Q3 2022 Brown-Forman Corp Earnings Call
Okay.
Good day and thank you for standing by welcome to the Brown Forman Corporation third quarter.
Fiscal 2022 earnings conference call.
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I would now like to turn the conference over to you.
Two parents 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 Leigh Ann Cunningham, Senior Vice President and Chief Financial Officer.
This morning's conference call contains forward looking statements based on our current expectations numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements.
Many of the factors that will determine future results are beyond the company's ability to control or predict you should not place undue reliance on any forward looking statements and 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 31st 2022. In addition to posting presentation materials that Lawson and Leann will walk through momentarily.
Both the release and the presentation can be found on our website under the section titled investors events and presentations.
In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward looking statements all.
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 invest.
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. 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 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 include 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 going forward. When we provide such guidance. We will do so on an organic basis. Therefore, the current outlook is not directly comparable.
Two 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 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 Justice League stepped up in every way 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 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.
Shared with you throughout this fiscal year.
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.
And Ah.
Our portfolio is also continuing to benefit from the premier's nation trends across our industry.
Finally, we continued 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.
All your 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 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.
<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 T DS 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.
Dana's, 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 Humidor grew organic net sales, 29% and 20% respectively. Woodford reserves organic net sales grew high single digits year to date, but given the prioritization objecting those Tennessee whiskey the brand experienced a decline in distributor inventories adversely impacting.
Its 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 Phi.
Finally, as I mentioned, our portfolio of Super premium brands continues to benefit from the consumer premium position trends as well as our investment behind our emerging brands teams brands such as old Forester Sham bore our single malt Scotches Glen drawn up Venrock and gun glass Hall as well as Fords Gin have also benefited from the reopening of the on premise.
Only 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.
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 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 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 de should bear and John Hayes, who are retiring later this summer for their many leadership contributions over decades and the many ways they've helped.
Our company grow and our inclusive culture thrive.
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'm 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 lost some review of 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 crouse.
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 false drink Tequila brands grew double digits in Mexico as the premium is Asian chain continued which more than offset the prior year comparison and Nymex rtd's.
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 and 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 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 <unk>.
<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.
Jack Daniel's RTD also delivered double digit organic sales growth as we continue to experience strong volume growth in Germany, where the brands sustained its momentum and remains a category leader and even with Australia lapping strong prior year comparison, and it continues to contribute to our growth.
In addition, Jack Daniels, Tennessee Honey.
Organic net sales by double digits led by Korea shift to international whisky brands strong consumer demand in France, and tourism, returning an checchi at <unk>.
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.
Beyond the Jack Daniel's family the rest of our portfolio delivered very strong double digit organic net sales growth led by al 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 was Jack Daniel's, 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 S Asian.
Consumer premium mass Asian trends also continued to benefit our premium Bourbons led by Whitford 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 bad Google mobility, and open table and they showed a decline in consumer Act.
<unk> during the third quarter, reflecting the disruption from the omicron variant, but trends appear to be rebounding in the recent weeks and the a 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.
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 onto 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.
Reported gross margin was down 20 basis points year over year, driven primarily by unfavorable cosmetics 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 the very strong growth of our RT DS.
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 had 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 grain.
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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.
They caused our 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 our reported an 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 cycled 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 Collingwood 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 her 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 supply chain inflation and the geopolitical environment. Amid these uncertainties, we continue to be confident in the strength of our portfolio of brands and our team's ability to navigate these challenges.
And 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 and.
As the recovery gains momentum and we cycled the effects of easier comparisons.
And we continue to expect our noncore 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 Asian 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 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 U K tariffs remain in place talks are still ongoing between the U S and the U K regarding the tariffs that remain in place and we continue to be cautiously.
Take 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.
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 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.
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.
Good morning.
I've kind of a modeling question and then just a follow up on Woodford. Please so 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 a Y I would've thought that you would've seen more on gross profit given the transaction impacts, but but the G. P hit.
Only an eight so if you could offer any color on why the FX impact was with such a greater magnitude on the Oi line in the quarter that'd be really helpful. Thank you.
Well, we know that in that and 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 the rest of that's where you'll see the biggest impact I believe that scheduled for you yeah.
