disruptions and we've just continued to work really closely with.

Our current supplier, which has yielded an improved glass supply and additional capacity with them.

Then also expanding our glass supplier network and we believe that that would that work.

Ill start.

Creasing and supplementing our current supply in the fourth quarter of this year and as a lesson mentioned does that glass is coming and we are producing it as quickly as possible.

Our inventory to date it has been some.

We believe that it has taken us multiple quarters to get to draw down those inventories, it's going to take multiple quarters to build that back.

And we just continue to have teams that are working on prioritizing.

The most optimal use of those finished cases that we're able to produce.

Now from a competitor perspective, we know others have commented on it and we'll let them kind of to help their story, so with that I'll switch over to inflation and as we talked about with our year to date gross margin. We did have a 110 basis points related to higher cost.

That is split between the supply chain channels, the cost associated with our supply chain challenges that we've had and trying to as quickly as possible and get our finish cases into the consumers' hands, while like others, we're facing increasing commodity costs on corn.

<unk> natural gases would steel.

But it didn't is is agave has stabilized.

We had hoped.

Cost of agave the price of agave was going to decline more quickly.

And that as we've reported on multiple quarters now the increased demand for.

The Tequila category has just maintain that but at least it has stabilized in that 27% to 29 pesos per kilo range.

No.

We are seeing inflation, but the good news is we've got a lot of things working in our favor which is premium inflation trends.

Already mentioned, our favorable channel mix, we're fully utilizing our RG and tools and we've talked about how we're taking price to help.

With the inflation that we're seeing not the reason why we are taking it but it is it is a positive offset to.

Some of the price increases are some of the cost increases that we're seeing yes, I mean I think.

In terms of inflation make sure I answer the right question, but I mean that the.

There is some spirit there is.

Pricing happening in the spirits category right now that is stronger than it has been I'll say in the last I don't know five years or more.

If you really try to pick apart Nielsen figure then obviously this is a U S comment.

Cultural change, but it has been a mindset change.

Inside the company really over the last year not just the last quarter, where we are pushing through low single digit, but steady price increases and it's our goal to be able to do that.

Consistently over the upcoming years, and we will see what the consumer reaction is I mean, the consumer reaction right now on other inflationary comments I mean gas prices going up is generally not great for the spirits industry, it's not great for consumer spending in general will have to see how that plays out I mean, so much of it is so recent that I don't really have any data to support that but.

No we've pushed through price increases in the U S on Woodford on old Forester, <unk>, Herradura Sambora and really the the vast majority of the Jack Daniel's portfolio. So we are following through with what we said to you last quarter and still feeling pretty good about our position.

Excellent if I could just quickly follow up on the inflation comment given.

Given the aging process of the product would it be fair to say that some of the inflation that youre seeing now won't really be an issue for brown Forman until we get kind of maybe into 2023 and beyond.

Or am I not that that's a bad thing.

Get into how much of the technicalities.

With the way in the methods that we use.

Most notably LIFO, most commodity costs will come through as we.

As we incur them.

Except for Wood Wood is one that will layer in over time.

Got it.

Thank you I'll pass it on good luck.

Thank you.

Our next question is from Bonnie Herzog with Goldman Sachs. Your line is open.

Thank you good morning, everyone.

Hi, I just wanted to kind of circle back on a few things and just kind of ask about.

The way Youre going to be discussing results now going forward in terms of organic sales growth and then distributor inventories.

I understand everything you guys said, but I just was hoping to maybe get a sense of how much distributor inventories may have impacted your results in the quarter.

And then given the supply challenges, which you guys have discussed is there a way for you to quantify how much your topline was negatively impacted in the quarter I'm just trying to get a sense of maybe how much higher it could have been and then when you guys are expecting some of these supply chain pressures tes.

So I'll start with.

The the change and how we talk about our business.

And again as you would have heard from Sue this is driven by.

A comment letter from and discussions with the SEC and just so that you. All are aware all of that has posted as of yesterday add on Edgar and available to you.

As we think about it it might be easier to run through an example, so when in our earnings release, when when you read that.

The U S business on a reported basis grew 5% organic basis, 8% and then in the commentary. It says an estimated net increase in distributor inventory positively impacted net sales.

We added we believe that it is.

Important information at with the transparency of what the health of our underlying of our business and the fact that we have added schedule E and at the bottom you can see how then following onto the US Example, that the net change in distributor inventories was 2% for the United States.

So our organic was.

Supported by 2%.

Net change in distributor inventories, we believe that supplemental information is important to continue to provide transparency into the trends of our business.

That chart will give you.

Our geographic and brands and then at the bottom you can see that the statement of operations. The line items that net sales.

In total was 2% impacted by our organic impacted by the net change in distributor inventory.

Does that help.

Definitely yes that does and then just thinking about all of these puts and takes.

And especially kind of going back to the supply chain pressures, because if I'm hearing you correctly like that.