Yep.
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.
Thank you I can certainly follow up after that on 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 you're seeing on the Jack Daniel's franchising and Jackie No, 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 it 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 know that.
It's hard to talk business. These days when when so much of this is hanging over so just a couple of things one.
No you know obviously, we are most concerned with our people that are over there. We do know they're all safe right now, but it is certainly a very very difficult and volatile situations.
Gary It's sad, it's exhausting for the employees and.
Well you know 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.
Touching I guess, a little bit and that our employees that live in Poland, and Romania and Hungary.
Hungry.
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 what the masses over there and met with defense's literally and our employees pick them up and took them 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, capex or 110th.
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.
As I think you all would know or those that have been following us closely we've been building to.
Have our own route to market organization. There are we've got about 80. Some odd employees now we were hiring a lot more than that with the intent to go live in July we've stalled that are paused. It would pause 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.
Only been a week so.
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 if Jack Daniel's, Tennessee Whiskey was down 4% as it's on premise business, which was so weak, but brown Forman 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 was 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 Q Q1, which was 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 as past 'twenty.
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 it would be 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 brands 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 Black label has not been above Tds, given its size and a long time. So it's just I think shows that when the <unk>.
Stock is available when the glasses available there is still tremendous amount of consumer demand for the brand and that makes us feel good.
Now 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 stays 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.
Our 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 in our earnings about how we're now rebuilding those inventories and shipments are running ahead of Depletions.
Hmm.
Which is a good thing and 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.
It's getting onto the shelves now.
It'll take us several more quarters, we think.
Fully reload, we'll see.
But it's not that data or that takeaway is not reflected in the current set of <unk>.
I've said that wrong, but 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.
Very much. Thank you very much for the color and I'll, certainly echo our sincere thoughts and prayers for your team in that region.
Great. Thanks.
Our next question comes from Nick Farwell with Bernstein. Your line is open.
Hi, Lawson Lee and thanks for taking my question.
Some advertising expense so I appreciate the comp impact but my.
My calculation on a nine month basis, you're reporting advertising margin was about 10.6 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 and from a brand.
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 we're closed and not available to us.
While sponsorships 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 them.
And unusual prior year and then as you think about it previously as we had talked about our brands than 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 soon.
What is it year to date.
Our full year increases in the 7% to 9% range and that includes and both our strategic.
<unk> initiatives, we're investing in and our brand expense.
Got it thank you and if I could just squeeze one more the price makes up 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 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 in our T. D's 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 do you think that contributed.
Or how you're benefiting from that and at retail.
And then the second question is again you know more.
Lately inflation, obviously has not been great for the consumer we are hearing.
Yep consumer shock I guess with some of the pricing that's in the marketplace. I was just curious on 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 and.
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 in encrypted glass supply and additional capacity.
We then also expanding our glass supplier network, and we believe that that or did that work.
We'll start.
Increasing and supplementing our current supply in the fourth quarter of this year and there's a lesson 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 inventories to date. It has been some we built.
Leave that it has taken us multiple quarters to get to 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.
From a competitive perspective, we know others have commented on it and we'll let them kind of held 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 channel the cost associated with our supply chain challenges that we have had and trying to as quickly as possible get our finished cases into the consumers' hand, well like others, we're facing increasing commodity cost on corn.
Rains natural gases would steal.
But it didn't is is agave has stabilized we had hoped that the cost of agave the price of the guy that was going to decline more quickly.
And as we've reported on multiple quarters now the increased demand for them.
But to kill a 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 innovation trends, we 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 that's a reason why we're take.
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 yeah, I mean I think.
Terms of inflation to make sure I answer the right question, but I mean 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.
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 ism and 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>, Sam bore and really the vast majority of the Jack Daniel's portfolio. So we are following through with what we said to you last quarter and I'm 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 you're 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 beyond that down the road.
Get in too much of the technicalities.
With the weight and 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.
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 you know given the supply challenges, which you guys have discussed is there a way for you to quantify you know 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 es.
So I'll start with that.
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 out on Edgar and available to you.
As we think about it it might be easier to run through an example.
In our earnings release, when when you read that.
The U S business on a reported basis grew 5% organic basis, 8% and then on 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 <unk> 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 line items that net sales in.
In total was 2% impacted by our organic impacted by the net change in distributor inventory.
Does that help.
Definitely yeah 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, it 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 pressures ease.
Yeah, and then as we as I 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.
<unk>.
Seed 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 is why the SEC couldnt.
Wouldn't get their heads around it so.
We switched to organic which is now largely consistent with the 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.
I do recognize that this is a crazy quarter to be doing it.
Given the volatility in distributor inventory right.
Alright, Thank you both so much.
Thank you. Our next question is 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 you've 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 air.
He is 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 recoveries sounds like stronger you've modeled but maybe on a like for like basis, just comments on what came in better in the quarter, then I have a follow up thanks.
Yes.
I'll start it at least.
What came in better in the quarter was Jack Daniel's, Tennessee Whiskey.
Yes.
Yes.
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 six I mean that.
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.
We 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.
<unk> been very resilient and Jack Daniel's, Tennessee whiskey, returning to growth related to the reopening travelling tourism really we keep saying strong consumer demand for both our American whiskey and our tequila.
Premium is Asia and to the extent that they werent disrupted by supply chain challenges Woodford reserve old Forester Herradura continuing to just.
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 ground global travel retail channel. So.
That is an underlying regardless of what method.
Methodologies 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 schedule I 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.
Estimates 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.
Maybe some of the hesitancy to sort of wait 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 then ill pass it on thank you.
Yeah, 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 and you know 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 distilling expansion, we have had there.
Selling expansion and our tequila facilities, we have our single malt Scotch Plantronic expansions, we have warehouse expansions to support Jack Daniels.
Growth 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.
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 guide is for 12 months to 16, so that implies <unk> to be negative and I. Just I was wondering if you could just unpack the drivers there, especially.
Especially because you're cycling last year's foundation contribution I don't know if that's included in the organic base or not but just how we should think about think about Oh I 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.
The remainder of the year.
Well I'll start with your last part of we don't we don't forecast.
Effects, 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.
In in the last quarter of the prior 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 and.
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 the rising the rising uncertainty of the geopolitical environment in the announced by which that creates.
Okay, That's fair I guess, where I'm thinking about there was that the organic guidance implies growth.
Both shipment and probably some inventory catch up.
But but but the cost trends are overwhelming that in in 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 as 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 then they lie in what we refer to as our IMC organization.
I mean, I think the biggest part of it really is a tough comp, though I mean, I think that 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 19.
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 up.
Points of 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.
And this isn't gonna be and I've said, a couple of times and this isn't 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 re filled 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.
Couple of follow up questions for me. Thank you.
Firstly I apologize came back from the Russia situation, but you had a very strong organic performance in Russia, what were you shipping and rebuilding inventories with the new route to market in place there or are we still selling into.
Independent.
Policies and in terms of going forward at the inventories that will be enough to carry forward for how many quarters without the ability to ship in and then secondly has the sort of the development and sort of 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%.
Turning to the international business. So your own distribution is something that perhaps we might see a pause now for a while until things settle.
Well, we're still for the time being we're going to continue using that same I think 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 from that 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 as you know 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 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 I mean, we will.
Deploy that inventory globally in the way that most optimally benefits.
The company.
Meaning higher margin markets.
Get more get first.
Choice in the glass line over those that are lower.
And maybe if you thought about how do you so much.
And the wife costs get into Russia or are you still at the sort of 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 as there is variable.
Well I mean, we have begun our we had begun to hire and I've said, a little bit ago. We had added 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.
We havent made any sort of material decisions, yet, but there wouldn't there not going be a write off or anything like that.
I cannot.
Would expect out of that market I mean, yes, it's a fluid situation and where it will you know as we as we meet them three.
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.
Thank you, Greg if I could.
Thank you we have run out of time for Q&A I would now like to turn the call back over to Sue Perm director of Investor Relations for closing remarks.
Thank you Shannon and thank you to Lawson and Leann and thank you to everyone for joining us today for Brown Forman third quarter and year to date fiscal 2022 earnings call. If you have any additional questions. Please contact us.
This concludes our call.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Thanks.
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