Obviously with an impact in the quarter and I think year to date. So I'm just trying to get a sense of the magnitude and when some of these are expected to maybe normalize so the pressure is.

Yeah and then.

As previously stated it took us several quarters as we were going through the most significant.

Period of glass supply constraints, and we had to draw down distributor and retailer inventories and even inventories at our own facilities, it's going to take us several months.

To rebuild that so we do expect for shipments too.

Exceed our depletions as we continue to rebuild that inventory.

And a comment on the underlying thing too a little bit we were the only company I think this is true that was doing underlying reporting as one of the SEC.

Get their heads around it so.

We switched to organic which is now largely consistent with way the rest of the industry has been doing it for a long time, so on a positive side of it all it we're now sort of equivalent with them and make it a little bit easier to compare.

But I do recognize that this is a crazy quarter to be doing it.

Given the volatility in distributor inventory.

Yes.

Alright, Thank you both so much.

Thank you. Our next question is from Kevin Grundy with Jefferies. Your line is open.

Sort of unpack the other items other areas of the business, which are coming in better than you had expected I think that would be appreciated. It seems like international business certainly stronger than we had modeled on premise recovery sounds like Xiaomi and model, but maybe on a like for like basis, just comment on what came in better in the quarter, then I have a follow up thanks.

Yes.

I will start it at least what came in better in the quarter with Jack Daniels, Tennessee Whiskey.

Yes.

It.

It was a blowout in terms of its ability to get the glass get it through the system.

And the demand.

I won't say surprised us to the upside, but it was just very very strong and so.

When that gets going it's amazing what kind of growth that this company can do as a comparative to last year. When it was down 4% and we were able to do the things that we.

It's not going to maintain a 20% growth rate through the year, but it's still going to be outstanding so and it really it came from really all parts of the world.

Really showed pretty dynamic growth, we had some really strong markets in Europe .

And some very strong markets in the emerging and the emerging world. So.

Yeah, and I think Thats the Big story, the Big story is our business has.

Premium amortization to the extent that they werent disrupted by supply chain challenges Woodford reserve old Forester Herradura continue digit.

Exceed expectations and then again, we have the rebound from the travel retail and all of our and we said in our opening comments we are seeing.

Growth in all areas of our business geographically, including the.

Global travel retail channel so.

That is an underlying regardless of what.

Method.

Another holiday our basis change, we're using I think thats. The big story, so that would have been that would have been a driver.

<unk> of the change what you can do again at the bottom of the bottom or schedule. A you can take a look at the organic guidance that we have put out there and as you try to make some high level adjustments for net change in distributor inventory I think you continue to see that.

Compared to our half year, we have momentum.

Got it that's helpful. If I could just one more I will take a number of these offline, but just shifting to capital allocation.

Repurchases and share repurchases, specifically any updated thoughts there and maybe just comment on.

I guess, maybe some of the hesitancy to sort of way back in with respect to share buybacks. The cash level is near historic highs. Your leverage ratio continues to creep lower and the business is obviously performing really well in volatile. It's obviously still volatile, but we're in a much better place collectively than we were a year or two ago, so kind of pulling that altogether.

But maybe comment on the hesitancy to buy back shares and then ill pass it on thank you.

Yes, I don't know if I would call. It a hesitancy I think we always look.

We try to use a very balanced approach because our core objective is for sustainable long term value creation.

We've talked about this many times all of the dimensions over which we we balance that and we have our ongoing investments in our business as far as the Kentucky, just filling expansion. We have had just filling expansion in our tequila facilities, we have our single malt Scotch Glenn <unk> expansion, we have we're.

Our house expanses to support Jack Daniels.

<unk> family of brands growth in Woodford reserve and those are.

They cost more in today's environment based off the inflation that we talked about.

But our number one objective is to maintain flexibility.

And strength of our balance sheet to do a couple of things, which is to be able to invest back behind our business and to take advantage of growth opportunities and recently, we did just do a special dividend.

It's approximately $480 million. So we did deploy cash to our shareholders from using that method. So again, our approach is consistent balance it's about maintaining flexibility and we are.

Looking at many things to and from the investments that I just spoke of.

And we're also thinking about the increased volatility that might be in the months and times ahead related to the geopolitical environment that are just unknown at this moment.

Very good thank you for all that.

Okay.

Thank you. Our next question comes from powers with Deutsche Bank. Your line is open.

Hey, thanks.

So.

On the operating income guidance year to date growth is plus 19%.

<unk> for 12 months to <unk>, plus <unk> to be negative and I. Just I was wondering if you could just unpack the drivers there.

Especially because you're cycling last year's foundation contribution I don't know if thats included in the organic base or not but just how we should think about think about the progression in <unk> and then I guess on top of that back to <unk> question, just how we should expect FX to the FX impact the trend.

It relates to operating income.

The remainder of the year.

Well I'll start with your last part of we don't we don't forecast.

We have it in there as what is known to date, but we wouldn't attempt to forecast what that change is going forward and then as I would just say from an outlook perspective, and our fourth quarter, we really are going to be cycling, our strongest comps from the prior year when in the last quarter of the prior year.

Year, the on premise largely in some places around the world, but specifically in the U S. Our largest market began to reopen so we do know we're going against some tough comps.

And we also are still addressing some supply chain constraints and input cost headwinds and then I will just layer on the last piece, which is potentially.

Potentially the rising there.

Rising uncertainty of the geopolitical environment in the announced by which that creates.

Okay, That's fair I guess.

Thinking about those the organic guidance implies growth.

Both shipment and probably some inventory catch up.

But then you are.

The cost trends are overwhelming that and the.

Implied guide so is it whereas the cost pressure coming from is it is it Cogs is it is it incremental SG&A and just how we should think about that.

So what was so from a cost perspective, we've talked about our commodities, we've talked about with labor we've talked about.

Transportation, which continues to be constrained of freight rates.

<unk> imbalances all of those things are in there and then we also are continuing to invest.

From an SG&A perspective in our strategic initiatives, which is increasing in the control of our distribution increasing the focus on our Super premium brands in places around the World and then just increasing investments back behind our brands with.

New marketing campaigns and a new high in what we refer to as our IMC organization.

Yes, I mean, I think the biggest part of it really tough comp, though I mean, I think there's nothing really.

Unusual going on or anything like that it's just I mean last year fourth quarter was plus 19 is that right so going against a plus my team.

Okay. Okay.

I guess.

If I could squeeze in one more question just.

I know, it's hard to dimension and certainly hard to time, but as we think about.

Just how far below some kind of normalized inventory levels you are.

Exiting the third quarter is there a way to size that is that is that on an annualized basis, maybe a couple of points of revenue growth to catch up to the relative normal or how do we think about the.

The magnitude of the inventory rebuild that remains.

Yeah, and this is not going to be an absolute a couple of times and this is on a specific number but if for example, it has taken us three quarters to draw down that inventory. We do believe that is going to take us three quarters.

To fully.

Replenish our inventories at all levels of the supply chain. So as we look ahead, we do believe that we're going to see those shipments be stronger as we rebuild inventory levels across.

The retailer the distributor and our internal.

Okay, well. Thank you both I appreciate it.

Thank you. Our next question comes from Christopher <unk> with Redburn. Your line is open.

Thank you very much.

Couple of follow up questions for me. Thank you.

I apologize for coming back on the Russia situation, but you had a very strong organic performance in Russia.

Are you shipping and rebuilding inventories that the new route to market in place there or are we still selling into.

Independent.

Policies and.

<unk> of that.

Going forward, the inventories that will be enough to carry forward.

So how many quarters without the ability to ship in and then secondly has the sort of the development and sort of global events, perhaps slow the expansion of route to consumer that you've been putting in place I think <unk> got up to 70% of your international business. So youre right in distribution is something that perhaps we might see a pause now for a while until things settle.

Thanks.

Well, we're still for the time being we're going to continue using that same I think you called independent third party distributor.

I don't know how many months of inventory they have.

They are continuing to stay in place and so that we don't expect a ton of disruption at least format side now consumer demand is going to fall off there is no way I mean, we're all in I think the competitors are doing it to taking big price increases as the ruble has fallen so far so.

That's going to that's going to shave off some demand but.

What was a very strong market for us.

He is going to be less of a driver going forward, but as we said earlier I mean it is in fiscal 'twenty. One it was 1% of our sales. So it is not a falling off the cliff.

And then the only thing I would add is.

We arent in a normal steady state we are in a situation, where we are prioritizing the most optimal usage of our finished goods. So as we think about our business we will.

We will.

Deploy that inventory globally in the way that most optimally benefit.

The company.

Meaning higher margin markets.

Get more get first choice in the glass line over those that are lower.

Maybe it's a follow up so much in the way of costs get into Russia or <unk>.

The design Phase I think you mentioned you would start to take but I'm just trying to get a sense of how much sunk cost is variable.

Well I mean, we have begun our we had begun to hiring I said, a little bit ago, We had 80 some odd people.

In the Russian market right now, we're obviously, putting a pause on that and we're just trying to survey and it's only been a week. So we just Kevin.

We havent made any sort of material decisions yet.

They're not going to write off or anything like that.

And then I would expect out of that market I mean, yes, it's a fluid situation and where it will as we as we need.

Three months from now we hope that we have much better geopolitical news to report, but at this point, we're just continuing to assess where we are.

Yeah.

Thank you Greg Thank you.

Yes.

Thank you we have run out of time for Q&A I would now like to turn the call back over to <unk> director of Investor Relations for closing remarks.

This concludes our call.

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

Q3 2022 Brown-Forman Corp Earnings Call

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